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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number
ORBCOMM GLOBAL, L.P.
ORBCOMM GLOBAL CAPITAL CORP.
(Exact name of Registrants as specified in their charters)
54-1698039
DELAWARE 54-1841164
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization of Registrants) Identification Nos.)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166
(Address of Registrants' principal executive offices)
(Zip Code)
(703) 406-6000
(Registrants' telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 16
Item 3. Legal Proceedings......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....................... 16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................... 16
Item 6. Selected Financial Data................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 17
Item 8. Financial Statements and Supplementary Data............................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................. 73
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 73
Item 11. Executive Compensation.................................................... 75
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 77
Item 13. Certain Relationships and Related Transactions............................ 77
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 85
Signatures................................................................ 87
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PART I
ITEM 1. BUSINESS
BACKGROUND
ORBCOMM Global, L.P. ("ORBCOMM" or the "Company") is establishing the first
commercial low-Earth orbit ("LEO") satellite-based mobile data and messaging
communications system that will be available on a global basis (the "ORBCOMM
System"). The ORBCOMM System, planned to be fully deployed in early 1998, is
designed to provide reliable, low-cost, two-way global data and messaging
communications through a constellation of 28 LEO satellites and a complement of
associated ground infrastructure situated around the world. Major target markets
include worldwide mobile asset tracking; remote industrial monitoring and
control applications; environmental data collection; and real time
person-to-person and machine-to-machine communications, including two-way
Internet electronic mail ("email") communications and recreational and business
messaging.
ORBCOMM is a Delaware limited partnership formed in 1993 to develop,
construct, operate and market the ORBCOMM System. The general and limited
partnership interests in ORBCOMM are held by each of Orbital Communications
Corporation ("OCC"), a Delaware corporation and subsidiary of Orbital Sciences
Corporation ("Orbital"), and Teleglobe Mobile Partners ("Teleglobe Mobile"), a
Delaware general partnership whose interests are wholly owned on an indirect
basis by Teleglobe Inc. ("Teleglobe") and Technology Resources Industries Bhd.
("TRI"). OCC and Teleglobe Mobile have invested approximately $160 million in
the ORBCOMM project.
Orbital, a Delaware corporation, is a space technology and satellite
services company that designs, manufactures, operates and markets a broad range
of space products and services, including launch systems, satellites, space
sensors and electronics, ground systems and software products, satellite access
products and communications and information services. Teleglobe, a Canadian
corporation, provides international telecommunications services to over 240
countries worldwide through a network of submarine cables and satellite Earth
stations. Teleglobe is owned approximately 22% by BCE Inc., which is the largest
public corporate entity in Canada, and indirectly approximately 20% by
Telesystem Ltd., a Canadian company, that also has an interest in Telesystem
International Wireless Corporation N.V. ("TIW"). TIW has paging and cellular
interests in several countries around the world, including China, Mexico,
Romania and India. Teleglobe has formed a partnership, Teleglobe Mobile, with
TRI to hold its interest in the ORBCOMM project. TRI operates the largest and
one of the fastest-growing cellular networks in Malaysia, with over 800,000
subscribers and also has cellular and paging joint ventures in five countries.
In addition, ORBCOMM has three subsidiaries, ORBCOMM USA, L.P. ("ORBCOMM
USA"), a Delaware limited partnership, ORBCOMM International Partners, L.P.
("ORBCOMM International"), a Delaware limited partnership, and ORBCOMM Global
Capital Corporation ("Capital"), a Delaware corporation. ORBCOMM holds general
and limited partnership interests with a 98% participation percentage
("Participation Percentage") in each of ORBCOMM USA and ORBCOMM International.
OCC directly holds general and limited partnership interests in ORBCOMM USA with
a 2% Participation Percentage. Teleglobe Mobile directly holds general and
limited partnership interests in ORBCOMM International with a 2% Participation
Percentage. ORBCOMM USA and ORBCOMM International were formed to market services
using the ORBCOMM System in the United States and internationally, respectively.
Capital, a Delaware corporation, was formed in July 1996 to act as a
co-issuer in connection with the private placement (the "Old Notes Offering") of
$170 million 14% Senior Notes due 2004 with Revenue Participation Interest (the
"Old Notes"). The Old Notes were exchanged in January 1997 for notes that are
substantially similar to the Old Notes except that the new notes (the "Notes")
are registered under the Securities Act of 1933, as amended. The Notes are fully
and unconditionally guaranteed on a joint and several basis by OCC, Teleglobe
Mobile, ORBCOMM USA and ORBCOMM International, except that the guarantees are
non-recourse to the shareholders and/or partners of the guarantors, limited only
to the extent necessary for each such guarantee not to constitute a fraudulent
conveyance under applicable law. Capital has nominal assets and will not conduct
any operations.
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THE ORBCOMM SYSTEM
General
The Company currently offers commercial intermittent data communications
services in the United States through its existing network, which consists of
two LEO satellites launched in April 1995 and related U.S. ground
infrastructure. When fully deployed, the ORBCOMM System is designed to provide
data and short, alphanumeric paging-like messaging communications coverage
virtually anywhere on the Earth's surface in a reliable and cost-effective
manner. In contrast to "Big LEO" systems, which are designed primarily for voice
applications, the ORBCOMM System, which is a "Little LEO" system, is focused on
data communications and messaging applications. The ORBCOMM System is designed
to address the substantial existing and growing demand for communications
services worldwide, without the high cost and geographic and technical
limitations imposed by other communications systems. The Company intends to
distribute its services globally in a cost-effective manner primarily through
the use of value-added resellers ("Resellers") and other distribution channels,
as appropriate, in the United States and international service licensees
("International Licensees") around the world.
To use the ORBCOMM System for text messaging, a user creates a message
using a computer connected to an ORBCOMM subscriber communicator ("Subscriber
Communicator") or a stand-alone Subscriber Communicator, which message is sent
to the nearest ORBCOMM System satellite and delivered to an ORBCOMM Earth
station, which supports communication with the satellites, and then to the
Gateway Switching System, which processes the messages. Within the Gateway, the
message is processed using a combination of ORBCOMM-developed and commercial
email software, and sent on to its ultimate destination. If desired, an
acknowledgment message is returned to the sender. The final delivery may be to
another Subscriber Communicator or may make use of public/private X.25 data
networks or the Internet. ORBCOMM expects that, with a planned constellation of
28 satellites, the ORBCOMM System will provide communications availability
generally exceeding 95% of each 24-hour period in the United States and other
temperate zones in the Northern and Southern Hemispheres and exceeding 75% of
each 24-hour period in the equatorial region. On full deployment, the ORBCOMM
System is designed to transmit a U.S.-initiated message ranging in length from
six bytes to 100 bytes, depending on system loading, in from approximately three
to 25 seconds.
In October 1994, OCC became the first company to be awarded Federal
Communications Commission ("FCC") authority to construct, launch and operate a
LEO satellite-based data and messaging communications system in the United
States (the "FCC License"). Today, the ORBCOMM System is the only commercial
Little LEO system that is fully licensed for all segments of its system in the
United States. In 1992, certain portions of the radio spectrum were allocated by
the International Telecommunications Union ("ITU") for use by Little LEO
satellite systems, such as the ORBCOMM System, on an international basis.
Recent Developments
In 1995, in addition to the successful launch of the first two ORBCOMM
System satellites, the Company completed initial development and construction of
the ground infrastructure located in the United States and associated network
control systems, and tested prototype Subscriber Communicators. In 1996,
additional progress was made on the ORBCOMM System. In February 1996, ORBCOMM
initiated intermittent data communications services in the United States. The
two ORBCOMM System satellites and four U.S. Earth stations currently are
providing data communications services, focused on environmental and industrial
monitoring applications for the U.S. environmental and oil and gas industries,
and asset and cargo tracking applications for the U.S. government and commercial
entities, with additional tracking and positioning applications targeted for the
near future. The Company currently has two satellites on orbit, with 26
additional satellites scheduled for launch in 1997 and 1998.
The Company plans to provide initial services in the United States
primarily through Resellers, many of whom have an existing, well-established
market presence through their existing customer bases, market-specific brand
name recognition and distribution networks. Outside the United States, the
Company will enter into service license agreements ("Service License
Agreements") with International Licensees who will be
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responsible in their territory for, among other things, procuring from ORBCOMM
and installing the necessary Gateways (facilities that transport and control the
flow of data and necessary communications and other information for the ORBCOMM
System), obtaining all regulatory approvals to provide services using the
ORBCOMM System and operating and marketing services using the ORBCOMM System.
During 1996, ORBCOMM added 14 Resellers and expanded its worldwide network of
International Licensees. Currently, ORBCOMM has 33 reseller agreements with
companies including Arinc, Inc., Corexco Consulting Services, Inc., Globitrac,
Inc., Sky-Eye Railway Services, Inc. and the Stevens Water Monitoring Division
of Leupold & Stevens, Inc. In addition, the Company also has signed seven
Service License Agreements with International Licensees, five of which were
executed during 1996. In 1996, ORBCOMM signed a Service License Agreement with
European Company for Mobile Communicator Services, B.V., ORBCOMM Europe
("ORBCOMM Europe"), a consortium of European companies, which has been given the
exclusive right to market services using the ORBCOMM System to approximately 40
European countries. ORBCOMM has also executed Service License Agreements with
ORBCOMM Canada Inc., which is controlled by Teleglobe, Cellular Communications
Network (Malaysia) Sdn. Bhd. ("Celcom"), a wholly owned subsidiary of TRI,
ORBCOMM Maghreb, S.A. ("ORBCOMM Maghreb"), CEC Bosphorus Communications, Ltd.
("CEC Bosphorus"), SEC ORBCOMM (Middle East) Ltd. ("SEC ORBCOMM") and
Communications Technology Inc. ("CTI"). ORBCOMM Canada, Celcom, ORBCOMM Maghreb,
CEC Bosphorus, SEC ORBCOMM and CTI were granted the exclusive right to market
ORBCOMM System services in Canada; Malaysia, Singapore and Brunei; Morocco,
Tunisia, Algeria and Mauritania; Turkey and eight Central Asian countries; 11
Middle East countries; and the Republic of Korea, respectively. Currently, 69
countries with a combined population of almost one billion are covered by
Service License Agreements. The Company is also in active negotiations with
approximately 25 other potential International Licensees, representing
approximately 75 countries around the world.
During 1996, two Subscriber Communicator manufacturers were added to the
three existing manufacturers and four different types of Subscriber
Communicators were approved for manufacture. The Company currently has
development and manufacturing agreements with Kyushu Matsushita Electric
Company, Ltd. (also known as "Panasonic") and is in the process of finalizing a
sales support agreement with Panasonic. The Company has also executed Subscriber
Communicator Manufacturing Agreements, which include terms regarding the
development, manufacture and sales support for Subscriber Communicators, with
Scientific-Atlanta, Inc. ("Scientific-Atlanta"), Magellan Corporation
("Magellan"), a subsidiary of Orbital, Torrey Science Corporation ("Torrey
Science") and Stellar Electronics Ltd. ("Stellar"). Panasonic has received
authorization from the Company to manufacture two basic Subscriber
Communicators, one with and one without the ability to receive positioning
signals from the Global Positioning Satellite ("GPS") system, both of which are
now commercially available. Torrey Science received authorization from the
Company in August 1996 and Stellar received authorization from the Company in
September 1996 to manufacture a basic Subscriber Communicator.
Services
ORBCOMM System service offerings for mobile data and messaging
communications will fall into two broad categories with variations based on
market requirements: tracking and monitoring; and message and priority
communications.
Tracking and Monitoring. The Company believes that tracking and monitoring
users will include a broad group of industries that require a means of regularly
collecting data from, or in some cases controlling equipment in, multiple remote
locations. Major target markets include: (i) worldwide mobile asset tracking;
(ii) industrial monitoring and control applications; and (iii) environmental
data collection. Many of these users manage numerous, widely dispersed sites in
remote areas out of reach of the public switched telephone network ("PSTN") or
terrestrial-based wireless systems, and often accomplish data collection and
equipment control functions manually with on-site personnel.
Messaging and Priority Communications. The Company believes that messaging
communications users will include a broad range of commercial and consumer users
who require a means of communicating with locations such as their office,
dispatch center or home or who require the ability to send priority messages or
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positioning information. Examples include professionals who work away from their
office, fleet operators who require reliable messaging between a central office
and mobile assets, and individuals who desire a means of communicating short
messages or positioning information from an automobile, boat or other remote
locations. These users currently rely on pagers, cellular phones, fleet dispatch
systems and public pay phones, all of which can be unavailable, inconvenient or
expensive in certain geographic locations. In remote geographic regions outside
the United States, these PSTN and terrestrial-based wireless systems are not
always available or cost-effective. As a satellite-based system with coverage
available virtually anywhere on the Earth's surface, the Company can offer
messaging services through the ORBCOMM System.
Addressable Markets
The Company has identified a number of industries and industry segments in
the United States where there currently exists a demand for mobile data and
messaging communications services for tracking and monitoring, which the Company
views as the initial primary target applications for its services. The Company
believes that certain portions of the transportation, energy, environmental and
marine industries or industry segments and the U.S. government possess
characteristics or requirements that are particularly well-suited to the
services offered by Little LEO systems. The Company refers to these portions as
"addressable markets." The Company's description of potential markets for its
data and messaging communications service offerings and the Company's
addressable markets represent only the Company's estimates as of the date hereof
with respect to such markets.
Transportation. Transportation companies require a cost-effective means of
regularly and reliably monitoring the location and the status of cargo globally
to reduce cargo losses, improve service and better use transportation assets.
The transportation market can be separated into four categories: trailers
including full truckload, less-than-full truckload and private trucking;
long-haul trucking; containers; and rail cars.
The Company believes that the U.S. addressable market for full truckloads
comprises non-refrigerated trailers belonging to large trucking fleets that need
to improve trailer utilization, and for less-than-full truckload comprises
non-refrigerated trailers that carry high-value goods and travel longer,
less-than-full truckload routes (greater than 400 miles) between regional
centers. The addressable market for private fleet trucks is expected to be those
used in "just-in-time" manufacturing and distribution systems and which,
therefore, typically require high levels of efficiency due to competition from
for-hire companies. The Company expects the addressable market for refrigerated
trailers to comprise those trailers for which cargo monitoring and trailer
utilization are required. Trailers (both refrigerated and non-refrigerated) are
currently being tracked by geostationary satellite-based systems (such as those
offered by QUALCOMM) that offer seamless coverage, but depend on larger power
sources that require the trailer to be attached to the main engine of the
tractor. As a result, when the trailer is detached from the tractor, it can no
longer be tracked. A low-power cellular system can be used to track untethered
trailers; however, geographic coverage is limited and the Company believes that
the cost of cellular roaming may make this service cost-prohibitive. Private
trucking fleets typically use systems internal to their companies where each
trailer's number is manually recorded as trailers enter and leave a point of
distribution.
The Company believes that its addressable portion of the U.S. long-haul
trucking market is characterized by smaller fleets (typically less than 50
trucks) that need mobile communications to compete with larger fleets but have
been unable to afford the current service offerings where equipment costs are
approximately $4,000 per unit. A low-cost alternative for these smaller fleets
has been paging, although paging currently offers only a one-way short data link
to the vehicle. The Company believes that the addressable market for the owner-
operated transportation vehicle sub-segment comprises those vehicles contracted
to larger, long-haul carriers. While these larger carriers resist installing
$4,000 mobile communications units on vehicles they do not own, many are still
requiring owner-operators to equip their vehicles with mobile communications.
The Company expects that its addressable market in the container
(intermodal) industry segment in the United States will comprise those
containers carrying the most valuable items subject to theft. Currently,
intermodal container transportation systems use manual systems to record
containers as they enter and leave
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yards. Unlike the ORBCOMM System, these passive systems record where a trailer
has been, but not where it is, its status or the condition of its contents.
The Company believes that the addressable market for rail transportation
will comprise those rail cars used to transport high-value cargo or hazardous
cargo comprising bulk materials. The American Association of Railroads has
mandated the use of automatic equipment identifiers ("AEI") on rail cars. AEI
systems consist of a radio tag mounted on the rail car and a reader that records
the identity of the car as it passes by. AEIs therefore share the same
limitations as bar code systems because they only record where the trailer has
been, not its current location, status or the condition of its contents.
Energy. The Company believes that the ORBCOMM System can provide an
effective means of monitoring and controlling various assets used in the energy
industry. Pipeline operators take active measures to monitor lines and limit
pipeline corrosion to comply with laws by installing cathodic protection systems
that include a device called a rectifier. Protection systems also are required
by federal regulations on storage tanks, utility systems and injection wells.
The majority of protection system records are now compiled from data collected
by personnel who travel to the site and record the readings. Conventional
industry practice is to install one rectifier per mile of pipeline with
generally one transceiver (subscriber communication device) per rectifier.
However, several pipelines can be laid along one right-of-way, with a common
rectifier system, meaning that multiple rectifiers can feed into one transceiver
unit. The Company believes that its addressable market comprises the aggregate
number of rectifiers currently deployed on U.S. pipelines. In addition, the
Company believes that its addressable market for wells producing natural gas and
crude oil and gas and electric utility meters in the United States will be those
production wells and utility meters located in remote geographic locations.
Environmental. Many industrial companies and government agencies have a
need to monitor meteorological, hydrological and environmental data such as
rainfall, water levels and water quality at remote sites. For example, the
Environmental Protection Agency has established standards for air and water
quality that require pollution abatement procedures, which procedures rely
heavily on the automated logging and collection of data from remote sites. In
addition to pollutants, water monitoring devices are used to measure flow rate,
temperature and water level. The Company believes that the addressable market
comprises those sites that are located in highly remote areas not served by
terrestrial systems, which can use Subscriber Communicators to transmit small
amounts of data relatively infrequently and on an exception basis.
Marine. The Company has identified two U.S. marine industry segments,
Fisheries, and Barges and Workboats. The Company's addressable market is
expected to be those fishing vessels that operate primarily in the Gulf of
Alaska, the Northwest United States and the Northwestern Atlantic. These vessels
usually remain at sea for extended periods and operate on extremely tight
margins with operating costs that are carefully controlled. As a result, they
need low-cost communications systems to meet safety and regulatory requirements
and to exchange commercial and operational information with their offices, fuel
providers, provisioners and packing houses. The Company expects that the
addressable market for barges and workboats will comprise barges that operate
without independent sources of power and carry grain, coal and other
commodities. They traverse U.S. waterways in groups of barges that are "fleeted"
together and pushed by towboats and require energy-efficient monitoring and
communications devices to transmit position reports, cargo status reports and
security information. Tugs, towboats and supply/service boats also need low-cost
two-way communications to send operational and service-related data to their
land-based headquarters and receive dispatch instructions in return.
U.S. Government. The Company believes U.S. Government applications
represent a major target market for its services. Pressures to contain Federal
spending and specific acts of Congress have resulted in a major change in the
procurement practices in the Department of Defense ("DoD") and civil agencies,
causing them, where possible, to purchase satellite-based services from
commercial providers. The Company believes that use of LEO systems like the
ORBCOMM System will provide Government users with low-cost solutions, low
probability of intercept and detection and worldwide availability. The Company
believes that DoD programs have requirements currently unfulfilled by existing
systems. Each program promotes the vision of extending communications down to
individual soldiers and system operators. Currently, there is no dedicated
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DoD system available using inexpensive, small, lightweight communication units.
The Company expects to compete to provide LEO service to the U.S. Government,
including in connection with certain programs already announced by the U.S.
Government.
Foreign Governments. Use of Little LEO systems such as the ORBCOMM System
is expected to provide foreign governments with low-cost applications, low
probability of intercept and detection and worldwide availability. Potential
defense applications include transmission of GPS-determined position data for
maneuvering units and downed pilots and transmission of air defense, fire
support data, asset tracking and tactical messaging. Potential civil government
applications include wide-area clandestine communications, monitoring and
control of natural resources and search and rescue functions. For foreign
governments, the Company anticipates that the ORBCOMM System could improve
coverage and reliability and reduce the cost of such applications.
With respect to the provision by the Company of services using the ORBCOMM
System on an international basis, the Company believes that certain of its
international business activities, including its provision of services through
International Licensees to foreign end-users, public or private, will be
governed primarily by the internal laws of the relevant foreign countries or
regions. The provision of such services may also be subject to U.S. laws,
regulations and treaties regarding the export or sale of technology, products or
services by U.S. companies to foreign governments or private foreign entities,
including those U.S. laws, regulations and treaties that restrict or regulate
the export by U.S. companies of certain sensitive technologies, products or
services having military or other applications.
Future Markets. In addition to the markets and applications (such as those
described above) that have already displayed a demand for mobile data and
messaging communications services, the Company believes that with the full
deployment of the constellation, the ORBCOMM System's combination of
capabilities will stimulate new demand, especially among potential messaging
users. The Company expects that in the United States, the ORBCOMM System will
complement existing and planned terrestrial wireless communications systems, by
providing coverage in geographic areas where such services are not offered or by
enhancing data applications currently being provided through the PSTN or the
public switched data network ("PSDN"). Internationally, the Company believes
that the ORBCOMM System can offer services in developing countries or remote
regions where basic telephone service or data and messaging services are not
available. As a satellite-based system with coverage of virtually all of the
Earth's surface, the Company can efficiently and cost-effectively offer
communications services in these geographic areas through the ORBCOMM System.
Marketing
Domestic. The exclusive right to market the ORBCOMM System in the United
States is held by ORBCOMM USA. ORBCOMM USA has developed a comprehensive
marketing plan that includes distribution, applications development, customer
service and pricing strategies. Currently, while offering commercial
intermittent service, ORBCOMM USA is seeking to build an initial base of
subscribers in the United States and expand on its agreements with key channels
of distribution. During the fully operational stage, the Company expects that
ORBCOMM USA's sales and marketing staff will primarily support indirect channels
of distribution.
ORBCOMM USA is in the process of negotiating and signing agreements with
Resellers who purchase ORBCOMM System services directly from the Company and
resell these services to end-users in a specific industry and/or market as part
of a package that may include other products or services. In soliciting
customers, the Reseller "adds value" to the basic service offering by bundling
related applications software, hardware or product packaging for its respective
industry or market segment. Existing mobile data carriers are expected to offer
ORBCOMM System services by taking advantage of the ORBCOMM System's "gap-filler"
properties as well as its geolocation and acknowledgment features. Such
additional ORBCOMM partners are likely to come from such areas as paging,
personal communications services ("PCS"), mobile data, cellular and intelligent
transportation systems.
International. The Company holds the exclusive right to market the ORBCOMM
System outside the United States and has licensed this right to ORBCOMM
International. Provision of communication services
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using the ORBCOMM System outside the United States is expected to be achieved
through International Licensees authorized by ORBCOMM International. ORBCOMM
International has signed seven Service License Agreements with International
Licensees and is in the process of negotiating and signing additional Service
License Agreements covering various countries or regions of planned service
outside of the United States.
International Licensees will be responsible for obtaining all necessary
licenses and approvals for the use of the ORBCOMM System and the construction
and operation of the Gateways in the designated territories. Accordingly, in
selecting authorized International Licensees for a particular country, ORBCOMM
International considers such factors as an International Licensee's: (i)
reputation in the marketplace; (ii) existing distribution capabilities and
infrastructure; (iii) financial condition and other resources; and (iv) ability
to obtain the requisite local regulatory approvals. International Licensees will
pay fees for access to the ORBCOMM System in their territory, including a
monthly Satellite Usage Fee. The Satellite Usage Fee is calculated as the
greater of a percentage of gross operating revenues and a data throughput fee,
which percentage and dollar amount may be increased by the Company in accordance
with the terms of the Agreement.
In conjunction with the execution of a Service License Agreement, an
International Licensee will be required to purchase from ORBCOMM a Gateway,
which will include a specific number of Earth stations. In certain defined
circumstances, an International Licensee may be permitted by the Company to
share a Gateway with another International Licensee in an adjacent territory,
thereby reducing the initial out-of-pocket start-up costs for an ORBCOMM System
franchise. For example, ORBCOMM International has executed a Ground Segment
Facilities Use Agreement with ORBCOMM Canada, pursuant to which ORBCOMM Canada
is authorized for a fee to access and use the U.S. Gateway on a shared basis
with ORBCOMM USA.
System Architecture
Overview. The ORBCOMM System has been designed to provide for the delivery
and receipt of data communications and short, alphanumeric paging-like messages
anywhere in the world on a highly efficient and cost-effective basis. ORBCOMM
System satellites are designed specifically for the transmission of short
messages. This design focus eliminates a number of complex and expensive
components such as customized spot beams, on-board switching and high-powered
amplifiers that are required on larger, more complex satellites designed to
carry voice, video and data traffic. The less complex and more compact design of
the ORBCOMM System satellites (approximately 95 pounds) reduces the cost and
time of production and enables the Company to launch multiple satellites using a
single, relatively low-cost launch vehicle. The ORBCOMM System uses a digital
packet-switched communication protocol. The Company believes this design will
provide ORBCOMM with a substantial cost advantage versus the communication
protocols to be used by the proposed Big LEO systems such as Iridium and
Globalstar. Unlike the ORBCOMM System, Big LEO systems, which are designed
primarily for two-way voice traffic, are required to establish a circuit-
oriented connection over their network to transmit even short messages, which
significantly increases the per-message transmission cost for short messages.
The two ORBCOMM System satellites currently operational have provided the
Company with significant information regarding actual satellite performance in a
space environment. As a result of analyzing this information, as well as
information obtained prior to launch, ORBCOMM, in conjunction with Orbital, has
undertaken a redesign of certain system elements of the satellites. The Company
also continues to experience, from time to time, certain technical difficulties
with the ORBCOMM network, including unplanned outages of certain electronic
systems and subsystems on its initial two satellites resulting in the temporary
inability to process subscriber communications. While the Company believes these
technical difficulties have been addressed as experienced, and that none of
these difficulties has resulted in a significant degradation of satellite
performance, there can be no assurance that performance degradation in these two
satellites will not occur in the future.
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The ORBCOMM System consists of four operational segments: (i) a base space
segment consisting of a constellation of 28 LEO satellites; (ii) a ground
segment consisting of Gateways, the major elements of which include Earth
stations sending and receiving signals and a message switching system that
processes the message traffic; (iii) a control segment to monitor and manage the
flow of information through the system; and (iv) a subscriber segment consisting
of communicators used by subscribers to transmit and receive messages to and
from nearby satellites.
Space Segment. The base Space Segment will consist of a constellation of
28 satellites comprising three planes of eight satellites and two planes of two
satellites in highly inclined orbits (of which one plane of two satellites has
been launched), all at approximately 775 kilometers above the Earth. The two
in-orbit satellites are in a 70 degrees inclined plane at an altitude of
approximately 740 kilometers. The MicroStar(TM) satellites are produced by
Orbital and generally will be deployed in groups of eight using Orbital's
Pegasus(R) XL launch vehicle. Two satellites are to be placed in a
high-inclination orbit using an Orbital Taurus(R) launch vehicle. The design of
the remaining 26 satellites (as well as the eight ground spare satellites) is
expected to be substantially identical.
The satellites, each of which is a self-contained node of the ORBCOMM
System, are equipped with a VHF and UHF communications infrastructure capable of
transmission in the 137.0-150.05 MHz and the 400.075-400.125 MHz bands. The use
of the Earth-to-space spectrum is managed by an on-board computer that employs
an ORBCOMM-developed Dynamic Channel Activity Assignment System ("DCAAS"). The
DCAAS continuously scans the authorized spectrum, identifies frequencies in use
and assigns channels to minimize the possibility of interference. DCAAS is
expected to change the frequency of the uplink random access channels every five
to 15 seconds. The ORBCOMM System satellites can also transmit a UHF beacon that
provides Subscriber Communicator manufacturers with the ability to supply
enhanced, low-cost, Doppler positioning.
Under the terms of the ORBCOMM System Procurement Agreement (the
"Procurement Agreement") between Orbital and the Company, the Company is
purchasing, among other things, 34 LEO satellites and launch services for 26
satellites. Eight of the 34 satellites may be used as ground spares and launched
in the event of the loss of satellites as a result of a launch failure or
in-orbit satellite failure. In the event such satellites are not needed for such
purpose, ORBCOMM currently intends to launch these satellites as an additional
plane of eight, as authorized by the FCC License. This would increase global
coverage and provide additional system redundancy. Except for the communications
software, which is the responsibility of ORBCOMM, Orbital is responsible for the
performance of the satellites, the U.S. Earth stations and the satellite
management functionality of the Network Control Center ("NCC"). See Item 13,
Certain Relationships and Related Transactions.
The Procurement Agreement with Orbital provides for the launch of 24
satellites on the Pegasus XL. Orbital's Pegasus XL vehicle is launched from
beneath Orbital's leased, modified Lockheed L-1011 and is capable of deploying
satellites weighing up to 1,000 pounds into low-Earth orbit. Orbital conducted
five Pegasus missions in 1996. Following a comprehensive review of design,
assembly, test and operations procedures triggered by two earlier unsuccessful
flights, the Pegasus XL, an enhanced version of the standard Pegasus launch
vehicle, successfully launched a satellite for the U.S. Air Force to its
intended orbit in March 1996, and performed two successful National Aeronautics
and Space Administration ("NASA") missions during the summer of 1996. A standard
Pegasus also successfully launched a DoD satellite in May 1996. In November
1996, a Pegasus XL delivered two NASA scientific satellites to their designated
orbits but the satellites failed to separate from the launch vehicle. The
Pegasus separation system used on this launch has worked properly on all
previous launches on which it was deployed. Orbital believes that the problem
was caused by a faulty electrical power system on the Pegasus that failed to
activate certain satellite separation mechanisms and does not anticipate
significant further delays in its launch schedule to implement necessary
corrective action.
In addition, the Company expects to launch two additional satellites as a
secondary payload on Orbital's Taurus launch vehicle. Taurus is a four-stage,
ground-launched derivative of Pegasus. In March 1994, Orbital successfully
launched the first Taurus vehicle, deploying two satellites for the Defense
Advanced Research
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Projects Agency into their target orbits. The Taurus launch vehicle is being
modified to incorporate corrective actions undertaken in response to the
November 1996 Pegasus XL launch anomaly.
The ORBCOMM network is unique in that both the Ground Segment and the
Subscriber Segment (described below) communicate with the satellites in the same
band, thus eliminating the design complexity, as well as the associated mass,
power and cost, of supporting multiple radio payloads on a single satellite. The
satellites also contain an intelligent packet-routing capability, including a
limited store-and-forward capability.
Ground Segment. The Ground Segment consists of Gateways strategically
located throughout the world. The role of the Gateway is to provide access to
the Space Segment and interface to public and private data networks. The major
elements of a Gateway include:
- Earth stations, each of which is composed of two radomes, with enclosed
VHF tracking antennae, one of which is redundant, associated pedestal,
controller, and radio equipment;
- Gateway Message Switching System, which processes the message traffic and
provides the interconnection to the terrestrial networks; and
- Gateway Management System, which manages the Gateway elements.
To provide real time services using the ORBCOMM System in a particular
geographic region, an appropriately located Gateway is required. Substantially
all elements of the U.S. Gateway have been constructed, including four Earth
stations located in New York, Arizona, Georgia and Washington. ORBCOMM has
entered into agreements with six International Licensees for the construction of
Gateways outside the United States and expects to enter into similar additional
agreements in connection with the execution of new Service License Agreements.
The cost and implementation of these Gateways is expected to be borne by the
International Licensees.
The Gateway satellite links have been designed to make use of single uplink
and downlink channels for all ORBCOMM System satellites by using a Time Division
Multiple Access ("TDMA") protocol. This protocol will permit multiple Gateways
to communicate simultaneously with a single satellite. The TDMA protocol has
several advantages, including the ability to provide a virtually seamless
handover of a satellite from Earth station to Earth station under the
centralized control of the NCC.
Control Segment. The Control Segment monitors and manages all network
elements to ensure continuous, consistent operations in the provision of quality
service. The Control Segment is housed at the NCC. ORBCOMM is constructing a new
NCC, which is scheduled to be completed during the third quarter of 1997, that
will allow ORBCOMM to control, monitor and administer the 28 satellite
constellation and ground control assets.
The Control Segment systems include a network management system that
presents the status of all network elements and a space vehicle management
system. Through the U.S. Gateway, managed from the NCC, ORBCOMM has access to
the Space Segment for command and control purposes, although, consistent with
the rules and regulations of the FCC, OCC maintains ultimate control over the
ORBCOMM System.
Subscriber Segment. The Subscriber Segment consists of various models of
Subscriber Communicators that are generally designed to support specific
application needs of users. The Subscriber Communicator models will include: (i)
vehicular/battery-powered Subscriber Communicators that could be used in asset
tracking, cargo monitoring, or vehicular operation monitoring; (ii) externally
powered Subscriber Communicators for fixed applications such as pipeline
monitoring, remote device control, or environmental monitoring; and (iii)
self-contained, battery- and/or solar-powered Subscriber Communicators that
would support applications where commercial or other external power is not
available, including personal messaging applications.
Subscriber Communicators targeted for industrial or telemetric applications
are designed to interface with sensors or control devices through an
industry-standard serial interface using a proprietary communications protocol,
developed to take advantage of the packet nature of the ORBCOMM System.
Subscriber Communicators targeted for personal use will incorporate interfaces
such as integrated keyboards or touch-sensitive screens. Additionally, while the
ORBCOMM System satellites are designed to support Doppler
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position determination in the Subscriber Communicators, certain Subscriber
Communicator models will also be equipped with GPS receivers, permitting more
rapid and more accurate location determination.
SUMMARY SATELLITE DATA
The most significant characteristics of the satellites that comprise the
ORBCOMM System, such as their design specification, coverage and design life, as
well as licensing and launch information for the satellites, are summarized in
the following table.
NUMBER OF LAUNCH DESIGN
SATELLITES(1) PLANE LAUNCH DATE VEHICLE LICENSED LIFE
------------- ----------- ----------------------- ----------- -------------------- --------
A. OPERATIONAL(2)
1. FM 1-2 2 70 degrees April 1995 Pegasus October 20, 1994(3) 4 Years
B. LICENSED
1. FM 3-4 2 70 degrees Third Quarter 1997(4) Taurus(5) October 20, 1994 5 Years
2. FM 5-12 8 45 degrees Third Quarter 1997(4) Pegasus XL October 20, 1994 5 Years
3. FM 13-20 8 45 degrees Fourth Quarter 1997(4) Pegasus XL October 20, 1994 5 Years
4. FM 21-28 8 45 degrees First Quarter 1998(4) Pegasus XL October 20, 1994 5 Years
5. FM 29-36(6) 8 45 degrees Optional Pegasus XL October 20, 1994 5 Years
- ---------------
(1) Each of the satellites that comprise the ORBCOMM System is an Orbital
MicroStar satellite, measuring approximately 41 inches in diameter, 6.5
inches in height, 170 inches in deployed length and 88 inches in "deployed
width at solar arrays." Each of the ORBCOMM System satellites is currently
authorized to operate in the 137.0-138.0 MHz band with a power flux density
("PFD") limit on Earth of -125 dB (W/m(2)/4 kHz) for (satellite-to-
subscriber and -Earth station) transmissions. Also, each satellite currently
is authorized to operate at 400.1 MHz (P25 kHz) for satellite-to-subscriber
transmissions with no PFD limit. Each of the ORBCOMM System satellites also
is currently authorized to operate in the 148.0-149.9 MHz band for uplink
(subscriber- and Earth station-to-satellite) transmissions at five watts and
up to 10,000 watts, respectively. OCC has requested that the FCC license
additional frequencies located at 137.0-138.0 MHz and 149.9-150.05 MHz for
use by ORBCOMM.
(2) The two ORBCOMM System satellites that are currently in orbit provide
communications availability in the United States for approximately 10% of
each 24-hour period (eight to ten passes over a fixed point on the Earth's
surface each day), with maximum outages of approximately nine hours. ORBCOMM
expects that, with a planned constellation of 28 satellites, the ORBCOMM
System will provide communications availability generally exceeding 95% of
each 24-hour period in the United States and other temperate zones in the
Northern and Southern hemispheres and averaging 75% of each 24-hour period
in the equatorial region.
(3) The license for the ORBCOMM System issued to OCC by the FCC on October 20,
1994 supersedes the earlier experimental licenses granted to OCC and
includes the two satellites launched by OCC in April 1995. The October 20,
1994 license grants OCC the authority to construct, launch and operate 36
LEO satellites in the United States.
(4) Each of the future launch dates identified represents the currently targeted
launch date.
(5) These two satellites are intended to be launched as a secondary payload on a
Taurus launch vehicle, also manufactured by Orbital.
(6) These eight satellites represent ground spares that may be deployed as a
fourth plane by the Company, provided that, subject to FCC approval, the
Company may determine not to so deploy such satellites.
COMPETITION
Competition in the communications industry is intense, fueled by rapid and
continuous technological advances and alliances between industry participants
seeking to use such advances on an international scale to capture significant
market share. At this time, the ORBCOMM System is the only commercial Little LEO
system to be licensed fully for all segments of its system within the United
States. ORBCOMM inaugurated commercial service on February 1, 1996, becoming the
first commercial Little LEO mobile satellite service provider. The Company
believes that commencement of commercial service provides it with a substantial
head start in developing markets, distribution systems, applications and
customers globally. The Company expects that potential competitors will include
other Little LEO systems, such as Starsys Global Positioning, Inc. ("Starsys"),
Big LEO systems, such as the Iridium and Globalstar systems and several existing
and planned geosynchronous Earth orbit ("GEO") systems such as the American
Mobile Satellite Corporation system.
Starsys is licensed to construct and operate a multiple-satellite
constellation that, if deployed, could compete directly with the ORBCOMM System.
Starsys employs code division multiple access ("CDMA") modulation (spread
spectrum) that must operate in spectrum that is allocated on both a "primary"
and
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"secondary" basis to Little LEO services. As a result, Starsys will operate at
low power levels to avoid interference to other services. The low power levels
result in a maximum transmission rate of 600 bps from Subscriber Communicators
compared with 2,400 bps for the ORBCOMM System. In addition, the U.S. Government
has imposed a channel occupancy limit on Starsys of 25% of that permitted for
the ORBCOMM System to prevent interference to existing U.S. Government systems.
The Company believes that no operational Starsys satellites will be launched
until 1998 at the earliest, and that completion of the network will not be
accomplished before 2000.
One other entity has been licensed by the FCC to provide Little LEO
satellite services in the United States. Volunteers in Technical Assistance
("VITA"), a not-for-profit organization, has been licensed for one of the two
satellites for which it applied. VITA will use a small amount of uplink and
downlink spectrum to transmit health, research and scientific data on a delayed
basis between developing countries and the United States. VITA's first satellite
was destroyed in 1995 as a result of a launch vehicle failure. VITA has
requested that the FCC authorize it to launch a replacement satellite. It is
expected that the FCC will authorize VITA to launch a replacement satellite.
The Company does not expect that any of the other proposed Little LEO
systems currently participating in a second licensing round before the FCC will
be in a position to offer competing real time data and messaging communications
services before the year 2000. Even if the FCC were to license one or more of
these other applicants, the Company holds a substantial advantage over these
potential competitors by virtue of its having already obtained FCC licensing for
all elements of its system in the United States, by achieving, in large part,
international coordination of its designated frequencies through the ITU, and
having already designed, constructed and deployed a fully functional, end-to-end
system. Over the course of the next several years, the Company is expected to
obtain further advantages over these potential competitors by launching the
remaining satellites in the ORBCOMM System, by signing agreements with
additional Subscriber Communicator manufacturers, by signing reseller and
Service License Agreements with additional marketing entities and by expanding
its marketing activities generally as the ORBCOMM System matures.
Plans for other Little LEO systems have been announced in Russia, France,
Tonga, Brazil, Mexico, Uganda, Australia and Korea. However, with the sole
exception of the French candidate system, the ORBCOMM System and those of the
other U.S. licensees are expected to occupy all but a small portion of the
currently allocated spectrum and are protected from harmful interference from
all other systems.
The Big LEO systems, which will operate LEO mobile satellite systems using
radio frequencies above 1 GHz, are not expected to be ready for real time,
uninterrupted service before 1998. In addition, all the Big LEO systems are
designed primarily to provide two-way voice services which require larger, more
complex satellites than the ORBCOMM System satellites, and larger constellations
to provide coverage. As a result, the cost of the Big LEO systems is
significantly greater than those of the ORBCOMM System. Based on filings with
the FCC, Iridium anticipates an initial service date in 1998 for a proposed
66-satellite constellation to provide voice and other communications services at
usage charges of approximately $3.00 per minute plus tail charges (land-line
extension charges). The total system cost is expected to be approximately $4.7
billion. The Globalstar system is expected to cost approximately $2.5 billion
and consists of a constellation of 48 satellites with usage charges of
approximately $0.55 per minute. The announced objective service date for the
Globalstar system is in 1998. Another satellite system designed to provide
primarily voice communications is the Odyssey system, a project in which
Teleglobe has an interest. Odyssey is a medium-Earth orbit system, which will be
composed of 12 satellites operating at an altitude of 10,355 kilometers above
the Earth. Odyssey proposes to begin operations and to become fully operational
by 2001. The total system cost is expected to be approximately $2.5 billion.
Satellite-based communications systems are characterized by high up-front
costs and relatively low marginal costs of providing service. A number of Big
LEO and Little LEO systems are presently being constructed or proposed, and
while the proponents of these systems foresee substantial demand for the
services they will provide, the actual level of demand will not become known
until such systems are constructed, launched and begin operations. Big LEO and
GEO systems are designed primarily to provide two-way voice services, which
require larger, more complex satellites and require a circuit-oriented
connection over their
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network to transmit even short messages, which significantly increases their
per-message cost for such short messages. However, these systems could seek to
offer services similar to those offered by the ORBCOMM System. In such case,
price competition could be intense.
The ORBCOMM System is not intended to compete directly with existing and
planned terrestrial messaging and data systems including cellular paging
systems. The Company believes that the ORBCOMM System will complement these
services, including the cellular and paging services currently provided by TIW
or TRI, which provide low-cost services primarily in metropolitan areas where
subscriber densities justify construction of radio towers. Such systems
generally do not have sufficient coverage outside metropolitan areas, making
them less attractive to some vertical markets such as field service operations
and trucking, where assets spend large portions of their operating time outside
terrestrial system coverage areas. The ORBCOMM System presents an attractive
complement to tower-based services because it can provide geographic gap-filler
service at affordable costs without the need for additional infrastructure
investment.
It is expected that as terrestrial communications services expand to
regions currently underserved or not served by wireline or cellular services,
demand for ORBCOMM System service in these regions may be reduced. ORBCOMM may
also face competition in the future from companies using new technologies and
new satellite systems. A number of these new technologies, even if they are not
ultimately successful, could have an adverse effect on ORBCOMM as a result of
their initial marketing efforts. ORBCOMM's business would be adversely affected
if competitors begin operations or existing or new communications service
providers penetrate ORBCOMM's target markets before completion of the ORBCOMM
System. Additionally, as with any satellite-based system, the ORBCOMM System
will function when there is an unobstructed line-of-sight between the user and
one or more of the ORBCOMM System satellites overhead, and services will not be
available inside buildings or other similar structures. There can be no
assurance that these characteristics will not adversely affect subscriber demand
for the ORBCOMM System.
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REGULATION
United States FCC Regulation
Regulatory History of ORBCOMM System. All commercial non-voice,
non-geosynchronous ("NVNG") satellite systems, including Little LEO systems such
as the ORBCOMM System, in the United States are subject to the regulatory
authority of the FCC, which is the U.S. agency with jurisdiction over commercial
uses of the radio spectrum. Little LEOs must obtain an authorization from the
FCC to construct and launch their satellites and to operate their satellites to
provide services in assigned spectrum segments.
On February 28, 1990, OCC filed an application with the FCC for a Little
LEO system and on March 13, 1992 and May 28, 1993, the FCC awarded OCC
experimental licenses to develop and test a limited Little LEO service. These
licenses, plus other licenses previously granted to OCC, permitted the launch of
two satellites, the construction of two ground stations, the development and
production of 1,000 subscriber terminals and the marketing of revenue-producing
services.
On October 20, 1994, the FCC License was issued to OCC. Pursuant to the FCC
License, OCC was granted authority by the FCC to construct, launch and operate
an additional 34 satellites located 775 kilometers above Earth, in four inclined
orbital and two near-polar planes, for the purpose of providing two-way data and
message communications and position determination services in certain specified
segments of the radio frequency spectrum. The FCC License grants OCC the
authority to operate in certain segments of the radio frequency spectrum for its
uplink and downlink functions.
Uplink: 148.0-149.9 MHz
Downlink: 137.0-138.0 MHz and 400.075-400.125 MHz
The FCC License is for private carriage and extends ten years from the
operational date of the first ORBCOMM satellite, FM1, which was April 3, 1995.
The milestone requirements of the FCC License mandate that OCC launch its first
two satellites by December 1998 and its remaining 34 authorized satellites by
December 2000. OCC has already met the first milestone with the launch of its
first two satellites, FM1 and FM2, in April 1995. OCC has set an aggressive
launch schedule for 26 satellites that, if successful, will result in OCC
reaching the second milestone by the end of the first quarter of 1998, subject
to receipt of FCC approval by such date in the event ORBCOMM determines not to
deploy the eight ground spares as a fourth plane. In addition, OCC is required,
three years prior to the expiration of the FCC License, to apply for a license
renewal. Although the FCC has indicated that it is inclined to grant license
renewals to existing NVNG licensees, it is not certain that OCC's license would
be renewed should it apply.
Under the terms of a coordination agreement between Starsys and OCC, which
was incorporated into the terms of the FCC License, OCC is required to shut down
its left-hand circular polarization ("LHCP") satellite-to-subscriber downlink
channels under certain circumstances when operation of such channels would
interfere with the Starsys system. To further lessen the possibility of
co-polarization interference, OCC also agreed to modify its frequency plan to
locate its LHCP channels in the lower portion of the 137.0-138.0 MHz band.
Although this agreement only applies to OCC's domestic operations, the FCC
reserved the right to consider extending these coordination provisions to OCC's
international operations if notified of actual sharing difficulties between the
ORBCOMM System and Starsys.
In 1995, the FCC granted OCC licenses to operate four Earth stations in the
continental United States and granted OCC a blanket license to deploy up to
200,000 Subscriber Communicators. Thus, the ORBCOMM System is the only
commercial Little LEO system to be licensed fully for all segments of its system
within the United States.
Second Processing Round. On November 16, 1994, the FCC closed the
application filing period for applications for other proposed NVNG satellite
systems. Currently, there are seven NVNG applicants in the second processing
round (including OCC), each of which proposes to operate in all or part of the
same frequencies as the ORBCOMM System in the United States.
In its second round application before the FCC, OCC seeks authorization to
construct 12 more satellites to improve its high-latitude coverage over Alaska,
Canada and Europe, as well as to provide additional
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capacity and greater in-orbit redundancy. This proposal would require the FCC to
allocate an additional 90 kHz of spectrum in the 137-138 MHz downlink to OCC.
OCC also has requested use of an additional 50 kHz in the 149.9-150.05 MHz band
for a worldwide gateway uplink. This spectrum, while registered to OCC, is
currently occupied by Russian military satellite downlinks.
Although the FCC has closed the second processing round for NVNG systems,
it has not yet licensed any of the second round applicants. On October 29, 1996,
the FCC issued a Notice of Proposed Rulemaking (the "Notice") that sets forth
proposed rules for the second licensing round for Little LEO systems. In the
Notice, the FCC indicated that there was sufficient spectrum available for only
one to three additional licensees. Due to the scarcity of spectrum, the FCC
proposed to limit the second processing round to applicants who were not
licensed in the first processing round and are not affiliated with companies
licensed in the first processing round. In addition, to the extent there are
mutually exclusive applicants in the second round, the FCC has sought comments
on whether it should conduct an auction for the available licenses. The FCC
anticipates that it will issue a final order on licensing rules by April 1997
and that it will proceed to licensing promptly thereafter. If the FCC's proposal
to limit the second licensing round to "new" applicants is adopted and upheld,
it would exclude OCC from participation in the second round. If OCC is in fact
excluded from the second licensing round, OCC would likely only obtain
additional spectrum to provide expansion capacity for the ORBCOMM System if
additional spectrum is subsequently allocated for use by Little LEO systems.
Request for Modification of FCC License. On October 20, 1995, OCC
submitted to the FCC a request for modification of the FCC License (the
"Modification Request"), proposing to reduce each of the ORBCOMM System
satellites' subscriber downlinks operating in the 137-138 MHz band from two to
one, while changing the downlink data rate to a selectable rate of either 4.8 or
9.6 kbps, which would reduce ORBCOMM's overall bandwidth requirements by 40 kHz.
OCC also proposed to continue to operate at 4.8 kbps in high-inclination planes,
and at 56 kbps in the gateway downlink on all satellites. The Modification
Request would eliminate the need for OCC to shut down its LHCP when in view of a
Starsys Earth station and thus obviate many of the restrictions imposed on the
ORBCOMM System under the terms of the FCC License. In addition, the Modification
Request would facilitate coordination of the ORBCOMM System with Russian
meteorological satellites currently operating in this bandwidth and could
facilitate OCC's coordination efforts with the proposed French S/80-1 satellite
system. Several of the other second round applicants have filed comments with
the FCC opposing the Modification Request. The Modification Request has now
completed the public comment cycle and OCC believes that the Modification
Request will be granted within the next several months. Should the FCC fail to
grant the Modification Request, it could have a material adverse effect on the
ORBCOMM System.
International Regulation
ITU Spectrum Allocations. The ORBCOMM System operates both in the United
States and internationally using frequencies allocated for Little LEO systems in
the International Table of Frequency Allocations (the "International Table").
The International Table identifies radio frequency segments that have been
designated for specific radio services by the member nations of the
International Telecommunications Union (the "ITU"). Major portions of the 137 to
150 MHz band and a narrow portion of the spectrum band at 400 MHz have been
allocated on a global basis to Little LEO systems. The specific frequency
allocations for uplink and downlink operations include the following:
Uplink: 148.0-149.9 MHz (1.9 MHz on a primary basis)
Downlink: 137.0-138.0 MHz (675 kHz on a primary basis; 325 kHz on
a secondary basis)
400.15-401.00 MHz (850 kHz on a primary basis)
In addition, 3 MHz of uplink and 3 MHz of downlink frequencies have been
allocated on a secondary basis in the 300 MHz band. The band 400.075-400.125 MHz
licensed for use by the ORBCOMM System already was allocated previously on a
global basis to Time and Frequency Standard service and, the Company's planned
use of this bandwidth complies with the regulations governing its use.
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A designation of "primary" places the Little LEO systems on an equal
footing with existing users of these frequencies, subject to the provision that
they not interfere with those services or constrain their growth and, with
respect to certain countries and certain frequency bands, that the Little LEO
systems not claim protection from those other services. A "secondary"
designation means that the other users of the same frequencies have priority
over the Little LEO systems and are not required to accommodate or avoid
interference with them.
ITU Coordination. The United States, on behalf of OCC, is required to
coordinate the frequencies used by the ORBCOMM System through the ITU. ITU
frequency coordination is a necessary prerequisite to obtaining interference
protection from other satellite systems. The United States through the FCC, on
behalf of OCC, notified the ITU that the ORBCOMM System was placed in service on
April 3, 1995 and that it has operated without complaints of interference since
that time. The FCC also informed the ITU that OCC has successfully completed its
coordination with all other administrations except Russia and France and the FCC
has notified (registered) the ORBCOMM System with the ITU except for Russia and
France. The Company believes that the Modification Request would facilitate its
coordination efforts with Russia and could facilitate its coordination efforts
with France. OCC expects that it will successfully complete the ITU coordination
process with Russia and with France in 1997, at which time the ORBCOMM System
will be fully registered with the ITU and accorded protection from interference
from any other subsequently developed system.
ITU coordination is also required for the uplink ground segment of the
ORBCOMM System, but is the responsibility of individual administrations.
Depending on the location of particular ground stations, the applicable
coordination distance specified in the ITU procedures may extend across
international boundaries and require coordination by more than one government
authority.
Coordination with Intelsat and Inmarsat. Pursuant to the Intelsat treaty,
international satellite operators are required to demonstrate that they will not
cause economic or technical harm to Intelsat. OCC was notified in March 1995
that this coordination with Intelsat has been completed successfully. The
Inmarsat treaty similarly requires both technical and economic harm
coordination. OCC was notified in October 1995 that it had successfully
completed both technical and economic coordination with Inmarsat.
Regulation of Service Providers. Primary responsibility for obtaining
local regulatory approval to offer ORBCOMM System services in countries outside
the United States will reside with the various International Licensees. The
process for obtaining operating approval in foreign countries generally conforms
to the following model. The International Licensee requests operating authority
from the appropriate national regulatory body, which has the sole authority to
grant an operating license. Obtaining such local regulatory approvals normally
requires, among other things, that the International Licensee demonstrate the
absence of interference to other authorized uses of the spectrum in each
country. In some countries, this process may take longer due to heavier shared
use of the applicable frequencies and, in certain other countries, may require
reassignment of some existing users. The national regulatory authority may
choose to associate with the ORBCOMM ITU submission. The national regulatory
authority also will be required to submit so-called Appendix 3 information as
required by the ITU Radio Regulations in order to coordinate and protect ORBCOMM
Earth stations in the territory or region from interference by other ground
systems.
ORBCOMM Canada has received authority to operate in Canada and provide
services using the ORBCOMM System. In addition, experimental or provisional
operating authority for the ORBCOMM System has been granted in Japan, Italy,
Germany, France, Russia, Mexico, Venezuela, Colombia, Chile and Korea to several
International Licenses or proposed International Licensees.
The Company provides technical and regulatory assistance to its proposed
International Licensees in pursuing operating authority. The assistance provided
by the Company includes actual in-country demonstrations that the ORBCOMM System
can share use of the allocated spectrum with existing users while causing no
harmful interference or constraining operations and growth of those systems.
While International Licensees have been selected, in part, based on their
perceived qualifications to obtain the requisite foreign regulatory
authorizations, there can be no assurance that they will be successful in doing
so, and if they are not successful, service on the ORBCOMM System will not be
available in such countries. In addition, the
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continued operations of the International Licensees may be subject to other
regulatory requirements and changes in each foreign jurisdiction.
EMPLOYEES
As of December 31, 1996, ORBCOMM had 107 full-time employees, none of whom
is subject to any collective bargaining agreement. The Company's management
considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company currently leases approximately 31,000 square feet of office
space in Dulles, Virginia from Orbital. The Company currently operates four
Earth stations. The Company owns the properties on which the St. Johns, Arizona
and Arcade, New York Earth stations are located and leases, subject to long-term
lease agreements, the properties on which the Ocilla, Georgia and East
Wenatchee, Washington Earth stations are located.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings material to its
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company is a Delaware limited partnership that is owned 50% by OCC and
50% by Teleglobe Mobile. There is no public trading market for any class of
common equity of ORBCOMM. To date, no cash dividends have been paid by ORBCOMM
to either OCC or Teleglobe Mobile and the Company does not intend to do so in
the near future.
There are no distributions required to be made to the partners of the
Company other than a minimum annual distribution required by the ORBCOMM
Partnership Agreement in the amount of (i) 40%, multiplied by the lesser of (a)
such partners distributive share of the Company's taxable income for the
preceding year, and (b) the excess, if any, of cumulative Net Income (as
defined) over cumulative Net Loss (as defined) allocated to such partner since
the inception of the Company. All other distributions are to be made at the
discretion of the partners. Pursuant to the covenants contained in the Indenture
dated August 7, 1996 among ORBCOMM, Capital and Marine Midland Bank, as trustee
(the "Indenture") governing the Notes, no additional cash distributions are
permitted to be made to the partners of the Company other that those
distributions that satisfy the requirements of the various limitations on
"Restricted Payments" contained in the Indenture.
ITEM 6. SELECTED FINANCIAL DATA
The following selected income and expense data of ORBCOMM for the years
ended December 31, 1994, 1995 and 1996 and the selected balance sheet data of
ORBCOMM at December 31, 1993, 1994, 1995 and 1996 have been derived from the
audited financial statements of ORBCOMM. The selected financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
of ORBCOMM and notes thereto included elsewhere in this report. SINCE THE
COMPANY ACCOUNTS FOR ITS OWNERSHIP IN BOTH ORBCOMM USA AND
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ORBCOMM INTERNATIONAL USING THE EQUITY METHOD, REFERENCE IS MADE TO THE
FINANCIAL STATEMENTS OF ORBCOMM USA AND ORBCOMM INTERNATIONAL LOCATED ELSEWHERE
IN THIS REPORT.
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------- --------- ------------
Income and Expense Data:(1)
Total income(2)................................... $ 0 $ 958,415(3) $ 3,974,948(3)
Equity in earnings (losses) of affiliates(4)...... 0 (853,270) (4,602,096)
Excess (deficiency) of income over expenses....... (9,062) 55,202 (19,480,178)
DECEMBER 31,
-------------------------------------------------------------
1993 1994 1995 1996
----------- ----------- ------------ ------------
Balance Sheet Data:
Cash and cash equivalents......... $ 0 $ 5,000,000 $ 1,784,950 $ 56,870,424
Investments(5).................... 0 0 0 96,612,441
Mobile Communications Satellite
System, net(6)................. 43,924,717 68,646,861 106,989,940 170,033,722
Total assets...................... 47,665,519 73,646,861 109,029,658 329,509,214
Long-term debt.................... 0 5,000,000 4,174,430 173,269,619
Partners' capital................. 47,665,519 58,509,418 94,601,239 137,941,554
- ---------------
(1) For the period June 30, 1993 (date of inception) through December 31, 1993,
there were no income and expense transactions.
(2) The Company is a development stage enterprise and had no significant system
revenue.
(3) Comprises interest income (expense), net and a non-refundable fee received
from a potential International Licensee.
(4) The Company accounts for its investments in ORBCOMM USA and ORBCOMM
International using the equity method of accounting.
(5) Includes $13 million of the net proceeds of the Old Notes Offering deposited
by ORBCOMM and Capital into a segregated account to be used solely for
purposes of funding the development and deployment of the ORBCOMM System and
related operating expenses. Also includes approximately $44.8 million in a
segregated account to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998 (the "Pledge Account") and
approximately $3.8 million in a segregated account related to the loan (the
"MetLife Note") provided under the Loan and Security Agreement dated
December 22, 1994 between the Company and MetLife Capital Corporation
("MetLife").
(6) Represents the ORBCOMM System.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In 1993, the Company was formed by Orbital, acting through OCC, and
Teleglobe, acting through Teleglobe Mobile. Each of OCC and Teleglobe Mobile
acquired and currently owns a 50% interest in the Company, with TRI through TR
(U.S.A.) Ltd. now holding a 30% interest in Teleglobe Mobile. Concurrently with
the formation of the Company, OCC and Teleglobe Mobile formed two marketing
partnerships, ORBCOMM USA and ORBCOMM International (collectively, the
"Marketing Partnerships"), with the exclusive right to market the ORBCOMM System
in the United States and internationally, respectively. The Company is a 98%
general partner in each of the Marketing Partnerships, while OCC and Teleglobe
Mobile control the remaining 2% of ORBCOMM USA and ORBCOMM International,
respectively. OCC retains control over the applicable FCC licenses and the
ORBCOMM System, consistent with FCC regulations.
To date, OCC and Teleglobe Mobile have invested an aggregate of
approximately $160 million in the ORBCOMM project. In addition, on August 7,
1996, the Company and Capital completed the Old Notes Offering. In January 1997,
all of the Old Notes were exchanged for the Notes, which are substantially
similar to the Old Notes, except that the Notes are registered under the
Securities Act of 1933, as amended. The Notes are fully and unconditionally
guaranteed on a joint and several basis by OCC, Teleglobe Mobile, ORBCOMM USA
and ORBCOMM International, except that the guarantees are nonrecourse to the
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shareholders and/or partners of the guarantors, limited only to the extent
necessary for each such guarantee not to constitute a fraudulent conveyance
under applicable law.
ORGANIZATIONAL STRUCTURE; FINANCIAL REPORTING
Pursuant to the terms of the partnership agreements for the Company and the
Marketing Partnerships: (i) OCC and Teleglobe Mobile share equal responsibility
for the operational and financial affairs of the Company; (ii) OCC generally
controls the operational and financial affairs of ORBCOMM USA; and (iii)
Teleglobe Mobile generally controls the operational and financial affairs of
ORBCOMM International. Since OCC and Teleglobe Mobile have effective control
over ORBCOMM USA and ORBCOMM International, respectively, the Company accounts
for the Marketing Partnerships using the equity method of accounting. The
Company does not consolidate, and therefore does not report in its financial
statements, ORBCOMM USA's and ORBCOMM International's actual assets, liabilities
and operating revenues and expenses. Instead, the Company's proportionate share
of the excess (deficiency) of income over expenses of the Marketing Partnerships
is recorded under the caption "Equity in Earnings (Losses) of Affiliates" in the
Company's financial statements. Correspondingly, the Company's investment in the
Marketing Partnerships is carried at cost, subsequently adjusted for the
proportionate share of net income and losses, additional capital contributions
and distributions under the caption "Investments in and Advances to Affiliates."
Investors are encouraged to refer to the financial statements of both ORBCOMM
USA and ORBCOMM International included elsewhere in this report.
ORBCOMM USA pays to OCC an Output Capacity Charge that is a quarterly fee
equal to 23% of its total service revenues for such calendar quarter in exchange
for the exclusive right to market, sell, lease and franchise all ORBCOMM System
output capacity in the United States and exclusive use of the tangible assets
(including software) to be delivered to ORBCOMM pursuant to certain procurement
agreements (the "System Assets") located in the United States. In consideration
of the construction and financing of the System Assets, OCC, in turn, pays to
the Company a System Charge that is a quarterly fee equal to the Output Capacity
Charge minus 1.15% of Total Aggregate Revenues, defined as the total of ORBCOMM
USA and ORBCOMM International total system service revenues.
ORBCOMM International pays to Teleglobe Mobile an International Output
Capacity Charge that is a quarterly fee equal to 23% of its total service
revenues for such calendar quarter in exchange for the exclusive right to
market, sell, lease and franchise all ORBCOMM System output capacity outside the
United States. In consideration of the grant to Teleglobe Mobile of the
exclusive right to market, sell, lease and franchise all ORBCOMM System output
capacity outside the United States, Teleglobe Mobile, in turn, pays to the
Company an International System Charge that is a quarterly fee equal to the
International Output Capacity Charge minus 1.15% of Total Aggregate Revenues as
defined above.
SERVICE ROLL-OUT
The roll-out of ORBCOMM System services will occur in two stages.
Commercial intermittent service commenced in the United States in February 1996.
The Company currently serves several U.S. market segments that can benefit from
intermittent data communications services, such as oil and gas pipeline
monitoring, certain environmental monitoring, and tracking and positioning
applications. As additional satellites are added to the constellation, it will
become possible to serve additional market segments such as certain messaging
applications that require real time services. Two additional satellites are
planned to be launched on a Taurus launch vehicle and an additional eight
satellites are planned to be launched on a Pegasus XL launch vehicle during the
third quarter of 1997. Service outside the United States will be provided as
International Licensees receive regulatory approval and build network ground
systems.
To facilitate the introduction and development of commercial service, the
Company procured several thousand Subscriber Communicators from certain of its
Subscriber Communicator manufacturers. The Company believes that this inventory
will be sufficient to support certain market sales activities into the second
half of 1997.
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REVENUE
Currently, during the period of commercial intermittent service, ORBCOMM
USA is building an initial base of subscribers in the United States through the
negotiation and execution of agreements with Resellers. Resellers purchase
ORBCOMM System services directly from ORBCOMM USA and resell these services to
end-users in a specific industry and/or market.
In the United States, service pricing is based on many variables, including
the availability and cost of substitute services, the cost of providing service
and the nature of the user application. Pricing generally incorporates an
initial registration charge, a recurring monthly charge for access to the
ORBCOMM System and usage charges based on the customer's activity. In charging
for registration, access and usage, the Company has developed a pricing
structure in the United States that suits the initial markets addressed by the
existing two-satellite system. Priority and other real time messaging pricing
will be developed as the full deployment of satellites in the ORBCOMM System
occurs. It is likely that multiple pricing alternatives will be offered in the
United States, including peak/off-peak, volume discounts and annual contract
commitment options.
The Company has a standard Service License Agreement for execution by
International Licensees outside the United States. International Licensees are
responsible for obtaining all necessary licenses and approvals for use of the
ORBCOMM System in their territory. Certain International Licensees will pay to
ORBCOMM International a fixed fee in exchange for the exclusive right to use the
ORBCOMM System in a specified service territory. In addition, International
Licensees will pay a monthly Satellite Usage Fee based on the greater of a
percentage of gross operating revenues and a data throughput fee. On the
execution of a Service License Agreement, International Licensees are required
to purchase a Gateway from ORBCOMM International or share the U.S. Gateway or a
closely located Gateway operated by an International Licensee.
Retail pricing in their respective territories will be at the discretion of
the International Licensees and is expected to vary from country to country to
reflect variations in economic conditions, the availability of substitute
services, local customs and government policy as required to be competitive with
other services.
OPERATING EXPENSES
As discussed above, the Company owns and operates the assets other than the
FCC License that comprise the ORBCOMM System. Satellite-based communications
systems are characterized by high up-front capital expenditures and relatively
low marginal costs for providing service. The Company has been depreciating some
of its assets, recording a depreciation charge in its statement of income and
expenses, beginning in January 1996. Additionally, the Company incurs, and
reports in its financial statements, engineering and other operating expenses
associated with the actual operation of the ORBCOMM System.
RESULTS OF OPERATIONS -- ORBCOMM
The Company commenced commercial intermittent service in the United States
on February 1, 1996 and has generated nominal revenues and negative cash flow to
date. The Company's activities have focused primarily on the acquisition of
regulatory approvals for operation of the ORBCOMM System, design, construction
and deployment of its initial satellites and associated network systems,
negotiation of agreements with domestic Resellers, execution of Service License
Agreements with International Licensees, identification of potential
International Licensees in countries outside the United States, identification
and authorization of Subscriber Communicator manufacturers and hiring of
management and other key personnel. The Company expects to continue to generate
negative cash flow through most of 1998.
Income. In 1995, the Company received a nonrefundable fee from a potential
International Licensee. The Company recognized this nonrefundable fee over the
term of the relevant agreement. No such fees were received in earlier periods or
during the year ended December 31, 1996.
In late 1994, the Company received the MetLife Note to help finance a
portion of the ORBCOMM System. In addition, in August 1996, ORBCOMM closed the
Old Notes Offering. The proceeds from the sale of the Old Notes are invested
primarily in short term government securities, with certain restrictions
attached
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to all of the investment portfolio. In January 1997, all of the Old Notes were
exchanged for the Notes. The Company recognized interest income on the invested
portion of the MetLife Note and the proceeds of the Old Notes Offering of
approximately $58,000 and $3,861,000 for the years ended December 31, 1995 and
1996, respectively.
Expenses. As discussed above, the Company is in its development stage and
does not anticipate emerging from the development stage until mid-1998. During
the construction phase of the ORBCOMM System, the Company has capitalized all
construction costs, consisting primarily of satellites, launch vehicles and the
U.S. ground segment acquired from Orbital. Research and development expenses and
selling, general and administrative costs have been expensed in the period
incurred. Interest expense, where appropriate, related to the MetLife Note, the
Old Notes and the Notes has been capitalized as part of the historical cost of
the ORBCOMM System.
The Company incurred approximately $9,000, $50,000 and $6,933,000 of
marketing, administrative and other expenses for the years ended December 31,
1994, 1995 and 1996, respectively. The Company incurred approximately $5,453,000
of ORBCOMM System engineering expenses for the year ended December 31, 1996
(none for the years ended December 31, 1994 and 1995). The Company is
capitalizing a portion of engineering direct labor costs that relates to
hardware and system design development and coding of the software products that
enhance the operation of the ORBCOMM System. The Company also incurred
approximately $6,199,000 in ORBCOMM System depreciation expense for the year
ended December 31, 1996, as the ORBCOMM System became available for service in
early 1996 (none for the years ended December 31, 1994 and 1995).
Equity in Earnings (Losses) of Affiliates. The Company recognized its
share of ORBCOMM USA's and ORBCOMM International's losses, consisting primarily
of marketing expenses, of approximately $853,000 for the year ended December 31,
1995 and approximately $4,602,000 for the year ended December 31, 1996 (none for
the year ended December 31, 1994). Each of ORBCOMM USA and ORBCOMM International
formally began their marketing efforts in 1995 in anticipation of commercial
service in 1996.
RESULTS OF OPERATIONS -- ORBCOMM USA
Income. In 1994 and 1995, ORBCOMM USA performed marketing activities for
the U.S. market pursuant to a contract with OCC (the "System Charge Agreement"),
whereby OCC reimbursed ORBCOMM USA for all marketing costs incurred.
Accordingly, ORBCOMM USA recognized contract revenues of approximately
$2,093,000 and $1,360,000 for the years ended December 31, 1994 and 1995,
respectively. The U.S. marketing service portion of the System Charge Agreement
expired in 1995. During 1996, ORBCOMM USA recognized its first revenues relating
to the provision of products and services of approximately $240,000.
Expenses. ORBCOMM USA incurred approximately $2,984,000 of marketing and
administrative expenses and $262,000 of cost of product sales for the year ended
December 31, 1996, once the ORBCOMM System began operations. Pursuant to the
System Charge Agreement, ORBCOMM USA incurred contract marketing costs of
approximately $2,093,000 and $1,360,000 for the years ended December 31, 1994
and 1995, respectively.
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RESULTS OF OPERATION -- ORBCOMM INTERNATIONAL
Expenses. ORBCOMM International incurred approximately $1,692,000 of
marketing and administrative expenses for the year ended December 31, 1996 (none
for the years ended December 31, 1994 and 1995).
Service License Agreements. During 1996, ORBCOMM International signed five
Service License Agreements and associated Gateway procurement contracts and
software license agreements with International Licensees covering Europe, the
Malaysian Region, a portion of North Africa, Turkey and the Middle East. The
Service License Agreements authorize the International Licensees to use the
ORBCOMM System to provide two-way messaging and data communication services.
Under these agreements, approximately $6,147,000 has been received and recorded
as deferred revenue at December 31, 1996. ORBCOMM International generally
recognizes fees from Service License Agreements ratably over the term of the
agreement, or when ORBCOMM International's obligations thereunder are
substantially complete. Revenue under the gateway procurement contracts is
recognized when products are shipped or when customers have accepted the
products or services, depending on contractual terms.
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SUPPLEMENTAL DATA
Set forth below is certain supplemental data for the ORBCOMM System
comprising data of the Company, ORBCOMM USA and ORBCOMM International for the
year ended December 31, 1996. Such supplemental data should be read in
conjunction with the financial statements of the Company, ORBCOMM USA and
ORBCOMM International and the notes thereto located elsewhere in this report.
SUPPLEMENTAL DATA
YEAR ENDED DECEMBER 31, 1996
ORBCOMM ORBCOMM ELIMINATION
ORBCOMM USA INTERNATIONAL ENTRIES TOTAL
------------ ----------- ----------- --------- ------------
Revenue(1)................ $ 420,760 $ 240,248 $ 8,000 $(268,350) $ 400,658
Interest income (expense),
net..................... 3,554,188(2) 0 0 3,554,188
Expenses.................. 18,853,030(3) 3,246,006 1,698,258 268,350 23,528,944
Earnings (loss) before
interest and taxes...... (14,878,082)(4) (3,005,758) (1,690,258) (19,574,098)
Net income (loss)......... (14,878,082)(4) (3,005,758) (1,690,258) (19,574,098)
Capital expenditures...... 69,242,301(5) 0 0 69,242,301
SUPPLEMENTAL DATA
AS OF DECEMBER 31, 1996
ORBCOMM ORBCOMM
ORBCOMM USA INTERNATIONAL TOTAL
------------ ------- ------- ------------
Cash and cash equivalents................ $ 56,870,424 $ 0 $ 0 $ 56,870,424
Mobile Communications
Satellite System, net.................. 170,033,722 0 0 170,033,722
Total debt............................... 173,269,619 0 0 173,269,619
Subscriber Communicators (units)......... 0 271 54 325
- ---------------
(1) As development-stage companies, none of the Company, ORBCOMM USA and ORBCOMM
International had any significant operating revenues for the year ended
December 31, 1996.
(2) Net of $306,594 of amortization of deferred financing fees.
(3) Includes depreciation expenses of $6,198,519. Approximately $10,030,000 of
interest expense was capitalized in 1996.
(4) Excludes equity in losses of affiliates of $(4,602,096).
(5) Represents capital expenditures, principally for the construction of the
space and ground network system elements.
LIQUIDITY AND CAPITAL RESOURCES
The development of the Company's business, launch of the initial two
satellites and construction of the network control center and U.S. Gateway have
resulted in substantial capital expenditures during the past several years.
Capital expenditures by the Company were approximately $25,000,000, $38,000,000,
and $69,000,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
A combination of operating losses and substantial capital expenditures
related to the development of the ORBCOMM System has resulted in negative cash
flow since 1994. Funding of this cash flow deficiency has been accomplished
through capital contributions from OCC and Teleglobe Mobile and through the
proceeds from the Old Notes Offering and the MetLife Note. The Company expects
to have to continue to fund operating losses as the Company develops and expands
its business. The Company has set aside a sufficient amount in a segregated
account to provide for payment in full of interest on the Old Notes and Notes
through August 15, 1998. Following August 15, 1998, interest expense on the
Notes will represent a significant cash requirement for the Company.
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The total cost of the construction and deployment of the ORBCOMM System is
estimated to be approximately $258,000,000. Of this amount, approximately
$202,000,000 will be used for the satellite constellation, ground spares and
launch services, approximately $30,000,000 will be used for the U.S. ground
segment, approximately $8,000,000 will be used for insurance and approximately
$18,000,000 will be used for other costs. As of December 31, 1996, approximately
$176,000,000 of this amount had been expended. To date, the Company's partners
have invested approximately $160,000,000 in the ORBCOMM project. Such equity
investment, together with the proceeds of the Old Notes Offering and cash
expected to be generated from operations, is expected to allow the Company to
meet its financial obligations through at least the end of 1997. The Company
believes that a significant portion of cash from operations through the end of
1997 will be generated through international license fees obtained by entering
into Service License Agreements. The Company expects that its capital
requirements in 1998 will be provided by cash flows from operations and,
consistent with the covenants contained in the Indenture governing the Notes,
credit facilities and operating lease arrangements.
The Notes contain a revenue participation feature providing for payment by
the Company, on each interest payment date, of interest ("Revenue Participation
Interest") in an aggregate amount equal to 5.0% of System Revenue (as defined in
the Indenture) for the six-month period ending on December 31 or June 30 most
recently completed prior to such interest payment date. The Company is not
required to pay any Revenue Participation Interest, however, until the Credit
Parties Fixed Charge Coverage Ratio (as defined in the Indenture) for the four
consecutive fiscal quarters last completed prior to such interest payment date
equals or exceeds 2.0:1. Once this ratio is exceeded, the Company will have to
pay additional interest on the Notes beyond the base rate of 14%, which will
negatively impact the Company's liquidity.
There are no distributions required to be made to the partners of the
Company other than a minimum annual distribution required by the ORBCOMM
Partnership Agreement in the amount of (i) 40%, multiplied by the lesser of (a)
such partners' distributive share of the Company's taxable income for the
preceding year, and (b) the excess, if any, of cumulative Net Income (as
defined) over cumulative Net Loss (as defined) allocated to such partner since
the inception of the Company. All other distributions are to be made at the
discretion of the partners. See Item 13, The Partnership
Agreement -- Allocations and Distributions. Pursuant to the covenants contained
in the Indenture, no additional cash distributions are permitted to be made to
the partners of the Company other that those distributions that satisfy the
requirements of the various limitations on "Restricted Payments" contained in
the Indenture. To the extent that such requirements are met and the partners
receive additional cash distributions from the Company beyond that required by
the ORBCOMM Partnership Agreement, this could negatively impact the Company's
liquidity.
LOAN AGREEMENT WITH METLIFE CAPITAL CORPORATION
Under the terms of the MetLife Note, MetLife loaned $5 million to the
Company, and in connection therewith the Company granted to MetLife a security
interest in certain equipment of the Company. The MetLife Note is guaranteed by
Orbital. As of December 31, 1996, approximately $3,300,000 was outstanding under
the MetLife Note. The Notes rank pari passu in right and priority of payment
with the MetLife Note, except to the extent of the collateral securing such
MetLife Note.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
ORBCOMM GLOBAL, L.P.
Independent Auditors' Report......................................................... 25
Balance Sheets as of December 31, 1995 and 1996...................................... 26
Statements of Income and Expenses for the Years Ended December 31, 1994, 1995 and
1996 and Total Accumulated During Development Stage through December 31, 1996..... 27
Statements of Partners' Capital for the Years Ended December 31, 1993, 1994, 1995 and
1996.............................................................................. 28
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and
Total Cash Flows During Development Stage through December 31, 1996............... 29
Notes to Financial Statements........................................................ 30
ORBCOMM USA, L.P.
Independent Auditors' Report......................................................... 36
Balance Sheets as of December 31, 1995 and 1996...................................... 37
Statements of Income and Expenses for the Years Ended December 31, 1994, 1995 and
1996 and Total Accumulated During Development Stage through December 31, 1996..... 38
Statements of Partners' Capital for the Years Ended December 31, 1993, 1994, 1995 and
1996.............................................................................. 39
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and
Total Cash Flows During Development Stage through December 31, 1996............... 40
Notes to Financial Statements........................................................ 41
ORBCOMM INTERNATIONAL PARTNERS, L.P.
Independent Auditors' Report......................................................... 44
Balance Sheets as of December 31, 1995 and 1996...................................... 45
Statements of Income and Expenses for the Years Ended December 31, 1994, 1995 and
1996 and Total Accumulated During Development Stage through December 31, 1996..... 46
Statements of Partners' Capital for the Years Ended December 31, 1993, 1994, 1995 and
1996.............................................................................. 47
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and
Total Cash Flows During Development Stage through December 31, 1996............... 48
Notes to Financial Statements........................................................ 49
ORBITAL COMMUNICATIONS CORPORATION
Independent Auditors' Report......................................................... 52
Consolidated Balance Sheets as of December 31, 1995 and 1996......................... 53
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and
1996.............................................................................. 54
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1994, 1995 and 1996.................................................. 55
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996.............................................................................. 56
Notes to Consolidated Financial Statements........................................... 57
TELEGLOBE MOBILE PARTNERS
Auditors' Report..................................................................... 63
Report of Independent Certified Public Accountants................................... 64
Consolidated Balance Sheets as of December 31, 1995 and 1996......................... 65
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and
1996 and Total Accumulated During Development Stage through December 31, 1996..... 66
Consolidated Statements of Partners' Capital for the Years Ended December 31, 1994,
1995 and 1996..................................................................... 67
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996 and Total Cash Flows During Development Stage through December 31, 1996...... 68
Notes to Consolidated Financial Statements........................................... 69
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INDEPENDENT AUDITORS' REPORT
The Partners
ORBCOMM Global, L.P.:
We have audited the accompanying balance sheets of ORBCOMM Global, L.P.
("ORBCOMM") (a development stage enterprise) as of December 31, 1996 and 1995,
and the related statements of income and expenses, partners' capital, and cash
flows for each of the years in the three year period ended December 31, 1996 and
for the period from June 30, 1993 (date of inception) through December 31, 1996.
These financial statements are the responsibility of ORBCOMM's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ORBCOMM (a development stage
enterprise) as of December 31, 1996 and 1995, and the results of its income and
expenses, partners' capital and cash flows for each of the years in the three
year period ended December 31, 1996 and for the period from June 30, 1993 (date
of inception) through December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Washington, DC
January 31, 1997
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ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31,
-----------------------------
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 1,784,950 $ 56,870,424
Short-term available-for-sale investments..................... 0 31,433,390
Short-term held-to-maturity investments....................... 0 23,335,992
Receivable -- Orbital Communications Corporation.............. 0 114,784
Receivables -- other.......................................... 0 637,727
Inventory..................................................... 446,684 1,751,270
------------ ------------
Total Current Assets....................................... 2,231,634 114,143,587
LONG TERM ASSETS:
Long-term available-for-sale investments...................... 0 20,364,987
Long-term held-to-maturity investments........................ 0 21,478,072
Receivables -- other.......................................... 0 517,370
Mobile Communications Satellite System, net of accumulated
depreciation............................................... 106,989,940 170,033,722
Other assets, net............................................. 0 6,137,567
Investments in and advances to affiliates..................... (191,916) (3,166,091)
------------ ------------
TOTAL ASSETS.......................................... $109,029,658 $329,509,214
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Current portion of long-term debt............................. $ 904,811 $ 991,652
Accounts payable.............................................. 4,037,675 4,610,786
Accrued expenses.............................................. 6,116,314 13,687,255
Deferred revenue.............................................. 100,000 0
------------ ------------
Total Current Liabilities.................................. 11,158,800 19,289,693
Long-term debt................................................ 3,269,619 172,277,967
------------ ------------
Total Liabilities.......................................... 14,428,419 191,567,660
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile Partners..................................... 33,517,008 73,595,777
Orbital Communications Corporation............................ 61,084,231 64,345,777
------------ ------------
Total Partners' Capital.................................... 94,601,239 137,941,554
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............... $109,029,658 $329,509,214
============ ============
(See accompanying notes to the financial statements)
26
29
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF INCOME AND EXPENSES
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
STAGE
YEAR ENDED DECEMBER 31, THROUGH
-------------------------------------- DECEMBER 31,
1994 1995 1996 1996
------- --------- ------------ ------------
INCOME:
Product sales.......................... $ 0 $ 0 $ 268,350 $ 268,350
Distribution fees...................... 0 900,000 100,000 1,000,000
Other.................................. 0 0 52,410 52,410
------- --------- ----------- -----------
Total Income........................ 0 900,000 420,760 1,320,760
EXPENSES:
Cost of product sales.................. 0 0 268,350 268,350
Depreciation........................... 0 0 6,198,519 6,198,519
Engineering expenses................... 0 0 5,453,299 5,453,299
Marketing, administrative and other
expenses............................ 9,062 49,943 6,932,862 6,991,867
------- --------- ----------- -----------
Total Expenses...................... 9,062 49,943 18,853,030 18,912,035
------- --------- ----------- -----------
Income (loss) from operations....... (9,062) 850,057 (18,432,270) (17,591,275)
OTHER INCOME AND EXPENSES:
Interest income (expenses), net........ 0 58,415 3,554,188 3,612,603
Equity in earnings (losses) of
affiliates.......................... 0 (853,270) (4,602,096) (5,455,366)
------- --------- ----------- -----------
EXCESS (DEFICIENCY) OF INCOME
OVER EXPENSES.......................... $(9,062) $ 55,202 $(19,480,178) $(19,434,038)
======= ========= =========== ===========
(See accompanying notes to the financial statements)
27
30
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF PARTNERS' CAPITAL
ORBITAL
TELEGLOBE MOBILE COMMUNICATIONS
PARTNERS CORPORATION TOTAL
---------------- -------------- --------------
Capital contributions........................ $ 10,000,000 $ 38,148,997 $ 48,148,997
Excess (deficiency) of income over
expenses.................................. 0 0 0
Financing fees............................... (241,739) (241,739) (483,478)
----------- ----------- ------------
PARTNERS' CAPITAL, DECEMBER 31, 1993........... 9,758,261 37,907,258 47,665,519
Capital contributions........................ 0 10,852,961 10,852,961
Excess (deficiency) of income over
expenses.................................. (4,531) (4,531) (9,062)
----------- ----------- ------------
PARTNERS' CAPITAL, DECEMBER 31, 1994........... 9,753,730 48,755,688 58,509,418
Capital contributions........................ 24,750,000 13,315,265 38,065,265
Excess (deficiency) of income over
expenses.................................. 27,601 27,601 55,202
Financing fees............................... (1,014,323) (1,014,323) (2,028,646)
----------- ----------- ------------
PARTNERS' CAPITAL, DECEMBER 31, 1995........... 33,517,008 61,084,231 94,601,239
Capital contributions........................ 49,775,000 12,957,777 62,732,777
Excess (deficiency) of income over
expenses.................................. (9,740,089) (9,740,089) (19,480,178)
Unrealized gains on available-for-sale
investments............................... 43,858 43,858 87,716
----------- ----------- ------------
PARTNERS' CAPITAL, DECEMBER 31, 1996........... $ 73,595,777 $ 64,345,777 $ 137,941,554
=========== =========== ============
(See accompanying notes to the financial statements)
28
31
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
TOTAL CASH
FLOWS DURING
DEVELOPMENT
YEAR ENDED DECEMBER 31, STAGE THROUGH
------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
------------ ------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Excess (deficiency) of income over expenses... $ (9,062) $ 55,202 $ (19,480,178) $ (19,434,038)
ADJUSTMENTS TO RECONCILE EXCESS (DEFICIENCY)
OF INCOME OVER EXPENSES TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES:
Depreciation................................ 0 0 6,198,519 6,198,519
Amortization of financing fees.............. 0 0 306,594 306,594
Equity in losses of affiliates.............. 0 833,670 4,602,096 5,435,766
Increase in receivable -- Orbital
Communications Corporation................ 0 0 (114,784) (114,784)
Increase in receivables -- other............ 0 0 (1,155,097) (1,155,097)
Increase in inventory....................... 0 (446,684) (1,304,586) (1,751,270)
Increase in accounts payable................ 2,270,775 1,786,500 573,111 4,630,386
Increase (decrease) in deferred revenue..... 0 100,000 (100,000) 0
Increase (decrease) in accrued expenses..... 7,866,668 (1,750,354) 7,570,941 13,687,255
Decrease in prepaid contract costs.......... 3,740,802 0 0 0
------------ ------------ ------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................. 13,869,183 578,334 (2,903,384) 7,803,331
------------ ------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (24,722,144) (38,343,079) (69,242,301) (176,232,241)
Increase in amount due from affiliates........ 0 (661,354) (1,608,321) (2,269,675)
Purchase of available-for-sale investments.... 0 0 (91,717,823) (91,717,823)
Proceeds from sale of available-for-sale
investments................................. 0 0 40,007,162 40,007,162
Purchase of held-to-maturity investments...... 0 0 (44,814,064) (44,814,064)
------------ ------------ ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES..... (24,722,144) (39,004,433) (167,375,347) (275,026,641)
------------ ------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term
debt........................................ 5,000,000 0 164,475,000 169,475,000
Repayment of long-term debt................... 0 (825,570) (904,811) (1,730,381)
Partners' contributions....................... 10,852,961 38,065,265 62,732,777 159,800,000
Financing fees paid........................... 0 (2,028,646) (938,761) (3,450,885)
------------ ------------ ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................. 15,852,961 35,211,049 225,364,205 324,093,734
------------ ------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 5,000,000 (3,215,050) 55,085,474 56,870,424
CASH AND CASH EQUIVALENTS:
Beginning of period........................... 0 5,000,000 1,784,950 0
------------ ------------ ------------- -------------
CASH AND CASH EQUIVALENTS:
End of period................................. $ 5,000,000 $ 1,784,950 $ 56,870,424 $ 56,870,424
============ ============ ============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid................................. $ 0 $ 425,765 $ 346,526 $ 772,291
============ ============ ============= =============
(See accompanying notes to the financial statements)
29
32
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) THE ORBCOMM SYSTEM
Organization
In 1993, Orbital Communications Corporation ("OCC"), a majority owned
subsidiary of Orbital Sciences Corporation ("Orbital"), and Teleglobe Mobile
Partners ("Teleglobe Mobile"), a partnership established by affiliates of
Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM" or the
"Company"), a Delaware limited partnership.
Pursuant to the terms of the Agreement of Limited Partnership of the
Company between OCC and Teleglobe Mobile (the "Partnership Agreement"), action
by the Company generally requires the approval of General Partners holding a
majority of the Participation Percentages held by the General Partners. OCC and
Teleglobe Mobile each holds 50% of the Participation Percentages in the Company,
with the result that the approval of both OCC and Teleglobe Mobile is generally
necessary for the Company to act.
The Company is a 98% noncontrolling General Partner in ORBCOMM USA, L.P.
("ORBCOMM USA") and ORBCOMM International Partners, L.P. ("ORBCOMM
International"), two partnerships formed to market services using the ORBCOMM
low-Earth orbit satellite communications system (the "ORBCOMM System") in the
United States and internationally, respectively.
The ORBCOMM System Description
The Company was created for the design, development, construction,
integration, testing and operation of the ORBCOMM System. The Company intends to
construct and implement the initial 28 satellite ORBCOMM System in two phases:
the ORBCOMM Phase 1A System, consisting of the worldwide network control center
(including the satellite management system), the U.S. Gateway control center,
four U.S. Earth stations and two satellites; and the ORBCOMM Phase 1B System
consisting of the ORBCOMM Phase 1A System, three additional planes each
consisting of eight satellites and one plane consisting of two high-inclination
satellites.
Orbital is the primary supplier of the communications satellites, launch
vehicles and U.S. ground systems and successfully launched the ORBCOMM Phase 1A
System satellites in April 1995. The ORBCOMM Phase 1A System began commercial
intermittent service in early 1996.
The System Charge
OCC is obligated to pay quarterly to the Company a System Charge in
consideration of the construction and financing of the ORBCOMM System assets by
the Company. Teleglobe Mobile is obligated to pay quarterly to the Company a
System Charge in consideration of the Company's grant to Teleglobe Mobile of the
right to market, sell, lease and franchise all ORBCOMM System output capacity
outside the United States.
Regulatory Status
Construction and operation of communications satellites in the United
States requires licenses from the Federal Communications Commission (the "FCC").
OCC has been granted full operational authority for the ORBCOMM System by the
FCC. Similar licenses are required from foreign regulatory authorities to permit
ORBCOMM System services to be offered outside the United States. Primary
responsibility for obtaining licenses outside the United States will reside with
entities who become International Licensees.
30
33
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company is in its development stage, devoting substantially all of its
efforts to establishing a new communications business. The Company's planned
principal operations are expected to commence in 1998. The accompanying
financial statements have been prepared on the accrual basis of accounting in
conformity with generally accepted accounting principles in the United States.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Depreciation and Recoverability of Long-Lived Assets
Depreciation is provided over an asset's estimated economic useful life
using the straight-line method as follows:
Space Segment Assets: lesser of five years or estimated life of the satellite
Ground Segment Assets: 10 years
Furniture and Equipment: three to 10 years
The Company anticipates depreciating the ORBCOMM System over the estimated
economic useful lives of the various ORBCOMM System components once the ORBCOMM
System is placed in service. The Phase 1A System, which includes the worldwide
network control center (including the satellite management system), the U.S.
Gateway control center, four U.S. Earth stations and two satellites, was placed
in service at the beginning of 1996, at which time the Company began
depreciating those assets. The Company anticipates that the ORBCOMM Phase 1B
System will become fully operational in 1998.
The Company's policy is to review its long-lived assets, including its
satellite systems, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company recognizes impairment losses when the sum of the expected future cash
flows is less than the carrying amount of the asset. Given the inherent
technical and commercial risks within the space communications industry, it is
possible that the Company's current estimate for recovery of the carrying amount
of its assets may change.
Investments in Affiliates
Pursuant to the terms of ORBCOMM USA's and ORBCOMM International's
partnership agreements, OCC controls the operational and financial affairs of
ORBCOMM USA and Teleglobe Mobile controls the operational and financial affairs
of ORBCOMM International. The Company, however, significantly influences both
marketing partnerships. Accordingly, the Company is accounting for its
investments in ORBCOMM USA and ORBCOMM International using the equity method.
Pursuant to the equity method of accounting, the Company's carrying amount
of an investment is initially recorded at cost and is increased to reflect its
share of the affiliate's income, and is reduced to reflect its share of the
affiliate's losses. The Company's investment is also increased to reflect
contributions to, and reduced to reflect distributions from, such affiliates.
31
34
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
in the accompanying financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents.
Investments
The Company maintains two investment portfolios characterized by
management's intentions as to future investment activity. Investments classified
as "held-to-maturity" are not intended to be sold prior to maturity and are
carried at cost. Investments not intended to be held until maturity are
classified as "available-for-sale" and carried at fair value with temporary
unrealized gains (losses) charged directly to partners' capital. Investments
with maturities of less than one year are classified as short-term investments.
Investments maturing after one year are classified as long-term investments. The
Company uses the average cost method in determining the basis of investments
sold when computing realized gains (losses).
Inventory
Inventory is stated at the lower of cost, determined on the specific
identification basis, or market and represents subscriber communicators
available for sale to customers.
Fair Value of Financial Instruments
The carrying value of the Company's cash and cash equivalents, receivables,
and accounts payables approximates fair value since all such instruments are
short-term in nature. Fair value for the Company's long-term debt is determined
based on current rates offered for debt of similar remaining maturities. At
December 31, 1995 and 1996, the fair value for the long-term debt approximated
carrying value.
Mobile Communications Satellite System Under Construction
During the construction of the ORBCOMM System, the Company is capitalizing
substantially all such construction costs. The Company is capitalizing a portion
of the engineering direct labor costs that relate to hardware and system design
development and coding of the software products that enhance the operation of
the ORBCOMM System. As of December 31, 1996, approximately $1,244,000 of such
costs have been capitalized (none for the year ended December 31, 1995).
Additionally, interest costs of approximately $426,000 and approximately
$10,030,000 have been capitalized as part of the historical cost of the ORBCOMM
System for the years ended December 31, 1995 and December 31, 1996,
respectively. Additionally, approximately $9,500 of Revenue Participation
Interest (see Note 6, "Long-Term Debt") at the rate of 5% of ORBCOMM System
revenue has been capitalized as of December 31, 1996.
Partners' Capital
In accordance with the Partnership Agreement, Teleglobe Mobile and OCC are
both general and limited partners in the Company. Therefore, limited and general
partner accounts are combined into one single capital account and presented as
such in the balance sheet and statements of Partners' Capital.
32
35
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Revenue Recognition
The Company provided subscriber communicator hardware to ORBCOMM USA and
ORBCOMM International at cost. Revenue is recognized when products are shipped
or when customers have accepted the products or services, depending on
contractual terms. Contract revenues and receivables are recognized and accrued
as contract costs are incurred. Related contract expenses incurred in providing
marketing services in the United States are recognized on the accrual basis of
accounting. The Company generally recognizes distribution fees ratably over the
term of the agreement, or when the Company's obligations under the agreement are
substantially complete.
Reclassification of Prior Years Balances
Certain amounts in the prior year's financial statements have been
reclassified to conform with the current year presentation.
(3) INVESTMENTS
Included in cash and cash equivalents is approximately $54,527,000 of
commercial paper as of December 31, 1996. The fair value of commercial paper
approximates carrying value.
The following table sets forth the aggregate cost and fair values and gross
unrealized gains (losses) of available-for-sale securities as of December 31,
1996 (none for the year ended December 31, 1995):
UNREALIZED
SECURITIES COST GAINS (LOSSES) FAIR VALUE
------------------------------------------- ----------- -------------- -----------
Short-Term
U.S. Treasury Notes...................... $21,152,137 $ 53,788 $21,205,925
Commercial Paper......................... 10,229,101 (1,636) 10,227,465
----------- ------- -----------
Total short-term investments.......... 31,381,238 52,152 31,433,390
----------- ------- -----------
Long-Term
U.S. Treasury Notes, maturing 2-5
years................................. 20,329,423 35,564 20,364,987
----------- ------- -----------
Total available-for-sale
investments......................... $51,710,661 $ 87,716 $51,798,377
=========== ======= ===========
The following table sets forth the aggregate cost and fair values of
held-to-maturity as of December 31, 1996 (none for the year ended December 31,
1995):
UNREALIZED
SECURITIES COST GAINS FAIR VALUE
--------------------------------------------- ----------- ---------- -----------
Short-Term
U.S. Treasury Notes........................ $23,335,992 $ 524,909 $23,860,901
Long-Term
U.S. Treasury Notes, maturing 2-5 years.... 21,478,072 541,807 22,019,879
----------- ---------- -----------
Total held-to-maturity investments...... $44,814,064 $1,066,716 $45,880,780
=========== ========== ===========
Unrealized gains on held-to-maturity investments represent accrued interest
income and unrealized holding gains.
33
36
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) RELATED PARTY TRANSACTIONS
The Company paid Orbital approximately $11,000,000, $38,000,000, and
$56,000,000 for the years ended December 31, 1994, 1995 and 1996, respectively,
and approximately $48,000,000 for the period June 30, 1993 (date of inception)
through December 31, 1993. Payments were made for work performed pursuant to the
ORBCOMM System Design, Development, and Operations Agreement (for the Phase 1A
System), the ORBCOMM System Procurement Agreement (for the Phase 1B System) and
the Administrative Services Agreement (for provision of ongoing support to the
Company).
In 1995, pursuant to the terms of the ORBCOMM System Design, Development
and Operations Agreement, the Company reimbursed OCC $1,375,000 for previous
costs incurred in obtaining the FCC License and other related costs. The Company
capitalized such costs as part of its Mobile Communications Satellite System.
At December 31, 1996, the Company had a receivable of approximately
$112,000 for a bonus payment to the Company's employees paid on behalf of OCC
for employees previously employed by OCC (none for the year ended December 31,
1995).
Certain provisions of the Partnership Agreement require the Company to
reimburse OCC for OCC's repurchase of shares of OCC common stock acquired
pursuant to the OCC 1992 Stock Option Plan ("Stock Option Plan"). During 1996,
the Company reimbursed OCC approximately $1,100,000 under the Stock Option Plan.
Orbital contributed approximately $100,000 to OCC to repurchase such shares.
Therefore, the net cash paid to third parties on repurchase of OCC common stock
was no greater than $1,000,000 per annum as required by the terms of the
Indenture.
(5) MOBILE COMMUNICATIONS SATELLITE SYSTEM
The Company's Mobile Communications Satellite System comprises the
following assets:
DECEMBER 31,
-----------------------------
1995 1996
------------ ------------
Space segment................................... $ 76,643,128 $140,999,409
Ground segment.................................. 29,799,853 33,554,094
Software........................................ 546,959 1,678,738
------------ ------------
Total fixed assets.............................. 106,989,940 176,232,241
Less accumulated depreciation................... 0 (6,198,519)
------------ ------------
Total fixed assets, net of depreciation......... $106,989,940 $170,033,722
============ ============
(6) LONG-TERM DEBT
In August 1996, ORBCOMM and ORBCOMM Global Capital Corp. (the "Issuers")
issued $170,000,000 of Senior Notes due in full in 2004 with Revenue
Participation Interest (the "Old Notes"). Revenue Participation Interest
represents an aggregate amount equal to 5% of the ORBCOMM System revenue and is
payable on the Old Notes on each interest payment date subject to certain
covenant restrictions. Interest on the Old Notes accrues at the rate of 14% per
annum and will be payable semi-annually in arrears on February 15 and August 15
each year, commencing on February 15, 1997.
All of the Old Notes have been exchanged for an equal principal amount of
registered 14% Series B Senior Notes due in full in 2004 with Revenue
Participation Interest (the "Notes"). The Notes are substantially similar to the
Old Notes except that the Notes are registered under the Securities Act of 1933,
as amended, and do not bear legends restricting the transfer thereof. The Notes
are fully and unconditionally
34
37
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) LONG-TERM DEBT -- (CONTINUED)
guaranteed on a joint and several basis by OCC, Teleglobe Mobile, ORBCOMM USA
and ORBCOMM International (each a "Guarantor" and collectively the
"Guarantors"), except that the guarantees are non-recourse to the shareholders
and/or partners of the Guarantors, limited only to the extent necessary for each
such guarantee not to constitute a fraudulent conveyance under applicable law.
The guarantee of each Guarantor ranks pari passu in right of payment with all
senior indebtedness of such Guarantor and senior in right of payment to all
indebtedness expressly subordinated to the guarantee of such Guarantor. The
guarantees are non-recourse to the shareholders and/or partners of each
Guarantor and no shareholders or partners of any Guarantors will have any
liability for any claim under the Notes.
On closing, the Company used a portion of the net proceeds from the sale of
the Old Notes, approximately $44,800,000, to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998 (see Note 3, "Investments").
The Company also has a $5,000,000 secured note outstanding with a financial
institution, which bears interest at 9.2% per annum and is due in monthly
principal and interest installments of $104,278 through December 1999. The note
is secured by equipment located at certain of the U.S. Earth stations, network
control center and satellite control center, and is guaranteed by Orbital.
Included in other assets is unamortized financing fees incurred for the
issuance of the Old Notes of approximately $6,138,000 net of approximately
$307,000 amortization cost for the year ended December 31, 1996 (none for the
year ended December 31, 1995). Such costs are being amortized over an eight-year
period.
35
38
INDEPENDENT AUDITORS' REPORT
The Partners
ORBCOMM USA, L.P.:
We have audited the accompanying balance sheets of ORBCOMM USA, L.P.
("ORBCOMM USA") (a development stage enterprise) as of December 31, 1996 and
1995, and the related statements of income and expenses, partners' capital, and
cash flows for each of the years in the three year period ended December 31,
1996 and for the period from June 30, 1993 (date of inception) to December 31,
1996. These financial statements are the responsibility of ORBCOMM USA's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ORBCOMM USA (a development
stage enterprise) as of December 31, 1996 and 1995, and the results of its
income and expenses, partners' capital and cash flows for each of the years in
the three year period ended December 31, 1996 and for the period from June 30,
1993 (date of inception) to December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Washington, DC
January 31, 1997
36
39
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31,
-------------------------
1995 1996
--------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 10,000 $ 0
Receivable -- Orbital Communications Corporation................. 0 9,427
Accounts receivable.............................................. 0 44,505
--------- -----------
TOTAL ASSETS............................................. $ 10,000 $ 53,932
========= ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable................................................. $ 177,100 $ 120,089
Other current liabilities........................................ 32,230 222,061
--------- -----------
Total Current Liabilities..................................... 209,330 342,150
Amount due to ORBCOMM Global, L.P. .............................. 661,354 3,578,224
--------- -----------
Total Liabilities............................................. 870,684 3,920,374
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Orbital Communications Corporation............................... (17,214) (77,329)
ORBCOMM Global, L.P.............................................. (843,470) (3,789,113)
--------- -----------
Total Partners' Capital....................................... (860,684) (3,866,442)
--------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL.................. $ 10,000 $ 53,932
========= ===========
(See accompanying notes to the financial statements)
37
40
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF INCOME AND EXPENSES
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEAR ENDED DECEMBER 31, STAGE THROUGH
----------------------------------------- DECEMBER 31,
1994 1995 1996 1996
---------- ---------- ----------- -------------
INCOME:
Product sales........................ $ 0 $ 0 $ 229,236 $ 229,236
Contract revenues.................... 2,093,289 1,360,328 0 4,202,879
Service revenues..................... 0 0 11,012 11,012
---------- ---------- ----------- -----------
Total Income...................... 2,093,289 1,360,328 240,248 4,443,127
EXPENSES:
Cost of product sales................ 0 0 262,120 262,120
Marketing and administrative
expenses.......................... 2,093,289 2,231,012 2,983,886 8,057,449
---------- ---------- ----------- -----------
Total Expenses.................... 2,093,289 2,231,012 3,246,006 8,319,569
---------- ---------- ----------- -----------
EXCESS (DEFICIENCY) OF INCOME OVER
EXPENSES............................. $ 0 $ (870,684) $(3,005,758) $ (3,876,442)
========== ========== =========== ===========
(See accompanying notes to the financial statements)
38
41
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF PARTNERS' CAPITAL
TELEGLOBE ORBITAL ORBCOMM
MOBILE COMMUNICATIONS GLOBAL,
PARTNERS CORPORATION L.P. TOTAL
--------- -------------- ----------- -----------
Capital contributions..................... $ 1,500 $ 8,500 $ 0 $ 10,000
Excess (deficiency) of income over
expenses............................... 0 0 0 0
------- -------- ----------- -----------
PARTNERS' CAPITAL, DECEMBER 31, 1993........ 1,500 8,500 0 10,000
Excess (deficiency) of income over
expenses............................... 0 0 0 0
------- -------- ----------- -----------
PARTNERS' CAPITAL, DECEMBER 31, 1994........ 1,500 8,500 0 10,000
Capital transfer.......................... (1,500) (8,300) 9,800 0
Excess (deficiency) of income over
expenses............................... 0 (17,414) (853,270) (870,684)
------- -------- ----------- -----------
PARTNERS' CAPITAL, DECEMBER 31, 1995........ 0 (17,214) (843,470) (860,684)
Excess (deficiency) of income over
expenses............................... 0 (60,115) (2,945,643) (3,005,758)
------- -------- ----------- -----------
PARTNERS' CAPITAL, DECEMBER 31, 1996........ $ 0 $(77,329) $(3,789,113) $(3,866,442)
======= ======== =========== ===========
(See accompanying notes to the financial statements)
39
42
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
TOTAL CASH
FLOWS DURING
DEVELOPMENT
YEAR ENDED DECEMBER 31, STAGE THROUGH
----------------------------------- DECEMBER 31,
1994 1995 1996 1996
------- --------- ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Excess (deficiency) of income over
expenses................................ $ 0 $(870,684) $(3,005,758) $(3,876,442)
ADJUSTMENTS TO RECONCILE EXCESS
(DEFICIENCY) OF INCOME OVER EXPENSES TO
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Increase in receivable -- Orbital
Communications Corporation............ 0 0 (9,427) (9,427)
Increase in accounts receivable......... 0 0 (44,505) (44,505)
Increase (decrease) in accounts
payable............................... 0 177,100 (57,011) 120,089
Increase in other current liabilities... 0 32,230 189,831 222,061
------- --------- ----------- -----------
NET CASH USED IN OPERATING
ACTIVITIES......................... 0 (661,354) (2,926,870) (3,588,224)
------- --------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in amount due to ORBCOMM Global,
L.P..................................... 0 661,354 2,916,870 3,578,224
Partners' contribution..................... 0 0 0 10,000
------- --------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES......................... 0 0 2,916,870 3,588,224
------- --------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.... 0 0 (10,000) 0
CASH AND CASH EQUIVALENTS:
Beginning of period........................ 10,000 10,000 10,000 0
------- --------- ----------- -----------
CASH AND CASH EQUIVALENTS:
End of period.............................. $10,000 $ 10,000 $ 0 $ 0
======= ========= =========== ===========
(See accompanying notes to the financial statements)
40
43
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) THE ORBCOMM SYSTEM
Organization
In 1993, Orbital Communications Corporation ("OCC"), a majority owned
subsidiary of Orbital Sciences Corporation ("Orbital"), and Teleglobe Mobile
Partners ("Teleglobe Mobile"), a partnership established by affiliates of
Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM" or the
"Company"), a Delaware limited partnership. OCC and Teleglobe Mobile also formed
two marketing partnerships, ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM
International Partners, L.P. ("ORBCOMM International"), to market services using
the ORBCOMM low-Earth orbit satellite communications system (the "ORBCOMM
System") in the United States and internationally, respectively. In 1995,
ORBCOMM became a 98% General Partner in ORBCOMM USA, reducing OCC's General
Partner interest to 2% and eliminating Teleglobe Mobile's interest entirely.
Pursuant to the terms of the Agreement of Limited Partnership of ORBCOMM
USA between OCC and ORBCOMM, action by ORBCOMM USA generally requires the
approval of General Partners holding a majority of the participating percentages
held by the General Partners, with OCC and Teleglobe Mobile each voting their
direct and indirect participation percentages as a whole. OCC and Teleglobe
Mobile each currently holds 51% and 49%, respectively, of the direct and
indirect participation percentages of ORBCOMM USA. Accordingly, ORBCOMM USA's
financial statements are included in OCC's consolidated financial statements.
The ORBCOMM System Description
ORBCOMM was created for the design, development, construction, integration,
testing and operation of the ORBCOMM System. ORBCOMM intends to construct and
implement the initial 28 satellite ORBCOMM System in two phases: the ORBCOMM
Phase 1A System, consisting of the worldwide network control center (including
the satellite management system), the U.S. Gateway control center, four U.S.
Earth stations and two satellites; and the ORBCOMM Phase 1B System, consisting
of the ORBCOMM Phase 1A System, three additional planes each consisting of eight
satellites and one plane consisting of two high-inclination satellites.
Orbital is the primary supplier of the communications satellites, launch
vehicles and U.S. ground systems and successfully launched the ORBCOMM Phase 1A
System satellites in April 1995. The ORBCOMM Phase 1A System began commercial
intermittent service in early 1996.
The Output Capacity Charge and the U.S. Marketing Services
Pursuant to the terms of the System Charge Agreement between OCC and
ORBCOMM USA, ORBCOMM USA has agreed to pay OCC an Output Capacity Charge that is
a quarterly fee equal to 23% of its total aggregate service revenues for such
calendar quarter in exchange for the exclusive right to market, sell, lease and
franchise all ORBCOMM System output capacity in the United States and for the
exclusive use of the System Assets in the United States.
Additionally, pursuant to the terms of the System Charge Agreement, through
September 12, 1995 ORBCOMM USA furnished all management, labor, facilities and
material necessary to perform, on a best efforts basis, certain marketing
services in the United States (the "U.S. Marketing Services"), on a cost-
reimbursable basis. The U.S. Marketing Services portion of the System Charge
Agreement expired on September 12, 1995.
41
44
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) THE ORBCOMM SYSTEM -- (CONTINUED)
Regulatory Status
Construction and operation of communications satellites in the United
States requires licenses from the Federal Communications Commission (the "FCC").
OCC has been granted full operational authority for the ORBCOMM System by the
FCC. Similar licenses are required from foreign regulatory authorities to permit
ORBCOMM System services to be offered outside the United States. Primary
responsibility for obtaining licenses outside the United States will reside with
the various International Licensees.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
ORBCOMM USA is in its development stage, devoting substantially all of its
efforts to establishing commercial and governmental markets in the United States
for the ORBCOMM System. ORBCOMM USA's planned principal operations are expected
to commence in 1998. The accompanying financial statements of ORBCOMM USA have
been prepared on the accrual basis of accounting in conformity with generally
accepted accounting principles in the United States.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
in the accompanying financial statements.
Cash and Cash Equivalents
ORBCOMM USA considers all highly liquid investments with maturities of
three months or less to be cash equivalents.
Revenue Recognition
ORBCOMM USA provides subscriber communicator hardware to commercial
customers. Revenue is recognized when products are shipped or when customers
have accepted the products or services, depending on contractual terms. Through
September 1995, ORBCOMM USA provided U.S. Marketing Services to OCC on a
cost-reimbursable basis.
(3) RELATED PARTY TRANSACTIONS
Payments by OCC to ORBCOMM USA for U.S. Marketing Services were based on
ORBCOMM USA's monthly costs incurred. For the years ended December 31, 1994,
1995 and 1996, ORBCOMM USA received approximately $2,093,000, $1,360,000, and
$0, respectively, and approximately $749,000 from June 30, 1993 (date of
inception) through December 31, 1993, from OCC as reimbursement of costs for
U.S. Marketing Services.
At December 31, 1995 and 1996, ORBCOMM USA had a payable of approximately
$661,000 and $3,578,000, respectively, to ORBCOMM for amounts advanced to
support ORBCOMM USA commercial
42
45
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) RELATED PARTY TRANSACTIONS -- (CONTINUED)
and government markets. ORBCOMM USA is currently in development stage and
obtains funds to support operations through non-interest bearing advances from
ORBCOMM.
At December 31, 1996, ORBCOMM USA had a receivable of approximately $9,400
for bonus payments to ORBCOMM USA employees paid on behalf of OCC for employees
previously employed by OCC (none for the year ending December 31, 1995).
(4) COMMITMENTS AND CONTINGENCIES
In August 1996, ORBCOMM and ORBCOMM Global Capital Corp. (the "Issuers")
issued $170,000,000 of Senior Notes due in full in 2004 with Revenue
Participation Interest (the "Old Notes"). Revenue Participation Interest
represents an aggregate amount equal to 5% of the ORBCOMM System revenue and is
payable on the Old Notes on each interest payment date subject to certain
covenant restrictions. Interest on the Old Notes accrues at a rate of 14% per
annum and will be payable semi-annually in arrears on February 15 and August 15
of each year, commencing on February 15, 1997.
All of the Old Notes have been exchanged for an equal principal amount of
registered 14% Series B Senior Notes due in full in 2004 with Revenue
Participation Interest (the "Notes"). The Notes are substantially similar to the
Old Notes except that the Notes are registered under the Securities Act of 1933,
as amended, and do not bear legends restricting the transfer thereof. The Notes
are fully and unconditionally guaranteed on a joint and several basis by OCC,
Teleglobe Mobile, ORBCOMM USA and ORBCOMM International (each a "Guarantor" and
collectively the "Guarantors"), except that the guarantees are non-recourse to
the shareholders and/or partners of the Guarantors, limited only to the extent
necessary for each such guarantee not to constitute a fraudulent conveyance
under applicable law. The guarantee of each Guarantor ranks pari passu in right
of payment with all senior indebtedness of such Guarantor and senior in right of
payment to all indebtedness expressly subordinated to the guarantee of such
Guarantor. The guarantees are non-recourse to the shareholders and/or partners
of each Guarantor and no shareholders or partners of any Guarantors will have
any liability for any claim under the Notes.
On closing, ORBCOMM used a portion of the net proceeds from the sale of the
Old Notes, approximately $44,800,000, to purchase a portfolio of United States
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998.
43
46
INDEPENDENT AUDITORS' REPORT
The Partners
ORBCOMM International Partners, L.P.:
We have audited the accompanying balance sheets of ORBCOMM International
Partners, L.P. ("ORBCOMM International") (a development stage enterprise) as of
December 31, 1996 and 1995, and the related statements of income and expenses,
partners' capital, and cash flows for each of the years in the three year period
ended December 31, 1996 and for the period from June 30, 1993 (date of
inception) to December 31, 1996. These financial statements are the
responsibility of ORBCOMM International's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ORBCOMM International (a
development stage enterprise) as of December 31, 1996 and 1995, and the results
of its income and expenses, partners' capital and cash flows for each of the
years in the three year period ended December 31, 1996 and for the period from
June 30, 1993 (date of inception) to December 31, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, DC
January 31, 1997
44
47
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31,
-------------------------
1995 1996
------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $10,000 $ 0
Receivable -- Orbital Communications Corporation................. 0 6,613
Accounts receivable.............................................. 0 8,000
Prepaid contract costs........................................... 0 3,871,118
Amount due from ORBCOMM Global, L.P. ............................ 0 1,308,549
------- -----------
TOTAL ASSETS............................................. $10,000 $ 5,194,280
======= ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued expenses............................ $ 0 $ 727,993
Deferred revenue................................................. 0 6,146,545
------- -----------
Total Liabilities............................................. 0 6,874,538
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile Partners........................................ 200 (33,605)
ORBCOMM Global, L.P. ............................................ 9,800 (1,646,653)
------- -----------
Total Partners' Capital....................................... 10,000 (1,680,258)
------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL.................. $10,000 $ 5,194,280
======= ===========
(See accompanying notes to the financial statements)
45
48
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF INCOME AND EXPENSES
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEAR ENDED DECEMBER 31, STAGE THROUGH
----------------------------- DECEMBER 31,
1994 1995 1996 1996
---- ---- ----------- -------------
INCOME:
Product sales.................................... $0 $0 $ 8,000 $ 8,000
EXPENSES:
Cost of product sales............................ 0 0 6,230 6,230
Marketing and administrative expenses............ 0 0 1,692,028 1,692,028
-- --
----------- -----------
Total Expenses................................ 0 0 1,698,258 1,698,258
-- --
----------- -----------
EXCESS (DEFICIENCY) OF INCOME...................... $0 $0 $(1,690,258) $ (1,690,258)
== == =========== ===========
(See accompanying notes to the financial statements)
46
49
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF PARTNERS' CAPITAL
ORBITAL TELEGLOBE ORBCOMM
COMMUNICATIONS MOBILE GLOBAL,
CORPORATION PARTNERS L.P. TOTAL
-------------- --------- ----------- -----------
Capital contributions...................... $ 8,500 $ 1,500 $ 0 $ 10,000
Excess (deficiency) of income over
expenses................................ 0 0 0 0
------- -------- ----------- -----------
PARTNERS' CAPITAL, DECEMBER 31, 1993......... 8,500 1,500 0 10,000
Excess (deficiency) of income over
expenses................................ 0 0 0 0
------- -------- ----------- -----------
PARTNERS' CAPITAL, DECEMBER 31, 1994......... 8,500 1,500 0 10,000
Capital transfer........................... (8,500) (1,300) 9,800 0
Excess (deficiency) of income over
expenses................................ 0 0 0 0
------- -------- ----------- -----------
PARTNERS' CAPITAL, DECEMBER 31, 1995......... 0 200 9,800 10,000
Excess (deficiency) of income over
expenses................................ 0 (33,805) (1,656,453) (1,690,258)
------- -------- ----------- -----------
PARTNERS' CAPITAL, DECEMBER 31, 1996......... $ 0 $ (33,605) $(1,646,653) $(1,680,258)
======= ======== =========== ===========
(See accompanying notes to the financial statements)
47
50
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
TOTAL CASH
FLOWS DURING
DEVELOPMENT
YEAR ENDED DECEMBER 31, STAGE THROUGH
----------------------------------- DECEMBER 31,
1994 1995 1996 1996
------- ------- ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Excess (deficiency) of income over
expenses............................... $ 0 $ 0 $(1,690,258) $ (1,690,258)
ADJUSTMENTS TO RECONCILE EXCESS
(DEFICIENCY) OF INCOME OVER EXPENSES TO
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Increase in receivable -- Orbital
Communications Corporation........... 0 0 (6,613) (6,613)
Increase in accounts receivable........ 0 0 (8,000) (8,000)
Increase in prepaid contract costs..... 0 0 (3,871,118) (3,871,118)
Increase in other current
liabilities.......................... 0 0 727,993 727,993
Increase in deferred revenue........... 0 0 6,146,545 6,146,545
------- ------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES........................ 0 0 1,298,549 1,298,549
------- ------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in amount due from ORBCOMM
Global, L.P............................ 0 0 (1,308,549) (1,308,549)
------- ------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES........................ 0 0 (1,308,549) (1,308,549)
------- ------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' Contribution.................... 0 0 0 10,000
------- ------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES........................ 0 0 0 10,000
------- ------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS... 0 0 (10,000) 0
CASH AND CASH EQUIVALENTS:
Beginning of period....................... 10,000 10,000 10,000 0
------- ------- ----------- -----------
CASH AND CASH EQUIVALENTS:
End of period............................. $10,000 $10,000 $ 0 $ 0
======= ======= =========== ===========
(See accompanying notes to the financial statements)
48
51
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) THE ORBCOMM SYSTEM
Organization
In 1993, Orbital Communications Corporation ("OCC"), a majority owned
subsidiary of Orbital Sciences Corporation ("Orbital"), and Teleglobe Mobile
Partners ("Teleglobe Mobile"), a partnership established by affiliates of
Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM" or the
"Company"), a Delaware limited partnership. OCC and Teleglobe Mobile also formed
two marketing partnerships, ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM
International Partners, L.P. ("ORBCOMM International"), to market services using
the ORBCOMM low-Earth orbit satellite communications system (the "ORBCOMM
System") in the United States and internationally, respectively. In 1995,
ORBCOMM became a 98% General Partner in ORBCOMM International, reducing
Teleglobe Mobile's General Partner interest to 2% and eliminating OCC's interest
entirely.
Pursuant to the terms of the Agreement of Limited Partnership of ORBCOMM
International between Teleglobe Mobile and ORBCOMM, action by ORBCOMM
International generally requires the approval of General Partners holding a
majority of the participating percentages held by the General Partners, with OCC
and Teleglobe Mobile each voting their direct and indirect participation
percentages as a whole. OCC and Teleglobe Mobile each currently holds 49% and
51%, respectively, of the direct and indirect participation percentages in
ORBCOMM International. Accordingly, ORBCOMM International's financial statements
are included in Teleglobe Mobile's consolidated financial statements.
The ORBCOMM System Description
ORBCOMM was created for the design, development, construction, integration,
testing and operation of the ORBCOMM System. ORBCOMM intends to construct and
implement the initial 28 satellite ORBCOMM System in two phases: the ORBCOMM
Phase 1A System, consisting of the worldwide network control center (including
the satellite management system), the U.S. Gateway control center, four U.S.
Earth stations and two satellites; and the ORBCOMM Phase 1B System, consisting
of the ORBCOMM Phase 1A System, three additional planes each consisting of eight
satellites and one plane consisting of two high-inclination satellites.
Orbital is the primary supplier of the communications satellites, launch
vehicles and U.S. ground systems and successfully launched the ORBCOMM Phase 1A
System satellites in April 1995. The ORBCOMM Phase 1A System began commercial
intermittent service in early 1996.
The Output Capacity Charge
Pursuant to the terms of the International System Charge Agreement (the
"International System Charge Agreement") among ORBCOMM, Teleglobe Mobile and
ORBCOMM International, ORBCOMM International has agreed to pay to Teleglobe
Mobile an International Output Capacity Charge that is equal to 23% of its total
aggregate service revenues for a calendar quarter in exchange for the exclusive
right to market, sell, lease and franchise all ORBCOMM System output capacity
outside the United States.
Regulatory Status
Construction and operation of communications satellites in the United
States requires licenses from the Federal Communications Commission (the "FCC").
OCC has been granted full operational authority for the ORBCOMM System by the
FCC. Similar licenses are required from foreign regulatory authorities to permit
ORBCOMM System services to be offered outside the United States. Primary
responsibility for obtaining licenses outside the United States will reside with
the various International Licensees.
49
52
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
ORBCOMM International is in its development stage, devoting substantially
all of its efforts to establishing commercial and governmental markets, through
International Licensees, for the ORBCOMM System internationally. ORBCOMM
International's planned principal operations are expected to commence in 1998.
The accompanying financial statements of ORBCOMM International have been
prepared on the accrual basis of accounting in conformity with generally
accepted accounting principles in the United States.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Revenue Recognition
ORBCOMM International generally recognizes fees from Service License
Agreements ("SLAs") with its International Licensees ratably over the term of
the agreement, or when ORBCOMM International's obligations thereunder are
substantially complete. Revenue under the gateway procurement contracts executed
in connection with the SLAs or sale of subscriber communicator hardware is
recognized when products are shipped or when customers have accepted the
products or services, depending on contractual terms.
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
in the accompanying financial statements.
Cash and Cash Equivalents
ORBCOMM International considers all highly liquid investments with
maturities of three months or less to be cash equivalents.
(3) RELATED PARTY TRANSACTIONS
As of December 31, 1996, ORBCOMM International had a receivable of
approximately $1,308,000 from ORBCOMM that represents net cash outflow to
ORBCOMM (none for the year ended December 31, 1995). ORBCOMM International is
currently in development stage and obtains funds to support operations through
non-interest bearing advances from ORBCOMM.
As of December 31, 1996, ORBCOMM International had a payable of
approximately $225,000 to Teleglobe Canada Inc., an affiliate of Teleglobe
Mobile, for a contracted employee to provide international marketing services
(none for the year ended December 31, 1995).
At December 31, 1996, ORBCOMM International had a receivable of
approximately $6,600 for bonus payments to ORBCOMM International employees paid
on behalf of OCC for employees previously employed by OCC (none for the year
ended December 31, 1995).
(4) COMMITMENTS AND CONTINGENCIES
In August 1996, ORBCOMM and ORBCOMM Global Capital Corp. (the "Issuers")
issued $170,000,000 of Senior Notes due in full in 2004 with Revenue
Participation Interest (the "Old Notes").
50
53
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Revenue Participation Interest represents an aggregate amount equal to 5% of the
ORBCOMM System revenue and is payable on the Old Notes on each interest payment
date subject to certain covenant restrictions. Interest on the Old Notes accrues
at a rate of 14% per annum and will be payable semi-annually in arrears on
February 15 and August 15 of each year, commencing on February 15, 1997.
All of the Old Notes have been exchanged for an equal principal amount of
registered 14% Series B Senior Notes due in full in 2004 with Revenue
Participation Interest (the "Notes"). The Notes are substantially similar to the
Old Notes except that the Notes are registered under the Securities Act of 1933,
as amended, and do not bear legends restricting the transfer thereof. The Notes
are fully and unconditionally guaranteed on a joint and several basis by OCC,
Teleglobe Mobile, ORBCOMM USA and ORBCOMM International (each a "Guarantor and
collectively the "Guarantors"), except that the guarantees are non-recourse to
the shareholders and/or partners of the Guarantors, limited only to the extent
necessary for each such guarantee not to constitute a fraudulent conveyance
under applicable law. The guarantee of each Guarantor ranks pari passu in right
of payment with all senior indebtedness of such Guarantor and senior in right of
payment to all indebtedness expressly subordinated to the guarantee of such
Guarantor. The guarantees are non-recourse to the shareholders and/or partners
of each Guarantor and no shareholders or partners of any Guarantors will have
any liability for any claim under the Notes.
On closing, ORBCOMM used a portion of the net proceeds from the sale of the
Old Notes, approximately $44,800,000, to purchase a portfolio of United States
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998.
In October 1996, ORBCOMM International entered into agreements with certain
manufacturers for construction of gateway Earth stations scheduled for delivery
over the next two years. As of December 31, 1996, ORBCOMM International has
approximately $3,800,000 of prepaid contract costs which represent advanced
payments to these manufacturers. Total commitments remaining under these
agreements approximate $14,000,000.
(5) SERVICE LICENSE AGREEMENTS
During 1996, ORBCOMM International signed five SLAs and the associated
Gateway procurement contracts and software license agreements with International
Licensees covering Europe, the Malaysian Region, a portion of North Africa,
Turkey and the Middle East. The SLAs authorize the International Licensees to
use the ORBCOMM System to provide two-way messaging and data communication
services. Under these agreements, approximately $6,000,000 has been received and
recorded as deferred revenue at December 31, 1996. ORBCOMM International is
obligated to ship six Gateways to certain international licensees under these
agreements.
51
54
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Orbital Communications Corporation:
We have audited the accompanying consolidated balance sheets of Orbital
Communications Corporation and subsidiary as of December 31, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orbital
Communications Corporation and subsidiary as of December 31, 1995 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Washington, D.C.
February 5, 1997
52
55
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ -- $ 141,654
Receivables, billed and billable................................ 900,296 28,820
Other current assets............................................ 927 --
----------- -----------
Total current assets......................................... 901,223 170,474
Investments in affiliates....................................... 62,977,126 67,667,383
----------- -----------
TOTAL ASSETS............................................ $63,878,349 $67,837,857
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Accounts payable................................................ $ 3,592 $ 116,681
Other current liabilities....................................... 685,131 554,431
----------- -----------
Total current liabilities.................................... 688,723 671,112
Due to affiliates............................................... 63,519,027 78,728,078
----------- -----------
Total liabilities............................................ 64,207,750 79,399,190
COMMITMENTS AND CONTINGENCIES
NON-CONTROLLING INTEREST IN NET ASSETS OF ORBCOMM USA, L.P. ...... (421,735) (1,894,556)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $0.01; 8,000,000 shares authorized;
4,663,122 and 4,730,392 shares issued; 4,660,110 and
4,679,620 shares
outstanding.................................................. 46,631 47,304
Additional paid-in capital...................................... 86,735 210,230
Treasury stock, 3,012 and 50,772 shares......................... (51,204) (155,508)
Retained earnings (deficit)..................................... 10,172 (9,768,803)
----------- -----------
Total stockholders' equity (deficit)......................... 92,334 (9,666,777)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).... $63,878,349 $67,837,857
=========== ===========
(See accompanying notes to the consolidated financial statements)
53
56
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
Contract revenues................................... $24,700,170 $15,652,114 $ --
Service and product revenues........................ -- -- 240,248
----------- ----------- -----------
Total revenues.................................... 24,700,170 15,652,114 240,248
Direct expenses..................................... 19,230,148 10,851,433 265,731
----------- ----------- -----------
Gross profit (loss)............................... 5,470,022 4,800,681 (25,483)
General and administrative expenses................. 5,470,022 5,671,366 2,958,794
----------- ----------- -----------
Operating income (loss)........................... -- (870,685) (2,984,277)
Equity in earnings (losses) of ORBCOMM Global,
L.P. ............................................. -- 454,222 (8,267,519)
Non-controlling interest in net loss of ORBCOMM
USA, L.P. ........................................ -- 426,635 1,472,821
----------- ----------- -----------
Income (loss) before provision for income taxes... -- 10,172 (9,778,975)
Provision for income taxes.......................... -- -- --
----------- ----------- -----------
NET INCOME (LOSS).............................. $ -- $ 10,172 $(9,778,975)
=========== =========== ===========
(See accompanying notes to the consolidated financial statements)
54
57
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID-IN TREASURY EARNINGS
SHARES AMOUNT CAPITAL STOCK (DEFICIT) TOTAL
---------- ------- ---------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1993............. 4,650,000 $46,500 $ 999 $ -- $ -- $ 47,499
Shares issued to employees........... 4,186 42 8,576 -- -- 8,618
Net income........................... -- -- -- -- -- --
--------- ------- -------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1994............. 4,654,186 46,542 9,575 -- -- 56,117
Shares issued to employees........... 8,936 89 77,160 -- -- 77,249
Treasury stock purchased............. -- -- -- (51,204) -- (51,204)
Net income........................... -- -- -- -- 10,172 10,172
--------- ------- -------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1995............. 4,663,122 46,631 86,735 (51,204) 10,172 92,334
Shares issued to employees........... 67,270 673 123,495 -- -- 124,168
Treasury stock purchased............. -- -- -- (104,304) -- (104,304)
Net loss............................. -- -- -- -- (9,778,975) (9,778,975)
--------- ------- -------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1996............. 4,730,392 $47,304 $ 210,230 $(155,508) $(9,768,803) $(9,666,777)
========= ======= ======== ========= =========== ===========
(See accompanying notes to the consolidated financial statements)
55
58
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ -- $ 10,172 $ (9,778,975)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in losses of affiliates.................. -- (454,222) 8,267,519
Non-controlling interest in net loss of ORBCOMM
USA, L.P. .................................... -- (426,635) (1,472,821)
Decrease (increase) in current assets........... (10,765,532) 11,010,397 872,403
Decrease in current liabilities................. (4,027,316) (354,858) (17,611)
Decrease (increase) in deposits, licenses, and
other assets.................................. (36,419) 1,374,995 --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................. (14,829,267) 11,159,849 (2,129,485)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates.......................... (10,777,960) (13,318,665) (12,957,776)
------------ ------------ ------------
Net cash used in investing activities......... (10,777,960) (13,318,665) (12,957,776)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock to employees.... 8,618 77,249 124,168
Purchases of treasury stock........................ -- (51,204) (104,304)
Net borrowings from affiliates..................... -- 661,354 3,280,977
Net borrowings from Orbital Sciences Corporation... 25,598,609 1,471,417 11,928,074
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES..... 25,607,227 2,158,816 15,228,915
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............ -- -- 141,654
CASH AND CASH EQUIVALENTS:
Beginning of period................................ -- -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS:
End of period...................................... $ -- $ -- $ 141,654
============ ============ ============
(See accompanying notes to the consolidated financial statements)
56
59
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE ORBCOMM SYSTEM
Organization and Business
Orbital Communications Corporation ("OCC"), a Delaware corporation, is a
majority owned subsidiary of Orbital Sciences Corporation ("Orbital") and is
included in Orbital's Consolidated Financial Statements. In 1990, Orbital formed
OCC to develop and operate the first satellite-based global two-way data and
messaging communications system. OCC formed ORBCOMM Global, L.P. ("ORBCOMM") in
1993 with Teleglobe Mobile Partners ("Teleglobe Mobile"), an affiliate of
Teleglobe Inc. OCC and Teleglobe Mobile are each 50% general partners in
ORBCOMM. OCC is also a 2% general partner in ORBCOMM USA, L.P. ("ORBCOMM USA"),
while Teleglobe Mobile is a 2% general partner in ORBCOMM International
Partners, L.P. ("ORBCOMM International"), two partnerships formed to market the
ORBCOMM System. ORBCOMM has a 98% non-controlling interest in each of these two
marketing partnerships. Directly and indirectly, OCC currently holds 51% and 49%
of ORBCOMM USA and ORBCOMM International, respectively.
ORBCOMM was formed for the design, development, construction, integration,
test and operation of the ORBCOMM low-Earth orbit satellite communications
system (the "ORBCOMM System"). ORBCOMM intends to construct and implement the
initial 28-satellite ORBCOMM System in two phases: the ORBCOMM Phase 1A System,
consisting of the worldwide network operations center (including the satellite
management system), the U.S. gateway control center, four U.S. gateway Earth
stations and two satellites; and the ORBCOMM Phase 1B System consisting of the
ORBCOMM Phase 1A System, three additional satellite planes each consisting of
eight satellites and one satellite plane consisting of two high-inclination
satellites. From inception through December 1995, OCC was an operating company
with employees working under contract to ORBCOMM. At the beginning of 1996, all
OCC employees transferred to ORBCOMM, ORBCOMM USA, or ORBCOMM International.
Currently, OCC operates as a holding company and has no operations.
ORBCOMM USA has been granted the exclusive right to market, sell, lease and
franchise the ORBCOMM System output capacity in the U.S. and the exclusive use
of the ORBCOMM System assets in the U.S.
The System Charge
In consideration of the construction and financing of the ORBCOMM System
assets by ORBCOMM, OCC is obligated to pay ORBCOMM a system charge equal to 23%
of ORBCOMM USA's total aggregate revenues (the "Output Capacity Charge") minus
1.15% of aggregate system service revenues, defined as the total of ORBCOMM USA
and ORBCOMM International total system service revenues. If the Output Capacity
Charge is less than 1.15% of aggregate system service revenues as described
above, then OCC is not required to pay any portion of the system charge to
ORBCOMM. No such system charges have been incurred to date.
Regulatory Status
Construction and operation of communications satellites in the U.S.
requires licenses from the Federal Communications Commission ("FCC"). OCC has
been granted full operational authority for the ORBCOMM System by the FCC.
Similar licenses are required from foreign regulatory authorities to permit
ORBCOMM System services to be offered outside the U.S. Primary responsibility
for obtaining licenses outside the U.S. will reside with the various
international licensees.
57
60
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of OCC and
ORBCOMM USA (the partnership in which OCC directly or indirectly controls the
general partner interests). All material transactions and accounts among
consolidated entities have been eliminated in consolidation.
Revenue Recognition
OCC recognizes revenues on long-term contracts using the percentage of
completion method of accounting. Accordingly, revenues on long-term fixed-price
contracts are recognized based on costs incurred in relation to total estimated
costs, or based on specific delivery terms and conditions. Anticipated contract
losses are recognized as they become known. OCC currently has no long-term
contracts, but was the primary supplier of the ORBCOMM Phase 1A System through
its April 1995 completion.
ORBCOMM USA provides subscriber communicator hardware to commercial
customers. Revenue is recognized when products are shipped or when customers
have accepted the products or services, depending on contractual terms.
Income Taxes
OCC is included in Orbital's consolidated Federal income tax returns. OCC
determines its provision for income taxes as if it were filing on a separate
return basis.
OCC recognizes income taxes using the asset and liability method. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Cash and Cash Equivalents
OCC considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Investments in Affiliates
OCC uses the equity method of accounting for its investments in and
earnings of affiliates in which OCC has the ability to significantly influence,
but not control, such affiliate's operations. In accordance with the equity
method of accounting, OCC's carrying amount of an investment in an affiliate is
initially recorded at cost and is increased to reflect its share of the
affiliate's income and is reduced to reflect its share of the affiliate's
losses. OCC's investment is also increased to reflect contributions to, and
decreased to reflect
58
61
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
distributions received from, each affiliate. Any excess of the amount of OCC's
investment and the amount of the underlying equity in each affiliate's net
assets is amortized over a period of twenty years.
In 1995, OCC adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), which (i) requires that long-lived assets "to be held and used" be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, (ii) requires that
long-lived assets "to be disposed of" be reported at the lower of carrying
amount or fair value less cost to sell, and (iii) provides guidelines and
procedures for measuring an impairment loss that are significantly different
from previous guidelines and procedures. The effect of adopting SFAS 121 on
income for 1995 and 1996 was not material. OCC's policy is to review its
long-lived assets, including investments in affiliates, for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. OCC recognizes an impairment loss when the sum of
expected future cash flows is less than the carrying amount of the asset.
Fair Value of Financial Instruments
The carrying value of OCC's cash and cash equivalents, receivables, and
accounts payable approximates fair value since all such instruments are
short-term in nature.
Stock Based Compensation
Prior to January 1, 1996, OCC accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Pursuant to APB 25, compensation expense is recorded only to
the extent that the current market price of the underlying stock exceeds the
exercise price on the date of grant. On January 1, 1996, OCC adopted Statement
of Financial Accounting Standards 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), which requires companies to (i) recognize as expense the fair
value of all stock-based awards on the date of grant, or (ii) continue to apply
the provisions of APB 25 and provide pro forma net income for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS 123 had been applied. OCC has elected to continue to apply the
provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123
(See Note 8).
(3) INVESTMENTS IN AFFILIATES
OCC's and Teleglobe Mobile's total capital commitments to ORBCOMM are
approximately $75,275,000 and $84,525,000, respectively, all of which had been
contributed through December 31, 1996. Capital contributions by OCC and
Teleglobe Mobile through December 31, 1995 were approximately $62,000,000 and
$35,000,000, respectively.
Pursuant to the terms of the relevant partnership agreements, (i) OCC and
Teleglobe Mobile share equal responsibility for the operational and financial
affairs of ORBCOMM; (ii) OCC controls the operational and financial affairs of
ORBCOMM USA; and (iii) Teleglobe Mobile controls the operational and financial
affairs of ORBCOMM International. Since OCC is unable to control, but is able to
exercise significant influence over ORBCOMM's and ORBCOMM International's
operating and financial policies, OCC is accounting for its investments in
ORBCOMM and ORBCOMM International using the equity method of accounting. Since
OCC is able to control the operational and financial affairs of ORBCOMM USA, it
consolidates the accounts of ORBCOMM USA.
At December 31, 1996, ORBCOMM had total assets, total liabilities and total
partners' capital of $329,509,000, $191,568,000 and $137,941,000, respectively.
At December 31, 1995, ORBCOMM had total
59
62
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS IN AFFILIATES -- (CONTINUED)
assets, total liabilities and total partner's capital of $109,030,000,
$14,428,000 and $94,602,000, respectively. ORBCOMM collected non-refundable fees
in the amount of approximately $900,000 in 1995 and $100,000 in 1996 from a
potential international licensee (none in 1994) and reported net income (loss)
of approximately ($9,000), $55,000, and ($19,480,000) for the years ended
December 31, 1994, 1995, and 1996, respectively.
Based on its current assessment of the overall business prospects of the
ORBCOMM partnerships and the ORBCOMM System, OCC currently believes its
investment in ORBCOMM is fully recoverable. If in the future, the ORBCOMM
business is not successful, OCC may be required to expense part or all of its
investment.
(4) RELATED PARTY TRANSACTIONS
OCC was the prime contractor of the Phase 1A ORBCOMM System, consisting of
communications satellites, launch vehicles and ground systems, and successfully
launched the Phase 1A ORBCOMM System satellites in April 1995. During 1994 and
1995, OCC recorded contract revenues on sales to ORBCOMM of approximately
$24,700,000 and $15,652,000, respectively. OCC recorded no contract revenues
during 1996.
Pursuant to the Phase 1A ORBCOMM System contract, OCC subcontracted with
Orbital to procure a majority of the communications satellites, launch vehicles,
and ground systems. During 1994 and 1995, OCC purchased hardware and services
totaling approximately $14,660,000 and $4,477,000, respectively, from Orbital.
No such purchases occurred in 1996.
Pursuant to the terms for the ORBCOMM Phase 1B System agreement, ORBCOMM
contracted directly with Orbital to procure additional communications satellites
and launch services. During 1995 and 1996, ORBCOMM purchased hardware and
services from Orbital totaling approximately $23,672,000 and $55,435,000,
respectively. No such purchases occurred in 1994.
OCC also procured U.S. marketing services from ORBCOMM USA on a cost
reimbursable basis through September 1995. In 1994 and 1995, OCC purchased
marketing services totaling approximately $2,093,000 and $1,360,000,
respectively.
OCC obtains virtually all of its funding for its operations and for its
capital investments in ORBCOMM from Orbital via a non-interest bearing
intercompany borrowing agreement. As of December 31, 1995 and December 31, 1996,
OCC owed Orbital $62,858,000 and $74,786,000, respectively, none of which is
currently payable. As of December 31, 1996, OCC owes $112,000 and $7,000 to
ORBCOMM and ORBCOMM International, respectively.
ORBCOMM USA currently obtains all of its funding from ORBCOMM and ORBCOMM
International via non-interest bearing intercompany borrowing agreements. As of
December 31, 1995 and December 31, 1996, ORBCOMM USA owed ORBCOMM approximately
$661,000 and $3,578,000, respectively, none of which is currently payable.
(5) INCOME TAXES
OCC had no current or deferred provision for income taxes for the years
ended December 31, 1994, 1995, and 1996. There are no significant differences
between pre-tax financial statement income and taxable income in 1994, 1995, and
1996.
60
63
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INCOME TAXES -- (CONTINUED)
The differences between the actual taxes and taxes computed at the U.S.
Federal income tax rate of 34% are summarized as follows:
DECEMBER 31,
----------------------
1994 1995 1996
---- ---- ----
U.S. Federal statutory rate............................. -- 34% (34)%
Generation (utilization) of net operating loss
carryforward.......................................... -- (34)% 34%
--- --- ---
Effective Rate.......................................... -- -- --
=== === ===
The tax effects of significant temporary differences at December 31, 1995
and 1996 are as follows:
DECEMBER 31,
------------------------
1995 1996
-------- -----------
Deferred Tax Assets:
Accrued expenses and other........................ $ 78,000 $ --
Net operating loss carryforward and other......... 3,975,000
Valuation allowance............................... (78,000) (3,975,000)
-------- -----------
$ -- $ --
======== ===========
(6) COMMITMENTS AND CONTINGENCIES
On August 7, 1996, ORBCOMM issued $170,000,000 senior unsecured notes due
2004 (the "Notes") to institutional investors. The Notes bear interest at a
fixed rate of 14% and provide for noteholder participation in future ORBCOMM
service revenues. The Notes are fully and unconditionally guaranteed on a joint
and several basis by OCC and Teleglobe Mobile. The guarantees are nonrecourse to
the shareholders and/or partners of the guarantors.
(7) STOCK OPTION PLAN
OCC adopted a stock option plan in 1992 (the "ORBCOMM Plan"). The ORBCOMM
Plan provides for grants of incentive and non-qualified stock options to
purchase OCC common stock to officers and employees of OCC, ORBCOMM, ORBCOMM
USA, ORBCOMM International, and Orbital. Under the terms of the ORBCOMM Plan,
incentive stock options may not be granted at less than 100% of the fair market
value at the date of grant and non-qualified options may not be granted at less
than 85% of the fair market value of OCC common stock at the date of grant as
determined by a committee consisting of two OCC Board members and two members
appointed by Teleglobe Mobile. The options vest at a rate set forth by the Board
of Directors in each individual option agreement, generally in one-fourth
increments over a four-year period.
Certain provisions of the ORBCOMM Plan require OCC to repurchase, with cash
or promissory notes, the common stock acquired pursuant to the options. The cash
repurchase is restricted by the terms of the Indenture covering the Notes (See
Note 6). During 1996, OCC paid approximately $1,100,000 in cash to repurchase
47,760 shares of common stock acquired by current and former employees resulting
from previously exercised options. These repurchases were funded by (i)
reimbursements from ORBCOMM pursuant to the terms of the Restated Agreement of
Limited Partnership of ORBCOMM Global, L.P. and (ii) contributions from Orbital,
such that the net cash paid to third parties for repurchase of OCC common stock
was no greater than $1,000,000 as required by the Indenture governing the Notes.
61
64
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) STOCK OPTION PLAN -- (CONTINUED)
The following table summarizes the option activity under the ORBCOMM Plan
for the last three years:
WEIGHTED-
NUMBER OF OPTION PRICE AVERAGE OUTSTANDING
SHARES PER SHARE EXERCISE PRICE AND EXERCISABLE
--------- --------------- -------------- ---------------
Outstanding at December 31, 1993.......... 496,274 $ 1.50 - $12.50 $ 3.81 184,966
Granted................................. 118,650 $ 5.25 - $12.50 13.42
Exercised............................... (4,186) $ 1.50 - $14.00 1.76
Canceled or Expired..................... (11,664) $ 1.50 - $13.00 8.17
------- -----------------
Outstanding at December 31, 1994.......... 599,074 $ 1.50 - $14.00 5.64 298,657
Granted................................. -- -- --
Exercised............................... (8,936) $ 1.50 - $13.00 3.87
Canceled or Expired..................... (44,238) $ 1.50 - $13.00 6.74
------- -----------------
Outstanding at December 31, 1995.......... 545,900 $ 1.50 - $14.00 5.56 411,086
Granted................................. 154,500 $17.00 - $25.00 20.50
Exercised............................... (67,270) $ 1.50 - $13.00 2.43
Canceled or Expired..................... (34,300) $ 1.50 - $17.00 13.81
------- -----------------
Outstanding at December 31, 1996.......... 598,830 $ 1.50 - $25.00 $ 9.40 393,903
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE
- --------------- ----------- ---------------- -------------- ----------- --------
$ 1.50 - $ 4.00 283,040 5.8 years.... $ 2.37 283,040 $ 2.37
$ 5.25 - $17.00 248,290 7.5 years.... $13.18 110,863 $11.33
$25.00 - $25.00 67,500 9.3 years.... $25.00 0 N/A
$ 1.50 - $25.00 598,830 6.9 years.... $ 9.40 393,903 $ 4.89
(8) STOCK BASED COMPENSATION
On January 1, 1996, OCC adopted SFAS 123. OCC uses the Black-Scholes
option-pricing model to determine the pro forma impact to OCC's net income
(loss). The model utilizes certain information, such as the interest rate on a
risk-free security maturing generally at the same time as the option being
valued, and requires certain assumptions, such as the expected amount of time an
option will be outstanding until it is exercised or it expires, to calculate the
weighted-average fair value per share of stock options granted. This information
and the assumptions used in the option pricing model for 1996 are as follows:
volatility, 30%; dividend yield, zero percent; risk free interest rate, 5.6%;
average expected life, 4.5 years; additional shares available, 20,778; and
weighted-average exercise price per share, $20.50.
OCC recorded compensation expense related to the ORBCOMM Plan of
approximately $47,000 and $32,000 for the years ended December 31, 1994 and
1995, respectively. No stock based compensation expense was recorded in 1996.
Had the company determined compensation cost based on the fair value at the
grant date for its stock options in accordance with the fair value method
prescribed by SFAS 123, OCC's net loss would have been approximately $10,200,000
for the year ended December 31, 1996. Pro forma net loss reflects only options
granted in 1995 and 1996, and therefore may not be representative of the effects
for future periods.
62
65
AUDITORS' REPORT
To the Partners of
Teleglobe Mobile Partners
We have audited the consolidated balance sheet of Teleglobe Mobile Partners (a
development stage enterprise) as at December 31, 1995 and the consolidated
statements of operations, partners' capital and cash flows for each of the years
in the two year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Partnership as at December 31,
1995 and the results of its operations, partners' capital and cash flows for
each of the years in the two year period ended December 31, 1995 in accordance
with generally accepted accounting principles in the United States of America.
Grant Thornton
General Partnership
Chartered Accountants
Montreal, Canada
June 25, 1996
63
66
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Partners
Teleglobe Mobile Partners
(a development stage enterprise)
We have audited the consolidated balance sheet of Teleglobe Mobile Partners (a
development stage enterprise) as of December 31, 1996, and the consolidated
statements of operations, partners' capital and cash flows for the year then
ended and for the period from July 21, 1993 (date of inception) through December
31, 1996. These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, these consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of Teleglobe
Mobile Partners (a development stage enterprise) as of December 31, 1996, and
the results of its operations, partners' capital and cash flows for the year
then ended and for the period from July 21, 1993 (date of inception) through
December 31, 1996 in conformity with generally accepted accounting principles.
Grant Thornton LLP
Vienna, Virginia
February 19, 1997
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67
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
DECEMBER 31,
-------------------
1995 1996
------- -------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................................. $34,168 $ 1,618
Accounts receivable.................................................... 0 17
Prepaid contract costs................................................. 0 3,871
Due from an affiliate, without interest and repayment terms............ 0 1,309
------- -------
Total current assets................................................ 34,168 6,815
Joint venture investment............................................... 33,512 74,361
------- -------
TOTAL ASSETS................................................... $67,680 $81,176
======= =======
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accounts payable and accrued liabilities............................... $ 271 $ 899
Deferred revenue....................................................... 0 6,147
------- -------
Total current liabilities........................................... 271 7,046
Non-controlling interest............................................... 5 (823)
------- -------
Total Liabilities................................................... 276 6,223
PARTNERS' CAPITAL
Teleglobe Mobile, L.P. ................................................ 46,711 51,942
TR (U.S.A.) Ltd. ...................................................... 20,221 22,486
Teleglobe Mobile Investment Inc. ...................................... 472 525
------- -------
Total Partners' Capital............................................. 67,404 74,953
------- -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........................ $67,680 $81,176
======= =======
(See accompanying notes to the consolidated financial statements)
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68
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
TOTAL
ACCUMULATED
DURING
YEAR ENDED DEVELOPMENT
DECEMBER 31, STAGE THROUGH
----------------------------- DECEMBER 31,
1994 1995 1996 1996
----- ------ -------- -------------
INCOME
Product sales.................................. $ 0 $ 0 $ 8 $ 8
Interest income................................ 0 1,253 905 2,158
Share in net loss of a joint venture........... 0 (219) (8,975) (9,194)
------ ------ --------- ---------
Total Income................................ 0 1,034 (8,062) (7,028)
EXPENSES
Cost of product sales.......................... 0 0 6 6
Operating expenses............................. 453 743 1,967 3,648
Financial charges.............................. 0 0 288 288
------ ------ --------- ---------
Total Expenses.............................. 453 743 2,261 3,942
Income (loss) before non-controlling interest.... (453) 291 (10,323) (10,970)
Non-controlling interest......................... 0 0 828 828
------ ------ --------- ---------
NET INCOME (LOSS)................................ $(453) $ 291 $ (9,495) $ (10,142)
====== ====== ========= =========
(See accompanying notes to the consolidated financial statements)
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TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS OF DOLLARS)
GENERAL PARTNERS
-----------------------------------------------
TELEGLOBE
TELEGLOBE MOBILE TR (U.S.A.)
MOBILE, L.P. INVESTMENT INC. LTD. TOTAL
------------ --------------- ------------ -------
Capital contributions........................ $ 9,903 $ 100 $ 0 $10,003
Net loss..................................... (480) (5) 0 (485)
------- ---- --------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1993........... 9,423 95 0 9,518
Net loss..................................... (449) (4) 0 (453)
------- ---- --------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1994........... 8,974 91 0 9,065
Capital contributions........................ 27,719 281 31,062 59,062
Excess of contributions from a new partner to
the existing partners..................... 10,587 106 (10,693) 0
Net income................................... 134 1 156 291
Share of financing fees of a joint venture... (703) (7) (304) (1,014)
------- ---- --------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1995........... 46,711 472 20,221 67,404
Capital contributions........................ 9,256 94 7,650 17,000
Excess of contributions from a new partner to
the existing partners..................... 2,525 25 (2,550) 0
Net loss..................................... (6,580) (67) (2,848) (9,495)
Share of unrealized gains on
available-for-sale investments of a joint
venture................................... 30 1 13 44
------- ---- --------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1996........... $ 51,942 $ 525 $ 22,486 $74,953
======= ==== ========= ========
(See accompanying notes to the consolidated financial statements)
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70
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
TOTAL
CASH FLOWS
DURING
DEVELOPMENT
YEAR ENDED DECEMBER 31, STAGE THROUGH
------------------------------- DECEMBER 31,
1994 1995 1996 1996
----- -------- -------- -------------
OPERATING ACTIVITIES
Net income (loss).......................... $(453) $ 291 $ (9,495) $ (10,142)
Non-cash items:
Share in net loss of a joint venture.... 0 219 8,975 9,194
Non-controlling interest................ 0 0 (828) (828)
Changes in non-cash operating balances:
Accounts receivable..................... 0 0 (17) (17)
Prepaid contract costs.................. 0 0 (3,871) (3,871)
Accounts payable and accrued
liabilities........................... 453 (667) 628 899
Deferred revenue........................ 0 0 6,147 6,147
----- -------- --------- ---------
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES......................... 0 (157) 1,539 1,382
----- -------- --------- ---------
INVESTING ACTIVITIES
Net increase in a joint venture
investment.............................. 0 (23,728) (49,780) (83,511)
Due from an affiliate...................... 0 0 (1,309) (1,309)
----- -------- --------- ---------
CASH USED IN INVESTING ACTIVITIES..... 0 (23,728) (51,089) (84,820)
----- -------- --------- ---------
FINANCING ACTIVITIES
Share of financing fees of a joint
venture................................. 0 (1,014) 0 (1,014)
Partners' contributions.................... 0 59,062 17,000 86,065
Non-controlling interest................... 0 5 0 5
----- -------- --------- ---------
CASH PROVIDED BY FINANCING
ACTIVITIES......................... 0 58,053 17,000 85,056
----- -------- --------- ---------
INCREASE (DECREASE) IN CASH.................. 0 34,168 (32,550) 1,618
Cash, beginning of period.................... 0 0 34,168 0
----- -------- --------- ---------
CASH, END OF PERIOD.......................... $ 0 $ 34,168 $ 1,618 $ 1,618
===== ======== ========= =========
CASH REPRESENTS CASH AND CASH EQUIVALENTS
(See accompanying notes to the consolidated financial statements)
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71
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
(1) GOVERNING STATUTES AND NATURE OF OPERATIONS
Teleglobe Mobile Partners, a Delaware general partnership (the
"Partnership") was originally formed July 21, 1993, in accordance with the
provisions of the Delaware Uniform Partnership Law for purposes of being a
general and a limited partner in ORBCOMM Global, L.P. ("ORBCOMM Global"), a
Delaware limited partnership providing international wireless data
communications services. The Partnership also carries on marketing activities
through its subsidiary, ORBCOMM International Partners, L.P. ("ORBCOMM
International"). As of June 29, 1994, the original Partnership was amended and
restated by admitting a new partner to the Partnership. The Partnership's term
commenced on June 29, 1994 and shall terminate on December 31, 2015.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Partnership holds a 50% Participation Percentage in ORBCOMM Global,
which in turn holds a 98% non-controlling interest in ORBCOMM USA, L.P.
("ORBCOMM USA") and ORBCOMM International, two other partnerships formed to
market the ORBCOMM system.
The Partnership also directly holds a 2% Participation Percentage in
ORBCOMM International bringing its direct and indirect Participation Percentage
to 51%. Teleglobe Mobile Partners controls the operational and financial affairs
of ORBCOMM International.
The Partnership is in its development stage, devoting substantially all of
its efforts to establishing a new communications business through ORBCOMM
Global. Operations are expected to commence in 1998. The consolidated financial
statements of the Partnership are prepared on the accrual basis of accounting,
in conformity with generally accepted accounting principles in the United States
of America and, where applicable, are in general conformity with practices
prevailing in the telecommunications industry. They include the accounts of the
Partnership and its subsidiary, ORBCOMM International. All significant
intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Joint venture investment
The investment in ORBCOMM Global is accounted for using the equity method.
Goodwill, consisting of the excess of the cost of the Partnership's
investment over its equity in the underlying net assets of ORBCOMM Global at the
acquisition date, is included in the joint venture investment. Goodwill is
amortized on a straight-line basis, starting October 1, 1996, over the estimated
economic useful life of the ORBCOMM system.
Revenue recognition
ORBCOMM International generally recognizes fees from Service License
Agreements ("SLAs") with its International Licensees ratably over the term of
the agreement, or when ORBCOMM International's obligations thereunder are
substantially complete. Revenue under the gateway procurement contracts
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72
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
executed in connection with SLAs or sale of subscriber communicator hardware is
recognized when products are shipped or when customers have accepted the
products or services, depending on contractual terms.
Income taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
in the consolidated financial statements.
Cash and cash equivalents
The Partnership considers all highly liquid investments with maturities of
three months or less to be cash equivalents.
Fair value of financial instruments
The carrying value of the Partnership's cash and cash equivalents,
receivables, and accounts payable approximates fair value since all such
instruments are short-term in nature.
(3) JOINT VENTURE INVESTMENT
As at December 31, 1996, goodwill, net of accumulated amortization in the
amount of $63, included in the joint venture investment amounts to $4,562 (none
in 1995).
The following tables summarize the information concerning the income,
assets and liabilities of ORBCOMM Global.
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEAR ENDED DECEMBER 31, STAGE THROUGH
-------------------------- DECEMBER 31,
1994 1995 1996 1996
---- ---- -------- -------------
Income statement data
Income............................................. $ 0 $958 $ 3,975 $ 4,933
Net income (loss).................................. (9) 55 (19,480) (19,434)
DECEMBER 31,
---------------------
1995 1996
-------- --------
Balance sheet data
Total assets......................................................... $109,029 $329,509
Total liabilities.................................................... 14,428 191,567
Partners' capital
Teleglobe Mobile Partners......................................... 33,517 73,596
Orbital Communications Corporation................................ 61,084 64,346
Based on its current assessment of the overall business prospects of
ORBCOMM Global's marketing partnerships and the ORBCOMM System, the Partnership
believes its investment of approximately $74,000 in ORBCOMM Global is fully
recoverable. If in the future, the ORBCOMM Global business is not successful,
the Partnership may be required to expense part or all of its investment.
70
73
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
(4) RELATED PARTY TRANSACTIONS
As of December 31, 1996, ORBCOMM International had a receivable of
approximately $1,300 from ORBCOMM Global that represents net cash outflow to
ORBCOMM Global (none for the year ended December 31, 1995). ORBCOMM
International is currently in development stage and obtains funds to support
operations through non-interest bearing advances from ORBCOMM Global.
As of December 31, 1996, ORBCOMM International had a payable of
approximately $225 to Teleglobe Canada Inc., an affiliate of the Partnership,
for a contracted employee to provide international marketing services (none for
the year ended December 31, 1995).
In 1996, the Partnership entered into an Administrative Services Agreement
with Teleglobe Inc. ("Teleglobe"), the ultimate parent company of the
Partnership. Under this agreement, Teleglobe provides management services to the
Partnership. Teleglobe invoices the Partnership for those services on a monthly
basis. As of December 31, 1996, the Partnership owed Teleglobe approximately
$155 ($271 for the year ended December 31, 1995).
As of December 31, 1996, ORBCOMM International had a receivable of
approximately $7 for bonus payments to ORBCOMM International employees paid on
behalf of Orbital Communications Corporation ("OCC"), a majority owned
subsidiary of Orbital Sciences Corporation, for employees previously employed by
OCC (none for the year ended December 31, 1995).
(5) COMMITMENTS AND CONTINGENCIES
In August 1996, ORBCOMM Global and ORBCOMM Global Capital Corp. (the
"Issuers") issued $170,000 of Senior Notes due in full in 2004 with Revenue
Participation Interest (the "Old Notes"). Revenue Participation Interest
represents an aggregate amount equal to 5% of the ORBCOMM System revenue and is
payable on the Old Notes on each interest payment date subject to certain
covenant restrictions. Interest on the Old Notes accrues at a rate of 14% per
annum and will be payable semi-annually in arrears on February 15 and August 15
of each year, commencing on February 15, 1997.
All of the Old Notes have been exchanged for an equal principal amount of
registered 14% Series B Senior Notes due in full in 2004 with Revenue
Participation Interest (the "Notes"). The Notes are substantially similar to the
Old Notes except that the Notes are registered under the Securities Act of 1933,
as amended, and do not bear legends restricting the transfer thereof. The Notes
are fully and unconditionally guaranteed on a joint and several basis by the
Partnership, OCC, ORBCOMM USA and ORBCOMM International (each a "Guarantor" and
collectively, the "Guarantors"), except that the guarantees are nonrecourse to
the shareholders and/or partners of the Guarantors, limited only to the extent
necessary for each such guarantee not to constitute a fraudulent conveyance
under applicable law. The guarantee of each Guarantor ranks pari passu in right
of payment with all senior indebtedness of such Guarantor and senior in right of
payment to all indebtedness expressly subordinated to the guarantee of such
Guarantor. The guarantees are non-recourse to the shareholders and/or partners
of each Guarantor and no shareholders or partners of any Guarantors will have
any liability for any claim under the Notes.
On closing, ORBCOMM Global used a portion of the net proceeds from the sale
of the Old Notes, approximately $44,800, to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998.
The Partnership is obligated to pay quarterly to ORBCOMM Global a System
Charge in consideration of ORBCOMM Global's grant to the Partnership of the
right to market, sell, lease and franchise all ORBCOMM System output capacity
outside the United States. Such System Charge is calculated as 23% of
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74
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
(5) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
ORBCOMM International's total service revenues for such quarter ("International
Output Capacity Charge") minus 1.15% of aggregate system service revenues,
defined as the total of ORBCOMM International and ORBCOMM USA total system
service revenues. If the International Output Capacity Charge is less than 1.15%
of aggregate system service revenues as described above, then the Partnership is
not required to pay and does not owe any portion of the System Charge to ORBCOMM
Global. The Partnership in turn has granted to ORBCOMM International, these same
privileges and the exclusive use of the ORBCOMM System Assets located outside
the United States for a period of 20 years. In consideration for this grant,
ORBCOMM International has agreed to pay to the Partnership an International
Output Capacity Charge. As of December 31, 1996, no such charge has been
incurred.
The Partnership is committed to invest approximately $85,000 in the ORBCOMM
project. As of December 31, 1996, this amount has already been invested entirely
($34,753 as of December 31, 1995).
In October 1996, ORBCOMM International entered into agreements with certain
manufacturers for construction of gateway Earth stations scheduled for delivery
over the next two years. As of December 31, 1996, ORBCOMM International has
approximately $3,800 of prepaid contract costs which represent advanced payments
to these manufacturers. Total commitments remaining under these agreements
approximate $14,000.
(6) SERVICE LICENSE AGREEMENTS
During 1996, ORBCOMM International signed five SLAs and the associated
Gateway procurement contracts and software license agreements with International
Licensees covering Europe, the Malaysian Region, a portion of North Africa,
Turkey and the Middle East. The SLAs authorize the International Licensees to
use the ORBCOMM System to provide two-way messaging and data communications
services. Under these agreements, approximately $6,000 has been received and
recorded as deferred revenues at December 31, 1996. ORBCOMM International is
obligated to ship six Gateways to certain international licensees under these
agreements.
(7) RECLASSIFICATION OF PRIOR YEARS BALANCES
Certain amounts in prior year's financial statements have been reclassified
to conform with the current year presentation.
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75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The ORBCOMM Partnership Agreement provides that the management of the
Company is the exclusive responsibility of the General Partners. Officers of the
Company are nominated by the President of the Company and elected by the General
Partners and exercise such authority as they are granted by the General
Partners.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of March 1, 1997 regarding
the executive officers of ORBCOMM and the directors and executive officers of
Capital.
NAME AGE POSITION TERM
- ------------------------- --- ------------------------------------------------------ ------
Alan L. Parker........... 57 President and Chief Executive Officer of ORBCOMM 1 year
President and Director of Capital 1 year
W. Bartlett Snell........ 44 Senior Vice President, Finance and Administration 1 year
and Chief Financial Officer of ORBCOMM
Vice President, Treasurer and Director of Capital 1 year
Robert J. Pizzimenti..... 48 Executive Vice President, Marketing and Business 1 year
Development of ORBCOMM
Brian L. Williams........ 46 Vice President, Marketing, Strategy and Communications 1 year
of ORBCOMM
Mary Ellen Seravalli..... 38 Senior Vice President and General Counsel of ORBCOMM 1 year
Vice President and Secretary of Capital 1 year
Paul A. Locke............ 55 Acting Vice President, Engineering and Operations 1 year
Alan L. Parker has been the President of ORBCOMM since its inception on
June 30, 1993 and Chief Executive Officer since February 1996. Mr. Parker has
been President and Director of Capital since July 1996. Mr. Parker was
previously, and continues to be, the President of OCC. Mr. Parker was a member
of the U.S. delegation to World Administrative Radio Conference '92 and the 1993
and 1995 World Radio Conferences ("WRC"). Mr. Parker's experience includes 25
years with Ford Aerospace and Ford Motor Company. Mr. Parker served as Chairman
and CEO of Ford Aerospace Satellite Services Corporation from 1982 to 1986 and
was Vice President of Marketing and Business Planning of Ford Aerospace
Corporation from 1976 to 1986. Prior to 1976, Mr. Parker held several marketing
and product planning positions at Ford, including Car Product Development, Ford
of Europe and Corporate Product Planning and Research.
W. Bartlett Snell has been the Senior Vice President, Finance and
Administration and the Chief Financial Officer at ORBCOMM since February 1996.
Mr. Snell has been Vice President, Treasurer and Director of Capital since July
1996. From 1993 to 1996, Mr. Snell was President and Chief Executive Officer of
Power Source Solutions, Inc., a company specializing in assisting organizations
undertaking strategic corporate change. From 1992 to 1993, Mr. Snell was Senior
Vice President and General Manager of People Karch International, an
international provider of work-site health promotion services, health and
fitness software and corporate child care programs. Prior to 1992, Mr. Snell
worked for IBM Corporation. Mr. Snell is a member of both the Northern Virginia
Business round table and the Northern Virginia Technology Council.
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Robert J. Pizzimenti has been the Executive Vice President for Marketing
and Business Development at ORBCOMM since April 1994. Prior to April 1994, Mr.
Pizzimenti was Vice President of Marketing for Iridium, Inc. Mr. Pizzimenti has
over 20 years of experience in wireless communications and international
business development. During the 1980s, Mr. Pizzimenti served as Ericsson Radio
Systems' North American Marketing Manager, and as President of Ericsson Paging
Systems, North America. Mr. Pizzimenti also has served as Vice President of
Marketing for Metro One, the non-wireline cellular system serving New York and
New Jersey. Mr. Pizzimenti has participated in a variety of industry
associations and committees, including the Telocator POCSAG Coordination
Initiative.
Brian L. Williams has been the Vice President, Marketing, Strategy and
Communications at ORBCOMM since January 1997. From March 1995 to January 1997,
Mr. Williams was Senior Vice President of Marketing and Business Development for
Optex Communications Corporation, a development stage company creating high
speed, high capacity data storage and imaging technologies. From December 1992
to March 1995, he was a director with Bell Atlantic Video Services Company where
he was instrumental in the formation of Bell Atlantic's multimedia strategy and
many of Bell Atlantic's strategic partner alliances. From 1986 to 1992, Mr.
Williams held several marketing and product development positions at NEC
Technologies, Inc., including the position of Assistant Vice President of
Marketing. Mr. Williams has served on the Board of Directors for the Electronic
Industries Association -- Consumer Electronics Group.
Mary Ellen Seravalli has been the Senior Vice President and General Counsel
at ORBCOMM since January 1997 and was Vice President and General Counsel at
ORBCOMM from January 1996 to December 1996. Ms. Seravalli has been Vice
President and Secretary of Capital since July 1996. From 1991 to 1995, Ms.
Seravalli was Vice President and Assistant General Counsel of Orbital. Prior to
1991, Ms. Seravalli was an associate in the law firm of Jones, Day, Reavis &
Pogue, where she worked on mergers and acquisitions, with an emphasis on the
telecommunications industry, and where she gained significant experience
representing both lenders and borrowers in connection with the establishment of
various types of credit facilities.
Paul A. Locke has been Acting Vice President, Engineering and Operations at
ORBCOMM since August 1996, and has been Senior Director Space Segment
Engineering at ORBCOMM since June 1992. From April 1991 to June 1992, Mr. Locke
was a regulatory and satellite system engineering consultant for a number of
satellite-based projects. Mr. Locke participated in the first FCC Negotiated
Rule Making for Little LEOs and has participated in a variety of preparatory
meetings for WRC '95.
PARTNER REPRESENTATION
Pursuant to the Partnership Agreements of ORBCOMM, ORBCOMM USA and ORBCOMM
International, each General Partner is represented at the meetings of the
General Partners by up to three authorized representatives. Each General Partner
may by notice to the other change its designated authorized representatives. Set
forth below is information as of March 1, 1997 regarding each of the General
Partners' representatives.
OCC:
David W. Thompson, 42, is a director of OCC. Mr. Thompson also is a
co-founder of Orbital and has been its Chairman, President and Chief Executive
Officer since 1982. Prior to 1982, Mr. Thompson was Special Assistant to the
President of Hughes Aircraft Company's Missile Systems Group and was a NASA
project manager and engineer on advanced rocket engines at Marshall Space Flight
Center and on the Viking Mars landing missions at the Jet Propulsion Laboratory.
Bruce W. Ferguson, 42, is the Chairman and is a director of OCC. Mr.
Ferguson also is a co-founder of Orbital and has been Executive Vice President
and General Manager, Communications and Information Services Group since 1993.
Mr. Ferguson was Executive Vice President and Chief Operating Officer of Orbital
from 1989 to 1993, Senior Vice President, Finance and Administration and General
Counsel from 1985 to 1989 and Vice President, Finance and General Counsel from
1982 to 1985. Before co-founding Orbital, Mr. Ferguson was an attorney in the
corporate and securities department of the law firm of Kirkland & Ellis. Mr.
Ferguson is a director of Superconducting Core Technologies, Inc.
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Jeffrey V. Pirone, 36, is the Vice President and Chief Financial Officer of
OCC. Mr. Pirone also is the Senior Vice President and Chief Financial Officer of
Orbital. Mr. Pirone came to Orbital in 1991, and prior to that was a Senior
Manager at KPMG Peat Marwick LLP.
Teleglobe Mobile:
Claude Seguin, 47, is the Chairman of the Board and Chief Executive Officer
of Teleglobe Mobile Investment Inc, the managing partner of Teleglobe Mobile. He
is also the Executive Vice-President, Finance and Corporate Development and
Chief Financial Officer of Teleglobe. Mr. Seguin served the Quebec Finance
Ministry as deputy minister from 1987 to 1992. He was responsible for all
departmental activities relating to Quebec's budgetary, fiscal and economic
policies and was also in charge of financing and treasury operations for the
entire government of Quebec. Mr. Seguin sits on the boards of La Societe
financiere Desjardins Laurentienne and La Societe generale de financement du
Quebec. He is also a former governor of the Montreal Exchange.
Marc J.E. Leroux, 45, is Vice President, Technology of Teleglobe and
President and Chief Operating Officer of Teleglobe's World Mobility Division.
Prior to joining Teleglobe in 1992, Mr. Leroux directed a wide range of research
and development projects at Bell-Northern Research, a subsidiary of Northern
Telecom.
Jean-Paul Tardif, 36, is Director, Financial Planning and Projects at
Teleglobe. From 1990 until he joined Teleglobe in early 1996, Mr. Tardif held
the position of Director, Planning and Special Projects Group at Telesystem
Ltd., a private holding company, and the position of Treasurer at Telesystem
International Wireless Services Ltd., a paging and cellular operator with
businesses in several countries around the world. Prior to that, Mr. Tardif was
a management consultant specialized in financial analysis and business valuation
with Raymond, Chabot, Martin, Pare, a Quebec-based accounting firm.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of all compensation earned,
awarded or paid in the fiscal years ended December 31, 1996 and 1995, as
applicable, to those persons who were (i) at December 31, 1996, the Chief
Executive Officer and the four most highly compensated executive officers of the
Company other than the chief executive officer and (ii) one former executive
officer of the Company (collectively, the "Named Officers").
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION(1) SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(2) COMPENSATION($)(3)
- ---------------------------------------- ---- --------- -------- ------------ -----------------
Alan L. Parker.......................... 1996 $ 200,000 $60,000 -- $16,655
President and Chief Executive Officer of 1995 167,846 33,512 -- 7,905
ORBCOMM; President and Director of
Capital
W. Bartlett Snell....................... 1996 127,769 44,000 25,000 10,480
Senior Vice President Finance and 1995(4) -- -- -- --
Administration/Chief Financial Officer
and Treasurer of ORBCOMM; Vice
President, Treasurer and Director of
Capital
Robert J. Pizzimenti(5)................. 1996 172,505 20,000 -- 13,761
Executive Vice President Marketing and 1995 152,408 23,500 -- 9,104
Business Development of ORBCOMM
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LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION(1) SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(2) COMPENSATION($)(3)
- ---------------------------------------- ---- --------- -------- ------------ -----------------
Mary Ellen Seravalli.................... 1996 $ 130,000 $33,000 20,000 $ 9,324
Senior Vice President and General 1995(4) -- -- -- --
Counsel of ORBCOMM; Vice President and
Secretary of Capital
William P. Fox.......................... 1996 124,868 11,000 -- 9,198
Vice President Business Operations of 1995 117,800 14,696 -- 7,312
ORBCOMM
David M. Baum........................... 1996 100,692 10,000 30,000 73,189(6)
Former Senior Vice President Engineering 1995(4) -- -- -- --
and Operations of ORBCOMM
- ---------------
(1) No compensation was received by the directors and officers of Capital by
virtue of serving as a director or officer of Capital.
(2) Shares of common stock of OCC subject to options granted under the Orbital
Communications Corporation 1992 stock option plan (the "OCC Option Plan").
(3) Includes Company matching and profit-sharing contributions earned under the
Company's 401(k) Plan.
(4) No compensation is reported where the individual person did not serve as an
executive officer of ORBCOMM at the end of 1995.
(5) Mr. Pizzimenti resigned his position as an executive officer and employee of
the Company in March 1997. Pursuant to a severance agreement between Mr.
Pizzimenti and the Company, Mr. Pizzimenti will receive $152,000 in exchange
for stock options previously issued to Mr. Pizzimenti pursuant to the OCC
Option Plan.
(6) Includes $68,045 payable under a severance agreement. Mr. Baum resigned his
position as an executive officer and employee of the Company in August 1996.
OCC OPTION GRANTS IN LAST FISCAL YEAR
Shown below is information on grants of stock options to the Named Officers
pursuant to the OCC Option Plan during the fiscal year ended December 31, 1996,
which options are reflected in the Summary Compensation Table.
INDIVIDUAL GRANTS
-------------------------------------------------------------- POTENTIAL REALIZED VALUE
NUMBER OF AT ASSUMED RATES OF
SECURITIES % OF TOTAL PRICE ON STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE DATE OF FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE GRANT EXPIRATION ------------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) ($/SHARE) DATE 5% 10%
- ------------------------- ---------- ------------ --------- --------- ---------- ----------- ----------
Alan L. Parker........... -- -- -- -- -- -- --
W. Bartlett Snell........ 25,000 16.18 $ 17.00 $ 17.00 2/19/2006 $ 267,188 $ 677,053
Robert J. Pizzimenti..... -- -- -- -- -- -- --
Mary Ellen Seravalli..... 20,000 12.95 17.00 17.00 12/31/2005 213,232 540,032
William P. Fox........... -- -- -- -- -- -- --
David M. Baum............ 30,000 19.42 17.00 17.00 1/1/2006 320,625 812,463
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table set forth certain information regarding the beneficial
ownership of the partnership interests of the Company as of March 1, 1997.
PERCENTAGE
NAME AND ADDRESS INTEREST
---------------------------------------------------------- ----------
Orbital Communications Corporation........................ 50%
21700 Atlantic Boulevard
Dulles, Virginia 20166
Teleglobe Mobile Partners................................. 50%
c/o Teleglobe Inc.
1000, rue de La Gauchetiere ouest
Montreal, Quebec H3B 4X5
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MASTER AGREEMENT
As of June 30, 1993, Orbital, OCC, Teleglobe and Teleglobe Mobile entered
into the Master Agreement, restated as of September 12, 1995, that sets forth
the principles upon which the parties have agreed to develop, construct and
operate the ORBCOMM System. The Master Agreement subsequently has been amended
and restated and currently provides for the following:
Covenants Relating to OCC. Orbital and OCC have agreed: (i) to preserve
OCC's corporate existence; (ii) to use all commercially reasonable efforts to
obtain and maintain all material U.S. operating licenses and permits necessary
for the construction, operation and marketing of the ORBCOMM System; (iii) so
long as OCC holds any FCC authorizations, that OCC will (a) remain a subsidiary
of Orbital, other than as a result of options granted under the Orbital
Communications Corporation 1992 Stock Option Plan; (b) carry on no business
other than the construction, operation and marketing of the ORBCOMM System or
business that is in furtherance, or in connection with the expansion of the
ORBCOMM System; (c) remain the sole holder of all FCC authorizations required
for the construction, launch and operation of the ORBCOMM System (other than FCC
authorization for individual user transceivers and FCC authorizations held by
ORBCOMM and ORBCOMM USA); (d) subject to certain exceptions in accordance with
the Definitive Agreements, not grant, create, assume, incur or suffer to exist
any lien affecting OCC or any of its property, rights, revenues or assets; (e)
subject to certain exceptions in accordance with the Definitive Agreements, not
sell, transfer, convey, lease or otherwise dispose of any assets; (f) not
consolidate, merge or amalgamate with any other person; (g) subject to certain
exceptions in accordance with the Definitive Agreements, not create, amend or
repeal any by-laws or modify the OCC certificate of incorporation; (h) subject
to certain exceptions in accordance with the Definitive Agreements, not make any
loans or give any financial guarantees for the obligations of any other party;
and (i) not make any assignment for the benefit of creditors or subject OCC to
any bankruptcy or insolvency law or take steps to wind up or terminate OCC's
corporate existence or engage in any financial restructuring. Additionally,
Orbital has agreed, as long as OCC holds the FCC License, not to dispose of any
debt interest in OCC.
Guarantees. Orbital has unconditionally and absolutely guaranteed the full
and punctual payment of all of OCC's payment obligations under the Definitive
Agreements to which OCC is a party. Teleglobe has unconditionally and absolutely
guaranteed the full and punctual payment of all of Teleglobe Mobile's payment
obligations under the Definitive Agreements to which Teleglobe Mobile is a
party.
Change of Control. In the event of a Change in Control of Orbital or
Teleglobe (a "Change of Control Party"), Teleglobe Mobile or OCC, as the case
may be (the "Non-Change of Control Party"), has the option: (i) for a period of
180 days from the Change of Control to require the Change of Control Party to
purchase the Non-Change of Control Party's interest in each of ORBCOMM, ORBCOMM
USA and ORBCOMM International at an aggregate price equal to the greater of (a)
the Non-Change of Control Party's aggregate Unrecouped Capital Preferences in
such partnerships and (b) the Non-Change of Control Party's direct
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Participation Percentage in each such partnership multiplied by the fair market
value (as defined) of each such partnership; or (ii) to cause the general
partners of ORBCOMM to adopt a resolution providing that, in the event there is
a deadlock on a matter requiring the approval of a Majority in Interest of the
partners, the President of ORBCOMM shall be entitled to decide on such matter by
way of casting a vote or otherwise, as deemed appropriate by the Non-Change of
Control Party, notwithstanding any contrary provision set forth in the ORBCOMM
Partnership Agreement. Subject to the receipt of all necessary government
approvals, upon a Change of Control of Orbital, Orbital agrees to cause OCC to
transfer to ORBCOMM USA all FCC licenses then held by OCC relating to the
construction, launch or operation of the ORBCOMM System.
In the event that OCC should become a common carrier or a CMRS
provider -- either by virtue of a change in the ORBCOMM System's regulatory
classification by the FCC from private-carrier to common-carrier or CMRS status,
or by virtue of a change in its service offerings that would convert OCC from a
private carrier to a common carrier or a CMRS provider -- ORBCOMM USA might be
precluded from acquiring the FCC licenses from OCC, due to the extent of alien
ownership in ORBCOMM USA as a result of Teleglobe Mobile's indirect interest in
ORBCOMM USA.
SYSTEM CONSTRUCTION AGREEMENT
Under the terms of the System Construction Agreement, restated as of
September 12, 1995, ORBCOMM has agreed to develop, construct, deploy, manage and
operate, subject to OCC's ultimate control, the ORBCOMM System satellites and
the System Assets, in consideration for which OCC is obligated to remit to
ORBCOMM, on a quarterly basis, OCC's allocated portion of the System Charge,
provided, however, that, if the Output Capacity Charge for any quarter is less
than 1.15% of Total Aggregate Revenues, then OCC shall not be required to pay
any portion of the System Charge for such calendar quarter.
OCC has granted to ORBCOMM under the System Construction Agreement the
right to market, sell, lease and franchise all output capacity outside the
United States.
ORBCOMM has agreed to indemnify OCC from and against any claim with respect
to an infringement or other violation of any copyright, trademark or patent or
other validly registered enforceable intellectual property right of any third
party for any items constructed by ORBCOMM pursuant to the authority granted in
the System Construction Agreement, but only to the same extent as the
indemnification received by ORBCOMM from Orbital pursuant to the Procurement
Agreement.
PROCUREMENT AGREEMENT
ORBCOMM and Orbital have entered into the Procurement Agreement, dated
September 12, 1995, pursuant to which Orbital has undertaken the overall design,
development, construction, integration, test and operation of the ORBCOMM
System. The Procurement Agreement was the result of arm's length negotiations
between Orbital and Teleglobe Mobile that took place prior to Teleglobe Mobile's
decision to exercise an option to invest an approximately $75 million in
additional equity in the ORBCOMM project. Under the Procurement Agreement,
Orbital will develop, construct and deliver to ORBCOMM 34 satellites and
complete the construction and design of the Satellite Control Center and of the
four Earth stations comprising the U.S. ground segment of the ORBCOMM System.
Orbital will also provide to ORBCOMM launch services for 24 satellites using
three Pegasus XL launch vehicles. Orbital will also provide in-orbit check-out
support for up to 120 days after each of the three satellite launches.
ORBCOMM has agreed to pay Orbital approximately $163 million for satellite
construction, launch services and other work specified in the Procurement
Agreement plus certain incentive fees. Upon execution of the Procurement
Agreement, ORBCOMM paid to Orbital approximately $17.2 million representing
reimbursement for costs incurred through the date thereof. Following execution
of the Procurement Agreement, Orbital invoices ORBCOMM monthly for a maximum of
90% of its costs incurred during such month. The remaining ten percent of costs
incurred in any month, as well as the remaining balance of the fixed-price
contract amount, may be invoiced only upon completion of certain specified
project milestones.
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The parties have recently amended the Procurement Agreement to set forth
the payment terms for the Taurus launch vehicle.
Optional Work. The Procurement Agreement provides for additional work and
services to be performed at the option of ORBCOMM, including: (i) launch
services for an additional plane of eight satellites using one additional
Pegasus XL launch vehicle, and in-orbit check-out support for up to 120 days
after such optional launch; (ii) a replacement constellation of 32 satellites
(including launch services using four Pegasus XL launch vehicles) in accordance
with the specifications contained in the Procurement Agreement at a cost of
$166.1 million (subject to adjustment for inflation and excluding taxes, if any,
and the cost of launch and satellite insurance); and (iii) a onetime option to
request Orbital to provide a standard Taurus launch vehicle rather than a
Pegasus XL launch vehicle for any launch procured pursuant to the Procurement
Agreement; this option may be exercised by ORBCOMM on or prior to September 12,
1998 at a price to be negotiated, but which will not exceed $21 million.
Regulatory Matters. Under the terms of the Procurement Agreement, Orbital
is required to use all commercially reasonable efforts directly or through OCC:
(i) to obtain and maintain the required U.S. regulatory authority needed to
construct, launch and operate the satellites and operate the ORBCOMM System;
(ii) obtain and maintain FCC regulatory authority for the operation of
Subscriber Communicators for use in connection with the ORBCOMM System; and
(iii) to take reasonable actions in any regulatory proceedings to defend any
claims against any regulatory authority granted to Orbital or OCC in connection
with the ORBCOMM System or to oppose any application by competing systems that
use frequencies below 1 GHz. ORBCOMM has agreed to pay or reimburse Orbital or
OCC for all out-of-pocket expenses and internal costs incurred in connection
with Orbital's or OCC's efforts.
Delivery; Title and Risk of Loss. Under the Procurement Agreement,
delivery of the launch vehicle and satellites occurs on separation of the launch
vehicle from Orbital's L-1011 aircraft. At such time, title to and risk of loss
or damage passes to ORBCOMM and ORBCOMM's sole remedy for launch failure,
defects or failures to conform to applicable specifications is limited to: (i)
non-payment to Orbital of the specified milestone payment and any satellite
performance incentive payment; and (ii) termination of the Procurement
Agreement.
Delivery of the remaining Earth station and Satellite Control Center
efforts set forth in the Procurement Agreement occurs in accordance with the
terms of the Procurement Agreement. Title to, and risk of loss of or damage,
passes to ORBCOMM on successful completion of the acceptance test procedures for
such work as set forth in the Procurement Agreement.
Incentive Payments. In addition to the above prices for work and service,
Orbital is entitled to receive under the Procurement Agreement certain
performance incentive payments. Payments are to be made on a per-plane basis
with the incentive to be earned monthly for each complete month that there are a
specified minimum number of working satellites in the plane. The minimum number
of working satellites in a plane is seven during the first 30 months of the
on-orbit performance incentive period and six during the second 30 months of the
on-orbit performance period.
SYSTEM CHARGE AGREEMENT
OCC and ORBCOMM USA have entered into the System Charge Agreement, restated
as of September 12, 1995, for the purpose of providing for the use by ORBCOMM
USA of all of the output capacity of the ORBCOMM System within the United States
and for the exclusive use by ORBCOMM USA of certain System Assets located within
the United States. The term of the System Charge Agreement commenced on June 30,
1993 and continues until June 30, 2013.
Exclusive Use of U.S. System Capacity. OCC has granted to ORBCOMM USA the
exclusive right in the United States to market, sell, lease and franchise all
ORBCOMM System output capacity and exclusive use of the System Assets located in
the United States. ORBCOMM USA is permitted to grant ORBCOMM International use
of the U.S. Gateway for the limited purpose of operating the ORBCOMM System in
Canada, Mexico and any other country proximate to the United States.
Notwithstanding these provisions of
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the System Charge Agreement, OCC has retained all rights in and to, and ORBCOMM
USA has been granted no rights to, the ORBCOMM System.
Output Capacity Charge. In consideration of the grant by OCC to ORBCOMM
USA of the exclusive right to market, sell, lease and franchise all ORBCOMM
System output capacity in the United States, ORBCOMM USA agrees: (i) within 30
days of the end of each calendar quarter, to notify OCC of the total aggregate
revenues invoiced by it during such calendar quarter; and (ii) to remit to OCC
23% of the total aggregate revenues invoiced by it during each calendar quarter.
ORBCOMM USA retains sole discretion to set the fees to be paid by its
subscribers, Resellers and licensees for use of the ORBCOMM System.
Indemnification. OCC and ORBCOMM USA agree to indemnify, defend and hold
harmless each other and their respective successors and assigns against any
liability, damage, loss or expense incurred by or imposed upon them in
connection with any claims, suits, actions, demands or judgments arising out of
any breach of the party's obligations under the System Charge Agreement. In
addition, OCC agrees to indemnify and hold harmless ORBCOMM USA and its
respective successors and assigns from and against any claim with respect to an
infringement or other violation of any copyright, trademark or patent or other
validly registered enforceable intellectual property right of any third party
for any items OCC has authorized ORBCOMM USA to use under the System Charge
Agreement (but only to the same extent as the indemnification received by OCC
from ORBCOMM, if any, under the terms of the System Construction Agreement).
INTERNATIONAL SYSTEM CHARGE AGREEMENT
ORBCOMM, ORBCOMM International and Teleglobe Mobile have entered into the
International System Charge Agreement, restated as of September 12, 1995, for
the purpose of: (i) providing for the use by Teleglobe Mobile of all of the
ORBCOMM System output capacity and exclusive use of the System Assets located in
all areas of the world outside of the United States (the "Non-U.S. Area"); and
(ii) providing the means by which Teleglobe Mobile will grant to ORBCOMM
International an exclusive right in the Non-U.S. Area to market, sell, lease and
franchise all ORBCOMM System output capacity. The term of the International
System Charge Agreement commenced on June 30, 1993 and continues until the
earlier of June 30, 2013 and the date on which Teleglobe Mobile ceases to be a
general and limited partner of ORBCOMM.
Exclusive Use of System Capacity Outside the United States. ORBCOMM has
granted to Teleglobe Mobile the exclusive right in the Non-U.S. Area to market,
sell, lease and franchise all ORBCOMM System output capacity and exclusive use
of the System Assets located in the Non-U.S. Area. Teleglobe Mobile, in turn,
has granted to ORBCOMM International the exclusive right in the Non-U.S. Area to
market, sell, lease and franchise all ORBCOMM System output capacity and
exclusive use of the System Assets located in the Non-U.S. Area. OCC ultimately
has retained all rights in and to, and neither Teleglobe Mobile nor ORBCOMM
International has been granted rights to, the ORBCOMM System.
System Charge. In consideration of the grant to Teleglobe Mobile of the
exclusive right to market, sell, lease and franchise all ORBCOMM System output
capacity in the Non-U.S. Area, Teleglobe Mobile agrees to remit to ORBCOMM
Teleglobe Mobile's allocated portion of the System Charge for that calendar
quarter calculated in accordance with the ORBCOMM Partnership Agreement. If the
International Output Capacity Charge for such calendar quarter is less than
1.15% of Total Aggregate Revenues, then Teleglobe Mobile is not required to pay
any portion of the System Charge for such calendar quarter.
International Output Capacity Charge. In consideration of the grant by
Teleglobe Mobile to ORBCOMM International of the exclusive right to market,
sell, lease and franchise all ORBCOMM System output capacity in the Non-U.S.
Area, ORBCOMM International agrees: (i) within 30 days of the end of each
calendar quarter, to notify ORBCOMM of the total aggregate revenues invoiced by
it during such calendar quarter; and (ii) to remit to Teleglobe Mobile 23% of
the total aggregate revenues invoiced by it during each calendar quarter.
ORBCOMM International retains sole discretion to set the fees to be paid by its
subscribers, Resellers and International Licensees for use of the ORBCOMM
System.
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Indemnification. With regard to patent infringement claims, ORBCOMM agrees
to defend, indemnify and hold harmless Teleglobe Mobile and ORBCOMM
International and their respective successors and assigns from and against any
claim with respect to an infringement or other violation of any copyright,
trademark or patent or other validly registered enforceable intellectual
property right of any third party for any items ORBCOMM has authorized Teleglobe
Mobile and ORBCOMM International to use under the International System Charge
Agreement but only to the same extent as the indemnification received by ORBCOMM
from Orbital, if any, under the Procurement Agreement.
PROPRIETARY INFORMATION AND NON-COMPETITION AGREEMENT
ORBCOMM, Orbital, OCC, Teleglobe, Teleglobe Mobile, ORBCOMM USA and ORBCOMM
International have entered into the Proprietary Information and Non-Competition
Agreement, restated as of September 12, 1995, to protect any confidential and
proprietary information that may be disclosed to one another in connection with
the development, construction, operation and marketing of the ORBCOMM System.
Orbital and Teleglobe entered into the agreement for the additional purpose of
prohibiting direct competition between the two entities in the provision of
certain LEO satellite services during the term of the agreement and for a period
of one year thereafter.
Orbital and Teleglobe agree that for the duration of the agreement and for
one year thereafter, they will not, directly or indirectly or in any capacity,
except in connection with the fulfillment of their respective obligations under
any of the Definitive Agreements: (i) carry on, engage, participate, invest or
have an equity or any financial interest in the marketing, construction,
development or management of any business or enterprise that competes with
Orbital or Teleglobe or their respective affiliates in offering commercial, LEO
non-voice satellite communications services operating in the 137-150 MHz band or
such other frequency allocated to the Little LEO mobile satellite service below
1 GHz, provided, however, OCC and Orbital are permitted to: (a) sell satellites,
launch vehicles, launch services and communications services to non-commercial
entities without limitation; and (b) provide all other entities up to two
satellites every two years and launch vehicles or launch services for up to two
satellites every two years; (ii) assist in or influence the hiring by any person
who competes with Orbital or Teleglobe or their respective affiliates of any
salesman, distributor, or employee of Orbital or Teleglobe or their respective
affiliates, or otherwise cause any person having a business relationship with
Orbital or Teleglobe or their respective affiliates to sever such relationship;
or (iii) employ any person to work on or represent the ORBCOMM System who will
also work on or represent another mobile communications system, without first
notifying the President of ORBCOMM.
Neither of Orbital or Teleglobe will be in default of its obligations under
this portion of the Proprietary Information and Non-Competition Agreement by
virtue of holding for portfolio purposes as a passive investor no more than 5%
of the issued and outstanding public equity securities of a corporation.
Indemnification. Orbital and Teleglobe agree to indemnify and save
harmless one another and their respective affiliates (an "Indemnified Party")
from and against any claims, demands, actions, causes of action, judgments,
damages, losses, liabilities, costs or expenses that may be made against any of
them as a result of, arising out of or relating to any violation, contravention
or breach of the Proprietary Information and Non-Competition Agreement by a
party who is not an Indemnified Party.
Termination. The Proprietary Information and Non-Competition Agreement
shall terminate upon the earlier of OCC or Teleglobe Mobile ceasing to be both a
general and a limited partner of ORBCOMM.
ADMINISTRATIVE SERVICES AGREEMENT
Under the terms of the Administrative Services Agreement, dated as of
September 12, 1995, Orbital has agreed to provide to the Company, ORBCOMM USA
and ORBCOMM International defined office space for a total price of $15,200 per
month. Orbital also has agreed to provide ORBCOMM with certain occupancy
services for a fixed monthly price of $50,000. The services includes security
and facilities support, MIS, telephone switchboard and communication services
and other support services. Orbital provides various administrative services to
ORBCOMM for a fixed monthly fee of $15,000, including accounting support,
payroll processing, miscellaneous purchasing services and personnel services.
Orbital also extends to
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ORBCOMM employees (to the extent possible) participation in various benefit and
insurance plans. Orbital also has agreed to provide to ORBCOMM executive
management services payable on a time and materials basis, limited to $9,000 per
month.
The Administrative Services Agreement continues in effect so long as any
category of services are being provided by Orbital, provided that ORBCOMM has
the right to terminate all or part of the services being provided upon 90 days
prior notice to Orbital, subject, in a case of a termination of services within
a specific category of services, to an agreement on the price to perform the
remaining services. The prices for the services are fixed through the end of
1996. The parties will negotiate the prices for such services and office space
for subsequent years, provided that prices for 1997 will not be more than 10%
higher than the prices in effect in 1996.
The parties are in the process of renegotiating the terms and conditions of
the Administrative Services Agreement so that the amounts paid by ORBCOMM to
Orbital are approximately equal to the actual costs incurred by Orbital in
providing the services specified in the Administrative Services Agreement.
TASK ORDER AGREEMENTS
ORBCOMM has entered into a Task Order Agreement with Orbital, pursuant to
which ORBCOMM may issue task orders on either a time and materials or
fixed-price basis for certain technical services to be provided by Orbital to
ORBCOMM. ORBCOMM is under no obligation to procure and Orbital is under no
obligation to provide such technical services.
ORBCOMM has entered into a Task Order Agreement with Teleglobe, pursuant to
which ORBCOMM may issue task orders on a time and materials basis to Teleglobe
for technical or other services to be provided by Teleglobe to ORBCOMM. ORBCOMM
is under no obligation to procure and Teleglobe is under no obligation to
provide such services.
THE PARTNERSHIP AGREEMENTS
The following paragraphs are a summary of certain provisions of the
Partnership Agreements, restated as of September 12, 1996, of each of ORBCOMM,
ORBCOMM USA and ORBCOMM International and such summary is qualified in its
entirety by reference to such Partnership Agreements. Each of the Partnership
Agreements are substantially identical. Unless otherwise described herein,
references to the "Partnership" constitute references to ORBCOMM, ORBCOMM USA
and ORBCOMM International, collectively, and references to the "Partnership
Agreement" constitute references to the Partnership Agreements of ORBCOMM,
ORBCOMM USA and ORBCOMM International, collectively.
Organization and Duration. The Partnership will dissolve on December 31,
2013, unless sooner dissolved on the written consent of all of the General
Partners or upon removal, withdrawal, resignation, liquidation or bankruptcy of
the last remaining General Partner (unless a new General Partner is appointed
within 90 days with the unanimous consent of the remaining partners).
General Partners; Management. OCC and Teleglobe Mobile are the general
partners of ORBCOMM. ORBCOMM and OCC are the general partners of ORBCOMM USA and
ORBCOMM and Teleglobe Mobile are the general partners of ORBCOMM International.
The management of the Partnership is the exclusive responsibility of the General
Partners and, except as provided by law or except as specified in the
Partnership Agreement and summarized below, the act of the General Partners
holding a majority of the Participation Percentages of the Partnership (a
"Majority in Interest") is the act of the Partnership.
The Partnership Agreement provides for meetings of the General Partners to
be called by any General Partner. It is the current practice of the Partnerships
to hold regular meetings of the General Partners on at least a quarterly basis.
Each General Partner is represented at the meetings by up to three authorized
representatives, although one representative of each general partner is entitled
to vote such General Partner's Participation Percentage.
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The Partnership Agreement provides for the election of officers to provide
for the day-to-day operation of the Partnership. Officers are nominated by the
President of the Partnership and elected by the General Partners. Officers
exercise the authority granted to such officers by the General Partners. Under
the terms of the ORBCOMM Partnership Agreement, the General Partners are
required to appoint one or more officers to have authority to act for the
Partnership with respect to the Procurement Agreement. Officers are subject to
removal for any reason by approval of the General Partners.
Certain Actions. Under the Partnership Agreement, the approval of at least
86% of the Participation Percentages held by the General Partners is required
to: (i) transfer all or substantially all the assets of the Partnership; (ii)
merge or consolidate the Partnership with any other person; (iii) permit the
entry by the Partnership into any additional lines of business; (iv) admit any
new Partner to the Partnership; (v) subject to certain exceptions in furtherance
of the business of the Partnership, cause the Partnership to borrow any amount
on a recourse basis or any amount in excess of $5 million on a non-recourse
basis; (vi) subject to certain exceptions set forth in the Partnership
Agreement, enter into any transaction with an affiliate of a General Partner
(excluding the Definitive Agreements); (vii) select or remove the independent
certified public accountant for the Partnership or adopt, or modify in any
material respect, any significant accounting policy or tax policy; (viii) make
on behalf of the Partnership an assignment for the benefit of creditors, decide
on behalf of the Partnership to subject the Partnership to any proceedings under
any bankruptcy or insolvency law, decide to avail the Partnership of the benefit
of any other legislation for the benefit of debtors, or take steps to wind up or
terminate the existence of the Partnership; (ix) delegate any of the powers of
the Partnership; (x) determine the value of the Partnership for purposes of the
Master Agreement; and (xi) amend any provision of the Partnership Agreement. No
amendment to the Partnership Agreement may: (i) decrease the capital account or
increase the amount required to be contributed by a Partner without the consent
of such Partner; or (ii) amend the provisions of, or adopt any provisions
inconsistent with, Sections 6.2, 6.3 and 6.4 of the Partnership Agreement, which
provisions regard super-majority approval requirements for certain actions of
the Company, enforcement of the Definitive Agreements and meetings of the
General Partners, respectively.
The Partnership Agreement also provides that: (i) any action of the
Partnership with respect to the enforcement by it of its rights under any
Definitive Agreement or other contract or agreement to which any General Partner
or any affiliate thereof is a party with respect to a breach, default or dispute
by such General Partner or affiliate, requires the approval of General Partners
having a majority of the Participation Percentages held by the General Partners
other than such General Partner; and (ii) subject to the limitations set forth
in (i) above, in the event that a Majority in Interest of the General Partners,
each acting in the best interests of the Partnership, shall be unable to agree
on exercising or enforcing the rights of the Partnership under the Procurement
Agreement including, without limitation, the rights to exercise the options
thereunder, to stop work, to request changes and to send notices to preserve or
exercise any such rights, then the President of the Partnership shall decide on
the appropriate action with respect to such rights, and the Partnership shall
then act upon such decision. The ORBCOMM Partnership Agreement also provides
that so long as ORBCOMM holds voting rights in either of ORBCOMM USA or ORBCOMM
International, each General Partner shall be entitled to exercise directly a
fraction of ORBCOMM's rights determined by dividing such General Partner's
Participation Percentage by the total Participation Percentages held by all
General Partners.
Capital Contributions. Pursuant to the terms of the ORBCOMM Partnership
Agreement, OCC is obligated to contribute up to approximately $75 million, and
Teleglobe Mobile is obligated to contribute up to approximately $85 million, of
capital to ORBCOMM, all of which was contributed prior to the consummation of
the Old Notes Offering.
Under the terms of the ORBCOMM USA Partnership Agreement, OCC and the
Company together were obligated to contribute nominal capital to ORBCOMM USA in
the amount of $10,000. Under the terms of the ORBCOMM International Partnership
Agreement, Teleglobe Mobile and the Company together were obligated to
contribute nominal capital to ORBCOMM International in the amount of $10,000.
Pursuant to a resolution adopted by the General Partners of ORBCOMM on September
12, 1995, ORBCOMM agreed that until December 31, 1996, ORBCOMM would provide
interest-free loans to each of ORBCOMM USA and ORBCOMM International in an
amount equal to their monthly net cash requirements so long as such cash
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requirements are generally in accordance with a budget approved by ORBCOMM or
the executive management of ORBCOMM.
System Charge. The ORBCOMM Partnership Agreement provides for the
remittance of the System Charge by OCC and Teleglobe to ORBCOMM each calendar
quarter. OCC's allocated portion of the System Charge for a calendar quarter is
equal to the Output Capacity Charge for such calendar quarter minus 1.15% of the
Total Aggregate Revenues. Teleglobe Mobile's allocated portion of the System
Charge for a calendar quarter is equal to the International Output Capacity
Charge for such calendar quarter minus 1.15% of the Total Aggregate Revenues.
Indemnification. The Partnership has agreed to indemnify its General
Partners and all of their respective officers, directors, partners, employees,
and agents (each an "Indemnitee") from and against any and all claims or
liabilities arising out of or in connection with any action taken or omitted by
the General Partners or the officers of the Partnership pursuant to authority
granted by the Partnership Agreement so long as such Indemnitee's conduct did
not constitute gross negligence, willful or wanton misconduct or bad faith. The
Partnership Agreement further provides that the General Partners and all of
their respective officers, directors, partners, employees and agents (each a
"General Partner Person") will not be liable to the Partnership or the limited
partners for any act or omission by such General Partner Person, except as such
act or omission results from gross negligence, willful or wanton misconduct or
bad faith.
Liquidation and Distribution of Proceeds. Upon the dissolution of the
Partnership, the General Partners, or, in the case of the removal, withdrawal,
resignation, liquidation or bankruptcy of the last remaining General Partner,
one of the limited partners elected by a majority vote of the limited partners,
shall act as liquidator to wind up the Partnership. The liquidator shall have
full power and authority to sell, assign and encumber any or all of the
Partnership's assets and to wind up and liquidate the affairs of the Partnership
in an orderly and business-like manner. All proceeds from liquidation shall be
distributed in the following order of priority: (i) to the payment of the debts
and liabilities of the Partnership and expenses of liquidation; (ii) to the
setting up of such reserves as the liquidator may reasonably deem necessary for
any contingent liability of the Partnership; and (iii) the balance to the
Partners in the proportions of their positive capital account balances, if any
(determined after taking into account all allocations of Net Income and Net Loss
for the year of liquidation).
Allocations and Distributions. Allocations of Net Income and Net Loss of
the Partners shall generally be allocated to the capital accounts of Partners in
proportion to their Participation Percentage. Except as set forth below, or in
the case of liquidating distributions, the amount and timing of distributions by
the Partnership are determined in the discretion of the General Partners. All
distributions will be made to Partners first to return to the Partners their
Capital Preference and, thereafter, to the Partners in proportion to their
Participation Percentages. The Partnership Agreement provides for a minimum
distribution each year in an amount sufficient to ensure that each Partner shall
have received at least an amount equal to the product of: (i) 40% multiplied by
(ii) the lesser of (a) such Partner's distributive share of the Partnership's
taxable income for the preceding year, and (b) the excess, if any, of cumulative
Net Income over cumulative Net Loss allocated to such Partner since the
inception of the Partnership.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
2. Financial Statement Schedules.
The financial statements listed in the index to the Financial
Statements that appears on page 24 of this Report on Form 10-K are
filed as part of this Report.
Financial statement schedules have been omitted because they are
inapplicable or are not required.
3. Exhibits
The exhibits to this Report on Form 10-K are listed under Item
14(c) below.
(b) Reports on Form 8-K
Neither the Company nor Capital has previously been required to file a
Report on Form 8-K under the Act.
(c) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- -----------------------------------------------------------------------------------
(a) 2 Purchase Agreement, dated as of August 2, 1996, by and among the Company, ORBCOMM
Global Capital Corp., ORBCOMM USA, L.P., ORBCOMM International Partners, L.P.,
Orbital Communications Corporation, Teleglobe Mobile Partners, Bear Stearns & Co.
Inc., J.P. Morgan Securities Inc. and RBC Dominion Securities Company.
(a) 3 Organizational Documents.
(a) 3.1 Certificate of Limited Partnership of the Company.
(a) 3.2 Restated Agreement of Limited Partnership of the Company.
(b) 3.2.1 Amendment No. 1 to Restated Agreement of Limited Partnership of the Company dated
December 2, 1996.
(a) 3.3 Certificate of Limited Partnership of ORBCOMM USA, L.P.
(a) 3.4 Restated Agreement of Limited Partnership of ORBCOMM USA, L.P.
(a) 3.5 Certificate of Limited Partnership of ORBCOMM International Partners, L.P.
(a) 3.6 Restated Agreement of Limited Partnership of ORBCOMM International Partners, L.P.
(a) 4 Indenture, dated as of August 7, 1996, by and among the Company, ORBCOMM Global
Capital Corp., ORBCOMM USA, L.P., ORBCOMM International Partners, L.P., Orbital
Communications Corporation, Teleglobe Mobile Partners and Marine Midland Bank.
(a)10 Material Contracts.
(a)10.1 Registration Rights Agreement, dated as of August 7, 1996, by and among the
Company, ORBCOMM Global Capital Corp., ORBCOMM USA, L.P., ORBCOMM International
Partners, L.P., Orbital Communications Corporation, Teleglobe Mobile Partners,
Bear, Stearns & Co. Inc., J.P. Morgan Securities Inc. and RBC Dominion Securities
Corporation.
(a)10.2 Pledge Agreement, dated as of August 7, 1996, by and among the Company, ORBCOMM
Global Capital Corp. and Marine Midland Bank as Collateral Agent.
(a)10.3 International System Charge Agreement, restated as of September 12, 1995, by and
among the Company, Teleglobe Mobile Partners and ORBCOMM International Partners,
L.P.
(a)10.4 Master Agreement, restated as of September 12, 1995, by and among the Company,
Orbital Sciences Corporation, Teleglobe Inc. and Teleglobe Mobile Partners.
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- -----------------------------------------------------------------------------------
(a)10.5 Procurement Agreement, dated as of September 12, 1995, by and between the Company
and Orbital Sciences Corporation (provided that Appendix I is incorporated by
reference to Exhibit 10.24.6 to the Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1993 filed by Orbital Sciences Corporation on August 13, 1993).
* 10.5.1 Amendment No. 1 to Procurement Agreement dated December 9, 1996 between Orbital
Sciences Corporation and the Company.
(a)10.6 Proprietary Information and Non-Competition Agreement, restated as of September 12,
1995, by and among the Company, Orbital Sciences Corporation, Orbital
Communications Corporation, Teleglobe Inc., Teleglobe Mobile Partners, ORBCOMM
USA, L.P. and ORBCOMM International Partners, L.P.
(a)10.7 System Charge Agreement, restated as of September 12, 1995, by and between Orbital
Communications Corporation and ORBCOMM USA, L.P.
(a)10.8 System Construction Agreement, restated as of September 12, 1995, by and between
the Company and Orbital Communications Corporation.
(a)10.9 Amendment No. 1 to System Construction Agreement, dated as of July 1, 1996, by and
between the Company and Orbital Communications Corporation.
(a)10.10 Service License Agreement, dated as of December 19, 1995, between ORBCOMM
International Partners, L.P. and ORBCOMM Canada Inc.
(a)10.11 Service License Agreement, dated as of October 10, 1996, between ORBCOMM
International Partners, L.P. and Cellular Communications Network (Malaysia) Sdn.
Bhd.
(a)10.12 Service License Agreement, dated as of October 15, 1996, between ORBCOMM
International Partners, L.P. and European Company for Mobile Communicator Services,
B.V., ORBCOMM Europe.
(a)10.13 Ground Segment Procurement Contract, dated as of October 10, 1996, between ORBCOMM
International Partners, L.P. and Cellular Communications Network (Malaysia) Sdn.
Bhd.
(a)10.14 Ground Segment Facilities Use Agreement, dated as of December 19, 1995, between
ORBCOMM International Partners, L.P. and ORBCOMM Canada Inc.
(a)10.15 Ground Segment Procurement Contract, dated as of October 15, 1996, between ORBCOMM
International Partners, L.P. and European Company for Mobile Communicator
Services, B.V., ORBCOMM Europe.
(c)10.16 Orbital Communications Corporation 1992 Stock Option Plan.
(d)10.16.1 Amendment No. 1 to Orbital Communications Corporation 1992 Stock Option Plan.
* 10.17 Agreement dated March 28, 1997 between the Company and Robert J. Pizzimenti.
* 21 Subsidiaries of the Registrants.
* 27 Financial Data Schedule.
- ---------------
* Filed Herewith.
(a) Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-4, as amended (Reg. No.
333-11149).
(b) Incorporated by reference to Exhibit 10.16.1 of the Annual Report on Form
10-K for the fiscal year ended December 31, 1996 (the "Orbital 1996 Form
10-K") of Orbital Sciences Corporation ("Orbital").
(c) Incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 of Orbital.
(d) Incorporated by reference to Exhibit 10.8.1 to the Orbital 1996 Form 10-K.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON
FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF DULLES, COMMONWEALTH OF VIRGINIA, ON MARCH 28, 1997.
ORBCOMM GLOBAL, L.P.
By: ORBITAL COMMUNICATIONS
CORPORATION, a general partner
By: /s/
------------------------------------
ALAN L. PARKER
PRESIDENT
By: TELEGLOBE MOBILE PARTNERS,
a general partner
By: TELEGLOBE MOBILE INVESTMENT INC.,
its managing partner
By: /s/
------------------------------------
CLAUDE SEGUIN
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
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Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
/s/ ALAN L. PARKER President and Chief Executive March 28, 1997
- ------------------------------------------ Officer of ORBCOMM Global, L.P.
ALAN L. PARKER (Principal Executive Officer)
/s/ W. BARTLETT SNELL Senior Vice President, Finance March 28, 1997
- ------------------------------------------ and Administration and Chief
W. BARTLETT SNELL Financial Officer of ORBCOMM
Global, L.P.
(Principal Financial Officer)
/s/ DENIS PRONE Vice President, Controller and March 28, 1997
- ------------------------------------------ Financial Planning of
DENIS PRONE ORBCOMM Global, L.P.
(Principal Accounting Officer)
/s/ DAVID W. THOMPSON Director, Orbital March 28, 1997
- ------------------------------------------ Communications Corporation
DAVID W. THOMPSON
/s/ BRUCE W. FERGUSON Director, Orbital March 28, 1997
- ------------------------------------------ Communications Corporation
BRUCE W. FERGUSON
/s/ CLAUDE SEGUIN Director, Teleglobe March 28, 1997
- ------------------------------------------ Mobile Investment Inc.
CLAUDE SEGUIN
/s/ GUTHRIE J. STEWART Director, Teleglobe March 28, 1997
- ------------------------------------------ Mobile Investment Inc.
GUTHRIE J. STEWART
Director, Teleglobe March , 1997
- ------------------------------------------ Mobile Investment Inc.
WAN AISHAH WAN HAMID
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON
FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF DULLES, COMMONWEALTH OF VIRGINIA, ON MARCH 28, 1997.
ORBCOMM GLOBAL CAPITAL CORP.
By: /s/
------------------------------------
ALAN L. PARKER
PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
/s/ ALAN L. PARKER President and Director of ORBCOMM March 28, 1997
- ------------------------------------------ Global Capital Corp.
ALAN L. PARKER (Principal Executive Officer)
/s/ W. BARTLETT SNELL Vice President, Treasurer and March 28, 1997
- ------------------------------------------ Director of ORBCOMM
W. BARTLETT SNELL Global Capital Corp.
(Principal Financial Officer)
89