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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
Commission file number 333-11149
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.)
2455 HORSE PEN ROAD, SUITE 100
HERNDON, VIRGINIA 20171
(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.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 24
Item 6. Selected Financial Data..................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 25
Item 8. Financial Statements and Supplementary Data................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 83
PART III
Item 10. Directors and Executive Officers of Registrant.............. 83
Item 11. Executive Compensation...................................... 86
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 87
Item 13. Certain Relationships with Related Transactions............. 88
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 97
Signatures.................................................. 100
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PART I
ITEM 1. BUSINESS
BACKGROUND
ORBCOMM Global, L.P. ("ORBCOMM" or the "Company") 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"). Through December 31, 1997,
Orbital, through OCC, and Teleglobe and TRI, through Teleglobe Mobile, had
invested in the aggregate approximately $160 million in ORBCOMM.
Orbital, a Delaware corporation, is a U.S.-based space and information
systems company that designs, manufactures, operates and markets a broad range
of space-related products and services, including the manufacture and launch of
the ORBCOMM satellites. Teleglobe is a North American-based overseas
telecommunications carrier whose network and service capabilities (including
voice, data, Internet and value-added services) can be accessed in virtually all
countries. TRI is a Malaysian holding company that controls the largest cellular
operator in Malaysia and has established cellular operations in Bangladesh,
Cambodia and Tanzania.
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 "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 does not conduct
any operations.
ORBCOMM
ORBCOMM provides two-way data and messaging services through the world's
first commercial low-earth orbit ("LEO") satellite-based system. ORBCOMM
believes that it will provide a reliable, cost-effective method of providing
fixed asset monitoring, mobile asset tracking and messaging services to a broad
range of customers around the world, enabling such customers to collect data
from multiple locations, track assets on a global basis and transmit and receive
short text messages outside the coverage area of other systems. ORBCOMM has
launched 12 satellites to date and expects to launch 16 additional satellites by
mid-1998, which will complete its planned 28-satellite "basic" constellation. An
additional eight satellites that will create a 36-satellite "enhanced"
constellation with increased capacity and improved service in equatorial regions
are expected to be launched in the third quarter of 1999.
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Since early 1996, ORBCOMM has been providing limited commercial service in
the United States through two satellites. ORBCOMM expects to offer commercial
service on a broader basis commencing in the spring of 1998, when satellites
launched in late 1997 and early 1998 are expected to begin to be placed in
commercial service. ORBCOMM expects to significantly expand its commercial
services later in the year in the United States and other temperate regions,
when 16 additional satellites are expected to be placed in commercial service.
Service outside the United States will be expanded as the necessary ground
infrastructure is completed and the necessary regulatory approvals are received.
Expanded service in the equatorial regions is expected to be available by the
fall of 1999, when the final eight satellites of the planned 36-satellite
enhanced constellation are scheduled to be placed in commercial service.
ORBCOMM is targeting specific markets for ORBCOMM services, including those
in which potential customers currently have geographically limited or otherwise
inefficient methods of obtaining information. ORBCOMM's current primary target
markets include: (i) fixed asset monitoring services for electric utility
meters, oil and gas storage tanks, wells and pipelines and environmental
projects; (ii) mobile asset tracking services for commercial vehicles, trailers,
containers, rail cars, heavy equipment, fishing vessels, barges and government
assets; and (iii) messaging services for consumers and commercial and government
entities. Future target markets are expected to include: (i) home security; (ii)
automotive; and (iii) additional U.S. and foreign government applications.
ORBCOMM has made substantial progress toward its goal of full commercial
operation of the ORBCOMM system. ORBCOMM has entered into agreements with over
40 value-added resellers ("VARs"), each of which is authorized to market and
distribute ORBCOMM services within specific regions and to targeted industries
or markets. ORBCOMM has also established two internal value-added resellers
("Internal VARs") to market and distribute monitoring and tracking services to
the oil and gas and transportation industries. In addition, ORBCOMM has entered
into agreements with 13 international licensees ("International Licensees") that
are expected to market and distribute ORBCOMM services in over 95 countries
following completion of the necessary ground infrastructure and receipt of the
necessary regulatory and other approvals in their respective regions. ORBCOMM
has also entered into agreements with six subscriber unit manufacturers, Kyushu
Matsushita Electric Company, Ltd. (also known as "Panasonic"),
Scientific-Atlanta, Inc., also a VAR ("Scientific-Atlanta"), Magellan
Corporation ("Magellan"), Stellar Electronics Ltd. ("Stellar"), Torrey Science
Corporation ("Torrey") and Communications Technology Inc. ("CTI"), and has type
approved ten subscriber unit models for commercial use with the ORBCOMM system.
Four subscriber unit manufacturers have commenced pre-commercial or commercial
production of subscriber units that can be used for electric utility meter, oil
and gas storage tank, well and pipeline and environmental monitoring and
commercial vehicle, trailer, container, rail car, heavy equipment, fishing
vessel and government asset tracking applications.
The ORBCOMM system consists of small and relatively inexpensive satellites
and subscriber units and a relatively low-cost ground infrastructure. ORBCOMM
expects that the aggregate cost to design, develop, launch and place in
commercial service the proposed 36-satellite enhanced constellation and design
and construct the associated ground infrastructure in the United States (the
"U.S. Ground Segment"), which includes an ORBCOMM system gateway (the "U.S.
Gateway") and the master control center for the entire ORBCOMM network (the
"Network Control Center"), will be approximately $332 million, of which
approximately $242 million had been spent through December 31, 1997, excluding
capitalized interest.
Since late December 1997, ORBCOMM has launched ten satellites. To date in
the in-orbit check-out process, certain of these satellites are generating lower
than expected solar power levels, although ORBCOMM anticipates that such power
levels will be sufficient to meet planned service and lifetime requirements, and
certain of these satellites have experienced anomalies in certain radio
transmitters. Orbital and ORBCOMM believe they have determined the causes of the
lower power level and radio transmitter anomalies, which they believe will be
corrected in future ORBCOMM satellites, and are developing procedures to
minimize the effects of and/or bypass the anomalies on the existing in-orbit
ORBCOMM satellites. There can be no assurance that Orbital and ORBCOMM will be
successful in their efforts or, if unsuccessful, that ORBCOMM's commercial
operations would not be adversely affected. See "System Architecture."
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SERVICE OFFERINGS
ORBCOMM believes that it will provide a reliable, cost-effective method of
providing fixed asset monitoring, mobile asset tracking and messaging services
to a broad range of customers around the world. ORBCOMM intends to integrate the
ORBCOMM system with related applications software and hardware developed by or
for ORBCOMM, International Licensees or third parties that address the needs of
specific industries and market segments.
Fixed Asset Monitoring. ORBCOMM believes its services will provide a means
of collecting data from industrial assets in multiple locations around the
world. Ultimately, ORBCOMM also expects to provide a method of controlling the
functions of such assets. Primary applications currently include or are expected
to include monitoring and control applications for: (i) electric utility meters;
(ii) oil and gas storage tanks and wells; (iii) oil and gas pipelines; and (iv)
environmental projects. Many of the customers for these applications manage
numerous, widely dispersed assets in locations not currently or adequately
served by other systems.
Mobile Asset Tracking. ORBCOMM believes its services will provide a means
to regularly and reliably track the location and report the status or condition
of mobile assets around the world, thereby enabling customers to reduce "down
time", repair costs, theft and other losses, improve service and more
effectively utilize transportation and other equipment assets. Primary
applications currently include or are expected to include tracking and
monitoring applications for: (i) commercial vehicles; (ii) trailers, containers
and rail cars; (iii) heavy equipment; (iv) fishing vessels and barges; and (v)
government assets. Certain of the customers in this market segment have no
efficient means of tracking the location and may have no means of monitoring the
status or condition of their assets.
Messaging. ORBCOMM plans to introduce messaging services in the United
States in the fall of 1998 and thereafter on a global basis as the necessary
ground infrastructure is completed, the necessary regulatory approvals are
received and, in the equatorial region, as additional satellites are launched.
The ORBCOMM system is designed to provide short, alphanumeric paging-like
communications services. ORBCOMM expects that messaging customers will include a
broad range of consumer, commercial and government customers that require a
means of communicating with various locations such as their offices, dispatch
centers or homes or who require the ability to send priority messages or
position information. Certain customers in this market segment currently have no
cost-effective alternatives or rely on pagers, cellular phones or fleet dispatch
systems, all of which services can be expensive, unavailable or inconvenient in
certain locations. ORBCOMM expects that messaging subscriber units that can be
used in the United States and certain other regions will be commercially
available from Magellan in mid-1998.
Future Applications. In addition to the addressable markets described
above for data and messaging services, ORBCOMM believes that future potential
markets include: (i) monitoring applications for home security systems; (ii)
tracking and messaging services for automobiles; and (iii) additional U.S. and
foreign government applications.
BUSINESS STRATEGY
ORBCOMM's business strategy is to provide data and messaging communications
services to customers in fixed asset monitoring, mobile asset tracking and
messaging markets worldwide. These services are being provided through the
world's first commercial LEO satellite-based communications system. Key
components of this strategy include:
Reliable, Global Coverage. ORBCOMM believes that the integration of proven
technologies into the ORBCOMM system and the redundancy provided by the ORBCOMM
constellation will enable ORBCOMM to provide reliable, global, two-way data and
messaging communications services. The distributed nature of the ORBCOMM
satellite constellation is designed to reduce potential risks associated with
the loss or outage of one or more satellites.
First-to-Market Advantage. ORBCOMM began providing limited commercial
service in the United States in February 1996 with two satellites and expects to
have the ability to provide expanded service on a global basis, other than in
equatorial regions, by the fall of 1998 and expanded service on a global basis
by the
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fall of 1999. ORBCOMM's first two satellites, as well an operational U.S.
Gateway and type approved subscriber units, has permitted ORBCOMM to conduct a
significant number of beta tests beginning in the second half of 1997 for
companies in various industries including the heavy equipment, oil and gas and
transportation industries. Based on published reports, ORBCOMM believes that
other Little LEO systems are not expected to be commercially operational until
at least the year 2000. ORBCOMM believes that being first to market with its
Little LEO system provides it with the opportunity to achieve a significant
competitive advantage and therefore a greater market penetration because of its
ability to: (i) establish certain industry standards for hardware and software
applications; (ii) demonstrate the ORBCOMM system in an actual operating
environment; (iii) deploy an installed base of subscriber units; (iv) solidify
customer relationships; and (v) create relationships with leading VARs,
International Licensees, subscriber unit manufacturers and other hardware and
software developers.
Affordable and Convenient Service. ORBCOMM believes that its small and
relatively inexpensive satellites and subscriber units and relatively low-cost
ground infrastructure will enable it to provide customers with affordable and
convenient data and messaging communications services. Each satellite is
designed specifically for the transmission of short messages. This design
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 satellites (which weigh
approximately 90 pounds each with the exception of the two satellites launched
in April 1995, which weigh approximately 104 pounds each) reduces the cost and
time of production and enables ORBCOMM to launch multiple satellites using a
single, relatively low-cost launch vehicle. As a result of ORBCOMM's relatively
inexpensive satellites and relatively low-cost ground infrastructure, ORBCOMM
believes that it will be in a position to offer affordable services.
Additionally, ORBCOMM subscriber units are small, lightweight and have
substantial battery lives. ORBCOMM believes that as more subscriber units become
commercially available and as the overall production volume for subscriber units
increases, the price for subscriber units will decline.
Global Marketing and Distribution of Services. ORBCOMM intends to target
specific markets for ORBCOMM services, including those in which customers have
geographically limited or otherwise inefficient methods of obtaining information
using other systems. ORBCOMM believes that it can rapidly achieve a global
presence by capitalizing on the customer relationships, technical expertise and
other resources of ORBCOMM's VARs, Internal VARs and International Licensees.
The Internal VARs enable ORBCOMM to broaden its distribution base, to capture
additional revenue from value-added hardware, software and customer services
provided directly to customers and to facilitate the development of application
hardware and software that can hasten market development in the United States
and by the International Licensees.
Commitment and Expertise of Strategic Partners. Through December 31, 1997,
Orbital, Teleglobe and TRI had through OCC and Teleglobe Mobile, respectively,
had invested an aggregate of approximately $160 million in ORBCOMM. Orbital is a
U.S.-based space and information systems company, with 1997 revenues of
approximately $600 million, that designs, manufactures, operates and markets a
broad range of space-related products and services, including satellites, launch
vehicles, electronics and sensor systems, ground systems, satellite-based
navigation and communications products and transportation management systems,
including the manufacture and launch of the ORBCOMM satellites. Teleglobe is a
North American-based overseas telecommunications carrier, with 1997 revenues of
approximately C$2 billion, whose network and service capabilities (including
voice, data, Internet and value-added services) can be accessed in virtually all
countries. TRI is a Malaysian holding company, with revenues of approximately
RM2 billion, that controls the largest cellular operator in Malaysia and has
established cellular operations in Bangladesh, Cambodia and Tanzania. Orbital
and Teleglobe have significant operating, regulatory and marketing experience in
the satellite and communications industries, which has contributed to ORBCOMM
becoming the operator of the first commercial global satellite-based data and
messaging communications system. ORBCOMM has used and will continue to use the
expertise and capabilities of its current partners, including their expertise in
the design, construction and launch of satellites and the marketing and
operation of communications services, to enhance the services offered by the
ORBCOMM system.
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PROJECT MILESTONES
Milestones Achieved to Date
Through March 31, 1998, ORBCOMM has achieved the following milestones:
- Launch of Satellites and Commencement of Commercial Service. In April
1995, ORBCOMM's first two satellites were launched. In February 1996,
after extensive testing, ORBCOMM commenced limited commercial service in
the United States. Since December 1997, an additional ten satellites have
been successfully launched on two separate launch vehicles. These
satellites are undergoing testing and are expected to be available for
commercial service beginning in the spring of 1998.
- VARs. ORBCOMM has entered into agreements with over 40 VARs to provide
services in the United States to various market segments, including the
electric utility meters, oil and gas storage tanks, wells and pipelines,
environmental, commercial vehicles, trailers, containers, rail cars,
heavy equipment, fishing vessels, barges and government market segments.
- Tracking and Monitoring Subscriber Units. ORBCOMM has type approved ten
subscriber unit models for commercial use with the ORBCOMM system. Four
subscriber unit manufacturers have commenced pre-commercial or commercial
production of subscriber units that can be used for electric utility
meter, oil and gas storage tank, well and pipeline and environmental
monitoring and commercial vehicle trailer, container, rail car, heavy
equipment, fishing vessel and government asset tracking applications.
- International Licensees. ORBCOMM has executed agreements with 13
International Licensees (one of which agreements is subject to approval
by the board of directors of the International Licensee) that are
expected to market and distribute ORBCOMM services in over 95 countries.
- Beta Tests. ORBCOMM has completed or is in the process of conducting beta
tests in a variety of market segments including electric utility meter,
oil and gas storage tank, pipeline and environmental monitoring and
trailers, containers, rail cars, heavy equipment and government asset
tracking applications.
- Internal VARs. ORBCOMM is engaged in direct sales activities to customers
through the Internal VARs, which are currently focused on developing
monitoring and tracking applications for use in the oil and gas and
transportation industries. One of the Internal VARs application software
and information systems, that is capable of monitoring oil and gas
storage tanks and wells and is in various stages of beta testing.
- Gateways. The U.S. Ground Segment, including four Gateway Earth Stations,
is operational. The U.S. Gateway will be used to serve the United States,
Canada and Mexico. In March 1998, a Gateway located in Italy successfully
completed acceptance testing. In each of South Korea and Japan, a Gateway
is under construction and is expected to be completed by mid-1998.
ORBCOMM expects that many International Licensees will enter into
agreements to share Gateways.
- Equity and Debt Funding. Through December 31, 1997, ORBCOMM's current
partners had invested an aggregate of $160 million in ORBCOMM. In
addition, in August 1996, ORBCOMM completed the Notes Offering and
received net proceeds of approximately $164 million.
- FCC Authorizations. In October 1994, the Federal Communications
Commission (the "FCC") granted to OCC a license (the "FCC License")
authorizing OCC to construct, deploy and operate 36 LEO satellites in the
United States. In May and June 1995, OCC received FCC authority to
operate the U.S. Gateway and to operate subscriber units in the United
States.
- ITU Allocations. In 1992, certain portions of the radio spectrum were
allocated by the International Telecommunication Union ("ITU") for use by
Little LEO systems such as the ORBCOMM system on an international basis.
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- Canadian and Malaysian Regulatory Approvals. In February 1996, ORBCOMM
Canada Inc. received full regulatory approval to provide ORBCOMM services
in Canada. In March 1998, Celcom Sdn. Bhd. (Celcom) of Malaysia
("Celcom") received full regulatory approval to provide ORBCOMM services
in Malaysia.
Future Milestones
ORBCOMM expects to achieve the following future milestones:
- Launch of Additional Satellites. By mid-1998, ORBCOMM plans to have
launched 16 additional satellites in two planes of eight satellites each
and, by the third quarter 1999, ORBCOMM plans to have launched an
additional plane of eight satellites in an equatorial orbit.
- Messaging Subscriber Units. By mid-1998, ORBCOMM expects that hand-held
subscriber units will be commercially available from Magellan for
messaging services.
- Internal VARs. One of the Internal VARs plans to have a commercial
product capable of tracking trailers and other assets available by
mid-1998.
- International Licensees. By December 1998, ORBCOMM plans to have executed
agreements with several additional International Licensees. During 1998,
ORBCOMM expects that certain of its International Licensees will be able
to offer ORBCOMM services in portions of Europe, Brazil, Japan, Morocco
and South Korea, subject to completion of the necessary ground
infrastructure and receipt of the necessary regulatory approvals.
- Commencement of Expanded Global Service. In 1998, following the planned
launch and placement in commercial service of 16 additional satellites,
ORBCOMM plans to offer expanded services in the United States and be able
to offer expanded services in other temperate zones on completion of the
necessary ground infrastructure and receipt of the necessary regulatory
and other approvals. In the third quarter of 1999, following the launch
and placement in commercial service of the last eight satellites in the
36-satellite enhanced constellation in an equatorial orbit, ORBCOMM plans
to be able to offer expanded services in equatorial regions, subject to
completion of the necessary ground infrastructure and receipt of the
necessary regulatory and other approvals.
MARKETING AND DISTRIBUTION
ORBCOMM markets its services to customers within the United States
indirectly through VARs and directly through Internal VARs, and internationally
through International Licensees that may distribute ORBCOMM services directly or
through a distribution network.
ORBCOMM's National Account Program, a sales and marketing initiative,
supplements the activities of VARs and Internal VARs by identifying specific
large corporations that are perceived as likely to purchase ORBCOMM services.
The National Account Program and the VAR and Internal VAR activities are
designed as complementary strategies, with the goals of coordinated penetration
of targeted markets and the efficient use of the full range of ORBCOMM services.
VARs. ORBCOMM has entered into agreements with over 40 VARs and is
currently negotiating agreements with prospective VARs. The VARs have primary
responsibility for marketing ORBCOMM services to industries or markets within
specific regions in accordance with a marketing plan and program approved by
ORBCOMM at the time of selection. The VARs are also responsible for developing
applications, retail pricing, customer service, billing, training, customer
support and maintaining an inventory of or having subscriber units available.
ORBCOMM's relationship with a VAR is governed by a reseller agreement that
establishes the VAR's responsibilities with respect to developing and
maintaining customer relationships, as well as the cost of service to the VAR.
In soliciting customers, the VAR "adds value" to the basic data service provided
by ORBCOMM by integrating the ORBCOMM system with related applications software
and hardware in a manner intended to address the needs of a particular industry
or market segment.
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The VARs will provide one or more of ORBCOMM's tracking, monitoring and
messaging services in one or more of the market segments identified by ORBCOMM
within its target markets.
Internal VARs. ORBCOMM also markets and distributes its services directly
to customers through Internal VARs. To date, ORBCOMM has established two
Internal VARs to market and distribute monitoring and tracking services to the
oil and gas and transportation industries. In the future, ORBCOMM may establish
additional Internal VARs to market and distribute applications to the automotive
and other industries and to provide messaging services. The Internal VARs are
working closely with customers to develop and integrate the ORBCOMM system with
related applications and development hardware and software to address the
specific needs of customers in particular industries and market segments.
The Internal VAR for fixed asset monitoring applications has focused
initially on developing applications to monitor oil and gas storage tanks and
wells. The applications developed and to be developed by this Internal VAR
involve the integration of sensors, subscriber units and automation equipment
located in the field with the ORBCOMM system and, eventually, with information
systems centrally located in the offices of customers. These integrated
applications are expected to be used by customers to efficiently and accurately
collect and deliver data from remote assets to central locations and, once
collected, to assist in the management of such data. This Internal VAR has begun
beta testing with several companies in the oil and gas industry and currently
has a commercial product, including application software and information
systems, that is capable of monitoring oil and gas storage tanks and wells. In
the future, this Internal VAR intends to develop monitoring and control
applications for chemical tanks, oil and gas pipelines, agricultural assets,
such as grain silos and irrigation systems, water treatment facilities and
environmental projects.
The Internal VAR for mobile asset tracking applications is currently
developing applications to track assets in the transportation industry. These
applications involve the integration of subscriber units mounted on mobile
assets with the ORBCOMM system and with applications software for use by
customers in conjunction with their existing management information systems.
Applications developed by this Internal VAR may also include a sensor,
particularly in the case of applications developed to track mobile assets with
controlled environments, such as refrigerated trailers, containers and rail
cars. This Internal VAR plans to have a commercial product capable of tracking
trailers and other assets available by mid-1998. In the future, this Internal
VAR may develop applications to track and monitor intermodal power generation
equipment and chassis.
International Licensees. ORBCOMM expects to market and distribute its
services outside the United States through International Licensees. ORBCOMM has
executed agreements with 13 International Licensees (one of which agreements is
subject to approval by the board of directors of the International Licensee)
covering over 95 countries. ORBCOMM continues to negotiate agreements with
potential International Licensees and expects to execute agreements with several
additional International Licensees during 1998.
ORBCOMM's relationship with International Licensees is governed by service
license or similar agreements. Subject to certain limitations, these agreements
grant to the International Licensee, among other things, the exclusive right to
market services using the ORBCOMM satellites in a designated geographic area and
a limited right to use certain ORBCOMM proprietary technologies and intellectual
property. In return, the International Licensees are responsible for, among
other things, procuring and installing the necessary Gateways, obtaining the
necessary regulatory and other approvals to provide ORBCOMM services in their
designated regions and marketing and distributing ORBCOMM services in such
regions. International Licensees generally are required to make the ORBCOMM
system available to VARs in their designated geographic regions on the same
terms as resellers authorized by such International Licensees. These agreements
generally have a ten-year term and provide that the International Licensee may
request an extension of up to ten years, which ORBCOMM may not unreasonably
deny. On the occurrence of certain events of default, the non-defaulting party
may terminate the agreement.
ORBCOMM selects the International Licensees primarily by evaluating their
ability to successfully market and distribute ORBCOMM services. Key components
of such an evaluation include the International Licensee's: (i) reputation in
the marketplace; (ii) existing distribution capabilities and infrastructure;
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(iii) financial condition and other resources; and (iv) ability to obtain the
necessary regulatory and other approvals. International Licensees will pay fees
for access to the ORBCOMM system in their region, including a monthly usage or
service fee. This 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 adjusted by ORBCOMM in accordance with the terms of the agreements.
Certain International Licensees are entitled to satellite usage fee credits if
ORBCOMM fails to meet certain milestones with respect to the launch of the
ORBCOMM system.
ORBCOMM PRICING
Services. In the United States, pricing of satellite capacity is based on
many variables, including the availability and cost of substitute services, the
cost of providing service and the nature of the customer application. Pricing
generally is based on a wholesale pricing structure that incorporates an initial
activation charge, a recurring monthly charge for access to the ORBCOMM system
and charges based on the customer's usage. In charging for activation, access
and usage, ORBCOMM has developed pricing structures in the United States that it
believes suit the initial markets ORBCOMM is targeting. Additional pricing,
including priority and other messaging pricing, is expected to be developed in
the future as additional satellites in the ORBCOMM system are placed in
commercial service. 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. Retail pricing for ORBCOMM services will be
largely outside the control of ORBCOMM and will be established by VARs or
International Licensees or their respective distribution networks.
The pricing of services provided by the Internal VARs will be based on a
pricing structure similar to the VAR pricing structure except that the Internal
VAR pricing structure will generate additional revenues from value-added
software, hardware and services provided to the customer.
Internationally, ORBCOMM earns revenues through license fees paid by, and
through the sale of Gateways to, International Licensees. In addition, all
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.
International Licensees' gross operating revenues are generally based on a
wholesale pricing structure similar to the prices charged to VARs, which
includes an activation charge, a recurring monthly access charge and a usage
charge.
Subscriber Units. To use ORBCOMM services, customers will need subscriber
units. ORBCOMM has type approved ten subscriber unit models for use with the
ORBCOMM system. Four subscriber unit manufacturers have commenced pre-commercial
or commercial production of subscriber units.
ADDRESSABLE MARKETS
ORBCOMM has defined its "addressable market" as certain market segments
that possess a significant unsatisfied need for, and can afford the products and
services provided by, Little LEO systems. ORBCOMM has identified a number of
industries and industry segments in which a demand currently exists for fixed
asset monitoring, mobile asset tracking and messaging services. ORBCOMM views
these industries and industry segments as its primary target markets.
FIXED ASSET MONITORING
The fixed asset monitoring market segment includes a broad group of
industries that require a means of regularly collecting data from, or in some
cases controlling equipment in, multiple locations. Primary applications include
or are expected to include monitoring and control applications for: (i) electric
utility meters; (ii) oil and gas storage tanks and wells; (iii) oil and gas
pipelines; and (iv) environmental projects.
Electric Utility Meters. The electric utility meter monitoring market
segment includes electric utility meters only and does not include water meters.
Currently, wireline, cellular and paging systems are being used to collect data
from utility meters located in urban and suburban areas, in addition to
traditional manual meter reading. For example, Mobile Telecommunications
Technologies Corp. ("Mtel") recently announced a service agreement with Enron
Energy Services, Inc., under which Mtel will use its system to support meter
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reading and provide services for residential power customers nationwide
primarily in urban areas. The ORBCOMM system is capable of reading electric
utility meters in urban, suburban and rural areas. The ORBCOMM subscriber unit
for utility meter monitoring currently has the capability to read meters and
transmit data relating to usage to a central location. In the future, subscriber
units may be programmed to turn power on and off and identify unauthorized
usage.
Oil and Gas Storage Tanks and Wells. ORBCOMM believes that the oil and gas
storage tank monitoring market segment comprises tanks used, among other things,
in petroleum upstream, crude oil production and retail, wholesale and fleet
motor fuel storage. ORBCOMM believes that its services could be used, among
other things, to monitor tank levels and provide related tank management
services, to assist in inventory management and to aid reporting and compliance
efforts by tank operators. For the monitoring of wells in less remote areas,
private radio systems based on VHF radio frequency, multiple-address radio and
microwave are currently being used to collect data for storage tanks and wells.
These systems have been installed primarily for other communications purposes;
therefore, the incremental cost of monitoring storage tanks and wells is low.
However, asset monitoring based on private radio systems is not cost-effective
in locations where the system cannot be combined with other communications
functions. In addition to recording operations data such as tank level and
leakage information, subscriber units using the ORBCOMM system could be
programmed to operate tank and well valves, oil pumps and gas compressors.
Oil and Gas Pipelines. The oil and gas pipeline monitoring market segment
consists of gas compressors, oil pumps, pipeline rectifiers (which measure
pipeline corrosion), offshore platforms and pipeline valves. For remote and
hard-to-read meters, manual monitoring systems are typically used, which require
personnel to travel to the site to read the meter. ORBCOMM believes that it will
be able to offer a cost-effective means of gathering data from meters located in
remote locations. In addition to recording operations data, subscriber units
could be programmed to operate pipeline, pumps, compressors and valves on a
routine basis, as well as in the event of a leak or other emergency.
Environmental. ORBCOMM believes that the environmental monitoring market
segment comprises numerous sites that monitor meteorological, hydrological and
other environmental data such as rainfall, water levels and water quality. These
sites are located in remote areas not served or inadequately served by wireline
or terrestrial-based wireless communications systems. Based on discussions with
VARs that target the environmental monitoring market, ORBCOMM believes that
there are numerous sites globally that require water and air quality monitoring
devices that measure substances such as bacteria, dissolved oxygen and
concentrations of carbon monoxide and ozone, as well as provide meteorological
data on wind speed and barometric pressure.
MOBILE ASSET TRACKING
ORBCOMM believes that primary applications for mobile asset tracking
include or are expected to include monitoring and tracking of: (i) commercial
vehicles; (ii) trailers, containers and rail cars; (iii) heavy equipment; (iv)
fishing vessels and barges; and (v) government assets. ORBCOMM expects that it
will provide companies in such industries with a cost-effective means to
regularly and reliably track the location and status of assets globally, thereby
enabling customers to reduce asset losses, improve service and more effectively
utilize transportation assets.
Commercial Vehicles. The commercial vehicle market segment includes
medium-weight owned trucks in smaller fleets, as well as medium-weight leased
trucks and heavy-weight trucks, both leased and owned, that need mobile
communications to compete with larger fleets but have been unable to afford the
current service offerings where equipment costs are approximately $3,000 per
unit. Cellular systems (such as the system offered by HighwayMaster
Communications, Inc. ("Highway Master")) can be used to provide tracking of and
communications to trucks; however, geographic coverage is limited. Paging and
narrowband personal communications services ("NPCS") may provide cost-effective
alternatives for these smaller fleets. Paging services currently offer only a
one-way short data link to the vehicle and NPCS is limited in geographic
coverage. ORBCOMM believes that the addressable market also includes
owner-operated vehicles contracted
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to larger, long-haul carriers. Shippers are requiring these carriers to be
equipped with mobile communications, regardless of whether the motor carrier is
using its own fleet of vehicles or contracting out to owner-operators.
Trailers, Containers and Rail Cars. ORBCOMM believes that the addressable
market for trailer tracking services includes: (i) non-refrigerated trailers
belonging to large trucking fleets that need to improve trailer utilization and
operational efficiency; (ii) trailers that carry high-value goods in the medium
and small truck fleet segment; and (iii) refrigerated trailers. Many trailers
(both refrigerated and non-refrigerated) are currently being tracked by a GEO
satellite-based system offered by Qualcomm, Inc. ("Qualcomm") This system
provides seamless coverage, but depends on larger power sources that require the
trailer to be attached to the tractor. As a result, when the trailer is detached
from the tractor, it can no longer be tracked. The GEO satellite-based services
proposed by GE LogistiCom, a GE Capital Services Company ("GE LogistiCom") could
be used to track untethered trailers, although ORBCOMM believes that the
line-of-sight limitations imposed by this system could cause it to be a less
effective tracking method. HighwayMaster has announced its intention to offer a
cellular-based system to track untethered trailers, although this system's
coverage will be limited to the range of cellular communications. Private
trucking fleets may use systems internal to their companies where each trailer's
number is manually recorded as trailers enter and leave a point of distribution.
ORBCOMM believes it will be able to provide a cost-effective means of tracking
untethered trailers based on their current location and will not be constrained
by cellular coverage limitations, significant power source requirements or, in
general, certain line-of-sight limitations of currently available solutions.
ORBCOMM believes that the addressable market for marine and land containers
includes refrigerated containers, containers carrying valuable items subject to
theft (e.g., electronics and cigarettes) and general freight containers that
need to be tracked for security and liability purposes. Currently, intermodal
container transportation systems use manual and radio tag systems to record
containers as they enter and leave distribution facilities. These systems
therefore record only where the container has been. The ORBCOMM system will be
capable of tracking the current location of the asset, as well as monitoring its
status and the condition of its contents.
ORBCOMM believes that the addressable market for rail cars includes rail
cars used to transport high-value cargo (e.g., automobiles, cigarettes,
refrigerated goods and paper rolls) 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 record only where the rail car has been, not its current
location, status or the condition of its contents. The ORBCOMM system will be
capable of tracking the current location of the railcar, as well as monitoring
its status or the condition of its contents.
Heavy Equipment. ORBCOMM believes that the addressable market for heavy
equipment includes equipment used in various large-scale construction,
infrastructure and mining operations. Currently, heavy equipment and machine
diagnostic information is collected manually and provided to equipment
manufacturers and operators for warranty programs and maintenance operations.
ORBCOMM believes that the ORBCOMM system will enable equipment manufacturers and
operators to automatically collect diagnostic information from remote locations
on a more timely and efficient basis.
Fishing Vessels and Barges. ORBCOMM believes that the use of Little LEO
systems such as the ORBCOMM system will provide fishing vessel and barge
operators with cost-effective tracking applications. Fishing vessels usually
remain at sea for extended periods and operate on extremely tight margins and
therefore must carefully control their operating costs. As a result, they need
cost-effective communications systems to meet safety and regulatory requirements
and to exchange commercial and operational information with their offices, fuel
providers, provisioners and packing houses. Commercial deep sea fishing vessels
currently use either high-frequency radio or one of the International Maritime
Satellite Organization ("Inmarsat") services. High-frequency radio is not
considered cost-effective and difficult to use, while use of the Inmarsat system
requires a considerable up-front investment of capital. Commercial fishing
vessels operating in coastal waters may also acquire service from American
Mobile Satellite Corporation ("AMSC") or use cellular telephone service,
particularly in the Gulf of Mexico. The ORBCOMM system is capable of
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providing remote tracking and operational data to a central location from a
fishing vessel anywhere in the world. Given the limitation of AMSC's geographic
coverage and the high cost of cellular roaming, the ORBCOMM system may provide a
more efficient, cost-effective communications service for both deep sea and
coastal fishing vessels.
Government Assets. ORBCOMM believes that use of Little LEO systems such as
the ORBCOMM system will provide government users with cost-effective solutions,
low probability of intercept and detection and worldwide availability. ORBCOMM
expects to compete to provide Little LEO service to the U.S. government,
including in connection with certain programs that have already been announced
by the U.S. government. The U.S. Department of Defense ("DoD") is developing the
Global Transportation Network ("GTN") to track personnel, aircraft and weapon
systems anywhere in the world. Effective military logistics requires location
identification and the ability to communicate tasking instructions. Asset
tracking is required at all locations from rear depots to front-line combat
elements, with integrated communications providing the essential link. The GTN
is a $418 million program that is being developed because no global system
currently exists to satisfy the requirements for tracking the status of assets.
The U.S. military has been relying on manual record keeping to track assets and
this process has recently been supplemented by distributed database systems
communicating over DoD-owned and/or leased lines. Asset tracking is currently
performed at the endpoints of the distribution chain. For this reason, a
misdirected shipment can only be relocated by tracing forward from its most
recent known location, and this can take weeks to accomplish. ORBCOMM believes
its services will provide tracking data on demand or on a scheduled basis for
use by the government for the location of personnel and military equipment.
MESSAGING
ORBCOMM believes that the messaging market segment includes a broad range
of consumer, commercial and government customers. ORBCOMM expects that the
ORBCOMM system will complement existing and planned wireline and
terrestrial-based wireless communications systems by providing coverage in
geographic areas where such services are not offered or by enhancing data
applications currently being offered by such systems. Internationally, ORBCOMM
believes that it will be able to offer services in developing countries or
remote regions where basic telephone service or data and messaging
communications services are not available. With coverage of virtually all of the
Earth's surface when fully operational, ORBCOMM believes that it will be able to
efficiently and cost-effectively offer messaging services in these geographic
areas through the ORBCOMM system.
Consumer. ORBCOMM believes that the addressable market for messaging
applications for consumers includes: (i) consumers who frequently engage in one
or more of the following "back-country" activities: hunting, hiking, camping,
and backpacking; and (ii) boating enthusiasts who enjoy traveling a considerable
distance outside the range of wireline and terrestrial-based wireless
communications systems and whose boats are generally over 26 feet and have
overnight accommodations suitable for extended travel. Recreational boaters
typically use VHF radio and/or cellular telephone where terrestrial-based
wireless communications systems are available. Some individuals rely on
high-frequency radio and a very small number employ Inmarsat services. However,
due to the significant limitations of these alternatives in terms of geographic
coverage or expense, there are few viable communications alternatives currently
available to back-country or boating enthusiasts. The primary market
requirements of these customers are based on a concern for safety and the desire
for a reliable, cost-effective, lightweight, personally portable unit. ORBCOMM
believes that its proposed messaging services and hand-held subscriber units
will enable it to meet these market requirements.
Commercial. ORBCOMM believes that the addressable market for messaging
applications for remote workers includes mobile and remote workers who
frequently use terrestrial-based wireless communications in their jobs but
require the extension of coverage that ORBCOMM believes it will be able to
provide. These workers spend a significant portion of their time away from an
office and require ubiquitous messaging while in remote areas as well as
reliable, cost-effective, lightweight and personally portable units. The
industries typically populated by these workers include: mining, construction,
energy, forestry and utilities. ORBCOMM believes that it can provide these
workers with messaging services through hand-held subscriber units and
laptop-compatible modems.
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Government. ORBCOMM believes that subscriber units will be able to be used
to send command and control messages between military personnel. The Defense
Messaging System ("DMS") is a $1.5 billion project with an annual operating
budget of $45 million designed to provide messaging for the DoD, NATO and
certain civilian agencies. ORBCOMM believes that Little LEO systems would
complement existing and other planned communications services. Today, numerous
independent email systems, including the Autodin system, provide messaging
services throughout the military. Autodin messages are sent between fixed
terminals located throughout the world. ORBCOMM believes that in the DMS
implementation, when the ORBCOMM system is fully operational, it could offer
users the ability to send and receive messages regardless of location.
FUTURE APPLICATIONS
In addition to the current primary target market segments described above
for data and messaging communications services, ORBCOMM believes that with the
commercial operation of its satellite constellation, the ORBCOMM system's
combination of capabilities may stimulate demand in other potential markets.
Home Security Systems. ORBCOMM believes that the ORBCOMM system could be
used for home security monitoring. In addition, units could be used to remotely
turn alarms, lights or home appliances on or off. Security systems have
historically relied on telephone lines for communication with central offices
but such lines can be intentionally disabled. Wireless systems are now being
adopted to eliminate this problem and ensure service quality. The ORBCOMM system
is designed to support messaging to and from central security offices as well as
emergency communications with ambulances, police and other public safely
personnel. ORBCOMM could supplement terrestrial-based wireless systems by
providing communications with security systems in remote areas. ORBCOMM is
continuing to assess this market.
Automotive. ORBCOMM believes that the global remote coverage expected to
be provided by the ORBCOMM system will address private car owners' safety and
security concerns and could complement services such as General Motors'
OnStar(R) and Ford's RESCU(R), each of which relies on the limited coverage of
terrestrial-based wireless communications systems. ORBCOMM also believes that
certain vehicles operating in fleets in and out of remote areas in dispatch mode
have similar safety and security concerns and would also value the ORBCOMM
system's ubiquitous coverage. This segment also includes taxis and special
vehicles such as emergency-response vehicles, regional police, buses, tow
trucks, snowplows and road maintenance vehicles.
U.S. Government. ORBCOMM believes that there are additional DoD programs
that may use the services of Little LEO systems. These programs include: the
Commercial Satellite Communications Initiative, budgeted for $1.6 billion; the
Global Command and Control System, budgeted for $500 million; the Combat Search
and Rescue program to locate downed pilots, budgeted for $220 million; the Air
Mobility Command and Control Information Processing System, budgeted for $210
million; the Mobile Satellite Service program, budgeted for $87 million; and the
Joint Surveillance System, budgeted for $85 million. There are also a number of
civil government applications suitable for Little LEO systems. The Post-FTS 2000
is a program to provide long distance domestic and international wireless
Internet access, data and email to U.S. government civilian agencies. It is a
ten-year contract providing an estimated $300 to $400 million in revenues to
service providers. The existing Post-FTS 2000 provides domestic long distance
calling service to the federal government only. The new contract for service
includes wireless, mobile and international services. The U.S. Departments of
State, Justice and Transportation are also developing wireless email and
messaging programs.
Foreign Governments. Use of Little LEO systems such as the ORBCOMM system
is expected to provide foreign governments with cost-effective applications, low
probability of intercept and detection and worldwide availability. Potential
defense applications include: (i) transmission of GPS-determined position data
for maneuvering units and recovering downed pilots; (ii) transmission of data
for air defense, fire support and asset tracking; and (iii) tactical messaging.
Potential civil government applications include wide-area secure communications,
monitoring and control of natural resources and search and rescue functions.
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SYSTEM ARCHITECTURE
The ORBCOMM system comprises three operational segments: (i) a space
segment consisting of a constellation of 36 LEO satellites; (ii) a ground and
control segment consisting of the Network Control Center that serves as the
global control for the satellites and Gateways, the major elements of which
include Gateway Earth Stations that send signals to and receive signals from the
satellites, and a message switching system that processes the message traffic;
and (iii) a subscriber segment consisting of subscriber units used by customers
to transmit and receive messages to and from satellites.
Overview. To use the ORBCOMM system, an initial message or other data is
generated by a subscriber unit. From that source, the data is transmitted to the
nearest ORBCOMM satellite, which confirms receipt to the unit. The satellite
downlinks the data to the Gateway Earth Station portion of an Gateway, which
then transmits the data to the associated Gateway Control Center. Within the
Gateway Control Center, the data is processed using a combination of
ORBCOMM-developed and commercial email software, and transmitted to its ultimate
destination which may be to another subscriber unit or to a personal or business
address using public/private X.25 data networks, the Internet, text-to-fax
conversion or modems connected to a telephone network. If desired, an
acknowledgment message is returned to the sender. To mitigate design and
implementation risks and to control costs, the ORBCOMM system architecture,
where possible, makes use of existing, mature technologies and conforms to
internationally accepted standards. The ORBCOMM system network architecture
comprises a multi-nodal packet network using X.400 messaging and Time Division
Multiple Access ("TDMA") as the enabling technologies.
Space Segment. The enhanced space segment will consist of a constellation
of 36 LEO satellites comprising: (i) four planes of eight satellites; and (ii)
two planes of two satellites each in highly inclined orbits between
approximately 740 and 825 kilometers above the Earth. Currently, two planes of
two satellites and one plane of eight satellites have been launched. The
satellites are produced by Orbital and generally have been or will be launched
in groups of eight using Orbital's Pegasus launch vehicle. One plane of two
satellites was placed in a high-inclination orbit using a Pegasus launch vehicle
and the other plane of two satellites was launched using a Taurus launch
vehicle.
The satellites are equipped with a VHF communications infrastructure
capable of operation in the 137.0-150.05 MHz and the 400.075-400.125 MHz bands.
The use of the spectrum is managed by an on-board computer that employs an
ORBCOMM-developed Dynamic Channel Activity Assignment System (the "DCAAS"). The
DCAAS continuously scans the authorized spectrum, identifies frequencies in use
and assigns channels to minimize the possibility of interference. The DCAAS is
expected to change the frequency of the uplink random access channels every five
seconds. The ORBCOMM satellites can also transmit a UHF beacon that provides
subscriber unit manufacturers with the ability to supply enhanced,
cost-effective, Doppler positioning.
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Since late December 1997, ORBCOMM has launched ten satellites. While
in-orbit testing to date has confirmed that most satellite systems are
performing normally, certain of these satellites, however, experienced an
anomaly in their solar power system resulting in reduced power margins. ORBCOMM
expects that the power for these satellites will be sufficient to meet planned
service and lifetime requirements. In addition, two satellites have experienced
an anomaly in their subscriber transmitters that currently result in the
inability of such satellites to transmit data to subscriber units. Orbital and
ORBCOMM are attempting to bypass the anomaly so that such satellites can perform
substantially all of their functions, although the coverage footprint of the
affected satellites will be reduced. Orbital and ORBCOMM are also taking similar
action, with a similar effect, to reduce the likelihood that such an anomaly
will occur with respect to the other in-orbit satellites launched since December
1997. Orbital and ORBCOMM believe they have identified the reason for both of
these anomalies and that they are being addressed on future satellites. There
can be no assurance, however, that Orbital and ORBCOMM will be successful in
resolving these anomalies or that similar anomalies will not occur on one or
more of the other eight satellites launched since December 1997 or on future
satellites. The inability to resolve or prevent such anomalies could have a
material adverse effect on ORBCOMM's ability to provide service, financial
condition and results of operations.
With respect to its initial two satellites launched in April 1995, ORBCOMM
has experienced outages of certain electronic systems and subsystems, resulting
in the inability during such outages to process customer communications, as well
as certain other technical difficulties. There can be no assurance that such
systems outages will not continue to occur, that if they do occur that ORBCOMM
will be able to restore such systems or that performance degradation in these
two satellites will not occur.
ORBCOMM has an option to procure a second generation of substantially
similar satellites from Orbital that would replace the system it is now
deploying at the end of the current system's expected life. The option, priced
at $166.1 million (subject to adjustment for inflation and excluding taxes, if
any, and the cost of launch and satellite insurance) can be exercised by ORBCOMM
at any time prior to December 31, 1999. However, such option would only be
exercised by ORBCOMM at the specified price if the satellites for the second
generation will be substantially similar to those of the current system.
The Procurement Agreement with Orbital currently provides for the launch of
34 satellites, of which ten satellites have been launched since December 1997,
and ORBCOMM is currently negotiating a contract modification for the procurement
of a Pegasus launch vehicle to launch an additional eight satellites into an
equatorial orbit. Orbital's Pegasus vehicle is launched from beneath a modified
Lockheed L-1011 owned by Orbital and is capable of deploying satellites weighing
up to 1,000 pounds into LEO. To date, Orbital has conducted 20 Pegasus missions,
with approximately a 90% success rate.
Gateway Earth Stations and the subscriber units comprising the ORBCOMM
system 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 satellite also contains an
intelligent packet-routing capability, including a limited store-and-forward
capability.
Ground and Control Segment. The ground and control segment consists of
Gateways strategically located throughout the world and the facilities to
monitor and manage all network elements to ensure continuous, consistent
operations in the provision of quality service. 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:
- Gateway Earth Stations, each of which is composed of two radomes, with
enclosed VHF tracking antennae, one of which is redundant, and associated
pedestal, controller and radio equipment;
- a Gateway message switching system located within each Gateway Control
Center, which processes the message traffic and provides the
interconnection to the terrestrial networks; and
- a Gateway management system located within each Gateway Control Center,
which manages the Gateway elements.
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To provide services using the ORBCOMM system in a particular region, an
appropriately located Gateway is required. Gateways cover a circular area with a
radius of approximately 3,300 miles. All elements of the U.S. Gateway are
operational, including four Gateway Earth Stations located in New York, Arizona,
Georgia and Washington and a Gateway Control Center located in Virginia. The
U.S. Gateway will be used to serve the United States, Canada and Mexico. In
March 1998, a Gateway, including one Gateway Earth Station, located in Italy
successfully completed acceptance testing. A Gateway Earth Station has been
constructed in each of South Korea and Japan, with each of the associated
Gateway Control Centers expected to be installed by mid-1998. ORBCOMM expects
that many International Licensees will enter into agreements to share Gateways.
The procurement of each of the existing Gateways located outside the United
States was funded by the relevant International Licensee. ORBCOMM has entered
into and will continue to enter into agreements with International Licensees for
the construction of additional Gateways outside the United States. The cost and
implementation of future 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 satellites by using a TDMA protocol. This
protocol will permit several 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 Gateway
Earth Station to Gateway Earth Station under the centralized control of the
Gateway Control Center.
The control segment of the ORBCOMM system is housed at the Network Control
Center. The control segment, includes a network management system, which
monitors the status of all network elements and a space vehicle management
system. Currently, there is no back-up Network Control Center, although the
existing Network Control Center is equipped with back-up hardware, and
associated software is backed up and stored off-site. In addition, the Network
Control Center is equipped with an automatic emergency generator to provide a
backup for normal building power. Requirements have been developed for a back-up
Network Control Center to be constructed in 1999. Through the U.S. Gateway,
managed from the Network Control Center, 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 units, some of which are intended for general use, and some of which
are designed to support specific applications, although even in the case of the
general use subscriber units, the configuration of these units may make them
more or less suitable for certain applications. The subscriber unit models will
include: (i) externally powered subscriber units for fixed applications such as
pipeline monitoring, remote device control or environmental monitoring; (ii)
self-contained, battery- and/or solar-powered subscriber units that would
support applications where commercial or other external power is not available,
including messaging applications; and (iii) vehicular-powered subscriber units
that could be used in asset tracking, cargo monitoring or vehicular operation
monitoring.
The subscriber units 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. The
subscriber units targeted for the messaging market will incorporate interfaces
such as integrated keyboards or touch-sensitive screens. Additionally, while the
ORBCOMM satellites are designed to support Doppler position determination in the
subscriber units, certain subscriber unit models are also equipped with GPS
receivers, permitting more rapid and more accurate location determination.
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 commercially
operational Little LEO system.
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ORBCOMM commenced limited commercial service in the United States on
February 1, 1996, becoming the first commercial Little LEO mobile satellite
services ("MSS") provider. ORBCOMM believes that commencement of commercial
service provides it with a substantial head start in developing markets,
distribution systems, applications and a customer base globally. ORBCOMM expects
that potential competitors will include other Little LEO systems, including
those that are licensed or expected to be licensed by the FCC in 1998 such as
the systems proposed by Leo One USA Corporation ("Leo One") and Final Analysis
Communication Services, Inc. ("Final Analysis"), certain geosynchronous or
geostationary orbit ("GEO")-based systems, certain terrestrial-based
communications systems and various Big LEO and medium-Earth orbit ("MEO")
systems.
In addition to OCC, two other entities have licenses from the FCC to
provide Little LEO satellite services in the United States. Volunteers in
Technical Assistance ("VITA") 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. In addition, the FCC's
International Bureau recently granted Leo One's second-round application for a
48-satellite system expected to provide a variety of commercial Little LEO
services. The FCC is in the process of completing the licensing of the remaining
second round Little LEO applications. ORBCOMM expects that a total of four
commercial Little LEO systems, and ORBCOMM's second-round application for an
additional 12 satellites, will be licensed by the FCC in 1998 as the FCC
finishes the second processing round.
Based on published reports, ORBCOMM does not believe that any of the other
proposed Little LEO systems currently participating in the second licensing
round before the FCC will be commercially operational until at least the year
2000. ORBCOMM believes that it holds a substantial advantage over these
potential competitors by having already designed, constructed and launched a
fully functional system, by virtue of its having already obtained FCC licensing
for all elements of its system in the United States, and by achieving, in large
part, international coordination of its designated frequencies through the ITU.
Over the course of the next several years, ORBCOMM is expected to obtain further
advantages over these potential competitors by establishing certain standards in
the industry, developing operational expertise, launching the remaining
satellites in the ORBCOMM system, signing agreements with additional subscriber
unit manufacturers, signing reseller agreements, service licenses and similar
agreements with additional marketing entities and expanding its marketing
activities generally as the ORBCOMM system matures.
Plans for Little LEO systems have been announced in Australia, Brazil,
France, Russia, South Korea, Tonga and Uganda, although ORBCOMM believes that,
without additional allocations of spectrum in the United States, these systems
will be unable to offer services in the United States. With the sole exception
of the French candidate system, the ORBCOMM system is protected from harmful
interference from all other systems.
In addition, ORBCOMM believes that it competes in certain of its market
segments with existing operators and users of certain GEO-based systems such as
AMSC, Qualcomm, GE LogistiCom and companies providing services using the
Inmarsat system. AMSC offers SKYCELL mobile data services, both satellite only
and "dual-mode", i.e., satellite and terrestrial, through the public data
network which can reach both densely populated urban areas and sparsely
populated rural areas. AMSC has recently announced that it is acquiring
Motorola's ARDIS two-way terrestrial-based wireless messaging network, which
will complement AMSC's existing satellite-based voice and data communications
services by allowing AMSC to offer a hybrid solution that will have the ability,
among other things, to serve urban areas and to penetrate buildings, which
AMSC's satellite-based system is currently unable to do effectively or at all.
Qualcomm designs, manufactures, distributes and operates the OmniTRACS
Communications System, a satellite-based, two-way mobile communications and
tracking system that provides messaging, position reporting and other services
for transportation companies and other mobile and fixed site customers using
certain GEO satellites. GE LogistiCom has announced plans to offer a trailer
tracking application in North America using the AMSC system. In addition,
various companies using the Inmarsat system are providing fishing vessel and
other marine tracking applications. ORBCOMM believes that the ORBCOMM system has
certain advantages over these other systems including worldwide coverage, lower
equipment costs in most cases and substantially reduced line-of-sight
limitations.
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While the ORBCOMM system is not intended to compete in general with
existing and planned terrestrial-based communications systems, in certain of its
market segments ORBCOMM believes it competes with certain of these systems
including the systems operated by HighwayMaster, ARDIS, RAM Mobile Data and
Mtel. The architecture of these systems may provide certain advantages relative
to the ORBCOMM system, including in-building penetration. HighwayMaster operates
a wireless enhanced services network providing integrated mobile voice, data,
tracking and fleet management information services to trucking fleets and other
operators in the long-haul segment of the transportation industry. The
terrestrial-based wireless systems operated by ARDIS and RAM Mobile Data are
capable of providing geographically limited data communications services to a
variety of end users. Mtel, through its wholly owned subsidiary, SkyTel Corp.
("SkyTel"), provides messaging services in cities in the United States. Mtel is
using its messaging network to provide fixed location services, specifically
utility meter reading in urban areas. Because of the inherent coverage
limitations of a terrestrial-based communications systems, ORBCOMM believes that
the ORBCOMM system will also complement these systems, which provide
cost-effective 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 certain market segments. ORBCOMM believes that 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. The ORBCOMM system's ability to serve as a geographic
gap-filler may be reduced, however, as terrestrial-based communications systems
expand their coverage.
The Big LEO and MEO systems are expected to provide real time,
uninterrupted service. These systems are designed primarily to provide two-way
voice services that require larger, more complex satellites than the ORBCOMM
satellites and larger constellations to provide coverage. As a result, the cost
of the Big LEO and MEO systems is significantly greater than those of the
ORBCOMM system. However, the marginal cost on a per-message basis of providing
services similar to those expected to be offered by ORBCOMM could be relatively
low for a Big LEO or MEO System that is unable to sell its capacity for voice
services. Based on publicly available information, Iridium anticipates an
initial service date in September 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 $3.7 billion. The
Globalstar system is expected to cost approximately $2.2 billion and consists of
a constellation of 48 satellites with wholesale usage charges of approximately
$0.35 to $0.55 per minute. The initial service date for the Globalstar system is
anticipated to be in early 1999. Another satellite system designed primarily to
provide voice communications is the ICO Global Communications System. The ICO
System is expected to cost $4.5 billion and consists of a constellation of MEO
satellites. The ICO System is scheduled to commence full commercial service in
the year 2000.
ORBCOMM may also face competition in the future from companies using new
technologies and new satellite systems. ORBCOMM's business could be adversely
affected if competitors begin operations or existing or new communications
service providers penetrate ORBCOMM's target markets. A number of these new
technologies, even if they are not ultimately successful, could have an adverse
effect on ORBCOMM's financial condition and results of operations.
REGULATION
U.S. FCC Regulation
Regulation of NVNG Systems. All commercial non-voice, non-geosynchronous
("NVNG") satellite systems, or 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. government agency with jurisdiction over commercial uses of the radio
spectrum. Little LEO operators must obtain authorization from the FCC to launch
and operate their satellites and to operate their satellites to provide services
in assigned spectrum segments.
In January 1993, the FCC allocated spectrum segments for NVNG MSS and
issued a Notice of Proposed Rulemaking to govern the NVNG application process.
In October 1993, the FCC formally adopted
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its rules pertaining to NVNG MSS systems. These rules included provisions
regarding financial qualifications, system size, intersystem coordination and
reporting requirements. These rules were applied to the three applications in
the initial NVNG processing round and each of these three applications
(including OCC's) was approved by the FCC. The ORBCOMM system is currently the
only commercial Little LEO system to be fully licensed for all segments of its
system, including four Gateway Earth Stations and its subscriber units, within
the United States. One of the other two first-round applicants, GE-Starsys
(formerly "Starsys"), has since relinquished its license.
On November 16, 1994, the FCC closed the application filing period for a
second processing round for NVNG applications. As a result of consolidation in
the satellite services industry, the total number of applicants currently
participating in the second round (including OCC) has been reduced from eight to
five. The FCC has indicated that it believes there will be sufficient spectrum
available to enable it to grant the applications, in whole or in part, of each
of the five second-round applicants. On February 13, 1998, one of the
second-round applicants, Leo One, was granted a satellite system license by the
FCC's International Bureau acting on delegated authority.
Regulatory History of the ORBCOMM System. On February 28, 1990, nearly two
years before the ITU allocated spectrum for NVNG systems, OCC filed an
application with the FCC for a Little LEO system. Starsys filed a Little LEO
system application with the FCC several months later, whereupon the FCC
established a cut-off date for the filing of applications to be considered
concurrently with these proposals. A third applicant, VITA, also filed a Little
LEO system application in this initial processing round.
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 units and the marketing of revenue-generating
services.
On October 20, 1994, OCC was granted authority by the FCC to construct,
launch and operate an additional 34 satellites located approximately 775
kilometers above Earth, in four inclined orbital and two near-polar planes, for
the purpose of providing two-way data and messaging communications and position
determination services in certain specified segments of the radio frequency
spectrum (the "FCC License"). The FCC License grants OCC the authority to
operate within specified radio frequency spectrum segments for its uplink and
downlink functions. The frequency bands in which the ORBCOMM system is
authorized to operate are as follows:
Uplink: 148.0 -- 149.9 MHz
Downlink: 137.0 -- 138.0 MHz and 400.075 -- 400.125 MHz
The FCC License pertains to private carriage and extends ten years from the
operational date of the first ORBCOMM satellite, FM1, which date 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 the remaining 24 satellites that, if successful, will result
in OCC reaching the second milestone by the third quarter of 1999. In addition,
OCC is required to apply for a license renewal three years prior to the
expiration of the FCC License. While, based on past experience, ORBCOMM believes
that the FCC generally grants license renewals to existing licensees where the
licensee has satisfied the requirements of the license, there can be no
assurance that OCC's license would be renewed should it apply.
At the time the FCC closed the first round of processing for NVNG
applications, ORBCOMM's application was mutually exclusive with that of Starsys.
In an effort to resolve this mutual exclusivity, the three first-round
applicants met and negotiated a Joint Sharing Proposal, executed on August 7,
1992. Using this Joint Sharing Proposal as a guide, the three first-round
applicants, the FCC, existing users of the same frequency bands and adjacent
bands and other interested parties met as a Negotiated Rulemaking Committee to
address and resolve operational and sharing concerns and to propose technical
rules to resolve them. The current rules, based on the proposals of this
committee, were adopted by the FCC and codified in its
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October 1993 NVNG order. OCC, as well as the other first round applicants, was
permitted to modify its license application in response to the October 1993 NVNG
order.
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. The
FCC imposed these restrictions on OCC's domestic operations but reserved the
right to consider extending these restrictions to OCC's international operations
if notified of actual sharing difficulties between the ORBCOMM system and
Starsys. The FCC License also provides that the ORBCOMM system is permitted to
operate throughout the 148.0-149.9 MHz band until such time as Starsys is
prepared to launch its first satellite. Once Starsys so notified the FCC, or
earlier if required by the FCC, OCC agreed to limit its operations to the upper
half of the 148.0-149.9 MHz band, permitting Starsys to operate its spread
spectrum system in the lower half of the band.
Although Starsys has returned its license to the FCC, under new rules that
took effect January 2, 1998, the FCC anticipates that E-SAT, Inc. ("E-SAT") will
occupy most of the spectrum previously licensed to Starsys. E-SAT may be
entitled to all rights previously granted to Starsys under the Joint Sharing
Proposal. In the final order issued in October 1997 (the "Final Order"), the FCC
indicated that E-SAT will share portions of spectrum with the ORBCOMM system
consistent with the Starsys sharing agreement.
The Final Order contains a provision allowing each of the three commercial
narrowband second-round applicants to have permanent access to approximately 355
kHz of spectrum in the lower portion of the 148.0-149.9 MHz band, thereby
promoting a greater availability of spectrum for second-round applicants while
at the same time protecting to the greatest extent possible a critical portion
of spectrum in the middle of the band for use by E-SAT. This access to
approximately 355 kHz of spectrum in the lower half of the band supersedes the
prior requirement in the FCC License that ORBCOMM discontinue its use of the
lower half of the band once Starsys launches its system.
The Final Order also imposed duty cycle limits on subscriber units
operating in the band 148.0-149.9 MHz. Subscriber units are limited to
transmitting no more than 1% of the time during any 15-minute period and no
transmission may exceed 450 milliseconds. Earth stations are limited to
transmitting no more than 1% of the time during any 15-minute period. ORBCOMM
believes that its services can be provided within this limitation.
The FCC also provided OCC a secondary right to use a portion of the
"transit band" (149.9-150.05 MHz) for feeder links, which right is contingent on
Final Analysis moving its feeder link to another location, which it has
indicated it desires to do. However, before Final Analysis can move its feeder
link, additional spectrum needs to be made available by ITU for the MSS, which
is not likely to happen until at least 1999.
In 1995, the FCC granted OCC licenses to operate four Gateway Earth
Stations in the continental United States and granted OCC a blanket license to
deploy up to 200,000 subscriber units. Currently, the ORBCOMM system is the only
commercial Little LEO system to be fully licensed for all segments of its system
within the United States.
Requests 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 satellite's
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 in the 137-138 MHz
band by 40 kHz, down from 320 kHz to 280 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. Although several of the other second-round
applicants have filed comments with the FCC opposing the Modification Request,
the Modification Request has several advantages for OCC's opponents, as well as
OCC. To the extent that E-SAT will operate in much the same way as
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Starsys would have, the Modification Request would eliminate the need for OCC to
shut down its left-hand circular polarization ("LHCP") when in view of an E-SAT
Earth station and thus obviate many of the restrictions imposed on the ORBCOMM
system under the terms of the FCC License. Moreover, the Modification Request
would free a certain portion of the allocated spectrum for use by other Little
LEO applicants, and the joint sharing proposal reflected in the Final Order
presumes the grant of the Modification Request. The Modification Request would
also 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. The
Modification Request has now completed the public comment cycle and OCC has
reached an agreement with the National Oceanic and Atmospheric Administration
("NOAA") with respect to technical matters raised by the Modification Request.
While OCC believes that the Modification Request will be approved shortly, there
can be no assurance that the FCC will do so. Should the FCC fail to approve the
Modification Request, it could have a material adverse effect on the ORBCOMM
system.
OCC has submitted an additional request for modification of the FCC License
to change the orbital altitude of the satellites in the ORBCOMM system from
approximately 775 kilometers to approximately 825 kilometers above Earth and to
launch two of the high inclination satellites to 108 degrees instead of 70
degrees. In December 1997, OCC received a special temporary authority from the
FCC allowing OCC to launch eight satellites to this altitude. In February 1998,
OCC received special temporary authority to launch the two high inclination
satellites to 108 degrees. OCC also plans to launch eight satellites in an
equatorial orbit, which will also require application to the FCC to modify the
FCC License. OCC believes that FCC authority will be received prior to the
scheduled launch.
Second Processing Round. On November 16, 1994, the FCC closed the
application filing period for applications from other proposed NVNG satellite
systems. As noted earlier, there are currently five 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 own second-round application, 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 capacity and greater in-orbit
redundancy. This proposal would require the FCC to license an additional 70 kHz
of spectrum in the 137-138 MHz downlink to OCC.
The FCC has closed the second processing round for NVNG systems, but so far
has licensed only one of the second-round applicants. On February 13, 1998, the
FCC's International Bureau, acting on delegated authority, granted LEO One's
application for a 48-satellite Little LEO system. ORBCOMM recently filed with
the FCC an Application for Review of the International Bureau's decision. Prior
to the World Radiocommunication Conference held in November 1995 ("WRC-95"), the
FCC noted that there was insufficient spectrum available to license all of the
second-round NVNG applicants, and declined to issue any additional Little LEO
system licenses pending its request for additional spectrum for the Little LEOs
at WRC-95. Significant additional spectrum was not allocated for use by NVNG
services at WRC-95. 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 that were not licensed in the first processing
round and are not affiliated with companies licensed in the first processing
round. Nevertheless, in the Final Order the FCC agreed to permit first-round
licensees to participate in the second processing round. The FCC has indicated
that it believes there will be sufficient spectrum available to enable it to
approve the applications, in whole or in part, of each of the five second-round
applicants. Should there prove to be insufficient spectrum available for each of
the five second-round applicants, or if OCC is denied the spectrum it has
requested, it 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. The ITU did not allot any significant additional
spectrum to NVNG systems at the World Radiocommunication Conference held in 1997
("WRC-97").
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OCC believes that the FCC will issue licenses to each of the other
second-round applicants in 1998.
International Regulation
Summary. The ORBCOMM system operates in frequencies that were allocated on
an international basis for use by Little LEO systems at the World Administrative
Radio Conference held in 1992 ("WARC-92"). The United States, on behalf of
various Little LEO service providers, including OCC, pursued international
allocations of additional frequencies for use of Little LEOs at WRC-95 with
limited success, as noted above. The United States also requested additional
frequencies for use by the Little LEOs at WRC-97, which resulted in the
allocation, on a footnote basis, of additional spectrum in the 454-455 MHz band,
which is adjacent to certain additional spectrum that was allocated for use
during WRC-95. In addition to cooperating with these efforts by the United
States to secure additional spectrum for Little LEO systems, OCC was required to
and has in fact, through the FCC, engaged in international coordination
procedures with other countries with respect to other satellite systems under
the aegis of the ITU. OCC has completed these international coordination
procedures, with the exception of those efforts involving France and Russia. OCC
was also required, by the FCC and the U.S. Department of State, to engage in
economic and/or technical coordination with two international satellite systems,
Intelsat and Inmarsat. These coordinations were completed successfully as of
1995. Finally, the ORBCOMM system must receive operational authority from each
of the foreign countries in which it proposes to provide service. It will be the
responsibility of the International Licensee in each country to obtain such
authority.
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 ITU. The
International Table is revised periodically at WRCs. Between WRCs, the member
nations of the ITU, in connection with private industry, prepare and propose
recommendations for international allocations to be considered at the next WRC.
Preparatory analyses and recommendations are considered in appropriate technical
study groups for specific topics.
Little LEO systems require use of radio spectrum on a global basis to reach
their full commercial potential. At WARC-92, with the sponsorship of the U.S.
government and a number of other key administrations, major portions of the 137
to 150 MHz band and a narrow portion of the spectrum band at 400 MHz were
allocated on a global basis to Little LEO systems. The specific frequency
allocations for uplink and downlink operations included the following:
Uplink: 148.0 -- 149.9 MHz (1.9 MHz on a primary basis)
Downlink: 137.0 -- 138.0 (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 were
allocated on a secondary basis. 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, therefore, was not subject to consideration
at WARC-92. ORBCOMM's planned use of this bandwidth complies with the
regulations governing its use. At WARC-92, a footnote to the Table of
Allocations was adopted providing that MSS uplinks in the band 148-149.9 MHz
would be secondary in more than 100 countries. Earth stations in these countries
would neither be protected from interference, nor permitted to cause
interference to terrestrial services.
A designation of "primary" places the Little LEO systems on an equal
footing with existing users of these frequencies, subject to the provision that
the Little LEO systems not interfere with existing users or constrain their
growth and, with respect to certain countries and certain frequency bands, that
the Little LEO systems not claim protection from existing users. 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. The procedures for "coordinating" Little LEO services
with other registered users of the band were established at WARC-92.
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At WRC-95, the U.S. government and other administrations sought an
additional allocation of 6.65 MHz of spectrum for Little LEO systems. This
proposal was largely unsuccessful due to the late identification of candidate
bands. At WRC-97, the U.S. government and other administrations again sought an
additional allocation of spectrum for Little LEO systems, which requests were
again met with only limited success. Consideration of additional bandwidth
allocations is currently scheduled to be on the agenda for the next WRC
scheduled for 1999. There can be no assurance that such additional allocations
will be approved.
Finally, a portion of the "transit band" between 149.9-150.05 MHz and
399.9-400.05 MHz was allocated to Little LEOs effective on January 1, 1997. OCC
has determined, however, that the upper portion of the transit band is not
particularly useful to the ORBCOMM system.
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 NVNG satellite systems. There is no penalty for launching
a satellite system prior to completion of the ITU coordination process, although
protection from interference through this process is afforded only as of the
date of successful completion of the process and notification of the satellite
by the ITU.
The FCC, on behalf of OCC, has notified the ITU that the ORBCOMM system was
placed in service on April 3, 1995 and that it has operated without complaint 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. ORBCOMM 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 France by December 1998, at which
time the ORBCOMM system will be fully registered with the ITU indicating the
completion of coordination with respect to all satellite systems preceding the
ORBCOMM system. Satellite systems subsequent to the ORBCOMM system must
coordinate with OCC to protect the ORBCOMM system from interference.
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 governmental
authority. For example, two of the four U.S. Earth Stations have a coordination
distance that extends into Canada, and thus required coordination with Canada
prior to ITU notification or registration.
At WRC-95, France proposed a reduction in the threshold for coordination
with terrestrial services, which would require additional coordination of MSS
systems. France raised this proposal again at WRC-97. This proposed change was
not adopted at either WRC-95 or WRC-97, but there can be no assurance that it
will not be proposed and adopted at the next WRC scheduled for 1999, or that, if
adopted, additional coordination requirements would not be imposed on the
ORBCOMM system, to the extent that OCC may not have completed the ITU
coordination process.
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 had 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. In all
cases, the proposed International Licensees are private companies, reflecting
the expectation that the ORBCOMM system will be licensed as a value-added
service rather than as a regulated basic service. International Licensees and
proposed International Licensees have had discussions with regulators in certain
major target countries and have advised ORBCOMM that such discussions indicate
that favorable regulatory treatment can be anticipated.
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The process for obtaining regulatory approval in foreign countries
generally conforms to the following process. The International Licensee requests
regulatory approval 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
will be required to associate with the ORBCOMM ITU submission. The national
regulatory authority also will be required to submit so-called Appendix 3
information to the ITU to coordinate and protect ORBCOMM Gateway Earth Stations
in the territory or region from interference by other ground systems in
neighboring countries.
To date, ORBCOMM has executed 13 agreements with International Licensees
covering Canada, Japan, Mexico, the Philippines, South Korea, Turkey and South
Central Asia, Thailand, the Andean/Caribbean region, Europe, the Malaysian
region, the Middle East, the northwest region of North Africa and the southern
cone of South America. Full regulatory approval to provide ORBCOMM services has
been received in Canada and Malaysia and preliminary, experimental or limited
regulatory approvals have been received in Chile, Germany, Italy, Japan, South
Africa, South Korea, Spain and Sweden.
ORBCOMM provides technical and regulatory assistance to its International
Licensees in pursuing operating authority. The assistance provided by ORBCOMM
includes actual in-country demonstrations that the ORBCOMM system can share use
of the allocated spectrum with existing users while neither causing harmful
interference nor constraining operations and growth of those systems. While
International Licensees have been selected, in part, based upon their perceived
qualifications to obtain the requisite foreign regulatory approvals, there can
be no assurance that they will be successful in doing so, and if they are not
successful, ORBCOMM services will not be available in such countries. In
addition, the continued operations of the International Licensees may be subject
to other regulatory requirements or regulatory or other changes in each foreign
jurisdiction.
EMPLOYEES
As of February 27, 1998, ORBCOMM had 251 full-time employees, none of whom
is subject to any collective bargaining agreement. ORBCOMM's management
considers its relations with employees to be good.
ITEM 2. PROPERTIES
ORBCOMM currently leases approximately 45,000 square feet of office space
in Herndon, Virginia, as well as approximately 25,000 square feet of office
space in Dulles, Virginia from Orbital. ORBCOMM also leases approximately 28,000
square feet of additional space at various sites in Virginia and Maryland for,
among other purposes, self-storage, space to assemble certain portions of the
Gateway and for use by employees and a contractor. ORBCOMM currently operates
four Gateway Earth Stations. ORBCOMM owns the properties on which the St. Johns,
Arizona and Arcade, New York Gateway Earth Stations are located and leases,
subject to long-term lease agreements, the properties on which the Ocilla,
Georgia and East Wenatchee, Washington Gateway Earth Stations are located.
ITEM 3. LEGAL PROCEEDINGS
ORBCOMM is not a party to any pending legal proceedings material to its
financial condition or results of operations. For a discussion of regulatory
issues affecting regulatory issues affecting ORBCOMM, see
"ORBCOMM -- Regulation."
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 1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ORBCOMM 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 ORBCOMM does not intend to do so in the near
future.
There are no distributions required to be made to the partners of ORBCOMM
other than a minimum annual distribution required by the Restated Agreement of
Limited Partnership of ORBCOMM Global, L.P. (the "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 ORBCOMM. 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, certain affiliate guarantors and Marine Midland Bank (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, 1993, 1994, 1995, 1996 and 1997 and the selected balance
sheet data of ORBCOMM as of December 31, 1993, 1994, 1995, 1996 and 1997 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 ORBCOMM ACCOUNTS FOR ITS OWNERSHIP IN BOTH ORBCOMM USA AND ORBCOMM
INTERNATIONAL USING THE EQUITY METHOD OF ACCOUNTING, REFERENCE IS MADE TO THE
FINANCIAL STATEMENTS OF ORBCOMM USA AND ORBCOMM INTERNATIONAL LOCATED ELSEWHERE
IN THIS REPORT.
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
-----------------------------------------------
1993 1994 1995 1996 1997
---- ---- ----- -------- --------
INCOME AND EXPENSE DATA: (1)
Total revenues (2)......................... $0 $ 0 $ 900(3) $ 420 $ 527
Cost of product sales...................... 0 0 0 268 517
Depreciation............................... 0 0 0 6,198 7,348
Engineering expenses (4)................... 0 0 0 5,453 8,160
Marketing, administrative and other
expenses................................. 0 9 50 6,933 12,070
Equity earnings (losses) of affiliates
(5)...................................... 0 0 (854) (4,602) (8,413)
Interest income (expense), net............. 0 0 59 3,554 4,545
-- --- ----- -------- --------
Net income (loss).......................... $0 $(9) $ 55 $(19,480) $(31,436)
== === ===== ======== ========
AS OF DECEMBER 31,
(IN THOUSANDS)
--------------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- -------- --------
BALANCE SHEET DATA:
Cash, cash equivalents and investments
(6)....................................... $ 0 $ 5,000 $ 1,785 $153,482 $ 38,862
ORBCOMM system, net (7)..................... 43,925 68,647 106,990 170,034 263,379
Total assets................................ 47,665 73,647 109,030 329,509 316,969
Total long-term debt........................ 0 5,000 4,174 173,269 172,277
Partners' capital........................... 47,665 58,509 94,601 137,942 106,418
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(1) For the period June 30, 1993 (date of inception) through December 31, 1994,
there were no significant income and expense transactions.
(2) The Company is a development stage enterprise and has had no significant
system revenues.
(3) Represents a non-refundable fee received from a potential International
Licensee.
(4) Prior to 1996, ORBCOMM capitalized substantially all engineering expenses as
part of the total costs of the ORBCOMM system.
(5) The Company accounts for its investments in ORBCOMM USA and ORBCOMM
International using the equity method of accounting.
(6) Includes U.S. government securities pledged as security for repayment of
principal and interest on the Notes (the "Pledged Securities") of $21.5
million and $44.8 million as of December 31, 1997 and 1996, respectively,
and the amount in a segregated account related to a Loan and Security
Agreement dated December 22, 1994 between MetLife Capital Corporation
("MetLife") and ORBCOMM (the "MetLife Note") of $2.8 million and $3.8
million as of December 31, 1997 and 1996, respectively.
(7) Represents the aggregate costs of the satellite constellation design,
construction and launch services, design and construction of the U.S. Ground
Segment, insurance and other system costs, including capitalized interest,
net of accumulated depreciation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In 1993, ORBCOMM 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 ORBCOMM, 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 services using the Company's
LEO satellite communications 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 FCC
License and the ORBCOMM system, consistent with FCC regulations.
Through December 31, 1997, Orbital, through OCC, and Teleglobe and TRI,
through Teleglobe Mobile, had invested in the aggregate approximately $160
million in ORBCOMM. In addition, on August 7, 1996, ORBCOMM and Capital
completed the Notes Offering of the Old Notes. In January 1997, all of the Old
Notes were exchanged for the Notes. 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.
ORBCOMM provides two-way data and messaging services through the world's
first commercial LEO satellite-based communications system. ORBCOMM's current
primary target markets include: (i) fixed asset monitoring services for electric
utility meters, oil and gas storage tanks, wells and pipelines and environmental
projects; (ii) mobile asset tracking services for commercial vehicles, trailers,
containers, rail cars, heavy equipment, fishing vessels, barges and government
assets; and (iii) messaging services for consumers and commercial and government
entities. Future target markets are expected to include: (i) home security; (ii)
automotive; and (iii) additional U.S. and foreign government applications.
ORBCOMM has entered into agreements with over 40 VARs, each of which is
authorized to market and distribute ORBCOMM services within specific regions and
to targeted industries or markets. ORBCOMM has also established two Internal
VARs to market and distribute monitoring and tracking services to the oil and
gas and transportation industries. In addition, ORBCOMM has entered into
agreements with 13 International Licensees that are expected to market and
distribute ORBCOMM services in over 95 countries following completion of the
necessary ground infrastructure and receipt of the necessary regulatory and
other approvals in their respective regions. ORBCOMM has also entered into
agreements with six subscriber unit manufacturers, Panasonic,
Scientific-Atlanta, Magellan, Stellar, Torrey and CTI, and has type approved ten
subscriber unit models for commercial use with the ORBCOMM system. Four
subscriber unit manufacturers have commenced pre-commercial or commercial
production of subscriber units that can be used for electric utility meter, oil
and gas storage tank, well and pipeline and environmental monitoring and
commercial vehicle, trailer, container, rail car, heavy equipment, fishing
vessel and government asset tracking applications.
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ORGANIZATIONAL STRUCTURE; FINANCIAL REPORTING
Pursuant to the terms of the partnership agreements for ORBCOMM and the
Marketing Partnerships: (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 and Teleglobe Mobile have effective control over ORBCOMM USA and ORBCOMM
International, respectively, ORBCOMM accounts for the Marketing Partnerships
using the equity method of accounting. ORBCOMM does not consolidate, and
therefore does not report in its financial statements, ORBCOMM USA's and ORBCOMM
International's assets, liabilities and operating revenues and expenses.
Instead, ORBCOMM's proportionate share of the net income and losses of the
Marketing Partnerships is recorded under the caption "Equity in losses of
affiliates" in ORBCOMM's financial statements. Correspondingly, ORBCOMM'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 ("Output Capacity
Charge") that is a quarterly fee equal to 23% of ORBCOMM USA's 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)
located in the United States to be delivered to the Company pursuant to certain
procurement agreements (the "System Assets"). In consideration of the
construction and financing of the System Assets by ORBCOMM, OCC, in turn, pays
to ORBCOMM a system charge that is a quarterly fee equal to the Output Capacity
Charge less 1.15% of total aggregate revenues, defined as the aggregate of
ORBCOMM USA's and ORBCOMM International's total system service revenues ("Total
Aggregate Revenues"). If the Output Capacity Charge as described above is less
than 1.15% of Total Aggregate Revenues, then OCC is not required to pay any
portion of the system charge to ORBCOMM.
ORBCOMM International pays to Teleglobe Mobile an international output
capacity charge ("International Output Capacity Charge") that is a quarterly fee
equal to 23% of ORBCOMM International's 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 by ORBCOMM 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 ORBCOMM a system charge that is a
quarterly fee equal to the International Output Capacity Charge less 1.15% of
Total Aggregate Revenues. If the International Output Capacity Charge as
described above is less than 1.15% of Total Aggregate Revenues, Teleglobe Mobile
is not required to pay any portion of the system charge to ORBCOMM.
SERVICE ROLL-OUT
ORBCOMM believes that it will provide a reliable, cost-effective method of
providing fixed asset monitoring, mobile asset tracking and messaging services
to a broad range of customers around the world, enabling such customers to
collect data from multiple locations, track assets on a global basis and
transmit and receive short text messages outside the coverage area of other
systems. ORBCOMM has launched 12 satellites to date and expects to launch 16
additional satellites by mid-1998, which will complete its planned 28-satellite
basic constellation. An additional eight satellites that will create a
36-satellite enhanced constellation with increased capacity and improved service
in equatorial regions are expected to be launched in the third quarter of 1999.
Since early 1996, ORBCOMM has been providing limited commercial services in
the United States through two satellites. ORBCOMM expects to offer commercial
service on a broader basis commencing in the spring of 1998, when satellites
launched in late 1997 and early 1998 are expected to begin to be placed in
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commercial service. ORBCOMM expects to significantly expand its commercial
services later in the year to provide expanded service in the United States and
other temperate regions, when 16 additional satellites are expected to be placed
in commercial service. Service outside the United States will be expanded as the
necessary ground infrastructure is completed and the necessary regulatory
approvals are received. Expanded service in the equatorial regions is expected
to be available by the fall of 1999, when the final eight satellites of the
planned 36-satellite enhanced constellation are scheduled to be placed in
commercial service.
The U.S. Ground Segment, including four Gateway Earth Stations, is
operational. In March 1998, a Gateway located in Italy successfully completed
acceptance testing. In each of South Korea and Japan, a Gateway is under
construction and is expected to be completed by mid-1998. During 1998, ORBCOMM
expects that certain of its International Licensees will be able to offer
ORBCOMM services in portions of Europe, Brazil, Japan, Morocco and South Korea,
subject to completion of the necessary ground infrastructure and receipt of the
necessary regulatory and other approvals.
REVENUES
Domestically, ORBCOMM generates revenues from the direct sale of satellite
capacity to VARs, which sales to date have been primarily for resale to beta
test customers. The pricing of satellite capacity is based on many variables,
including the availability and cost of substitute services, the cost of
providing service and the nature of the customer application. Pricing generally
is based on a wholesale pricing structure that incorporates an initial
activation charge, a recurring monthly charge for access to the ORBCOMM system
and charges based on the customer's usage.
ORBCOMM expects that beginning in 1998 it will also generate revenues from
the sale of data and messaging communications services and applications
developed and distributed by Internal VARs. The pricing of services provided by
the Internal VARs will be based on a pricing structure similar to the VAR
pricing structure except that the Internal VAR pricing structure will generate
additional revenues from value-added software, hardware and services provided to
the customer.
ORBCOMM has on occasion purchased and recently entered into an agreement,
and may enter into additional agreements in the future, to purchase subscriber
units for resale. In the past, ORBCOMM has not generated substantial revenues
from the sale of subscriber units.
Internationally, ORBCOMM generates revenues through license fees paid by,
and through the sale of Gateways to, International Licensees. In addition, all
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.
International Licensees' gross operating revenues are based on a wholesale
pricing structure similar to the prices charged to VARs, which includes an
activation charge, a recurring monthly access charge and a usage charge. On
execution of a service license or similar agreement, an International Licensee
purchases a Gateway or Gateway components from ORBCOMM pursuant to a Gateway
procurement contract or arranges to share a Gateway with an International
Licensee that is in close proximity. Cash received under the Gateway procurement
contracts is generally accounted for as deferred revenues and recognized when
the Gateway has successfully completed acceptance testing. License fees from
service license or similar agreements are generally accounted for as deferred
revenues and recognized over the term of the agreements or when ORBCOMM's
obligations under the agreements are substantially complete.
OPERATING EXPENSES
ORBCOMM owns and operates the assets that comprise the ORBCOMM system other
than the FCC License (which is held by OCC, with certain contractual rights
relating thereto granted to ORBCOMM). Satellite-based communications systems are
characterized by high initial capital expenditures and relatively low marginal
costs for providing service. ORBCOMM has been depreciating certain of its assets
beginning in 1996, when commercial operation of the ORBCOMM system began. Cost
of products sold consists of the sale of subscriber units. ORBCOMM has agreed to
pay to Magellan a subsidy for each Magellan subscriber unit sold through March
1999, up to an aggregate of $2.4 million. Additionally, ORBCOMM incurs
engineering expenses related to the development and operation of the ORBCOMM
system and marketing, administrative
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and other expenses related to the operation of the ORBCOMM system. ORBCOMM has
also incurred nominal expenses related to the development of Internal VARs which
are included in marketing expenses. ORBCOMM anticipates that its expenses
related to the continued development and operation of the Internal VARs
(including the development of applications for customers) will increase
substantially as ORBCOMM expands the marketing and distribution efforts of the
Internal VARs.
RESULTS OF OPERATIONS -- ORBCOMM
ORBCOMM commenced limited commercial service in the United States in
February 1996 and has generated nominal revenues and substantial negative cash
flows to date. ORBCOMM's activities have focused primarily on the acquisition of
U.S. regulatory approvals for the operation of the ORBCOMM system, the design,
construction and launch of satellites, the design and construction of associated
ground network and operating systems (including associated software), the
development of subscriber unit manufacturing sources, the negotiation of
agreements with International Licensees, the hiring of key personnel, the
negotiation of agreements with VARs, the development of Internal VARs, the
development of customer software and hardware applications and preliminary
marketing and sales activities associated with ORBCOMM's limited commercial
operations to date.
Income. In 1995, ORBCOMM received a nonrefundable distribution fee from a
potential International Licensee. ORBCOMM recognized this nonrefundable
distribution fee over the term of the relevant agreement. No such fees were
received in earlier periods or during the years ended December 31, 1997 and
1996.
In late 1994, ORBCOMM received the MetLife Note to help finance a portion
of the ORBCOMM system. In addition, in August 1996, ORBCOMM closed the Notes
Offering. The proceeds from the sale of the Old Notes are invested primarily in
short-term government securities, with certain restrictions attached to all of
the investment portfolio. In January 1997, the Old Notes were exchanged for the
Notes. ORBCOMM recognized interest income (excluding interest expenses of
$833,000, $307,000 and $0) on the invested portion of the MetLife Note and the
proceeds of the Notes Offering of $5.4 million, $3.8 million and $59,000,
respectively, for the years ended December 31, 1997, 1996 and 1995.
Expenses. As discussed above, ORBCOMM is in its development stage and does
not anticipate emerging from the development stage until the fall of 1998.
During the construction phase of the ORBCOMM system, ORBCOMM 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.
ORBCOMM incurred $12.0 million, $6.9 million and $50,000 of marketing,
administrative and other expenses for the years ended December 31, 1997, 1996
and 1995, respectively. ORBCOMM incurred $8.2 million and $5.5 million of
ORBCOMM system engineering expenses for the years ended December 31, 1997 and
1996 (none for the year ended December 31, 1995). ORBCOMM 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. ORBCOMM also incurred $7.3 million and $6.2
million in ORBCOMM system depreciation expense for the years ended December 31,
1997 and 1996, as the ORBCOMM system became available for commercial service in
early 1996 (none for the year ended December 31, 1995).
Equity in Earnings (Losses) of Affiliates. ORBCOMM recognized its share of
ORBCOMM USA's and ORBCOMM International's losses, consisting primarily of
marketing expenses. As of December 31, 1997, 1996 and 1995, ORBCOMM recognized
$8.4 million, $4.6 million and $854,000 of such losses, respectively. ORBCOMM
USA and ORBCOMM International each formally began their marketing efforts in
1995 in anticipation of commercial service in 1996.
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RESULTS OF OPERATION -- ORBCOMM USA
Income. In 1995 and 1994, 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 $1.4 million and $2.1
million for the years ended December 31, 1995 and 1994, respectively. The U.S.
marketing service portion of the System Charge Agreement expired in 1995.
ORBCOMM USA also recognized revenues relating to the provision of products and
services of $172,000 and $240,000 for the years ended December 31, 1997 and
1996, respectively. The cost of product sales associated with revenues was
$383,000 and $262,000, respectively.
Expenses. ORBCOMM USA incurred $5.2 million and $2.9 million of marketing
expenses for the years ended December 31, 1997 and 1996, respectively. Pursuant
to the System Charge Agreement, ORBCOMM USA incurred contract marketing expenses
of $1.4 million and $2.1 million for the years ended December 31, 1995 and 1994,
respectively.
RESULTS OF OPERATION -- ORBCOMM INTERNATIONAL
Expenses. ORBCOMM International incurred $3.1 million and $1.7 million of
marketing expenses for the years ended December 31, 1997 and 1996, respectively
(none for the year ended December 31, 1995).
Service License or Similar Agreements. ORBCOMM International has signed 13
service license or similar agreements with International Licensees, ten of which
have associated gateway procurement contracts and software license agreements.
These agreements authorize the International Licensees to use the ORBCOMM System
to provide two-way data and messaging communications services. As of December
31, 1997 and 1996, $13.3 million and $6.1 million, respectively, had been
received under these agreements and the associated Gateway procurement
agreements and recorded as deferred revenue. ORBCOMM International is obligated
to ship ten Gateways under certain of these agreements.
SUPPLEMENTAL DATA
Set forth below is certain supplemental data for the ORBCOMM system
comprising data of ORBCOMM, ORBCOMM USA and ORBCOMM International for the year
ended December 31, 1997. Such supplemental data should be read in conjunction
with the financial statements of ORBCOMM, ORBCOMM USA and ORBCOMM International,
and the notes thereto are located elsewhere in this report.
SUPPLEMENTAL DATA
YEAR ENDED DECEMBER 31, 1997
ORBCOMM ORBCOMM ELIMINATION
ORBCOMM USA INTERNATIONAL ENTRIES TOTAL
-------- ------- ------------- ----------- --------
Total revenue(1)............... $ 527 $ 172 $ 56 $(487) $ 268
Interest income (expense),
net.......................... 4,545 (2) 0 0 4,545
Expenses....................... 28,095 (3) 5,556 3,256 487 36,420
Earnings (loss) before interest
and taxes.................... (27,568)(4) (5,384) (3,200) (36,152)
Net income (loss).............. (23,023)(4) (5,384) (3,200) (31,607)
Capital expenditures........... 100,693 (5) 0 0 100,693
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SUPPLEMENTAL DATA
AS OF DECEMBER 31, 1997
ORBCOMM ORBCOMM
ORBCOMM USA INTERNATIONAL TOTAL
-------- ------- ------------- --------
Cash and cash equivalents....................... $16,106 $ 0 $ 0 $ 16,106
ORBCOMM system, net............................. 263,379 0 0 263,379
Total debt...................................... 172,277 0 0 172,277
Subscriber units(6)............................. 0 537 343 880
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(1) As development-stage companies, none of ORBCOMM, ORBCOMM USA, and ORBCOMM
International has had any significant operating revenues for the year ended
December 31, 1997.
(2) Net of $833,000 of amortization of deferred financing fees.
(3) Includes depreciation expenses of $7.3 million. Interest expense of $24.1
million was capitalized in 1997.
(4) Excludes equity in losses of affiliates of $8.4 million.
(5) Represents capital expenditures, principally for the construction of the
space and ground network system elements.
(6) Represents units that either generate revenues or are used in beta testing.
These units do not include units that are used for demonstration purposes.
LIQUIDITY AND CAPITAL RESOURCES
ORBCOMM is a development stage enterprise and has incurred cumulative net
losses from inception. ORBCOMM has financed its operations to date primarily
with capital contributions from its current partners and through financing
activities. For the year ended December 31, 1997, net cash provided by operating
activities was $4.1 million primarily as a result of a net loss, excluding
non-cash charges for depreciation, amortization and equity in losses of
affiliates, of $14.8 million, offset by an increase in accounts payable to
Orbital and other accrued liabilities of $19.9 million. As of December 31, 1997,
cash and investments had been reduced by $114.6 million, which decrease was
attributable to capital expenditures, operating expenses, interest payments and
an increase in accounts payable to Orbital under the Procurement Agreement as a
result of the achievement of milestones under the Procurement Agreement,
including the launch of eight satellites in December 1997. As of December 31,
1997, ORBCOMM International had also received $3.7 million under service license
or similar agreements and $9.6 million under Gateway procurement agreements that
are recorded as deferred revenue.
Cash flows used in investing activities for the year ended December 31,
1997 were $43.6 million primarily as a result of additional capital
expenditures, advances to affiliates and purchases and sales of securities. In
1997, ORBCOMM invested $100.7 million, including $24.1 million of capitalized
interest, for design, development and construction of satellites, launch
services, and design and construction of the U.S. Ground Segment. In addition,
ORBCOMM advanced an additional $16.4 million to ORBCOMM USA and ORBCOMM
International to support their marketing activities. This use of cash was
partially offset by $73.8 million of net proceeds of the sale of securities. For
the years ended December 31, 1996 and 1995, $167.4 million and $39.0 million
respectively, were used in investing activities, primarily for capital
expenditures and purchases and sales of securities. In 1996 and 1995, ORBCOMM
invested $69.2 million and $39.3 million, respectively, in capital expenditures.
In 1996 and 1995, investing activities also included $96.5 million and $0,
respectively, of cash used to purchase securities (net of proceeds).
Cash flows used in financing activities for the fiscal year ended December
31, 1997 were $1.2 million, $992,000 of which was used to repay a portion of the
principal of the MetLife Note. Cash flows related to financing activities for
the fiscal years ended December 31, 1996 and 1995, resulted in increases of
$225.3 million and $35.2 million, respectively. These increases reflect
additional partners' contributions of $62.7 million and $38.1 million in 1996
and 1995, respectively, and net proceeds of approximately $164.5 million from
the Notes Offering in 1996.
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Expected future uses of cash include continued hiring of employees, capital
expenditures related to the completion of the ORBCOMM constellation, debt
servicing and working capital requirements. In addition, ORBCOMM intends to
continue to increase marketing and product development expenditures in
anticipation of expanded commercial operations. The total cost of the
36-satellite enhanced constellation is expected to be approximately $332.0
million. Of this amount, $244.0 million is for the design, development and
construction of the satellite constellation and launch services, $39.0 million
is for the design and construction of the U.S. Ground Segment, $17.0 million is
for insurance and approximately $32.0 million is for other system costs such as
engineering and billing system costs. Through December 31, 1997, $242.4 million
had been spent for the ORBCOMM system, excluding a total of $34.5 million of
interest expenses that have been capitalized. The foregoing information reflects
ORBCOMM's current estimate of its funding requirements for the ORBCOMM system.
Actual amounts may vary from such estimates for a variety of reasons, including
delays or launch or satellite failures.
ORBCOMM expects to continue to generate negative cash flows through all of
1998 and at least a portion of 1999. ORBCOMM expects that a portion of its cash
requirements will be met through cash expected to be generated from operations.
ORBCOMM's ability to generate significant revenues is subject to numerous
uncertainties. In 1998, ORBCOMM expects to receive additional cash payments
related to certain milestones under agreements with International Licensees.
ORBCOMM's service and equipment contracts are U.S. dollar-based and do not
generate foreign currency risk. ORBCOMM partners' capital contributions,
together with the net proceeds of the Notes Offering and the MetLife Note and
cash expected to be generated from operations are expected to enable ORBCOMM to
meet its financial obligations through mid-1998. During the first half of 1998,
OCC and Teleglobe Mobile are expected to provide ORBCOMM with up to an
additional $30.0 million in capital contributions or debt financing expressly
subordinated to the Notes. Additionally, Orbital has and indicated that it will
continue to defer invoicing of certain amounts otherwise due under the
Procurement Agreement until other sources of financing are secured by ORBCOMM.
ORBCOMM expects to require additional capital in 1998 and may seek to raise
such additional capital through additional contributions or loans from its
current partners, other equity or debt financings or operating lease
arrangements or ORBCOMM may seek to enter into strategic arrangements. There can
be no assurance, however, that debt or equity financing or operating lease
arrangements will be available and, if so, that it will be available on terms
acceptable to ORBCOMM or that strategic arrangements will be possible and, if
so, that they will be possible on terms acceptable to ORBCOMM.
ORBCOMM has made a preliminary assessment of potential "Year 2000" issues
with respect to various computer-related systems. ORBCOMM has developed an
initial corrective action plan that includes reprogramming impacted software
when appropriate and feasible, obtaining vendor-provided software upgrades when
available and completely replacing impacted systems when necessary. ORBCOMM
currently expects that identified "Year 2000" impacted systems will be corrected
by the end of 1998, although there can be no assurance that the company has
identified all "Year 2000" impacted systems or that its corrective action plan
will be timely and successful. ORBCOMM believes that the costs to correct its
systems will not materially affect its results of operations or its financial
condition. In addition, ORBCOMM has not received any indication to date that the
impact of "Year 2000" issues on its customers and suppliers will have a material
adverse effect on ORBCOMM.
ORBCOMM is a development stage enterprise. Many statements in this Report
are not historical and are forward looking in nature. Examples of such forward
looking statements include statements concerning ORBCOMM's operations,
prospects, markets, technical capabilities, funding needs, financing sources,
pricing, launch and commercial service schedules and cash flows, as well as
information concerning future regulatory approvals, expected characteristics of
competing systems and expected actions of third parties such as equipment
suppliers, International Licensees and VARs. These forward looking statements
are inherently predictive and speculative and no assurance can be given that any
of such statements will prove to be correct. Actual results and developments may
be materially different from those expressed or implied by such statements.
31
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
ORBCOMM GLOBAL, L.P.
Independent Auditors' Report.............................. 33
Balance Sheets as of December 31, 1997 and 1996........... 34
Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995 and Total Accumulated During
Development Stage through December 31, 1997............ 35
Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995 and Total Cash Flows During
Development Stage through December 31, 1997............ 36
Statements of Partners' Capital for the period June 30,
1993 (date of inception) to December 31, 1997.......... 37
Notes to Financial Statements............................. 38
ORBCOMM USA, L.P.
Independent Auditors' Report.............................. 45
Balance Sheets as of December 31, 1997 and 1996........... 46
Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995 and Total Accumulated During
Development Stage through December 31, 1997............ 47
Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995 and Total Cash Flows During
Development Stage through December 31, 1997............ 48
Statements of Partners' Capital for the period June 30,
1993 (date of inception) to December 31, 1997.......... 49
Notes to Financial Statements............................. 50
ORBCOMM INTERNATIONAL PARTNERS, L.P.
Independent Auditors' Report.............................. 53
Balance Sheets as of December 31, 1997 and 1996........... 54
Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995 and Total Accumulated During
Development Stage through December 31, 1997............ 55
Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995 and Total Cash Flows During
Development Stage through December 31, 1997............ 56
Statements of Partners' Capital for the period June 30,
1993 (date of inception) to December 31, 1997.......... 57
Notes to Financial Statements............................. 58
ORBITAL COMMUNICATIONS CORPORATION
Independent Auditors' Report.............................. 61
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... 62
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996, and 1995...................... 63
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995....................... 64
Consolidated Statement of Stockholders' Deficit for the
Years Ended December 31, 1994, 1995, 1996, and 1997.... 65
Notes to Consolidated Financial Statements................ 66
TELEGLOBE MOBILE PARTNERS
Independent Auditors' Report.............................. 72
Independent Auditors' Report.............................. 73
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... 74
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996, and 1995 and Total Accumulated
During Development Stage through December 31, 1997..... 75
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995 and Total Cash Flows
During Development Stage through December 31, 1997..... 76
Consolidated Statements of Partners' Capital for the
period July 21, 1993 (date of inception) to December
31, 1997............................................... 77
Notes to Consolidated Financial Statements................ 78
32
35
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, 1997 and 1996,
and the related statements of operations, partners' capital, and cash flows for
each of the years in the three-year period ended December 31, 1997, and for the
period from June 30, 1993 (date of inception) through December 31, 1997. 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, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1997, and for the period from June 30, 1993 (date of inception) through
December 31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
February 5, 1998
33
36
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------
1997 1996
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 16,106 $ 56,870
Investments............................................... 22,756 54,769
Other receivables......................................... 1,931 753
Inventory................................................. 2,160 1,751
-------- --------
Total Current Assets................................... 42,953 114,143
Investments................................................. 0 41,843
Other receivables........................................... 0 517
ORBCOMM System, net......................................... 263,379 170,034
Other assets, net........................................... 5,527 6,138
Investments in and advances to affiliates................... 4,777 (3,166)
Investment in ORBCOMM Japan................................. 333 0
-------- --------
TOTAL ASSETS...................................... $316,969 $329,509
======== ========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Current portion of long-term debt......................... $ 1,087 $ 991
Accounts payable -- Orbital Sciences Corporation.......... 21,100 4,648
Other accounts payable and accrued liabilities............ 17,174 13,650
-------- --------
Total Current Liabilities.............................. 39,361 19,289
Long-term debt............................................ 171,190 172,278
-------- --------
Total Liabilities...................................... 210,551 191,567
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile Partners................................. 57,834 73,596
Orbital Communications Corporation........................ 48,584 64,346
-------- --------
Total Partners' Capital................................ 106,418 137,942
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $316,969 $329,509
======== ========
See accompanying notes to the financial statements
34
37
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
--------------------------- DECEMBER 31,
1997 1996 1995 1997
-------- -------- ----- ------------
REVENUES:
Product sales...................................... $ 517 $ 268 $ 0 $ 785
Distribution fees.................................. 0 100 900 1,000
Other.............................................. 10 52 0 62
-------- -------- ----- --------
Total revenues.................................. 527 420 900 1,847
EXPENSES:
Costs of product sales............................. 517 268 0 785
Depreciation....................................... 7,348 6,198 0 13,546
Engineering expenses............................... 8,160 5,453 0 13,613
Marketing, administrative and other expenses....... 12,070 6,933 50 19,062
-------- -------- ----- --------
Total expenses.................................. 28,095 18,852 50 47,006
-------- -------- ----- --------
Income (loss) from operations................... (27,568) (18,432) 850 (45,159)
OTHER INCOME AND EXPENSES:
Interest income, net of interest expenses of $833,
$307 and $0, respectively....................... 4,545 3,554 59 8,158
Equity in losses of affiliates..................... (8,413) (4,602) (854) (13,869)
-------- -------- ----- --------
NET INCOME (LOSS).................................... $(31,436) $(19,480) $ 55 $(50,870)
======== ======== ===== ========
See accompanying notes to the financial statements
35
38
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TOTAL
CASH FLOWS
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
1997 1996 1995 1997
--------- --------- -------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ (31,436) $ (19,480) $ 55 $ (50,870)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation.................................. 7,348 6,198 0 13,546
Amortization of financing fees................ 833 307 0 1,140
Equity in losses of affiliates................ 8,413 4,602 854 13,869
Increase in other receivables................. (661) (1,270) 0 (1,931)
Increase in inventory......................... (409) (1,304) (447) (2,160)
Increase in accounts payable -- Orbital
Sciences Corporation....................... 16,452 573 1,788 21,100
Increase (decrease) in other accounts payable
and accrued liabilities.................... 3,524 7,471 (1,670) 17,174
--------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES................ 4,064 (2,903) 580 11,868
--------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (100,693) (69,242) (38,343) (276,925)
Increase in amount due from affiliates........ (16,356) (1,608) (661) (18,625)
Investment in ORBCOMM Japan................... (333) 0 0 (333)
Purchase of investments....................... (47,125) (136,532) 0 (183,657)
Proceeds from sale of investments............. 120,893 40,007 0 160,900
--------- --------- -------- ---------
NET CASH USED IN INVESTING
ACTIVITIES.......................... (43,614) (167,375) (39,004) (318,640)
--------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term
debt....................................... 0 164,475 0 169,475
Repayment of long-term debt................... (992) (905) (825) (2,722)
Partners' contributions....................... 0 62,733 38,065 159,800
Financing fees paid........................... (222) (940) (2,031) (3,675)
--------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES................ (1,214) 225,363 35,209 322,878
--------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (40,764) 55,085 (3,215) 16,106
CASH AND CASH EQUIVALENTS:
Beginning of period........................... 56,870 1,785 5,000 0
--------- --------- -------- ---------
CASH AND CASH EQUIVALENTS:
End of period................................. $ 16,106 $ 56,870 $ 1,785 $ 16,106
========= ========= ======== =========
See accompanying notes to the financial statements
36
39
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
TELEGLOBE ORBITAL
MOBILE COMMUNICATIONS
PARTNERS CORPORATION TOTAL
--------- -------------- --------
Capital contributions................................... $ 10,000 $ 38,149 $ 48,149
Net income (loss)....................................... 0 0 0
Financing fees.......................................... (242) (242) (484)
-------- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1993...................... 9,758 37,907 47,665
Capital contributions................................... 0 10,853 10,853
Net loss................................................ (4) (5) (9)
-------- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1994...................... 9,754 48,755 58,509
Capital contributions................................... 24,750 13,315 38,065
Net income.............................................. 27 28 55
Financing fees.......................................... (1,014) (1,014) (2,028)
-------- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1995...................... 33,517 61,084 94,601
Capital contributions................................... 49,775 12,958 62,733
Net loss................................................ (9,740) (9,740) (19,480)
Unrealized gains on investments, net.................... 44 44 88
-------- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1996...................... 73,596 64,346 137,942
Net loss................................................ (15,718) (15,718) (31,436)
Unrealized losses on investments, net................... (44) (44) (88)
-------- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1997...................... $ 57,834 $ 48,584 $106,418
======== ======== ========
See accompanying notes to the financial statements
37
40
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
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 each holds
a 50% partnership interest in the Company, with the result that the approval of
both OCC and Teleglobe Mobile is generally necessary for the Company to act.
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, the Company became a 98% general partner
in ORBCOMM USA, reducing OCC's direct partnership interest to 2% and eliminating
Teleglobe Mobile's direct partnership interest entirely. Simultaneously, the
Company became a 98% general partner in ORBCOMM International, reducing
Teleglobe Mobile's direct partnership interest to 2% and eliminating OCC's
direct partnership interest entirely.
The ORBCOMM System Description
ORBCOMM was created for the design, development, construction, integration,
testing and operation of the ORBCOMM System. The space segment will consist of a
constellation of up to 36 satellites. At December 31, 1997, one plane of two
satellites and one plane of eight satellites were in orbit. The ground and
control segment consists of gateways strategically located throughout the world
and the facilities to monitor and manage all network elements to ensure
continuous, consistent operations in the provision of quality service. In
addition, ORBCOMM operates a network control center, which is designed to
support the full constellation of ORBCOMM System satellites. The subscriber
segment consists of various models of subscriber units, some of which are
intended for general use, and some are designed to support specific
applications.
The System Charge
OCC is obligated to pay to the Company a system charge that is equal to 23%
of ORBCOMM USA's total service revenues (the "Output Capacity Charge") less
1.15% of total aggregate revenues, defined as the aggregate of ORBCOMM USA's and
ORBCOMM International's total system service revenues ("Total Aggregate
Revenues") for a calendar quarter in consideration of the construction and
financing of the ORBCOMM System assets by the Company. Teleglobe Mobile is
obligated to pay to the Company a system charge that is equal to 23% of ORBCOMM
International's its total service revenues (the "International Output Capacity
Charge") less 1.15% of Total Aggregate Revenues for a calendar quarter 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. If the Output Capacity Charge as described above is less than 1.15% of
Total Aggregate Revenues, then OCC is not required to pay any portion of the
system charge to ORBCOMM. If the International Output Capacity Charge as
described above is less than 1.15% of Total Aggregate Revenues, then Teleglobe
Mobile is not required to pay any portion of the system charge to ORBCOMM.
38
41
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) NATURE OF OPERATIONS -- (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
entities who become international licensees.
(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 data and messaging communications business. The
Company's planned principal operations are expected to commence in the fall of
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 and
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
The Company depreciates its operational assets over the estimated economic
useful life using the straight-line method as follows:
Space Segment Assets: estimated life of the constellation
Ground Segment Assets: 10 years
Furniture and Equipment: 3 to 10 years
The ORBCOMM System, which includes the worldwide network control center
(including the satellite management system), the U.S. Gateway and two
satellites, was placed into service at the beginning of 1996, at which time
ORBCOMM began depreciating those assets.
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 assets. 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 of
accounting.
39
42
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
within 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 or traded to
capitalize on market gains are classified as "available-for-sale" and are
carried at fair value with temporary unrealized gains (losses) charged directly
to partners' capital. 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 quoted market rates. At December 31, 1997 and 1996, the fair value for
the long-term debt approximated market value.
ORBCOMM System Under Construction
During the construction of the ORBCOMM System, the Company is capitalizing
substantially all construction costs. The Company also 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, 1997 and 1996, $4,641,000 and $1,244,000,
respectively, of such costs have been capitalized, (none as of December 31,
1995). Interest expenses of $24,060,000, $10,030,000 and $426,000 have been
capitalized as a part of the historical cost of the ORBCOMM System for the years
ended December 31, 1997, 1996 and 1995, respectively.
40
43
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 sheets and statements of partners' capital.
Revenue Recognition
Revenues are generally recognized when products are shipped or when
customers have accepted the products, depending on contractual terms. Service
revenues are generally recognized as such services are rendered. Distribution
fees and license fees from service license or similar agreements are recognized
ratably over the term of the agreements, or when ORBCOMM's obligations under the
agreements are substantially completed.
Reclassification of Prior Years Balances
Certain amounts in the prior years financial statements have been
reclassified to conform with the current year presentation.
(3) INVESTMENTS
Included in cash and cash equivalents is $5,420,000 and $54,527,000 of
commercial paper as of December 31, 1997 and 1996, respectively. The fair value
of the commercial paper approximates carrying value.
The following table sets forth the aggregate costs and fair values and
gross unrealized gains (losses) of available-for-sale investments as of December
31, 1997 and 1996:
DECEMBER 31, 1997 DECEMBER 31, 1996
(IN THOUSANDS) (IN THOUSANDS)
-------------------------------- ---------------------------------
UNREALIZED UNREALIZED
GAINS GAINS
COST (LOSSES) FAIR VALUE COST (LOSSES) FAIR VALUE
------ ---------- ---------- ------- ---------- ----------
SHORT-TERM
U.S. Treasury Notes.......................... $ 0 $0 $ 0 $21,152 $54 $21,206
Commercial Paper............................. 1,278 0 1,278 10,229 (2) 10,227
------ -- ------ ------- --- -------
Total short-term investments............... 1,278 0 1,278 31,381 52 31,433
------ -- ------ ------- --- -------
LONG-TERM
U.S. Treasury Notes, maturing 2-5 years...... 0 0 0 20,329 36 20,365
------ -- ------ ------- --- -------
Total available-for-sale investments....... $1,278 $0 $1,278 $51,710 $88 $51,798
====== == ====== ======= === =======
41
44
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS -- (CONTINUED)
The following table sets forth the aggregate cost and fair values of
held-to-maturity investments as of December 31, 1997 and 1996:
DECEMBER 31, 1997 DECEMBER 31, 1996
(IN THOUSANDS) (IN THOUSANDS)
--------------------------------- ---------------------------------
UNREALIZED UNREALIZED
COST GAINS FAIR VALUE COST GAINS FAIR VALUE
------- ---------- ---------- ------- ---------- ----------
SHORT-TERM
U.S. Treasury Notes......................... $21,478 $1,841 $23,319 $23,336 $ 525 $23,861
LONG-TERM
U.S. Treasury Notes, maturing 2-5 years..... 0 0 0 21,478 542 22,020
------- ------ ------- ------- ------ -------
Total held-to-maturity investments........ $21,478 $1,841 $23,319 $44,814 $1,067 $45,881
======= ====== ======= ======= ====== =======
Unrealized gains on held-to-maturity investments represent accrued interest
income as of December 31, 1997 and 1996, respectively.
(4) RELATED PARTY TRANSACTIONS
ORBCOMM paid Orbital $41,843,000, $56,177,000 and approximately $38,000,000
for the periods ended December 31, 1997, 1996 and 1995, respectively. Payments
were made for work performed pursuant to the ORBCOMM System Design, Development,
and Operations Agreement, the ORBCOMM System Procurement Agreement and the
Administrative Services Agreement (for provision of ongoing support to ORBCOMM).
In 1995, pursuant to the terms of the ORBCOMM System Design, Development
and Operations Agreement, the Company reimbursed OCC $1,375,000 for costs
previously incurred in obtaining the FCC License and other related costs. The
Company capitalized such costs as part of the ORBCOMM System.
Certain provisions of the Partnership Agreement require ORBCOMM 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 1997
and 1996, ORBCOMM reimbursed OCC approximately $598,000 and $1,100,000,
respectively, under the Stock Option Plan (none in 1995). In 1996, Orbital
contributed approximately $100,000 to OCC to repurchase such shares (none in
1997 and 1995).
(5) ORBCOMM SYSTEM
The ORBCOMM System comprises the following assets:
DECEMBER 31,
(IN THOUSANDS)
--------------------
1997 1996
-------- --------
Space segment........................................ $234,110 $142,678
Ground segment....................................... 42,815 33,554
-------- --------
Total................................................ 276,925 176,232
Less accumulated depreciation........................ (13,546) (6,198)
-------- --------
Total, net of depreciation........................... $263,379 $170,034
======== ========
42
45
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES
Long-Term Debt
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 of Senior Notes due 2004 with Revenue Participation Interest (the
"Old Notes"). All the Old Notes were exchanged for an equal principal amount of
registered 14% Series B Senior Notes due 2004 with Revenue Participation
Interest (the "Notes"). 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.
On the closing of the offering of the Old Notes, the Company used
$44,800,000 of the net proceeds from the sale of the Old Notes 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. Of this investment
portfolio, $23,300,000 was used to pay interest that was due on the Notes on
February 15, and August 15, 1997.
The Company also has a $5,000,000 secured note with a financial institution
of which $2,277,000 is outstanding. The note bears interest at 9.2% per annum
and is due in monthly principal and interest installments of $104,000 through
December 1999. The note is secured by equipment located at certain of the U.S.
gateway Earth stations and the network control center, and is guaranteed by
Orbital. A portion of the net proceeds from the offering of the Old Notes,
sufficient to pay when due all remaining interest and principal payments on this
note, was deposited into a segregated account.
System Procurement Agreement
Pursuant to the System Procurement Agreement with Orbital, the Company's
remaining obligation to purchase satellites, launch services and the ground
system is approximately $49,600,000 over the next two years.
Lease Commitments
In November 1997, ORBCOMM entered into a five-year operating lease
agreement for approximately 46,000 square feet of additional office space.
ORBCOMM has an option to renew the lease for another five-year period
immediately upon the expiration of the original operating lease. Rental expense
for 1997, 1996 and 1995 amounted to $825,000, $393,000, and $48,000,
respectively, which was paid to Orbital as part of the Administrative Services
Agreement. Rental expense to third parties amounted to $126,000 in 1997. The
future minimum rental payments under non-cancelable operating leases are as
follows:
PERIODS IN THOUSANDS
------- ------------
1998........................................................ $ 978
1999........................................................ 1,007
2000........................................................ 1,038
2001........................................................ 1,062
2002........................................................ 1,094
Thereafter.................................................. 0
------
Total minimum lease commitments........................... $5,179
======
43
46
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) SUBSEQUENT EVENTS (UNAUDITED)
In February 1998, two additional satellites for the ORBCOMM constellation
were successfully launched and have been placed in a high inclination orbit
using Orbital's Taurus(R) launch vehicle.
As of March 31, 1998, OCC and Teleglobe Mobile each paid to the Company an
additional $10,000,000 in capital contributions (or debt financing expressly
subordinated to the Notes) as required under the Indenture governing the Notes.
44
47
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, 1997 and
1996, and the related statements of operations, partners' capital, and cash
flows for each of the years in the three-year period ended December 31, 1997,
and for the period from June 30, 1993 (date of inception) through December 31,
1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, and for the period from June 30, 1993 (date of
inception) through December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
February 5, 1998
45
48
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-----------------
1997 1996
------- -------
ASSETS
CURRENT ASSETS:
Accounts receivable....................................... $ 65 $ 54
Prepaid contract costs.................................... 123 0
------- -------
TOTAL ASSETS...................................... $ 188 $ 54
======= =======
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable.......................................... $ 38 $ 120
Other accounts payable and accrued liabilities............ 765 222
------- -------
Total Current Liabilities.............................. 803 342
Amount due to ORBCOMM Global, L.P. ....................... 8,635 3,578
------- -------
Total Liabilities...................................... 9,438 3,920
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
ORBCOMM Global, L.P....................................... (9,065) (3,789)
Orbital Communications Corporation........................ (185) (77)
------- -------
Total Partners' Capital................................ (9,250) (3,866)
------- -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $ 188 $ 54
======= =======
See accompanying notes to the financial statements
46
49
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
1997 1996 1995 1997
------- ------- ------ ------------
REVENUES:
Product sales.................................... $ 127 $ 229 $ 0 $ 356
Contract revenues................................ 0 0 1,360 4,203
Service revenues................................. 45 11 0 56
------- ------- ------ -------
Total revenues................................ 172 240 1,360 4,615
EXPENSES:
Costs of product sales........................... 383 262 0 645
Marketing expenses............................... 5,173 2,984 2,230 13,230
------- ------- ------ -------
Total expenses................................ 5,556 3,246 2,230 13,875
------- ------- ------ -------
NET LOSS........................................... $(5,384) $(3,006) $ (870) $(9,260)
======= ======= ====== =======
See accompanying notes to the financial statements
47
50
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TOTAL
CASH FLOWS
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
------------------------- DECEMBER 31,
1997 1996 1995 1997
------- ------- ----- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(5,384) $(3,006) $(870) $ (9,260)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Increase in accounts receivable...................... (11) (54) 0 (65)
Increase in prepaid contract costs................... (123) 0 0 (123)
Increase (decrease) in accounts payable.............. (82) (57) 177 38
Increase in other accounts payable and accrued
liabilities....................................... 543 190 32 765
------- ------- ----- --------
NET CASH USED IN OPERATING ACTIVITIES........ (5,057) (2,927) (661) (8,645)
------- ------- ----- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in amount due to ORBCOMM Global, L.P........ 5,057 2,917 661 8,635
Partners' contributions.............................. 0 0 0 10
------- ------- ----- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.... 5,057 2,917 661 8,645
------- ------- ----- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS.......................................... 0 (10) 0 0
CASH AND CASH EQUIVALENTS:
Beginning of period.................................. 0 10 10 0
------- ------- ----- --------
CASH AND CASH EQUIVALENTS:
End of period........................................ $ 0 $ 0 $ 10 $ 0
======= ======= ===== ========
See accompanying notes to the financial statements
48
51
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
TELEGLOBE ORBITAL ORBCOMM
MOBILE COMMUNICATIONS GLOBAL,
PARTNERS CORPORATION L.P. TOTAL
--------- -------------- ------- -------
Capital contributions.......................... $2 $ 8 $ 0 $ 10
Net income (loss).............................. 0 0 0 0
-- ----- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1993............. 2 8 0 10
Net income (loss).............................. 0 0 0 0
-- ----- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1994............. 2 8 0 10
Capital transfer............................... (2) (8) 10 0
Net loss....................................... 0 (17) (853) (870)
-- ----- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1995............. 0 (17) (843) (860)
Net loss....................................... 0 (60) (2,946) (3,006)
-- ----- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1996............. 0 (77) (3,789) (3,866)
Net loss....................................... 0 (108) (5,276) (5,384)
-- ----- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1997............. $0 $(185) $(9,065) $(9,250)
== ===== ======= =======
See accompanying notes to the financial statements
49
52
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
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 each holds
a 50% partnership interest in the Company, with the result that the approval of
both OCC and Teleglobe Mobile is generally necessary for the Company to act.
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, the Company became a 98% general partner
in ORBCOMM USA, reducing OCC's direct partnership interest to 2% and eliminating
Teleglobe Mobile's partnership interest entirely. Simultaneously, the Company
became a 98% general partner in ORBCOMM International, reducing Teleglobe
Mobile's partnership interest to 2% and eliminating OCC's direct partnership
interest entirely.
The ORBCOMM System Description
ORBCOMM was created for the design, development, construction, integration,
testing and operation of the ORBCOMM System. The space segment will consist of a
constellation of up to 36 satellites. At December 31, 1997, one plane of two
satellites and one plane of eight satellites were in orbit. The ground and
control segment consists of gateways strategically located throughout the world
and the facilities to monitor and manage all network elements to ensure
continuous, consistent operations in the provision of quality service. In
addition, ORBCOMM operates a network control center, which is designed to
support the full constellation of ORBCOMM System satellites. The subscriber
segment consists of various models of subscriber units, some of which are
intended for general use, and some are designed to support specific
applications.
The System Charge and 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 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.
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
50
53
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) NATURE OF OPERATIONS -- (CONTINUED)
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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company and ORBCOMM USA are in the development stage, devoting
substantially all of their efforts to establishing a new data and messaging
communications business. The planned principal operations of the Company and
ORBCOMM USA are expected to commence in the fall of 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 and
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.
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
within 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. Pursuant to banking arrangements,
ORBCOMM USA has no cash or cash equivalents in accordance with the zero balance
agreement with ORBCOMM.
Revenue Recognition
ORBCOMM USA provides subscriber communicator hardware to commercial
customers. Revenues are recognized when products are shipped or when customers
have accepted the products or services, depending on contractual terms. Service
revenues are recognized as such services are rendered.
(3) RELATED PARTY TRANSACTIONS
Through September 1995, ORBCOMM USA provided U.S. Marketing Services to OCC
on a cost reimbursable basis. Payments by OCC to ORBCOMM USA for U.S. Marketing
Services were based on ORBCOMM USA's monthly costs incurred. For the period
ended December 31, 1995 and the period from June 30, 1993 (date of inception)
through December 31, 1994, ORBCOMM USA received $1,360,000 and $2,843,000,
respectively, from OCC as reimbursement of costs to provide U.S. Marketing
Services.
At December 31, 1997 and 1996, ORBCOMM USA had a payable of $8,635,000 and
$3,578,000, respectively, to ORBCOMM for amounts advanced to support ORBCOMM
USA's efforts to establish commercial and government markets. ORBCOMM USA is
currently in the development stage and obtains funds to support operations
through non-interest bearing advances from ORBCOMM.
51
54
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES
Long-Term Debt
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 of Senior Notes due 2004 with Revenue Participation Interest (the
"Old Notes"). All the Old Notes were exchanged for an equal principal amount of
registered 14% Series B Senior Notes due 2004 with Revenue Participation
Interest (the "Notes"). 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.
On the closing of the offering of the Old Notes, the Company used
$44,800,000 of the net proceeds from the sale of the Old Notes 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. Of this investment
portfolio, $23,300,000 was used to pay interest that was due on the Notes on
February 15, and August 15, 1997.
(5) SUBSEQUENT EVENT (UNAUDITED)
In February 1998, two additional satellites for the ORBCOMM constellation
were successfully launched and have been placed in a high inclination orbit
using Orbital's Taurus(R) launch vehicle.
52
55
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, 1997 and 1996, and the related statements of operations, partners'
capital, and cash flows for each of the years in the three-year period ended
December 31, 1997, and for the period from June 30, 1993 (date of inception)
through December 31, 1997. 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, 1997 and 1996, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1997, and for the period from June 30, 1993 (date of
inception) through December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
February 5, 1998
53
56
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------
1997 1996
-------- --------
ASSETS
CURRENT ASSETS:
Accounts receivable....................................... $ 0 $ 15
Inventory-gateway Earth stations.......................... 19,580 3,871
Amount due from ORBCOMM Global, L.P....................... 0 1,309
------- -------
TOTAL ASSETS...................................... $19,580 $ 5,195
======= =======
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued liabilities.................. $ 1,200 $ 728
Deferred revenue.......................................... 13,270 6,147
------- -------
Total Current Liabilities.............................. 14,470 6,875
Amount due to ORBCOMM Global, L.P......................... 9,990 0
------- -------
Total Liabilities...................................... 24,460 6,875
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile Partners................................. (98) (34)
ORBCOMM Global, L.P....................................... (4,782) (1,646)
------- -------
Total Partners' Capital................................ (4,880) (1,680)
------- -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $19,580 $ 5,195
======= =======
See accompanying notes to the financial statements
54
57
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
1997 1996 1995 1997
------- ------- ---- ------------
REVENUES:
Product sales................................ $ 56 $ 8 $0 $ 64
EXPENSES:
Costs of product sales....................... 104 6 0 110
Marketing expenses........................... 3,152 1,692 0 4,844
------- ------- -- -------
Total expenses............................ 3,256 1,698 0 4,954
------- ------- -- -------
NET LOSS....................................... $(3,200) $(1,690) $0 $(4,890)
======= ======= == =======
See accompanying notes to the financial statements
55
58
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TOTAL
CASH FLOWS
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
------------------------- DECEMBER 31,
1997 1996 1995 1997
-------- ------- ---- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (3,200) $(1,690) $ 0 $ (4,890)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
(Increase) decrease in accounts receivable.......... 15 (15) 0 0
Increase in inventory -- gateway Earth stations..... (15,709) (3,871) 0 (19,580)
Increase in accounts payable and accrued
liabilities...................................... 472 728 0 1,200
Increase in deferred revenue........................ 7,123 6,147 0 13,270
-------- ------- --- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................ (11,299) 1,299 0 (10,000)
-------- ------- --- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in amount due from ORBCOMM
Global, L.P...................................... 1,309 (1,309) 0 0
-------- ------- --- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................ 1,309 (1,309) 0 0
-------- ------- --- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in amount due to OBCOMMM Global, L.P....... 9,990 0 0 9,990
Partners' contributions............................. 0 0 0 10
-------- ------- --- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES... 9,990 0 0 10,000
-------- ------- --- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS............. 0 (10) 0 0
CASH AND CASH EQUIVALENTS:
Beginning of period................................. 0 10 10 0
-------- ------- --- --------
CASH AND CASH EQUIVALENTS:
End of period....................................... $ 0 $ 0 $10 $ 0
======== ======= === ========
See accompanying notes to the financial statements
56
59
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
ORBITAL TELEGLOBE ORBCOMM
COMMUNICATIONS MOBILE GLOBAL,
CORPORATION PARTNERS L.P. TOTAL
-------------- --------- ------- -------
Capital contributions.......................... $ 8 $ 2 $ 0 $ 10
Net income (loss).............................. 0 0 0 0
--- ---- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1993............. 8 2 0 10
Net income (loss).............................. 0 0 0 0
--- ---- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1994............. 8 2 0 10
Net income (loss).............................. 0 0 0 0
Capital transfer............................... (8) (2) 10 0
--- ---- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1995............. 0 0 10 10
Net loss....................................... 0 (34) (1,656) (1,690)
--- ---- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1996............. 0 (34) (1,646) (1,680)
Net loss....................................... 0 (64) (3,136) (3,200)
--- ---- ------- -------
PARTNERS' CAPITAL, DECEMBER 31, 1997............. $ 0 $(98) $(4,782) $(4,880)
=== ==== ======= =======
See accompanying notes to the financial statements
57
60
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
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 each holds
a 50% partnership interest in the Company, with the result that the approval of
both OCC and Teleglobe Mobile is generally necessary for the Company to act.
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, the Company became a 98% general partner
in ORBCOMM USA, reducing OCC's direct partnership interest to 2% and eliminating
Teleglobe Mobile's partnership interest entirely. Simultaneously, the Company
became a 98% general partner in ORBCOMM International, reducing Teleglobe
Mobile's partnership interest to 2% and eliminating OCC's direct partnership
interest entirely.
The ORBCOMM System Description
ORBCOMM was created for the design, development, construction, integration,
testing and operation of the ORBCOMM System. The space segment will consist of a
constellation of up to 36 satellites. At December 31, 1997, one plane of two
satellites and one plane of eight satellites were in orbit. The ground and
control segment consists of gateways strategically located throughout the world
and the facilities to monitor and manage all network elements to ensure
continuous, consistent operations in the provision of quality service. In
addition, ORBCOMM operates a network control center, which is designed to
support the full constellation of ORBCOMM System satellites. The subscriber
segment consists of various models of subscriber units, some of which are
intended for general use, and some are designed to support specific
applications.
The System Charge
Pursuant to the terms of the international system charge agreement between
ORBCOMM, Teleglobe Mobile and ORBCOMM International, ORBCOMM International has
agreed to pay 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 and for the
exclusive use of the system assets 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.
58
61
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company and ORBCOMM International are in the development stage,
devoting substantially all of their efforts to establishing a new data and
messaging communications business. The planned principal operations of the
Company and ORBCOMM International are expected to commence in the fall of 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 and
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.
Revenue Recognition
Revenues under the gateway procurement contracts with international
licensees or the sale of subscriber communicator hardware are generally
recognized when contracts are completed, products are shipped or when customers
have accepted the products or services, depending on contractual terms.
Distribution fees and license fees from service license or similar agreements
are recognized ratably over the term of the agreements, or when ORBCOMM
International's obligations under the agreements are substantially completed.
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
within 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. Pursuant to banking arrangements,
ORBCOMM International has no cash and cash equivalents in accordance with the
zero balance agreement with ORBCOMM.
Inventory
Inventory consists of work-in-process for the construction of gateway Earth
stations for sale to international licensees.
(3) RELATED PARTY TRANSACTIONS
At December 31, 1997, ORBCOMM International had a payable of $9,990,000 to
ORBCOMM for amounts advanced to support ORBCOMM International's efforts to
establish commercial markets. As of December 31, 1996, ORBCOMM International had
a receivable of $1,309,000 from ORBCOMM that represents a net cash outflow to
ORBCOMM. ORBCOMM International is currently in the development stage and obtains
funds to support operations through non-interest bearing advances from ORBCOMM.
At December 31, 1997 and 1996, ORBCOMM International had a payable of
$87,000 and $225,000, respectively, to Teleglobe Canada Inc., an affiliate of
Teleglobe Mobile, for a contracted employee to provide international marketing
services.
59
62
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES
Long-Term Debt
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 of Senior Notes due 2004 with Revenue Participation Interest (the
"Old Notes"). All the Old Notes were exchanged for an equal principal amount of
registered 14% Series B Senior Notes due 2004 with Revenue Participation
Interest (the "Notes"). The Notes are fully and unconditionally guaranteed on a
joint and several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM
Internationals 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.
On the closing of the offering of the Old Notes, the Company used
$44,800,000 of the net proceeds from the sale of the Old Notes 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. Of this investment
portfolio, $23,300,000 was used to pay interest that was due on the Notes on
February 15, and August 15, 1997.
Construction of Gateway Earth Stations
In October 1996, ORBCOMM International entered into agreements with certain
manufacturers for the construction of twenty gateway Earth stations scheduled
for delivery over the next two years, with the first installations occurring
during the first quarter of 1998. As of December 31, 1997 and 1996, ORBCOMM
International had $19,580,000 and $3,871,000, respectively, of prepaid contract
costs of which $11,016,000 and $3,547,000, respectively, represent advance
payments to those manufacturers. Total commitments under these manufacturing
agreements approximate $18,000,000. Included in inventory-gateway Earth stations
is a portion of the engineering direct labor costs that are specifically related
to the construction of gateway Earth stations. At December 31, 1997, $1,609,000
of such costs had been included in inventory-gateway Earth stations (none at
December 31, 1996).
(5) SERVICE LICENSE OR SIMILAR AGREEMENTS
ORBCOMM International has signed thirteen service license or similar
agreements with international licensees, ten of which have associated gateway
procurement contracts and software license agreements. The service license or
similar agreements authorize the international licensees to use the ORBCOMM
System to provide two-way data and messaging communications services. At
December 31, 1997 and 1996, $13,270,000 and $6,147,000, respectively, had been
received under these agreements and recorded as deferred revenue. ORBCOMM
International is obligated to ship ten gateways under certain of these
agreements (see note 4).
(6) SUBSEQUENT EVENTS (UNAUDITED)
In February 1998, two additional satellites for the ORBCOMM constellation
were successfully launched and have been placed in a high inclination orbit
using Orbital's Taurus(R) launch vehicle.
60
63
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, 1997 and 1996, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for each of the years in the three-year period ended December 31,
1997. 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, 1997 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, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Washington, D.C.
February 4, 1998
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ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
1997 1996
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 34 $ 142
Accounts receivable....................................... 65 29
Other current assets...................................... 123 --
-------- -------
Total current assets................................... 222 171
Investments in affiliates................................... 54,663 67,667
-------- -------
TOTAL ASSETS...................................... $ 54,885 $67,838
======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES:
Accounts payable.......................................... $ 41 $ 117
Accrued expenses.......................................... 765 388
Promissory Notes.......................................... 331 166
-------- -------
Total current liabilities.............................. 1,137 671
Due to affiliates......................................... 84,160 78,728
-------- -------
Total Liabilities...................................... 85,297 79,399
Non-Controlling Interest in Net Assets of Consolidated
Subsidiary................................................ (4,533) (1,894)
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, par value $0.01; 8,000,000 shares
authorized; 4,751,292 and 4,730,392 shares issued;
4,656,720 and 4,679,620 shares outstanding............. 48 47
Additional paid-in capital................................ 350 210
Treasury stock, at cost, 94,572 and 50,772 shares......... (730) (155)
Accumulated deficit....................................... (25,547) (9,769)
-------- -------
Total stockholders' deficit............................ (25,879) (9,667)
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT....... $ 54,885 $67,838
======== =======
See accompanying notes to the consolidated financial statements.
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ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED
DECEMBER 31,
----------------------------
1997 1996 1995
-------- ------- -------
REVENUES:
Contract revenues......................................... $ -- $ -- $15,652
Service and product revenues.............................. 172 240 --
-------- ------- -------
Total revenues......................................... 172 240 15,652
EXPENSES:
Costs of product sales.................................... 383 265 10,851
Marketing, administrative and other expenses.............. 5,202 2,959 5,671
-------- ------- -------
Total expenses......................................... 5,585 3,224 16,522
Loss from operations................................... (5,413) (2,984) (870)
OTHER INCOME AND EXPENSES:
Equity in earnings (losses) of affiliates................. (13,004) (8,268) 454
Non-controlling interest in net losses of consolidated
subsidiary............................................. 2,639 1,473 426
-------- ------- -------
Income (loss) before provision for income taxes........... (15,778) (9,779) 10
Provision for income taxes................................ -- -- --
-------- ------- -------
NET INCOME (LOSS)........................................... $(15,778) $(9,779) $ 10
======== ======= =======
See accompanying notes to the consolidated financial statements.
63
66
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(15,778) $ (9,779) $ 10
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Equity in earnings (losses )of affiliates................. 13,004 8,268 (454)
Non-controlling interest in net losses of consolidated
subsidiary............................................. (2,639) (1,473) (426)
Decrease (increase) in accounts receivable................ (36) 873 11,010
Decrease (increase) in other assets....................... (123) -- 1,375
Increase (decrease) in accounts payable................... (76) 113 (355)
Increase (decrease) in accrued expenses................... 377 (131) --
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES...................................... (5,271) (2,129) 11,160
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates................................. -- (12,958) (13,319)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES............. -- (12,958) (13,319)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock to employees........... 141 124 77
Purchases of treasury stock, net of reimbursement from
ORBCOMM Global, L.P. .................................. (575) (104) (51)
Repayments of promissory notes............................ (166) -- --
Net borrowings from affiliates............................ 5,763 15,209 2,133
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 5,163 15,229 2,159
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (108) 142 --
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 142 -- --
-------- -------- --------
CASH AND CASH EQUIVALENTS:
End of period............................................. $ 34 $ 142 $ --
======== ======== ========
See accompanying notes to the consolidated financial statements.
64
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ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL TREASURY STOCK RETAINED
------------------ PAID-IN --------------- EARNINGS
SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT) TOTAL
--------- ------ ---------- ------ ------ --------- --------
BALANCE, DECEMBER 31, 1994............ 4,654,186 $47 $ 9 -- $ -- $ -- $ 56
Shares issued to employees.......... 8,936 -- 77 -- -- -- 77
Treasury stock purchased............ -- -- -- 3,012 (51) -- (51)
Net income.......................... -- -- -- -- -- 10 10
--------- --- ---- ------ ----- -------- --------
BALANCE, DECEMBER 31, 1995............ 4,663,122 47 86 3,012 (51) 10 92
Shares issued to employees.......... 67,270 -- 124 -- -- -- 124
Treasury stock purchased, net of
reimbursement from ORBCOMM
Global, L.P. .................... -- -- -- 47,760 (104) -- (104)
Net loss............................ -- -- -- -- -- (9,779) (9,779)
--------- --- ---- ------ ----- -------- --------
BALANCE, DECEMBER 31, 1996............ 4,730,392 47 210 50,772 (155) (9,769) (9,667)
Shares issued to employees.......... 20,900 1 140 -- -- -- 141
Treasury stock purchased, net of
reimbursement from ORBCOMM
Global, L.P. .................... -- -- -- 43,800 (575) -- (575)
Net loss............................ -- -- -- -- -- (15,778) (15,778)
--------- --- ---- ------ ----- -------- --------
BALANCE, DECEMBER 31, 1997............ 4,751,292 $48 $350 94,572 $(730) $(25,547) $(25,879)
========= === ==== ====== ===== ======== ========
See accompanying notes to the consolidated financial statements.
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ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Organization and Business
Orbital Communications Corporation ("OCC") is a majority owned subsidiary
of Orbital Sciences Corporation ("Orbital") and is included in Orbital's
consolidated financial statements. In 1993, OCC and Teleglobe Mobile Partners
("Teleglobe Mobile"), a partnership established by affiliates of Teleglobe Inc.
("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM"), a Delaware limited
partnership, and two marketing partnerships, ORBCOMM USA, L.P. ("ORBCOMM USA")
and ORBCOMM International Partners, L.P. ("ORBCOMM International"). OCC and
Teleglobe Mobile are each 50% General Partners in ORBCOMM, and ORBCOMM is a 98%
General Partner in each of the two marketing partnerships. Additionally, OCC is
a 2% direct General Partner in ORBCOMM USA, and Teleglobe Mobile is a 2% direct
General Partner in ORBCOMM International. Directly and indirectly, OCC currently
holds 51% and 49% of ORBCOMM USA and ORBCOMM International, respectively. OCC
consolidates the financial results of ORBCOMM USA.
ORBCOMM was created for the design, development, construction, integration,
testing and operation of the ORBCOMM System. The ORBCOMM System comprises three
operational segments: (i) a space segment consisting of a constellation of 36
LEO satellites; (ii) a ground and control segment consisting of a network
control center which serves as the global control for the satellites, gateway
Earth stations which send signals to and receive signals from the satellites,
and gateway control centers which serve as message switching systems that
process the message traffic; and (iii) a subscriber segment consisting of
subscriber units used by customers to transmit and receive messages to and from
satellites.
The space segment will consist of a constellation of 36 satellites. At
December 31, 1997, one plane of two satellites and one plane of eight satellites
are operating in orbit. The ground and control segment consists of gateways
strategically located throughout the world and the facilities to monitor and
manage all network elements to ensure continuous, consistent operations in the
provision of quality service. In addition, ORBCOMM operates a network control
center, which is designed to support the full constellation of the ORBCOMM
System. The subscriber segment consists of various models of subscriber units,
some of which are intended for general use, and some are designed to support
specific applications.
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 service 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.
Regulatory Status
Construction and operation of communications satellites in the U.S.
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 U.S. Primary responsibility
for obtaining licenses outside the U.S. will reside with the various
international licensees.
66
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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. Certain
reclassifications have been made to the 1996 and 1995 financial statements to
conform to the 1997 financial statement presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of OCC and
ORBCOMM USA. 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 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, depending on contractual terms. Service
revenues are recognized when rendered.
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 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.
67
70
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 current assets and current liabilities
approximate 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 exceeded 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 7).
New Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in the financial statements.
OCC will adopt the provisions of SFAS No. 130 in 1998. The disclosure of
comprehensive income in accordance with SFAS No. 130 will not impact the manner
of presentation of OCC's financial statements as currently and previously
reported.
(3) INVESTMENTS IN AFFILIATES
OCC's and Teleglobe Mobile's total capital commitments to ORBCOMM as of
December 31, 1997 are $75,275,000 and $84,525,000, respectively, all of which
had been contributed through December 31, 1996. 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.
At December 31, 1997, ORBCOMM had total assets, total liabilities and total
partners' capital of $316,969,000, $210,551,000 and $106,418,000, respectively.
ORBCOMM recorded $527,000 in revenues and $31,436,000 in losses for the year
ended December 31, 1997. Based on its current assessment of the overall business
prospects of the ORBCOMM partnerships and the ORBCOMM System, OCC currently
believes its investments in ORBCOMM and ORBCOMM International are fully
recoverable. If in the future, the ORBCOMM business is not successful, OCC may
be required to expense part or all of its investments.
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ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) RELATED PARTY TRANSACTIONS
Pursuant to the terms of the ORBCOMM System agreement, ORBCOMM contracted
directly with Orbital to procure additional communications satellites and launch
services. During 1997, 1996, and 1995, ORBCOMM purchased hardware and services
from Orbital totaling $57,505,000, $55,435,000, and $23,672,000, respectively.
OCC was the prime contractor and Orbital the subcontractor of the ORBCOMM
System, consisting of communications satellites, launch vehicles and ground
systems, and successfully launched the ORBCOMM System satellites in April 1995.
During 1995, OCC recorded contract revenues on sales to ORBCOMM of $15,652,000
and purchased hardware and services totaling $4,477,000 from Orbital. OCC also
procured U.S. marketing services from ORBCOMM USA on a cost reimbursable basis
through September 1995. During 1995, OCC purchased marketing services totaling
$1,360,000. In 1997 and 1996, OCC recorded no contract revenues on sales to
ORBCOMM and purchased no hardware or services from Orbital or ORBCOMM USA.
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, 1997 and 1996, OCC owed
Orbital $75,513,000 and $74,786,000, respectively, none of which is currently
payable. As of December 31, 1997, OCC owes ORBCOMM $12,000 and has no
liabilities to either ORBCOMM International or ORBCOMM USA. As of December 31,
1996, OCC owed $112,000 and $7,000 to ORBCOMM and ORBCOMM International,
respectively.
ORBCOMM USA currently obtains all of its funding from ORBCOMM via
non-interest bearing intercompany borrowing agreements. As of December 31, 1997
and 1996, ORBCOMM USA owed ORBCOMM $8,635,000 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, 1997, 1996, and 1995. There are no significant differences
between pre-tax financial statement income and taxable income in 1997, 1996, and
1995.
The differences between the actual taxes and taxes computed at the U.S.
Federal income tax rate of 34% are summarized as follows:
YEARS ENDED
DECEMBER 31,
------------------
1997 1996 1995
---- ---- ----
U.S. Federal statutory rate............................ (34%) (34%) 34%
Generation (utilization) of net operating loss
carryforward......................................... 34% 34% (34%)
---- ---- ----
Effective Rate......................................... 0 0 0
==== ==== ====
The tax effects of significant temporary differences at December 31, 1997
and 1996 are as follows:
DECEMBER 31,
(IN THOUSANDS)
-------------------
1997 1996
-------- --------
Deferred Tax Assets:
Net operating loss carryforward and other............... $ 9,939 $ 3,975
Valuation allowance..................................... (9,939) (3,975)
------- -------
$ 0 $ 0
======= =======
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ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES
On August 7, 1996, ORBCOMM and ORBCOMM Global Capital Corporation (a
wholly-owned subsidiary of ORBCOMM) co-issued $170,000,000 senior unsecured
notes due in 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, Teleglobe Mobile, ORBCOMM USA
and ORBCOMM International. The guarantees are non-recourse to OCC's stockholders
(including Orbital) and Teleglobe Mobile's partners (including Teleglobe and
Technology Resources Industries Bhd.).
(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
total amount of cash for stock repurchases and promissory note repayments is
restricted to $1,000,000 per year, in accordance with the terms of the Notes
(See Note 6). During 1997 and 1996, OCC paid $829,000 and $1,000,000 in cash and
issued $331,000 and $166,000 in promissory notes to repurchase 43,800 and 47,760
shares of common stock, respectively. The 1996 promissory notes were repaid in
1997. 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.
The following tables summarize information regarding the options under the
ORBCOMM Plan for the last three years:
WEIGHTED OUTSTANDING
NUMBER OPTION PRICE AVERAGE AND
OF SHARES PER SHARE EXERCISE PRICE EXERCISABLE
--------- --------------- -------------- -----------
OUTSTANDING AT DECEMBER 31,
1994............................ 599,074 $ 1.50 -- $14.00 $ 5.64 298,657
Granted......................... 0 -- --
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
Granted......................... 284,500 $ 1.50 -- $26.50 $26.50
Exercised....................... (20,900) $ 1.50 -- $25.00 $ 6.68
Canceled or Expired............. (112,600) $25.00 $14.86
-------- ---------------- ------
OUTSTANDING AT DECEMBER 31,
1997............................ 749,830 $ 1.50 -- $26.50 $15.22 415,804
======== ================ ======
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ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) STOCK OPTION PLAN -- (CONTINUED)
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- --------------
$ 1.50 -- $ 4.00 261,540 4.82 years $ 2.37 261,540 $ 2.38
$ 5.25 -- $25.00 163,790 6.52 years $13.39 116,389 $11.79
$26.50 -- $26.00 324,500 9.36 years $ 6.50 37,875 $26.50
$ 1.50 -- $26.50 749,830 7.16 years $15.22 415,804 $ 7.21
(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 1997 and 1996
respectively, are as follows: volatility, 30% and 30%; dividend yield, zero
percent and zero percent; risk free interest rate, 6.1% and 5.6%; average
expected life, 4.5 and 4.5 years; additional shares available, 48,878 and
20,778; and weighted-average exercise price per option grant, $26.50 and $20.50.
The majority of these assumptions were not applicable for 1995.
OCC recorded compensation expense related to the ORBCOMM Plan of $32,000
for the year ended December 31, 1995. No stock based compensation expense was
recorded in 1996 or 1997. 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 proscribed by SFAS 123, OCC's net loss would have been
$16,460,000 and $10,200,000 for the years ended December 31, 1997 and 1996,
respectively. Pro forma net loss reflects only options granted in 1997, 1996,
and 1995, and therefore, may not be representative of the effects for future
periods.
(9) SUBSEQUENT EVENTS (UNAUDITED)
In February 1998, two additional satellites for ORBCOMM's constellation
were successfully launched and have been placed in high inclination orbit using
Orbital's Taurus launch vehicle.
As of March 31, 1998, OCC and Teleglobe Mobile each paid additional
$10,000,000 in capital contributions as required under the Indenture Agreement.
71
74
INDEPENDENT AUDITORS' REPORT
To the Partners of
Teleglobe Mobile Partners
We have audited the consolidated balance sheets of Teleglobe Mobile
Partners (the "Partnership") (a development stage enterprise) as of December 31,
1997 and 1996, and the consolidated statements of operations, partners' capital
and cash flows for each of the years in the two-year period ended December 31,
1997, and for the period from July 21, 1993 (date of inception), through
December 31, 1997. 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 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, these consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of the
Partnership (a development stage enterprise) as of December 31, 1997 and 1996,
and the results of its operations, partners' capital and cash flows for each of
the years in the two-year period ended December 31, 1997, and for the period
from July 21, 1993 (date of inception) through December 31, 1997, in conformity
with generally accepted accounting principles.
Grant Thornton LLP
Vienna, Virginia
February 20, 1998
72
75
INDEPENDENT AUDITORS' REPORT
To the Partners of
Teleglobe Mobile Partners
We have audited the consolidated balance sheet of Teleglobe Mobile Partners
(the "Partnership") (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 (a development
stage enterprise) 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
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76
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-----------------
1997 1996
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,439 $ 1,618
Accounts receivable....................................... 40 17
Inventory-gateway Earth stations.......................... 19,580 3,871
Amount due from ORBCOMM Global, L.P. ..................... 0 1,309
------- -------
Total Current Assets................................... 21,059 6,815
Investments in affiliates................................... 59,645 74,361
------- -------
TOTAL ASSETS...................................... $80,704 $81,176
======= =======
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued liabilities.................. $ 1,565 $ 899
Deferred revenue.......................................... 13,270 6,147
------- -------
Total Current Liabilities.............................. 14,835 7,046
Amount due to ORBCOMM Global, L.P. ....................... 9,990 0
------- -------
Total Liabilities...................................... 24,825 7,046
Non-controlling interest in net assets of ORBCOMM
International Partners, L.P. .......................... (2,391) (823)
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile, L.P. ................................... 40,381 51,942
TR (U.S.A.) Ltd. ......................................... 17,481 22,486
Teleglobe Mobile Investment Inc. ......................... 408 525
------- -------
Total Partners' Capital................................ 58,270 74,953
------- -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $80,704 $81,176
======= =======
See accompanying notes to the consolidated financial statements
74
77
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
--------------------------- DECEMBER 31,
1997 1996 1995 1997
-------- ------- ------ -------------------
REVENUES:
Product sales................................. $ 56 $ 8 $ 0 $ 64
EXPENSES:
Costs of product sales........................ 104 6 0 110
Marketing, administrative and other
expenses................................... 3,565 1,967 743 7,213
-------- ------- ------ --------
Total expenses........................... 3,669 1,973 743 7,323
-------- ------- ------ --------
Loss from operations..................... (3,613) (1,965) (743) (7,259)
OTHER INCOME AND EXPENSES:
Interest income (expense), net................ 78 617 1,253 1,948
Equity in losses of ORBCOMM Global, L.P....... (14,672) (8,975) (219) (23,866)
Non-controlling interest in losses of ORBCOMM
International Partners, L.P. .............. 1,568 828 0 2,396
-------- ------- ------ --------
NET INCOME (LOSS)............................... $(16,639) $(9,495) $ 291 $(26,781)
======== ======= ====== ========
See accompanying notes to the consolidated financial statements
75
78
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TOTAL
CASH FLOWS
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
----------------------------- DECEMBER 31,
1997 1996 1995 1997
-------- -------- ------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $(16,639) $ (9,495) $ 291 $(26,781)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Equity in losses of ORBCOMM Global, L.P. ........ 14,672 8,975 219 23,866
Non-controlling interest in losses of ORBCOMM
International Partners, L.P. ................. (1,568) (828) 0 (2,396)
Increase in accounts receivable.................. (23) (17) 0 (40)
Increase in inventory-gateway Earth stations..... (15,709) (3,871) 0 (19,580)
Increase (decrease) in accounts payable and
accrued liabilities........................... 666 628 (667) 1,565
Increase in deferred revenue..................... 7,123 6,147 0 13,270
-------- -------- ------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................. (11,478) 1,539 (157) (10,096)
-------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates........................ 0 (49,780) (24,742) (84,525)
Decrease (increase) in amount due from ORBCOMM
Global, L.P. ................................. 1,309 (1,309) 0 0
-------- -------- ------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES............................. 1,309 (51,089) (24,742) (84,525)
-------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in amount due to ORBCOMM Global,
L.P. ......................................... 9,990 0 0 9,990
Partners' contributions.......................... 0 17,000 59,062 86,065
Non-controlling interest in net assets of ORBCOMM
International Partners, L.P. ................. 0 0 5 5
-------- -------- ------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................. 9,990 17,000 59,067 96,060
-------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (179) (32,550) 34,168 1,439
CASH AND CASH EQUIVALENTS
Beginning of period.............................. 1,618 34,168 0 0
-------- -------- ------- --------
CASH AND CASH EQUIVALENTS:
End of period.................................... $ 1,439 $ 1,618 $34,168 $ 1,439
======== ======== ======= ========
See accompanying notes to the consolidated financial statements
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79
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
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 ORBCOMM Global,
L.P. .................................... (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 investments of
ORBCOMM Global, L.P., net................ 30 1 13 44
-------- ----- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1996.......... 51,942 525 22,486 74,953
Net loss.................................... (11,531) (116) (4,992) (16,639)
Share of unrealized losses on investments of
ORBCOMM Global, L.P., net................ (30) (1) (13) (44)
-------- ----- -------- --------
PARTNERS' CAPITAL, DECEMBER 31, 1997.......... $ 40,381 $ 408 $ 17,481 $ 58,270
======== ===== ======== ========
See accompanying notes to the consolidated financial statements
77
80
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Organization
Teleglobe Mobile Partners, a Delaware general partnership (the
"Partnership"), is a majority-owned indirect subsidiary of Teleglobe Inc.
("Teleglobe") and is included in Teleglobe's consolidated financial statements.
The Partnership was originally formed July 21, 1993, in accordance with the
provisions of the Delaware Uniform Partnership Law. 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.
In 1993, the Partnership and Orbital Communications Corporation ("OCC"), a
majority-owned subsidiary of Orbital Sciences Corporation ("Orbital"), formed
ORBCOMM Global, L.P. ("ORBCOMM" or the "Company"), a Delaware limited
partnership.
The Partnership and OCC 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. The Partnership and OCC are each 50% general
partners in ORBCOMM, and ORBCOMM is a 98% general partner in each of the two
marketing partnerships. Additionally, the Partnership is a 2% direct general
partner in ORBCOMM International, and OCC is a 2% direct general partner in
ORBCOMM USA. Directly and indirectly, the Partnership currently holds 51% and
49% of ORBCOMM International and ORBCOMM USA, respectively.
The ORBCOMM System Description
ORBCOMM was created for the design, development, construction, integration,
testing and operation of the ORBCOMM System. The space segment will consist of a
constellation of up to 36 satellites. At December 31, 1997, one plane of two
satellites and one plane of eight satellites were in orbit. The ground and
control segment consists of gateways strategically located throughout the world
and the facilities to monitor and manage all network elements to ensure
continuous, consistent operations in the provision of quality service. In
addition, ORBCOMM operates a new network control center, which is designed to
support the full constellation of ORBCOMM System satellites. The subscriber
segment consists of various models of subscriber units, some of which are
intended for general use, and some are designed to support specific
applications.
The System Charge
The Partnership is obligated to pay quarterly to ORBCOMM a system charge in
consideration of ORBCOMM'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 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. No such charges
have been incurred.
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
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81
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) NATURE OF OPERATIONS -- (CONTINUED)
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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Partnership is in the development stage, devoting substantially all of
its efforts to establishing a new data and messaging communications business
through ORBCOMM. The planned principal operations of the Partnership are
expected to commence in the fall of 1998. The accompanying consolidated
financial statements have been prepared on the accrual basis of accounting in
conformity with generally accepted accounting principles in the United States.
They include the accounts of the Partnership and its subsidiary, ORBCOMM
International. All significant intercompany transactions and balances have been
eliminated on consolidation.
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.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with maturities of
three months or less to be cash equivalents.
Inventory
Inventory consists of work-in-process for the construction of gateway Earth
stations for sale to international licensees.
Investments in Affiliates
The Partnership uses the equity method of accounting for its investments in
and earnings of affiliates in which the Partnership has the ability to
significant influence, but not control, such affiliates' operations. In
accordance with the equity method of accounting, the Partnership 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. The Partnership's investment is also increased
to reflect contributions to, and decreased to reflect distributions received
from, each affiliate.
Goodwill, consisting of the excess of the cost of the Partnership's
investment over its equity in the underlying net assets of ORBCOMM at the
acquisition date, is included in the Investments in affiliates. Goodwill is
amortized on a straight-line basis, starting October 1, 1996, over the estimated
economic useful life of the ORBCOMM System.
79
82
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Each year, the Partnership reviews the underlying value of its investments
by comparing its carrying amount to its net recoverable amount. The
determination of the net recoverable amount consists of evaluating forecasted
income and non-discounted cash flows. Any permanent impairment of such value
would be written off to expense.
Revenue Recognition
Revenues under the gateway procurement contracts with international
licensees or sale of subscriber communicator hardware are generally recognized
when contracts are completed, products are shipped or when customers have
accepted the products or services, depending on contractual terms. Distribution
fees and license fees from service license or similar agreements are recognized
ratably over the term of the agreements, or when ORBCOMM International's
obligations under the agreements are substantially complete.
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
within the accompanying consolidated financial statements.
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.
New Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in the financial statements.
The Partnership will adopt the provisions of SFAS No. 130 in 1998.
Reclassification of Prior Years Balances
Certain amounts in prior years consolidated financial statements have been
reclassified to conform with the current year presentation.
(3) INVESTMENTS IN AFFILIATES
As of December 31, 1997, goodwill, net of accumulated amortization in the
amount of $522,000 ($63,000 as of December 31, 1996), included in the
Investments in affiliates amounts to $4,040,000 ($4,562,000 as of December 31,
1996).
Pursuant to the terms of the relevant partnership agreements, (i) the
Partnership and OCC share equal responsibility for the operational and financial
affairs of ORBCOMM; (ii) the Partnership controls the operational and financial
affairs of ORBCOMM International and (iii) OCC controls the operational and
financial affairs of ORBCOMM USA. Since the Partnership is unable to control,
but is able to exercise significant influence over ORBCOMM's and ORBCOMM USA's
operating and financial policies, the Partnership is accounting for its
investments in ORBCOMM and ORBCOMM USA using the equity method of accounting.
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83
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS IN AFFILIATES -- (CONTINUED)
The following tables summarize the information concerning the income,
assets and liabilities of ORBCOMM, including ORBCOMM's equity interests in
ORBCOMM USA and ORBCOMM International.
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEARS ENDED STAGE
DECEMBER 31, THROUGH
(IN THOUSANDS) DECEMBER 31,
----------------------------- 1997
1997 1996 1995 (IN THOUSANDS)
-------- -------- ------- --------------
INCOME STATEMENT DATA
Revenue................................... $ 527 $ 420 $ 900 $ 1,847
Net income (loss)......................... (31,436) (19,480) 55 (50,870)
DECEMBER 31,
(IN THOUSANDS)
--------------------
1997 1996
-------- --------
BALANCE SHEET DATA
Total assets.............................................. $316,969 $329,509
Total liabilities......................................... 210,551 191,567
Partners' capital
Teleglobe Mobile Partners.............................. 57,834 73,596
Orbital Communications Corporation..................... 48,584 64,346
Based on its current assessment of the overall business prospects of
ORBCOMM's marketing partnerships and the ORBCOMM System, the Partnership
currently believes its investments in ORBCOMM and ORBCOMM USA are fully
recoverable. If in the future, the ORBCOMM business is not successful, the
Partnership may be required to expense part or all of its investments.
(4) RELATED PARTY TRANSACTIONS
As of December 31, 1997, ORBCOMM International had a payable of $9,990,000
to ORBCOMM for amounts advanced to support ORBCOMM International's efforts to
establish commercial markets. As of December 31, 1996, ORBCOMM International had
a receivable of $1,309,000 from ORBCOMM that represents net cash outflow to
ORBCOMM. ORBCOMM International is currently in the development stage and obtains
funds to support operations through non-interest bearing advances from ORBCOMM.
As of December 31, 1997 and 1996, ORBCOMM International had a payable of
$87,000 and $225,000, respectively, to Teleglobe Canada Inc., an affiliate of
the Partnership, for a contracted employee to provide international marketing
services.
As of December 31, 1997, the Partnership had a payable of $200,000 to
ORBCOMM Canada Inc., an affiliate of the Partnership, for an employee to provide
management services to ORBCOMM on behalf of the Partnership (none as of December
31, 1996).
In 1996, the Partnership entered into an administrative services agreement
with 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, 1997, the Partnership owed Teleglobe $141,000 ($155,000 as of December 31,
1996).
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84
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES
Long-Term Debt
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 of Senior Notes due 2004 with Revenue Participation Interest (the
"Old Notes"). All the Old Notes were exchanged for an equal principal amount of
registered 14% Series B Senior Notes due 2004 with Revenue Participation
Interest (the "Notes"). The Notes are fully and unconditionally guaranteed on a
joint and several basis by the Partnership, OCC, 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.
On the closing of the offering of the Old Notes, the Company used
$44,800,000 of the net proceeds from the sale of the Old Notes 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. Of this investment
portfolio, $23,300,000 was used to pay interest that was due on the Notes on
February 15, and August 15, 1997.
Construction of Gateway Earth Stations
In October 1996, ORBCOMM International entered into agreements with certain
manufacturers for the construction of twenty gateway Earth stations scheduled
for delivery over the next two years, with the first installations occurring
during the first quarter 1998. As of December 31, 1997 and 1996, ORBCOMM
International had $19,580,000 and $3,871,000, respectively, of prepaid contract
costs of which $11,016,000 and $3,547,000, respectively, represent advance
payments to those manufacturers. Total commitments under these manufacturing
agreements approximate $18,000,000. Included in inventory -- gateway Earth
stations is a portion of the engineering direct labor costs that are
specifically related to the construction of gateway Earth stations. As of
December 31, 1997, $1,609,000 of such costs had been included in
inventory-gateway Earth stations (none as of December 31, 1996).
(6) SERVICE LICENSE OR SIMILAR AGREEMENTS
ORBCOMM International has signed thirteen service license or similar
agreements with international licensees, ten of which have associated gateway
procurement contracts and software license agreements. The service license or
similar agreements authorize the international licensees to use the ORBCOMM
System to provide two-way data and messaging communications services. As of
December 31, 1997 and 1996, $13,270,000 and $6,147,000, respectively, had been
received under these agreements and recorded as deferred revenue. ORBCOMM
International is obligated to ship ten gateways under certain of these
agreements (see note 5).
(7) SUBSEQUENT EVENTS (UNAUDITED)
In February 1998, two additional satellites for the ORBCOMM constellation
were successfully launched and have been placed in a high inclination orbit
using Orbital's Taurus(R) launch vehicle.
As of March 31, 1998, OCC and the Partnership each paid to the Company an
additional $10,000,000 in capital contributions (or debt financing expressly
subordinated to the Notes) as required under the Indenture governing the Notes.
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85
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS
The Partnership Agreement provides that the management of ORBCOMM is the
exclusive responsibility of the General Partners. Officers of ORBCOMM are
nominated by the President of ORBCOMM 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 31, 1998 concerning
the executive officers of ORBCOMM and the directors and executive officers of
Capital.
NAME AGE POSITION
- -------------------- --- ----------------------------------------------
Scott L. Webster 45 Chief Executive Officer of ORBCOMM
President and Director of Capital
Alan L. Parker 59 President, Global Development of ORBCOMM
Robert F. Latham 55 President and Chief Operating Officer of
ORBCOMM
W. Bartlett Snell 46 Senior Vice President Finance and
Administration, Chief Financial Officer and
Treasurer of ORBCOMM
Vice President, Treasurer and Director of
Capital
Robert L. Vence 56 Senior Vice President Engineering and
Operations of ORBCOMM
Abdul H. Rana 47 Senior Vice President Product Management and
Development of ORBCOMM
Brian L. Williams 48 Senior Vice President Marketing, Strategy and
Communications of ORBCOMM
Mary Ellen Seravalli 39 Senior Vice President, General Counsel and
Secretary of ORBCOMM
Vice President and Secretary of Capital
Scott L. Webster has been Chairman and Chief Executive Officer of ORBCOMM
since February 1998. Mr. Webster also has been the President of OCC since 1997.
He has been President and Director of Capital since March 1998. Mr. Webster is a
co-founder of Orbital, and served in various consulting capacities with Orbital
from 1993 to 1996. He served as President of Orbital's Space Data Division from
1990 to 1993 and was Executive Vice President of that organization from 1989 to
1990. Mr. Webster served as Orbital's Vice President and Senior Vice President
of Marketing from Orbital's inception in 1982 until 1989. Previously, he held
technical and management positions at Advanced Technology Laboratories and
Litton Industries.
Alan L. Parker has been President, Global Development of ORBCOMM since
February 1998 and was the President of ORBCOMM from June 1993 to February 1998
and Chief Executive Officer of ORBCOMM from February 1996 to February 1998. Mr.
Parker was President and Director of Capital from July 1996 to March 1998. Mr.
Parker is also Executive Vice President of OCC. Mr. Parker was a member of the
United States delegation to WARC-92, the WRC held in 1993 and WRC-95. Mr.
Parker's experience includes 25 years with Ford Aerospace and Ford Motor
Company. Mr. Parker served as Chairman and Chief Executive Officer 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,
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86
Mr. Parker held several marketing and product planning positions at Ford,
including Car Product Development, Ford of Europe and Corporate Product Planning
and Research.
Robert F. Latham has been President and Chief Operating Officer of ORBCOMM
since February 1998 and was Executive Vice President and Chief Operating Officer
of ORBCOMM from May 1997 to February 1998. From April 1997 to May 1997, Mr.
Latham was an independent consultant to ORBCOMM. From February 1996 to February
1997, Mr. Latham was Managing Director, Telecom for Bell Canada International
Management Ltd., UK ("BCIM"). From April 1996 until November 1996, Mr. Latham
was secunded to Mercury Communications, Limited in London, England as the
Managing Director, Commercial Services. Prior to joining BCIM, Mr. Latham spent
28 years with Bell Canada, most recently as Group Vice President ("GVP"),
Gateways and Public Telephony. From July 1992 to February 1995, Mr. Latham held
the positions of GVP, Business Sales and Services, and GVP, Signature Service,
with responsibility for Bell Canada's business accounts. From 1986 to 1991, Mr.
Latham led the development of Bell Cellular as President and Chief Executive
Officer. Prior to 1986, Mr. Latham held a variety of positions with Bell Canada,
including in the areas of Business Development, Customer Services, Regulatory
Matters, Cost and Performance and Forecasting and Planning.
W. Bartlett Snell has been Senior Vice President Finance and
Administration, Chief Financial Officer and Treasurer of 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 PowerSource 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 RoundTable and the Northern Virginia Technology Council.
Robert L. Vence has been Senior Vice President Engineering and Operations
of ORBCOMM from April 1997 to March 1998. Effective April 3, 1998, Mr. Vence
will resign his position with ORBCOMM. From September 1996 to April 1997, Mr.
Vence was Director of Messaging Services for Iridium. From 1987 to 1996, Mr.
Vence was Vice President of Engineering and Operations at SkyTel. From 1984 to
1987, Mr. Vence was Program Manager and Member of Executive Staff for Computer
Sciences Corporation. From 1983 to 1984, Mr. Vence was Senior Manager of Network
Operations for MCI. Mr. Vence's career in high technology began in the United
States Coast Guard in 1963. During his 20-year tenure in the Coast Guard, he
centralized its nationwide air and ground voice communications system, managed
Atlantic and Gulf Coast communications and navigation system stations, managed a
worldwide very low frequency radio navigation system and served as aircraft
commander of a C-130 unit.
Abdul H. Rana has been Senior Vice President Product Management and
Development of ORBCOMM since December 1997. From January 1997 to December 1997,
Dr. Rana was Vice President of Engineering and Technology Services for GE
LogistiCom, where he provided technical leadership for development and launch of
a low-cost mobile satellite communications product for asset management. From
1984 to 1996, Dr. Rana held several positions at GTE in the areas of product
development and program management, where, among other achievements, he managed
the launch of several successful commercial data and video products, was three
times the recipient of the GTE Leslie Warner Award, GTE's highest technical
honor, and twice the recipient of President's Awards for personal technical and
professional achievements. Prior to 1984, Dr. Rana held technical and management
positions at COMSAT Labs and ENSCO Incorporated in the areas of satellite
communications and signal processing. Dr. Rana received his Ph.D. in engineering
in 1977 and has 20 years of engineering and product development experience in
telecommunications, satellite and cellular communications and wireless data
networks. Dr. Rana has published over 30 articles in professional journals and
currently is a member of the Institute of Electrical and Electronics Engineers
Inc.
Brian L. Williams has been Senior Vice President Marketing, Strategy and
Communications of ORBCOMM since December 1997. Between May 1997 and December
1997, Mr. Williams was Senior Vice President, Marketing and Product Development
at ORBCOMM, and from January 1997 to May 1997,
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Mr. Williams was Vice President, Marketing, Strategy and Communications at
ORBCOMM. 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 Senior Vice President, General Counsel and
Secretary of ORBCOMM since January 1997 and was Vice President and General
Counsel of 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 Assistant General Counsel of Orbital and from January 1995 to
December 1995 she was also a Vice President 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.
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 31, 1998 regarding each of the General
Partners' representatives.
OCC
David W. Thompson, 44, is a founder of Orbital and has been Chairman of the
Board, President and Chief Executive Officer of Orbital since 1982. From 1981 to
1982, Mr. Thompson was Special Assistant to the President at Hughes Aircraft
Company's Missile Systems Group. From 1977 to 1979, Mr. Thompson was employed by
NASA at the Marshall Space Flight Center as a project manager and engineer.
Prior to that, he worked on the Space Shuttle's autopilot design at the Charles
Stark Draper Laboratory.
Jeffrey V. Pirone, 37, has been Executive Vice President and Chief
Financial Officer of Orbital since January 1998. Mr. Pirone has also been the
Vice President and Chief Financial Officer of OCC since June 1996. Prior to
January 1998, he held a number of positions at Orbital, including Senior Vice
President and Chief Financial Officer and Vice President and Controller. Prior
to joining Orbital in 1991, Mr. Pirone was a Senior Manager at KPMG Peat Marwick
LLP.
Scott L. Webster is a representative of OCC.
Teleglobe Mobile
Claude Seguin, 48, is 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 Chief Financial Officer of
Teleglobe. Mr. Seguin served the Quebec Finance Ministry as Deputy Minister from
1987 to 1992. Mr. Seguin sits on the boards of Telesystem International Wireless
Corporation, Levesque Beaubien Geoffrion Inc. and La Societe generale de
financement du Quebec. He is also a former governor of the Montreal Exchange and
director of Caisse de depot et placement du Quebec.
William J. Meder, 55, has been President of ORBCOMM Canada Inc., a
majority-owned subsidiary of Teleglobe, since August 1994 and is also a
part-owner of ORBCOMM Canada Inc. Mr. Meder has also been Vice President,
Special Projects of ORBCOMM since July 1997. From 1993 to 1994, Mr. Meder was a
business consultant and, from 1990 to 1993, Chief Operating Officer of Henry
Birks and Sons Ltd. From 1982
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to 1989, Mr. Meder was the Chief Executive Officer of Comp-u-Card Canada, Inc.
and, from 1978 to 1982, Chief Executive Officer of Imperial Manufacturing Inc.
Prior to that, Mr. Meder spent 13 years with IBM in various senior management
positions. Mr. Meder was formerly a chairman of Syscor, an information services
company serving hospitals in the Montreal area, and President of the Young
Presidents Association.
Marc J.E. Leroux, 47, has been President and Chief Operating Officer of
Teleglobe World Mobility, a division of Teleglobe, since 1994. Since 1992, Mr.
Leroux has also served as Vice President, Technology of Teleglobe. Prior to
1992, Mr. Leroux was Senior Manager, Services Development with Bell-Northern
Research Ltd., a telecommunications research and development company.
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, 1997, 1996 and 1995, as
applicable, to those persons who were at December 31, 1997, the Chief Executive
Officer and the four other most highly compensated executive officers of ORBCOMM
(collectively, the "Named Officers").
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- ---------------
NUMBER OF
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(1) COMPENSATION(2)
- ----------------------------------- ------- -------- -------- --------------- ---------------
Alan Parker........................ 1997 $210,000 $ 73,500 -- $14,404
President and Chief Executive 1996 200,000 60,000 -- 16,655
Officer (3) 1995 167,846 33,512 -- 7,905
Robert F. Latham................... 1997(5) 108,692 157,800 70,000 32,250
Executive Vice President and 1996(6) -- -- -- --
Chief Operating Officer (4) 1995(6) -- -- -- --
W. Bartlett Snell..................
Senior Vice President Finance and 1997 160,000 53,965 -- 10,189
Administration, Chief Financial 1996 127,769 44,000 25,000 10,480
Officer and Treasurer 1995(6) -- -- -- --
Brian L. Williams.................. 1997(7) 147,692 68,867 30,000 6,518
Senior Vice President Marketing, 1996(6) -- -- -- --
Strategy and Communications 1995(6) -- -- -- --
Mary Ellen Seravalli............... 1997 150,000 52,531 -- 7,645
Senior Vice President, General 1996 130,000 33,000 20,000 9,342
Counsel and Secretary 1995(6) -- -- -- --
- ------------------------------
(1) Shares of common stock of OCC subject to options granted under the OCC Stock
Option Plan.
(2) Includes ORBCOMM matching and profit sharing contributions made under
ORBCOMM's 401(k) plan. The 1997 amount for Robert F. Latham also reflects
payments by ORBCOMM of $10,385 in consulting fees prior to his employment by
ORBCOMM and $14,008 in moving expenses paid by ORBCOMM.
(3) In February 1998, Mr. Parker ceased being President and Chief Executive
Officer of ORBCOMM and became President, Global Development of ORBCOMM.
(4) In February 1998, Mr. Latham became President and Chief Operating Officer of
ORBCOMM.
(5) Represents compensation beginning in May 1997 when Mr. Latham started his
employment at ORBCOMM.
(6) No compensation is reported where the individual person did not serve as an
executive officer of ORBCOMM during a given fiscal year.
(7) Represents compensation from the end of January 1997, when Mr. Williams
started his employment at ORBCOMM.
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OCC OPTION GRANTS IN LAST FISCAL YEAR
Shown below is information on grants of stock options to the Named Officers
pursuant to the Stock Option Plan during the fiscal year ended December 31,
1997, which options are reflected in the Summary Compensation Table.
INDIVIDUAL GRANTS
-------------------------------------------------------------- POTENTIAL REALIZED VALUE
NUMBER OF AT ASSUMED RATES OF
SECURITIES % OF TOTAL PRICE ON STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE DATE OF FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE GRANT EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) ($/SHARE) DATE 5% 10%
---- ---------- ------------ --------- --------- ---------- --------- -----------
Robert F. Latham....... 55,000 19.33 $26.50 $26.50 5/15/07 $916,614 $2,322,800
15,000 5.27 26.50 26.50 7/18/07 249,986 633,513
Brian L. Williams...... 30,000 10.54 26.50 26.50 2/05/07 499,971 1,267,025
EMPLOYMENT AGREEMENT
On May 15, 1997, ORBCOMM and Robert F. Latham entered into an employment
agreement that sets forth the terms and conditions of Mr. Latham's employment
with ORBCOMM. The employment agreement is for a term of three years commencing
on May 15, 1997, and is automatically extended from year to year thereafter
unless terminated either by ORBCOMM or Mr. Latham. Pursuant to the terms of the
employment agreement, Mr. Latham received a $75,000 signing bonus and is
entitled to a base salary of $180,000 per year. In addition to the signing bonus
and base salary, under the employment agreement Mr. Latham is eligible to
receive from ORBCOMM, among other things, an annual bonus of up to 50% of his
base salary, relocation expenses of up to $50,000 and a loan of up to $50,000.
Mr. Latham was also awarded options to purchase 55,000 shares of OCC common
stock at a price of $26.50 per share. The options vest, pro rata, over a period
of four years with one-fourth vested on the date of the grant, and are generally
governed by the terms of the Stock Option Plan. In the event of a termination of
Mr. Latham's employment, either: (i) by the Company without cause (as defined in
the agreement); or (ii) by Mr. Latham within three months following a change of
control (as defined in the agreement), Mr. Latham will be entitled to receive
from ORBCOMM: (x) a lump sum severance payment of twelve months annual base
salary (in the case of a termination without cause) or a lump sum severance
payment of the remaining balance of Mr. Latham's base salary through the end of
the term of the agreement plus 50% of Mr. Latham's then current annual base
salary (in the case of a change in control); (y) accelerated vesting of OCC
stock options; and (z) relocation expenses of up to $50,000. Pursuant to the
terms of the employment agreement, Mr. Latham has an obligation not to solicit
any employees of ORBCOMM for a period of one year following termination of his
employment with ORBCOMM.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the partnership interests of ORBCOMM as of March 1, 1998.
NAME AND ADDRESS PARTNERSHIP 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
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of ORBCOMM, OCC, Teleglobe Mobile and Orbital have entered into a
series of agreements or arrangements for the development, construction,
operation and marketing of the ORBCOMM system. The following paragraphs are a
summary of the material provisions of certain of these agreements and are
qualified in their entirety by reference to the actual agreements, which are
filed as exhibits to or incorporated by reference in this report.
MASTER AGREEMENT
As of June 30, 1993, Orbital, OCC, Teleglobe and Teleglobe Mobile entered
into the Master Agreement 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) to
ensure that so long as OCC holds any FCC licenses, OCC will (a) remain a
subsidiary of Orbital, other than as a result of options exercised under the OCC
Stock Option Plan; (b) carry on no business other than the construction,
operation and marketing of the ORBCOMM system or businesses that are in
furtherance of, or in connection with, the expansion of the ORBCOMM system; (c)
remain the sole holder of all FCC licenses required for the construction, launch
and operation of the ORBCOMM system (other than FCC licenses for individual user
transceivers and FCC licenses held by ORBCOMM); (iv) subject to certain
exceptions, that OCC will not grant, create, assume, incur or suffer to exist
any lien affecting OCC or any of its property, rights, revenues or assets and
that in no circumstances will OCC grant, create, assume, incur or suffer to
exist any lien on any FCC licenses held by OCC; (v) subject to certain
exceptions, that Orbital will not dispose of any debt interest in OCC and that
OCC will not sell, transfer, convey, lease or otherwise dispose of any assets;
(vi) that OCC will not consolidate, merge or amalgamate with any other person;
(vii) subject to certain exceptions in accordance with the Definitive Agreements
(as defined), that Orbital and OCC will not create, amend or repeal any by-laws
or modify the OCC certificate of incorporation; (viii) subject to certain
exceptions in accordance with the Definitive Agreements, that OCC will not make
any loans or give any financial guarantees for the obligations of any other
party; and (ix) that Orbital and OCC will not make any assignment for the
benefit of creditors or subject OCC to any proceedings under any bankruptcy or
insolvency law or take steps to wind up or terminate OCC's corporate existence
or engage in any financial restructuring.
Covenant Relating to Teleglobe Mobile. Teleglobe and Teleglobe Mobile have
agreed to preserve Teleglobe Mobile's corporate existence.
Guarantees. 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. 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.
Change of Control. In the event of a Change of Control (as defined in the
Master Agreement) of Orbital or Teleglobe (the "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 such Change of Control (the
"Option Period") to require the Change of Control Party to purchase the
Non-Change of Control Party's interest in ORBCOMM at an aggregate price equal to
the greater of (a) the Non-Change of Control Party's aggregate Unrecouped
Capital Preferences (as defined in the Master Agreement) in such partnerships
and (b) the Non-Change of Control Party's direct and indirect Participation
Percentage (as defined in the Master Agreement) in each such partnership
multiplied by the fair market value (as defined in the Master Agreement) 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 (as defined in the Master
Agreement) 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
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Control Party, notwithstanding any contrary provision set forth in the
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 all FCC licenses then held by OCC relating to the
construction, launch or operation of the ORBCOMM system.
SYSTEM CONSTRUCTION AGREEMENT
Under the terms of the System Construction Agreement, restated as of
September 12, 1995 and subsequently amended, 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 calculated in accordance with the ORBCOMM Partnership
Agreement, 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
As of September 12, 1995, ORBCOMM and Orbital entered into the Procurement
Agreement 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 ORBCOMM. The Procurement Agreement has subsequently been
amended and currently provides for the following:
Under the Procurement Agreement, Orbital will develop, construct and
deliver and launch 34 ORBCOMM satellites (ten of which have been launched) and
complete the construction and design of the U.S. Ground Segment. Under the
Procurement Agreement Orbital will launch the satellites using three Pegasus
launch vehicles and the Taurus launch vehicle. To date, Orbital has successfully
launched eight satellites on a Pegasus launch vehicle and two satellites on a
Taurus launch vehicle. Orbital will also provide in-orbit check-out support for
up to 120 days after each of the satellite launches.
ORBCOMM has agreed to pay Orbital approximately $196.4 million for
satellite construction, launch services and other work specified in the
Procurement Agreement, not including certain incentive fees. On execution of the
Procurement Agreement, ORBCOMM paid to Orbital approximately $17 million
representing reimbursement for certain costs incurred through the date thereof.
Under the Procurement Agreement, Orbital is entitled to invoice ORBCOMM monthly
for a maximum of 90% of certain costs incurred during each month. The remaining
ten percent of costs incurred in any month may be invoiced only on completion of
certain specified project milestones referred to in the Procurement Agreement as
Category B Milestones.
The remaining balance of the fixed price contract amount is generally
allocated to Category A Milestones as defined in the Procurement Agreement. In
the event that Orbital fails to achieve any Category A Milestone on or before
the scheduled completion date, ORBCOMM is relieved of its obligation to pay the
applicable amounts specified for such Category A Milestone until such time as
Orbital achieves such Category A Milestone or obtains a waiver in writing from
ORBCOMM for such achievement; provided, however, that
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Orbital's failure to timely complete any milestone shall not relieve ORBCOMM of
its obligation to pay for other achieved milestones.
Incentive Payments. In addition to the above prices for work and service,
Orbital is entitled to receive certain in-orbit 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 in-orbit performance incentive
period and six during the second 30 months of the in-orbit performance period.
Optional Work. The Procurement Agreement provides for additional work and
services to be performed on an optional basis, including: (i) an option to
purchase on or prior to December 31, 1999 a replacement constellation of 32
satellites substantially similar to those of the current system (including
launch services using four Pegasus 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 (ii) a one-time option to
request Orbital to provide a standard Taurus launch vehicle rather than a
Pegasus launch vehicle for any launch procured pursuant to the Procurement
Agreement, which option may be exercised by ORBCOMM on or prior to September 12,
1998 at a price to be negotiated, provided that the price 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) to obtain and maintain FCC regulatory authority for the operation of
subscriber units 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, with
respect to a satellite launch using the Pegasus launch vehicle, delivery of the
launch vehicle and satellites occurs on separation of the launch vehicle from
Orbital's L-1011 aircraft. With respect to a satellite launch using a Taurus
launch vehicle, delivery of the satellites occurs on intentional ignition of the
Taurus launch vehicle. At such time, title to and risk of loss or damage passes
to ORBCOMM and ORBCOMM's sole remedy for launch failure, defects, failures to
conform to applicable specifications or any other requirements 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.
Limitation of Liability. Under no circumstances, regardless of fault,
shall Orbital be liable for any damage greater than $10 million excluding: (i)
any unpaid portion of Category A Milestone payments; and (ii) any unpaid portion
of the in-orbit performance incentive payment.
Stop Work. ORBCOMM may at any time by written order to Orbital require
Orbital to stop all or any part of the work called for by the Procurement
Agreement for a period of 60 days or for any further period to which the parties
may agree. Within a period of 60 days after a stop-work is delivered to Orbital,
or within any extension of that period to which the parties agree, ORBCOMM will
either cancel the stop-work order and make an equitable adjustment to the
Procurement Agreement for the delay or terminate the work as provided in the
Procurement Agreement or if Orbital otherwise agrees to terminate.
Intellectual Property. In general, all designs, inventions, processes,
technical data, drawings and/or confidential information related to the
satellites, launch vehicle launch services, the Network Control Center and U.S.
Gateway Earth Stations are the exclusive property of Orbital and its
subcontractors. All rights, title and interest in and to all underlying
intellectual property relating to the work to be performed pursuant to the
Procurement Agreement will remain exclusively in Orbital and its subcontractors,
notwithstanding Orbital's disclosure of any information or delivery of any data
items to ORBCOMM or ORBCOMM's payment to
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Orbital for engineering or non-recurring charges. ORBCOMM will not use or
disclose such information or property to any third party without the prior
written consent of Orbital.
Termination. ORBCOMM may, by written notice of termination to Orbital,
terminate the Procurement Agreement upon the failure of Orbital: (i) to achieve
any of the Category A Milestones within 56 weeks after the scheduled completion
date set forth in the Milestone Payment Schedule (as defined in the Procurement
Agreement) provided that scheduled completion dates can be extended by any
excusable delays as a result of a force majeure event; or (ii) to comply in any
material respect with any of the provisions of the Procurement Agreement and to
correct such failure, within 60 days from the date of Orbital's receipt of
written notice thereof from ORBCOMM, setting forth in detail ORBCOMM's basis for
termination of the Procurement Agreement.
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 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, VARs 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
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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, VARs and International Licensees for use of the ORBCOMM System.
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 and Teleglobe Mobile have entered into the
Proprietary Information and Non-Competition Agreement 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. The parties to the agreement that are in receipt of proprietary
information agree that they will not, during and for a period of five years
after the term of the agreement, use, disclose or otherwise disseminate such
proprietary information to any person or make any use of the proprietary
information for their own benefit or for the benefit of any other person.
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:
(i) except in connection with the fulfillment of their respective obligations
under any of the Definitive Agreements, 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 MSS below 1 GHz, provided,
however, that 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
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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 five
percent 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 and representatives (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
will terminate on the earlier of OCC or Teleglobe Mobile ceasing to be both a
general partner and a limited partner of ORBCOMM.
AMENDED AND RESTATED ADMINISTRATIVE SERVICES AGREEMENT
As of January 1, 1997, ORBCOMM and Orbital entered into the Amended and
Restated Administrative Services Agreement (the "Administrative Services
Agreement") that sets forth the terms on which Orbital has agreed to provide
office space and certain administrative and other services to ORBCOMM. The
Administrative Services Agreement currently provides for the following:
Under the terms of the Administrative Services Agreement, Orbital has
agreed to provide to ORBCOMM defined office space for a total price per month
that is based on ORBCOMM's occupied useable square footage as a percentage of
total useable square footage in any Orbital facility occupied by ORBCOMM, and is
equal to ORBCOMM's pro rata portion of all Orbital's monthly costs and expenses
relating to the applicable facility, including but not limited to rent, mortgage
(including interest), operating expenses, taxes, building maintenance,
utilities, janitorial services, landscaping, management fees and leasehold
improvement amortization for interior buildout. Orbital also has agreed to
provide ORBCOMM with certain use and occupancy services on a cost reimbursable
basis (as specified therein). The use and occupancy services to be provided by
Orbital include management information systems services, security and facilities
support, telephone switchboard and communication services, employee training
services and other support services. Finally, Orbital has agreed to provide
various administrative and executive management services to ORBCOMM on a cost
reimbursable basis (as specified therein). The administrative and executive
management services to be provided by Orbital include accounting support,
payroll processing, miscellaneous purchasing services, personnel services and
other administrative services.
Orbital also has agreed to provide to ORBCOMM certain insurance on a cost
reimbursable basis, including health insurance, property and casualty insurance,
workers compensation insurance, auto liability insurance, general liability
insurance, fiduciary liability insurance, employee dishonesty insurance, transit
insurance and aviation products insurance. Orbital shall be required to provide
such insurance to ORBCOMM until such time as ORBCOMM can commercially procure
its own insurance at a rate comparable to Orbital's, or until such time as the
partners of ORBCOMM determine that ORBCOMM should procure its own insurance.
ORBCOMM has agreed to indemnify Orbital, its directors, officers or
employees against any liability in connection with any actions arising out of
the performance of the services except to the extent that such liability arises
from Orbital's gross negligence or willful misconduct.
The Administrative Services Agreement continues in effect so long as any of
the categories of office space or administrative services are being provided by
Orbital, provided that ORBCOMM has the right to terminate any or all of the
administrative services being provided by Orbital on 90 days prior written
notice to Orbital,
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and provided further that ORBCOMM shall have the right to terminate the
provision by Orbital of any office space occupied by ORBCOMM only upon the
expiration of the lease relating to such office space.
ORBCOMM CANADA INC. CONSULTING AGREEMENT
As of March 18, 1998, ORBCOMM and ORBCOMM Canada Inc. ("ORBCOMM
Canada")entered into the ORBCOMM Canada Consulting Agreement, which currently
provides for the following:
ORBCOMM Canada has agreed to furnish to ORBCOMM certain business and
industry consultancy services including: (i) arranging meetings with senior
executives of Fortune 100 companies with the objective of developing business
relationships for ORBCOMM services; (ii) providing advice and counsel to ORBCOMM
marketing executives to build and extend ORBCOMM business partner relationships;
(iii) acting as the executive contact for certain application developers,
manufacturers and related vendors; (iv) providing advice and counsel to ORBCOMM
management as it develops and improves business processes, with a particular
focus on sales and pricing policies and practices; and (v) establishing
strategic relationships with key partners on a global basis.
In consideration for these consultancy services, ORBCOMM has agreed to pay
ORBCOMM Canada one thousand dollars per day, not to exceed four thousand dollars
in any calendar week. Either party may terminate the ORBCOMM Canada Consulting
Agreement by giving ten days written notice to the other party.
U.S. GATEWAY EARTH STATION MAINTENANCE SERVICE AGREEMENT
As of October 1, 1997, Orbital and ORBCOMM entered into the U.S. Gateway
Earth Station Maintenance Service Agreement for the purpose of Orbital
providing, among other things, to ORBCOMM routine quarterly maintenance, spare
equipment, a site representative, repair services, ORBCOMM satellite launch
support and special projects in accordance with a detailed Statement of Work to
each of the four existing U.S. Gateway Earth Stations. The term of the agreement
is for one year. The routine maintenance includes quarterly visits to each
Gateway Earth Station site by a qualified engineer or senior technician,
transmitter output power tests, command communications tests, environmental
monitoring tests, electrical and mechanical hardware inspections, inspection of
all grounding connections and inspections of the physical facilities at each
Gateway Earth Station site. Orbital is required to hire a site representative to
provide periodic visits to the respective sites and to respond to any failure
within a specified period. Orbital is required under the agreement to establish
a primary and back-up 24-hour point of contact to respond to ORBCOMM telephone
queries and alerts. Finally, the agreement provides that Orbital and ORBCOMM
will identify special projects where performance characteristics, availability,
reliability, life or operational readiness of the ORBCOMM sites can be enhanced.
ORBCOMM may terminate the agreement in whole or in part, at any time by
providing written notice to Orbital.
ORBCOMM RESELLER AGREEMENT WITH ORBITAL SCIENCES CORPORATION
On March 3, 1997, ORBCOMM entered into a Reseller Agreement with Orbital.
The agreement has subsequently been amended and currently provides that, subject
to certain exclusions, ORBCOMM grants to Orbital the non-exclusive right to
market and resell ORBCOMM products and services for Intelligent Transportation
System monitoring, tracking and messaging applications to Federal, state and
local government and commercial accounts. The agreement provides that Orbital
will pay to ORBCOMM an activation fee for each new subscriber and monthly access
and usage fees for each new and current subscriber solicited by Orbital to use
the ORBCOMM system.
The term of the agreement is for one year renewable automatically for
additional terms of one year each unless either party gives 60 days' written
notice to the other party.
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SERVICE LICENSE AGREEMENTS WITH ORBCOMM CANADA INC. AND CELCOM
On December 19, 1995 and October 10, 1996, ORBCOMM entered into Service
License Agreements with two International Licensees, ORBCOMM Canada Inc., a
majority-owned subsidiary of Teleglobe, and Celcom, a wholly owned subsidiary of
TRI, respectively. Under the terms of each agreement, which each provides for an
initial ten year term and is renewable for up to an additional ten years,
ORBCOMM has granted to each International Licensee an exclusive license to
market ORBCOMM services throughout its territory and a nonexclusive license to
market ORBCOMM services in international waters.
Each agreement provides that each International Licensee will obtain the
necessary regulatory approvals, procure the necessary ground infrastructure and
use commercially reasonable efforts to advertise, promote and market the ORBCOMM
system throughout the territory. In addition, each International Licensee has
agreed to pay certain license fees according to the provisions of each
agreement. Finally, each International Licensee pays to ORBCOMM a monthly
satellite usage fee based on the greater of a percentage of gross operating
revenues and a data throughput fee.
SUBSCRIBER UNIT MANUFACTURE AGREEMENT WITH MAGELLAN
As of July 31, 1996, and for a ten-year term, ORBCOMM entered into a
Subscriber Unit Manufacture Agreement with Magellan, a majority-owned subsidiary
of Orbital. Under the terms of the agreement, Magellan agrees to manufacture,
distribute and service subscriber units to be used with the ORBCOMM system
according to specifications and technical requirements established by ORBCOMM.
Under the terms of the agreement, ORBCOMM authorizes Magellan to use the
ORBCOMM-developed subscriber unit software in subscriber units Magellan offers
for sale to ORBCOMM or to any other buyer. ORBCOMM also authorizes Magellan to
manufacture and sell each subscriber unit that has been type approved by
ORBCOMM. Under the terms of the agreement, ORBCOMM does not remit any payments
to Magellan for the development, manufacture or delivery of any subscriber units
not specifically purchased by ORBCOMM. Moreover, the agreement provides that
Magellan shall pay to ORBCOMM per-subscriber unit royalty for each unit that
Magellan sells. Under a letter agreement dated as of March 19, 1998 between
ORBCOMM and Magellan, ORBCOMM has agreed to pay to Magellan a subsidy for each
Magellan subscriber unit sold through March 1999, up to an aggregate of $2.4
million.
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
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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.
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
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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 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The Financial statements listed in the index to the Financial
Statements that appears on page of this Report on Form 10-K are filed
as part of this Report.
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2. Financial Statement Schedules
Financial statement schedules have been omitted because they are
inapplicable or are not required.
(b) Reports on Form 8-K
Neither ORBCOMM nor Capital has previously been required to file a
Report on Form 8-K under the Act.
(c) Exhibits.
2(a) Purchase Agreement, dated as of August 2, 1996, by and among
ORBCOMM Capital, ORBCOMM USA, ORBCOMM International, OCC,
Teleglobe Mobile, Bear Stearns & Co. Inc., J.P. Morgan
Securities Inc. and RBC Dominion Securities Company.
3 Organizational Documents.
3.1(a) Certificate of Limited Partnership of ORBCOMM.
3.2(a) Restated Agreement of Limited Partnership of ORBCOMM.
3.2.1(d) Amendment No. 1 to Restated Agreement of Limited Partnership
of ORBCOMM dated December 2, 1996.
3.3(a) Certificate of Limited Partnership of ORBCOMM USA.
3.4(a) Restated Agreement of Limited Partnership of ORBCOMM USA.
3.5(a) Certificate of Limited Partnership of ORBCOMM International.
3.6(a) Restated Agreement of Limited Partnership of ORBCOMM
International.
4(a) Indenture, dated as of August 7, 1996, by and among ORBCOMM,
Capital, ORBCOMM USA, ORBCOMM International, OCC, Teleglobe
Mobile and Marine Midland Bank.
10 Material Contracts.
10.2(a) Pledge Agreement, dated as of August 7, 1996, by and among
ORBCOMM, Capital, and Marine Midland Bank as Collateral
Agent.
10.3(a) International System Charge Agreement, restated as of
September 12, 1995, by and among ORBCOMM, Teleglobe Mobile
and ORBCOMM International.
10.4(a) Master Agreement, restated as of September 12, 1995, by and
among ORBCOMM, Orbital, ORBCOMM, Teleglobe and Teleglobe
Mobile.
10.4.1(b) Amendment No. 1 to Master Agreement, dated as of February 5,
1997 by and among OCC, Orbital, Teleglobe and Teleglobe
Mobile.
10.5(a) Procurement Agreement, dated as of September 12, 1995, by
and between ORBCOMM and Orbital (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 on August 13, 1993).
10.5.1(c) Amendment No. 1 to Procurement Agreement dated December 9,
1996 between Orbital and ORBCOMM.
10.5.2(b) Amendment No. 2 to Procurement Agreement dated March 24,
1997 between Orbital and ORBCOMM.
10.6(a) Proprietary Information and Non-Competition Agreement,
restated as of September 12, 1995, by and among ORBCOMM,
Orbital, OCC, Teleglobe, Teleglobe Mobile, ORBCOMM USA, and
ORBCOMM International.
10.7(a) System Charge Agreement, restated as of September 12, 1995,
by and between OCC and ORBCOMM USA.
10.8(a) System Construction Agreement, restated as of September 12,
1995, by and between ORBCOMM and OCC.
10.9(a) Amendment No. 1 to System Construction Agreement, dated as
of July 1, 1996, by and between ORBCOMM and OCC.
10.10(a) Service License Agreement, dated as of December 19, 1995,
between ORBCOMM International and ORBCOMM Canada Inc.
10.11(a) Service License Agreement, dated as of October 10, 1996,
between ORBCOMM International and Cellular Communications
Network (Malaysia) Sdn. Bhd.
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10.12(a) Service License Agreement, dated as of October 15, 1996,
between ORBCOMM International and European Company for
Mobile Communicator Services, B.V., ORBCOMM Europe.
10.13(a) Ground Segment Procurement Contract, dated as of October 10,
1996, between ORBCOMM International and Cellular
Communications Network (Malaysia) Sdn. Bhd.
10.14(a) Ground Segment Facilities Use Agreement, dated as of
December 19, 1995, between ORBCOMM International and ORBCOMM
Canada Inc.
10.15(a) Ground Segment Procurement Contract, dated as of October 15,
1996, between ORBCOMM International and European Company for
Mobile Communicator Services, B.V., ORBCOMM Europe.
10.16* Orbital Communications Corporation 1992 Stock Option Plan.
10.17* Amended and Restated Administrative Services Agreement,
dated as of January 1, 1997 by and between ORBCOMM and
Orbital.
10.18* U.S. Gateway Earth Station Maintenance Service Agreement
dated as of October 1, 1997 by and between Orbital and
ORBCOMM.
10.19* Subscriber Communicator Manufacture Agreement dated as of
July 31, 1996 by and between ORBCOMM and Magellan
Corporation.
10.20* Reseller Agreement dated as of March 3, 1997 by and between
ORBCOMM USA and Orbital Sciences Corporation (the "Reseller
Agreement").
10.20.1* Amendment No. 1 to the Reseller Agreement dated as of
September 2, 1997.
10.21* Employment Agreement dated as of May 15, 1997 by and between
ORBCOMM and Robert F. Latham.
10.22* Consulting Agreement dated as of March 18, 1998 by and
between ORBCOMM and ORBCOMM Canada Inc.
21(c) Subsidiaries of the Registrants.
27* Financial Data Schedule.
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* Filed herewith.
(a) Incorporated by reference to the identically numbered exhibit to ORBCOMM's
Registration Statement on Form S-4, as amended (Reg. No. 333-11149).
(b) Incorporated by reference to the identically numbered exhibit to ORBCOMM's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 filed by
ORBCOMM on May 14, 1997.
(c) Incorporated by reference to the identically numbered exhibit to ORBCOMM's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed
by ORBCOMM on March 28, 1997.
(d) 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, filed by Orbital on March 27, 1997.
(e) 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, filed by Orbital on
March 28, 1996.
(f) Incorporated by reference to Exhibit 10.8.1 to the Orbital 1996 Form 10-K.
99
102
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 HERNDON, COMMONWEALTH OF VIRGINIA, ON MARCH 31, 1998.
ORBCOMM GLOBAL, L.P.
By: ORBITAL COMMUNICATIONS
CORPORATION, a general partner
By: /s/ SCOTT L. WEBSTER
------------------------------------
Scott L. Webster,
President
By: TELEGLOBE MOBILE PARTNERS,
a general partner
By: TELEGLOBE MOBILE INVESTMENT INC.,
its managing partner
By: /s/ CLAUDE SEGUIN
------------------------------------
Claude Seguin
Chief Executive Officer
100
103
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/ SCOTT L. WEBSTER Chief Executive Officer of ORBCOMM March 31, 1998
- ----------------------------------------------------- Global, L.P.
Scott L. Webster (Principal Executive Officer)
/s/ W. BARTLETT SNELL Senior Vice President Finance and March 31, 1998
- ----------------------------------------------------- Administration, Chief Financial
W. Bartlett Snell Officer and Treasurer of ORBCOMM
Global, L.P.
(Principal Financial Officer and
Principal Accounting Officer)
/s/ DAVID W. THOMPSON Director, Orbital Communications March 31, 1998
- ----------------------------------------------------- Corporation
David W. Thompson
/s/ SCOTT L. WEBSTER Director, Orbital Communications March 31, 1998
- ----------------------------------------------------- Corporation
Scott L. Webster
/s/ CLAUDE SEGUIN Director, Teleglobe Mobile Investment March 31, 1998
- ----------------------------------------------------- Inc.
Claude Seguin
/s/ GUTHRIE J. STEWART Director, Teleglobe Mobile Investment March 31, 1998
- ----------------------------------------------------- Inc.
Guthrie J. Stewart
Director, Teleglobe Mobile Investment
- ----------------------------------------------------- Inc.
Wan Aishah Wan Hamid
101
104
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 HERNDON, COMMONWEALTH OF VIRGINIA, ON MARCH 31, 1998.
ORBCOMM GLOBAL CAPITAL CORP.
By: /s/ SCOTT L. WEBSTER
------------------------------------
Scott L. Webster
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/ SCOTT L. WEBSTER President and Director of ORBCOMM March 31, 1998
- ----------------------------------------------------- Global Capital Corp.
Scott L. Webster (Principal Executive Officer)
/s/ W. BARTLETT SNELL Vice President, Treasurer and March 31, 1998
- ----------------------------------------------------- Director of ORBCOMM Global Capital
W. Bartlett Snell Corp.
(Principal Financial Officer and
Principal Accounting Officer)
102