1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 333-11149
ORBITAL COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 54-1535585
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization of Registrant) Identification No.)
21700 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166
(Address of Registrant's principal executive offices)
(Zip Code)
(703) 406-5000
(Registrant's 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 __ No X
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]
================================================================================
2
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 52
Item 11. Executive Compensation...................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 53
Item 13. Certain Relationships and Related Transactions.............. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 56
Signatures.................................................. 58
i
3
PART I
ITEM 1. BUSINESS
The information contained in this report on Form 10-K speaks as of and for
the year ended December 31, 1996 and not as of or for any other date or period
except as otherwise provided herein.
BACKGROUND
Orbital Communications Corporation ("OCC" or the "Company"), a Delaware
corporation, is a majority owned subsidiary of Orbital Sciences Corporation
("Orbital"). In 1990, Orbital formed OCC to develop and operate the first
satellite-based global two-way data and messaging communications system. In
1993, OCC, along with Teleglobe Mobile Partners ("Teleglobe Mobile"), a Delaware
general partnership, formed ORBCOMM Global, L.P. ("ORBCOMM"), a Delaware limited
partnership. Teleglobe Mobile is owned by Teleglobe Inc. ("Teleglobe") and
Technology Resources Industries Bhd. ("TRI"). Pursuant to the terms of the
Agreement of Limited Partnership of ORBCOMM between OCC and Teleglobe Mobile,
action by ORBCOMM generally requires the approval of General Partners (as
defined) holding a majority of the Participation Percentages (as defined) held
by the General Partners. Because OCC and Teleglobe Mobile each holds 50% of the
Participation Percentages in ORBCOMM, the approval of both OCC and Teleglobe
Mobile is generally required for ORBCOMM to act.
OCC is also a 2% general and limited partner in ORBCOMM USA, L.P. ("ORBCOMM
USA"), a Delaware limited partnership, while Teleglobe Mobile is a 2% general
and limited partner in ORBCOMM International Partners, L.P. ("ORBCOMM
International"), a Delaware limited partnership. ORBCOMM USA and ORBCOMM
International were formed to market ORBCOMM products and services in the United
States and internationally, respectively. OCC controls the operational and
financial affairs of ORBCOMM USA, and Teleglobe Mobile controls the operational
and financial affairs of ORBCOMM International. Directly and indirectly, OCC
holds 51% and 49% of ORBCOMM USA and ORBCOMM International, respectively, and
ORBCOMM holds a 98% non-controlling interest in each of these two marketings
partnerships.
OCC's largest asset is its 50% interest in ORBCOMM. OCC and Teleglobe
Mobile have invested approximately $160 million in ORBCOMM.
ORBCOMM is establishing the first commercial low-Earth orbit ("LEO")
satellite-based mobile data and messaging communications system that will be
available on a global basis (the "ORBCOMM System"). The ORBCOMM System, planned
to be fully deployed in early 1998, is designed to provide reliable, low-cost,
two-way global data and messaging communications through a constellation of 28
LEO satellites and a complement of associated ground infrastructure situated
around the world. Major target markets include worldwide mobile asset tracking;
remote industrial monitoring and control applications; environmental data
collection; and real time person-to-person and machine-to-machine
communications, including two-way Internet electronic mail ("email")
communications and recreational and business messaging.
Orbital is a space technology and satellite services company that designs,
manufactures, operates and markets a broad range of space products and services,
including launch systems, satellites, space sensors and electronics, ground
systems and software products, satellite access products and communications and
information services.
ORBCOMM Global Capital Corp. ("Capital"), a Delaware corporation, was
formed in July 1996 to act as a co-issuer in connection with the private
placement (the "Old Notes Offering") of $170 million 14% Senior Notes due 2004
with Revenue Participation Interest (the "Old Notes"). The Old Notes were
exchanged in January 1997 for notes that are substantially similar to the Old
Notes except that the new notes (the "Notes") are registered under the
Securities Act of 1933, as amended. The Notes are fully and unconditionally
guaranteed on a joint and several basis by OCC, Teleglobe Mobile, ORBCOMM USA
and ORBCOMM International, except that the guarantees are non-recourse to the
shareholders and/or partners
1
4
of the guarantors, limited only to the extent necessary for each such guarantee
not to constitute a fraudulent conveyance under applicable law. Capital has
nominal assets and will not conduct any operations.
THE ORBCOMM SYSTEM
General
ORBCOMM offers commercial intermittent data communications services in the
United States through its existing network, which consists of two LEO satellites
launched in April 1995 and related U.S. ground infrastructure. When fully
deployed, the ORBCOMM System is designed to provide data and short, alphanumeric
paging-like messaging communications coverage virtually anywhere on the Earth's
surface in a reliable and cost-effective manner. In contrast to "Big LEO"
systems, which are designed primarily for voice applications, the ORBCOMM
System, which is a "Little LEO" system, is focused on data communications and
messaging applications. The ORBCOMM System is designed to address the
substantial existing and growing demand for communications services worldwide,
without the high cost and geographic and technical limitations imposed by other
communications systems. ORBCOMM intends to distribute its services globally in a
cost-effective manner primarily through value-added resellers ("Resellers") and
other distribution channels, as appropriate, in the United States and
international service licensees ("International Licensees") around the world.
To use the ORBCOMM System for text messaging, a user creates a message
using a computer connected to an ORBCOMM subscriber communicator ("Subscriber
Communicator") or a stand-alone Subscriber Communicator, which message is sent
to the nearest ORBCOMM System satellite and delivered to an ORBCOMM Earth
station, which supports communication with the satellites, and then to the
Gateway Switching System, which processes the messages. Within the Gateway, the
message is processed using a combination of ORBCOMM-developed and commercial
email software, and sent on to its ultimate destination. If desired, an
acknowledgment message is returned to the sender. The final delivery may be to
another Subscriber Communicator or may make use of public/private X.25 data
networks or the Internet.
In October 1994, OCC became the first company to be awarded Federal
Communications Commission ("FCC") authority to construct, launch and operate a
LEO satellite-based data and messaging communications system in the United
States (the "FCC License"). The ORBCOMM System is the only commercial Little LEO
system that is fully licensed for all segments of its system in the United
States. In 1992, certain portions of the radio spectrum were allocated by the
International Telecommunications Union ("ITU") for use by Little LEO satellite
systems, such as the ORBCOMM System, on an international basis.
Recent Developments
In 1995, in addition to the successful launch of the first two ORBCOMM
System satellites, ORBCOMM completed initial development and construction of the
ground infrastructure located in the United States and associated network
control systems, and tested prototype Subscriber Communicators. In 1996,
additional progress was made on the ORBCOMM System. In February 1996, ORBCOMM
initiated intermittent data communications services in the United States. The
two ORBCOMM System satellites and four U.S. Earth stations are providing data
communications services, focused on environmental and industrial monitoring
applications for the U.S. environmental and oil and gas industries, and asset
and cargo tracking applications for the U.S. government and commercial entities,
with additional tracking and positioning applications targeted for the near
future. ORBCOMM has two satellites on orbit, with 26 additional satellites
scheduled for launch in 1997 and 1998.
ORBCOMM USA plans to provide initial services in the United States
primarily through Resellers, many of whom have an existing, well-established
market presence through their customer bases, market-specific brand name
recognition and distribution networks. Outside the United States, ORBCOMM
International will enter into service license agreements ("Service License
Agreements") with International Licensees who will be responsible in their
territory for, among other things, procuring from ORBCOMM International and
installing the necessary Gateways (facilities that transport and control the
flow of data and necessary communications and other information for the ORBCOMM
System), obtaining all regulatory
2
5
approvals to provide services using the ORBCOMM System and operating and
marketing services using the ORBCOMM System. During 1996, ORBCOMM USA executed
agreements with 14 additional Resellers and expanded its worldwide network of
International Licensees. ORBCOMM USA has 33 reseller agreements with companies
including ARINC, Inc., Corexco Consulting Services, Inc., Globitrac, Inc.,
Sky-Eye Railway Services, Inc. and the Stevens Water Monitoring Division of
Leupold & Stevens, Inc. In addition, ORBCOMM International has signed seven
Service License Agreements with International Licensees, five of which were
executed during 1996. In 1996, ORBCOMM International signed a Service License
Agreement with European Company for Mobile Communication Services, B.V., ORBCOMM
Europe ("ORBCOMM Europe"), a consortium of European companies, which has been
given the exclusive right to market services using the ORBCOMM System to
approximately 40 European countries. ORBCOMM International has also executed
Service License Agreements with ORBCOMM Canada Inc., which is controlled by
Teleglobe, Cellular Communications Network (Malaysia) Sdn. Bhd. ("Celcom"), a
wholly owned subsidiary of TRI, ORBCOMM Maghreb, S.A. ("ORBCOMM Maghreb"), CEC
Bosphorus Communications, Ltd. ("CEC Bosphorus"), SEC ORBCOMM (Middle East) Ltd.
("SEC ORBCOMM") and Communications Technology Inc. ("CTI"). ORBCOMM Canada,
Celcom, ORBCOMM Maghreb, CEC Bosphorus, SEC ORBCOMM and CTI were granted the
exclusive right to market ORBCOMM System services in Canada; Malaysia, Singapore
and Brunei; Morocco, Tunisia, Algeria and Mauritania; Turkey and eight Central
Asian countries; 11 Middle East countries; and the Republic of Korea,
respectively. As of December 31, 1996, 69 countries with a combined population
of almost one billion were covered by Service License Agreements.
During 1996, two Subscriber Communicator manufacturers were added to the
three existing manufacturers and four different types of Subscriber
Communicators were approved for manufacture. ORBCOMM has development and
manufacturing agreements with Kyushu Matsushita Electric Company, Ltd. (also
known as "Panasonic"). ORBCOMM has also executed Subscriber Communicator
Manufacturing Agreements, which include terms regarding the development,
manufacture and sales support for Subscriber Communicators, with
Scientific-Atlanta, Inc. ("Scientific-Atlanta"), Magellan Corporation
("Magellan"), a subsidiary of Orbital, Torrey Science Corporation ("Torrey
Science") and Stellar Electronics Ltd. ("Stellar"). Panasonic has received
authorization from ORBCOMM to manufacture two basic Subscriber Communicators,
one with and one without the ability to receive positioning signals from the
Global Positioning Satellite ("GPS") system, both of which are now commercially
available. Torrey Science received authorization from ORBCOMM in August 1996 and
Stellar received authorization from ORBCOMM in September 1996 to manufacture a
basic Subscriber Communicator.
Services
ORBCOMM System service offerings for mobile data and messaging
communications will fall into two broad categories with variations based on
market requirements: tracking and monitoring; and message and priority
communications.
Tracking and Monitoring. ORBCOMM believes that tracking and monitoring
users will include a broad group of industries that require a means of regularly
collecting data from, or in some cases controlling equipment in, multiple remote
locations. Major target markets include: (i) worldwide mobile asset tracking;
(ii) industrial monitoring and control applications; and (iii) environmental
data collection. Many of these users manage numerous, widely dispersed sites in
remote areas out of reach of the public switched telephone network ("PSTN") or
terrestrial-based wireless systems, and often accomplish data collection and
equipment control functions manually with on-site personnel.
Messaging and Priority Communications. ORBCOMM believes that messaging
communications users will include a broad range of commercial and consumer users
who require a means of communicating with locations such as their office,
dispatch center or home or who require the ability to send priority messages or
positioning information. Examples include professionals who work away from their
office, fleet operators who require reliable messaging between a central office
and mobile assets, and individuals who desire a means of communicating short
messages or positioning information from an automobile, boat or other remote
locations. These users rely on pagers, cellular phones, fleet dispatch systems
and public pay phones, all of which can be unavailable, inconvenient or
expensive in certain geographic locations. In remote geographic regions outside
3
6
the United States, these PSTN and terrestrial-based wireless systems are not
always available or cost-effective. As a satellite-based system with coverage
available virtually anywhere on the Earth's surface, ORBCOMM can offer messaging
services through the ORBCOMM System.
Addressable Markets
ORBCOMM has identified a number of industries and industry segments in the
United States where there exists a demand for mobile data and messaging
communications services for tracking and monitoring, which ORBCOMM views as the
initial primary target applications for its services. ORBCOMM believes that
certain portions of the transportation, energy, environmental and marine
industries or industry segments and the U.S. government possess characteristics
or requirements that are particularly well-suited to the services offered by
Little LEO systems. ORBCOMM refers to these portions as "addressable markets."
ORBCOMM's description of potential markets for its data and messaging
communications service offerings and ORBCOMM's addressable markets represent
only ORBCOMM's estimates with respect to such markets.
Transportation. Transportation companies require a cost-effective means of
regularly and reliably monitoring the location and the status of cargo globally
to reduce cargo losses, improve service and better use transportation assets.
The transportation market can be separated into four categories: trailers
including full truckload, less-than-full truckload and private trucking;
long-haul trucking; containers; and rail cars.
ORBCOMM believes that the U.S. addressable market for full truckloads
comprises non-refrigerated trailers belonging to large trucking fleets that need
to improve trailer utilization, and for less-than-full truckload comprises
non-refrigerated trailers that carry high-value goods and travel longer,
less-than-full truckload routes (greater than 400 miles) between regional
centers. The addressable market for private fleet trucks is expected to be those
used in "just-in-time" manufacturing and distribution systems and which,
therefore, typically require high levels of efficiency due to competition from
for-hire companies. ORBCOMM expects the addressable market for refrigerated
trailers to comprise those trailers for which cargo monitoring and trailer
utilization are required. Trailers (both refrigerated and non-refrigerated) are
being tracked by geostationary satellite-based systems (such as those offered by
QUALCOMM) that offer seamless coverage, but depend on larger power sources that
require the trailer to be attached to the main engine of the tractor. As a
result, when the trailer is detached from the tractor, it can no longer be
tracked. A low-power cellular system can be used to track untethered trailers;
however, geographic coverage is limited and ORBCOMM believes that the cost of
cellular roaming may make this service cost-prohibitive. Private trucking fleets
typically use systems internal to their companies where each trailer's number is
manually recorded as trailers enter and leave a point of distribution.
ORBCOMM believes that its addressable portion of the U.S. long-haul
trucking market is characterized by smaller fleets (typically less than 50
trucks) that need mobile communications to compete with larger fleets but have
been unable to afford the service offerings where equipment costs are
approximately $4,000 per unit. A low-cost alternative for these smaller fleets
has been paging, although paging offers only a one-way short data link to the
vehicle. ORBCOMM believes that the addressable market for the owner-operated
transportation vehicle sub-segment comprises those vehicles contracted to
larger, long-haul carriers. While these larger carriers resist installing $4,000
mobile communications units on vehicles they do not own, many are requiring
owner-operators to equip their vehicles with mobile communications.
ORBCOMM expects that its addressable market in the container (intermodal)
industry segment in the United States will comprise those containers carrying
the most valuable items subject to theft. Intermodal container transportation
systems use manual systems to record containers as they enter and leave yards.
Unlike the ORBCOMM System, these passive systems record where a trailer has
been, but not where it is, its status or the condition of its contents.
ORBCOMM believes that the addressable market for rail transportation will
comprise those rail cars used to transport high-value cargo or hazardous cargo
comprising bulk materials. The American Association of Railroads has mandated
the use of automatic equipment identifiers ("AEI") on rail cars. AEI systems
consist of a radio tag mounted on the rail car and a reader that records the
identity of the car as it passes by.
4
7
AEIs therefore share the same limitations as bar code systems because they only
record where the trailer has been, not its current location, status or the
condition of its contents.
Energy. ORBCOMM believes that the ORBCOMM System can provide an effective
means of monitoring and controlling various assets used in the energy industry.
Pipeline operators take active measures to monitor lines and limit pipeline
corrosion to comply with laws by installing cathodic protection systems that
include a device called a rectifier. Protection systems also are required by
federal regulations on storage tanks, utility systems and injection wells. The
majority of protection system records are compiled from data collected by
personnel who travel to the site and record the readings. Conventional industry
practice is to install one rectifier per mile of pipeline with generally one
transceiver (subscriber communication device) per rectifier. However, several
pipelines can be laid along one right-of-way, with a common rectifier system,
meaning that multiple rectifiers can feed into one transceiver unit. ORBCOMM
believes that its addressable market comprises the aggregate number of
rectifiers deployed on U.S. pipelines. In addition, ORBCOMM believes that its
addressable market for wells producing natural gas and crude oil and gas and
electric utility meters in the United States will be those production wells and
utility meters located in remote geographic locations.
Environmental. Many industrial companies and government agencies have a
need to monitor meteorological, hydrological and environmental data such as
rainfall, water levels and water quality at remote sites. For example, the
Environmental Protection Agency has established standards for air and water
quality that require pollution abatement procedures, which procedures rely
heavily on the automated logging and collection of data from remote sites. In
addition to pollutants, water monitoring devices are used to measure flow rate,
temperature and water level. ORBCOMM believes that the addressable market
comprises those sites that are located in highly remote areas not served by
terrestrial systems, which can use Subscriber Communicators to transmit small
amounts of data relatively infrequently and on an exception basis.
Marine. ORBCOMM has identified two U.S. marine industry segments,
Fisheries, and Barges and Workboats. ORBCOMM's addressable market is expected to
be those fishing vessels that operate primarily in the Gulf of Alaska, the
Northwest United States and the Northwestern Atlantic. These vessels usually
remain at sea for extended periods and operate on extremely tight margins with
operating costs that are carefully controlled. As a result, they need low-cost
communications systems to meet safety and regulatory requirements and to
exchange commercial and operational information with their offices, fuel
providers, provisioners and packing houses. ORBCOMM expects that the addressable
market for barges and workboats will comprise barges that operate without
independent sources of power and carry grain, coal and other commodities. They
traverse U.S. waterways in groups of barges that are "fleeted" together and
pushed by towboats and require energy-efficient monitoring and communications
devices to transmit position reports, cargo status reports and security
information. Tugs, towboats and supply/service boats also need low-cost two-way
communications to send operational and service-related data to their land-based
headquarters and receive dispatch instructions in return.
U.S. Government. ORBCOMM believes U.S. Government applications represent a
major target market for its services. Pressures to contain Federal spending and
specific acts of Congress have resulted in a major change in the procurement
practices in the Department of Defense ("DoD") and civil agencies, causing them,
where possible, to purchase satellite-based services from commercial providers.
ORBCOMM believes that use of LEO systems like the ORBCOMM System will provide
Government users with low-cost solutions, low probability of intercept and
detection and worldwide availability. ORBCOMM believes that DoD programs have
requirements unfulfilled by existing systems. Each program promotes the vision
of extending communications down to individual soldiers and system operators.
There is no dedicated DoD system available using inexpensive, small, lightweight
communication units. ORBCOMM expects to compete to provide LEO service to the
U.S. Government, including in connection with certain programs already announced
by the U.S. Government.
Foreign Governments. Use of Little LEO systems such as the ORBCOMM System
is expected to provide foreign governments with low-cost applications, low
probability of intercept and detection and worldwide availability. Potential
defense applications include transmission of GPS-determined position data for
maneuvering units and downed pilots and transmission of air defense, fire
support data, asset tracking and
5
8
tactical messaging. Potential civil government applications include wide-area
clandestine communications, monitoring and control of natural resources and
search and rescue functions. For foreign governments, ORBCOMM anticipates that
the ORBCOMM System could improve coverage and reliability and reduce the cost of
such applications.
With respect to the provision by ORBCOMM of services using the ORBCOMM
System on an international basis, ORBCOMM believes that certain of its
international business activities, including its provision of services through
International Licensees to foreign end-users, public or private, will be
governed primarily by the internal laws of the relevant foreign countries or
regions. The provision of such services may also be subject to U.S. laws,
regulations and treaties regarding the export or sale of technology, products or
services by U.S. companies to foreign governments or private foreign entities,
including those U.S. laws, regulations and treaties that restrict or regulate
the export by U.S. companies of certain sensitive technologies, products or
services having military or other applications.
Future Markets. In addition to the markets and applications (such as those
described above) that have already displayed a demand for mobile data and
messaging communications services, ORBCOMM believes that with the full
deployment of the constellation, the ORBCOMM System's combination of
capabilities will stimulate new demand, especially among potential messaging
users. ORBCOMM expects that in the United States, the ORBCOMM System will
complement existing and planned terrestrial wireless communications systems by
providing coverage in geographic areas where such services are not offered or by
enhancing data applications being provided through the PSTN or the public
switched data network ("PSDN"). Internationally, ORBCOMM believes that the
ORBCOMM System can offer services in developing countries or remote regions
where basic telephone service or data and messaging services are not available.
As a satellite-based system with coverage of virtually all of the Earth's
surface, ORBCOMM can efficiently and cost-effectively offer communications
services in these geographic areas through the ORBCOMM System.
Marketing
Domestic. The exclusive right to market the ORBCOMM System in the United
States is held by ORBCOMM USA, a marketing partnership in which OCC owns a 51%
direct and indirect controlling interest. ORBCOMM USA has developed a
comprehensive marketing plan that includes distribution, applications
development, customer service and pricing strategies. While offering commercial
intermittent service, ORBCOMM USA is seeking to build an initial base of
subscribers in the United States and expand on its agreements with key channels
of distribution. During the fully operational stage, ORBCOMM expects that
ORBCOMM USA's sales and marketing staff will primarily support indirect channels
of distribution.
ORBCOMM USA is in the process of negotiating and signing agreements with
Resellers who purchase ORBCOMM System services directly from it and resell these
services to end-users in a specific industry and/or market as part of a package
that may include other products or services. In soliciting customers, the
Reseller "adds value" to the basic service offering by bundling related
applications software, hardware or product packaging for its respective industry
or market segment. Mobile data carriers are expected to offer ORBCOMM System
services by taking advantage of the ORBCOMM System's "gap-filler" properties as
well as its geolocation and acknowledgment features. Such additional ORBCOMM
partners are likely to come from such areas as paging, personal communications
services ("PCS"), mobile data, cellular and intelligent transportation systems.
International. The Company indirectly owns a 49% interest in ORBCOMM
International, the marketing partnership that has been exclusively licensed to
market the ORBCOMM System outside the United States. Provision of communication
services using the ORBCOMM System outside the United States is expected to be
achieved through International Licensees authorized by ORBCOMM International.
ORBCOMM International has signed seven Service License Agreements with
International Licensees and is in the process of negotiating and signing
additional Service License Agreements covering various countries or regions of
planned service outside of the United States.
International Licensees will be responsible for obtaining all necessary
licenses and approvals for the use of the ORBCOMM System and the construction
and operation of the Gateways in the designated territories.
6
9
Accordingly, in selecting authorized International Licensees for a particular
country, ORBCOMM International considers such factors as an International
Licensee's: (i) reputation in the marketplace; (ii) existing distribution
capabilities and infrastructure; (iii) financial condition and other resources;
and (iv) ability to obtain the requisite local regulatory approvals.
International Licensees will pay fees for access to the ORBCOMM System in their
territory, including a monthly Satellite Usage Fee. The Satellite Usage Fee is
calculated as the greater of a percentage of gross operating revenues and a data
throughput fee, which percentage and dollar amount may be increased by ORBCOMM
International in accordance with the terms of the agreement.
In conjunction with the execution of a Service License Agreement, an
International Licensee will be required to purchase from ORBCOMM International a
Gateway, which will include a specific number of Earth stations. In certain
defined circumstances, an International Licensee may be permitted by ORBCOMM
International to share a Gateway with another International Licensee in an
adjacent territory, thereby reducing the initial out-of-pocket start-up costs
for an ORBCOMM System franchise. For example, ORBCOMM International has executed
a Ground Segment Facilities Use Agreement with ORBCOMM Canada, pursuant to which
ORBCOMM Canada is authorized for a fee to access and use the U.S. Gateway on a
shared basis with ORBCOMM USA.
System Architecture
Overview. The ORBCOMM System has been designed to provide for the delivery
and receipt of data communications and short, alphanumeric paging-like messages
anywhere in the world on a highly efficient and cost-effective basis. ORBCOMM
System satellites are designed specifically for the transmission of short
messages. This design focus eliminates a number of complex and expensive
components such as customized spot beams, on-board switching and high-powered
amplifiers that are required on larger, more complex satellites designed to
carry voice, video and data traffic. The less complex and more compact design of
the ORBCOMM System satellites (approximately 95 pounds) reduces the cost and
time of production and enables ORBCOMM to launch multiple satellites using a
single, relatively low-cost launch vehicle. The ORBCOMM System uses a digital
packet-switched communication protocol. ORBCOMM believes this design will
provide it with a substantial cost advantage versus the communication protocols
to be used by the proposed Big LEO systems such as Iridium and Globalstar.
Unlike the ORBCOMM System, Big LEO systems, which are designed primarily for
two-way voice traffic, are required to establish a circuit-oriented connection
over their network to transmit even short messages, which significantly
increases the per-message transmission cost for short messages.
The two operational ORBCOMM System satellites have provided ORBCOMM with
significant information regarding actual satellite performance in a space
environment. As a result of analyzing this information, as well as information
obtained prior to launch, ORBCOMM, in conjunction with Orbital, has undertaken a
redesign of certain system elements of the satellites. ORBCOMM also continues to
experience, from time to time, certain technical difficulties with the ORBCOMM
network, including unplanned outages of certain electronic systems and
subsystems on its initial two satellites resulting in the temporary inability to
process subscriber communications. While ORBCOMM believes these technical
difficulties have been addressed as experienced, and that none of these
difficulties has resulted in a significant degradation of satellite performance,
there can be no assurance that performance degradation in these two satellites
will not occur in the future.
The ORBCOMM System consists of four operational segments: (i) a base space
segment consisting of a constellation of 28 LEO satellites; (ii) a ground
segment consisting of Gateways, the major elements of which include Earth
stations sending and receiving signals and a message switching system that
processes the message traffic; (iii) a control segment to monitor and manage the
flow of information through the system; and (iv) a subscriber segment consisting
of communicators used by subscribers to transmit and receive messages to and
from nearby satellites.
Space Segment. The base Space Segment will consist of a constellation of
28 satellites comprising three planes of eight satellites and two planes of two
satellites in highly inclined orbits (of which one plane of two
7
10
satellites has been launched), all at approximately 775 kilometers above the
Earth. The two in-orbit satellites are in a 70 degrees inclined plane at an
altitude of approximately 740 kilometers. The MicroStar(TM) satellites are
produced by Orbital and generally will be deployed in groups of eight using
Orbital's Pegasus(R) XL launch vehicle. Two satellites are to be placed in a
high-inclination orbit using an Orbital Taurus(R) launch vehicle. The design of
the remaining 26 satellites (as well as the eight ground spare satellites) is
expected to be substantially identical.
Under the terms of the ORBCOMM System Procurement Agreement (the
"Procurement Agreement") between Orbital and ORBCOMM, ORBCOMM is purchasing,
among other things, 34 LEO satellites and launch services for 26 satellites.
Eight of the 34 satellites may be used as ground spares and launched in the
event of the loss of satellites as a result of a launch failure or in-orbit
satellite failure. In the event such satellites are not needed for such purpose,
ORBCOMM intends to launch these satellites as an additional plane of eight, as
authorized by the FCC License. This would increase global coverage and provide
additional system redundancy. Except for the communications software, which is
the responsibility of ORBCOMM, Orbital is responsible for the performance of the
satellites, the U.S. Earth stations and the satellite management functionality
of the Network Control Center ("NCC").
The ORBCOMM network is unique in that both the Ground Segment and the
Subscriber Segment (described below) communicate with the satellites in the same
band, thus eliminating the design complexity, as well as the associated mass,
power and cost, of supporting multiple radio payloads on a single satellite. The
satellites also contain an intelligent packet-routing capability, including a
limited store-and-forward capability.
Ground Segment. The Ground Segment consists of Gateways strategically
located throughout the world. The role of the Gateway is to provide access to
the Space Segment and interface to public and private data networks. The major
elements of a Gateway include:
- Earth stations, each of which is composed of two radomes, with enclosed
VHF tracking antennae, one of which is redundant, associated pedestal,
controller, and radio equipment;
- Gateway Message Switching System, which processes the message traffic and
provides the interconnection to the terrestrial networks; and
- Gateway Management System, which manages the Gateway elements.
To provide real time services using the ORBCOMM System in a particular
geographic region, an appropriately located Gateway is required. Substantially
all elements of the U.S. Gateway have been constructed, including four Earth
stations located in New York, Arizona, Georgia and Washington. ORBCOMM
International has entered into agreements with six International Licensees for
the construction of Gateways outside the United States and expects to enter into
similar additional agreements in connection with the execution of new Service
License Agreements. The cost and implementation of these Gateways is expected to
be borne by the International Licensees.
The Gateway satellite links have been designed to make use of single
uplink and downlink channels for all ORBCOMM System satellites by using a Time
Division Multiple Access ("TDMA") protocol. This protocol will permit multiple
Gateways to communicate simultaneously with a single satellite. The TDMA
protocol has several advantages, including the ability to provide a virtually
seamless handover of a satellite from Earth station to Earth station under the
centralized control of the NCC.
Control Segment. The Control Segment monitors and manages all network
elements to ensure continuous, consistent operations in the provision of
quality service. The Control Segment is housed at the NCC. ORBCOMM is
constructing a new NCC, which is scheduled to be completed during the third
quarter of 1997, that will allow ORBCOMM to control, monitor and administer the
28 satellite constellation and ground control assets.
The Control Segment systems include a network management system that
presents the status of all network elements and a space vehicle management
system. Through the U.S. Gateway, managed from the NCC, ORBCOMM has access to
the Space Segment for command and control purposes, although, consistent with
the rules and regulations of the FCC, OCC maintains ultimate control over the
ORBCOMM System.
8
11
Subscriber Segment. The Subscriber Segment consists of various models of
Subscriber Communicators that are generally designed to support specific
application needs of users. The Subscriber Communicator models will include: (i)
vehicular/battery-powered Subscriber Communicators that could be used in asset
tracking, cargo monitoring, or vehicular operation monitoring; (ii) externally
powered Subscriber Communicators for fixed applications such as pipeline
monitoring, remote device control, or environmental monitoring; and (iii)
self-contained, battery- and/or solar-powered Subscriber Communicators that
would support applications where commercial or other external power is not
available, including personal messaging applications.
SUMMARY SATELLITE DATA
The most significant characteristics of the satellites that comprise the
ORBCOMM System, such as their design specifications, coverage and design life,
as well as licensing and launch information for the satellites, are summarized
in the following table.
NUMBER OF DESIGN
SATELLITES(1) PLANE LAUNCH DATE LICENSED LIFE
------------- ---------- ----------- ------------------- -------
A. OPERATIONAL(2)
1. FM 1-2 2 70 degrees Pegasus October 20, 1994(3) 4 Years
B. LICENSED
1. FM 3-4 2 70 degrees Taurus(4) October 20, 1994 5 Years
2. FM 5-12 8 45 degrees Pegasus XL October 20, 1994 5 Years
3. FM 13-20 8 45 degrees Pegasus XL October 20, 1994 5 Years
4. FM 21-28 8 45 degrees Pegasus XL October 20, 1994 5 Years
5. FM 29-36(5) 8 45 degrees Pegasus XL October 20, 1994 5 Years
- ---------------
(1) Each of the satellites that comprise the ORBCOMM System is an Orbital
MicroStar satellite, measuring approximately 41 inches in diameter, 6.5
inches in height, 170 inches in deployed length and 88 inches in "deployed
width at solar arrays."
(2) The two ORBCOMM System satellites that are in orbit provide communications
availability in the United States for approximately 10% of each 24-hour
period (eight to ten passes over a fixed point on the Earth's surface each
day), with maximum outages of approximately nine hours.
(3) The license for the ORBCOMM System issued to OCC by the FCC on October 20,
1994 supersedes the earlier experimental licenses granted to OCC and
includes the two satellites launched by OCC in April 1995. The October 20,
1994 license grants OCC the authority to construct, launch and operate 36
LEO satellites in the United States.
(4) These two satellites are intended to be launched as a secondary payload on a
Taurus launch vehicle, also manufactured by Orbital.
(5) These eight satellites represent ground spares that may be deployed as a
fourth plane by ORBCOMM, provided that, subject to FCC approval, ORBCOMM may
determine not to so deploy such satellites.
COMPETITION
Competition in the communications industry is intense, fueled by rapid and
continuous technological advances and alliances between industry participants
seeking to use such advances on an international scale to capture significant
market share. The ORBCOMM System is the only commercial Little LEO system to be
licensed fully for all segments of its system within the United States. ORBCOMM
inaugurated commercial service on February 1, 1996, becoming the first
commercial Little LEO mobile satellite service provider. ORBCOMM believes that
commencement of commercial service provides it with a substantial head start in
developing markets, distribution systems, applications and customers globally.
ORBCOMM expects that potential competitors will include other Little LEO
systems, such as Starsys Global Positioning, Inc. ("Starsys"), Big LEO systems,
such as the Iridium and Globalstar systems and several existing and planned
geosynchronous Earth orbit ("GEO") systems such as the American Mobile Satellite
Corporation system.
Starsys is licensed to construct and operate a multiple-satellite
constellation that, if deployed, could compete directly with the ORBCOMM System.
Starsys employs code division multiple access ("CDMA") modulation (spread
spectrum) that must operate in spectrum that is allocated on both a "primary"
and "secondary" basis to Little LEO services. As a result, Starsys will operate
at low power levels to avoid interference to other services. The low power
levels result in a maximum transmission rate of 600 bps from Subscriber
Communicators compared with 2,400 bps for the ORBCOMM System. In addition, the
U.S.
9
12
Government has imposed a channel occupancy limit on Starsys of 25% of that
permitted for the ORBCOMM System to prevent interference to existing U.S.
Government systems. ORBCOMM believes that no operational Starsys satellites will
be launched until 1998 at the earliest, and that completion of the network will
not be accomplished before 2000.
One other entity has been licensed by the FCC to provide Little LEO
satellite services in the United States. Volunteers in Technical Assistance
("VITA"), a not-for-profit organization, has been licensed for one of the two
satellites for which it applied. VITA will use a small amount of uplink and
downlink spectrum to transmit health, research and scientific data on a delayed
basis between developing countries and the United States. VITA's first satellite
was destroyed in 1995 as a result of a launch vehicle failure. VITA has
requested that the FCC authorize it to launch a replacement satellite. It is
expected that the FCC will authorize VITA to launch a replacement satellite.
ORBCOMM does not expect that any of the other proposed Little LEO systems
participating in a second licensing round before the FCC will be in a position
to offer competing real time data and messaging communications services before
the year 2000. Even if the FCC were to license one or more of these other
applicants, ORBCOMM holds a substantial advantage over these potential
competitors by virtue of its having already obtained FCC licensing for all
elements of its system in the United States, by achieving, in large part,
international coordination of its designated frequencies through the ITU, and
having already designed, constructed and deployed a fully functional, end-to-end
system. Over the course of the next several years, ORBCOMM expects that it will
obtain further advantages over these potential competitors by (i) launching the
remaining satellites in the ORBCOMM System, (ii) signing agreements with
additional Subscriber Communicator manufacturers, (iii) signing reseller
agreements through ORBCOMM USA, (iv) signing Service License Agreements through
ORBCOMM International and Service License Agreements with additional marketing
entities and (v) expanding its marketing activities generally as the ORBCOMM
System matures.
Plans for other Little LEO systems have been announced in Russia, France,
Tonga, Brazil, Mexico, Uganda, Australia and Korea. However, with the sole
exception of the French candidate system, the ORBCOMM System and those of the
other U.S. licensees are expected to occupy all but a small portion of the
allocated spectrum and are protected from harmful interference from all other
systems.
The Big LEO systems, which will operate LEO mobile satellite systems using
radio frequencies above 1 GHz, are not expected to be ready for real time,
uninterrupted service before 1998. In addition, all the Big LEO systems are
designed primarily to provide two-way voice services which require larger, more
complex satellites than the ORBCOMM System satellites, and larger constellations
to provide coverage. As a result, the cost of the Big LEO systems is
significantly greater than those of the ORBCOMM System. Based on filings with
the FCC, Iridium anticipates an initial service date in 1998 for a proposed
66-satellite constellation to provide voice and other communications services at
usage charges of approximately $3.00 per minute plus tail charges (land-line
extension charges). The total system cost is expected to be approximately $4.7
billion. The Globalstar system is expected to cost approximately $2.5 billion
and consists of a constellation of 48 satellites with usage charges of
approximately $0.55 per minute. The announced objective service date for the
Globalstar system is in 1998.
Satellite-based communications systems are characterized by high up-front
costs and relatively low marginal costs of providing service. A number of Big
LEO and Little LEO systems are being constructed or proposed, and while the
proponents of these systems foresee substantial demand for the services they
will provide, the actual level of demand will not become known until such
systems are constructed, launched and begin operations. Big LEO and GEO systems
are designed primarily to provide two-way voice services, which require larger,
more complex satellites and require a circuit-oriented connection over their
network to transmit even short messages, which significantly increases their
per-message cost for such short messages. However, these systems could seek to
offer services similar to those offered by the ORBCOMM System. In such case,
price competition could be intense.
The ORBCOMM System is not intended to compete directly with existing and
planned terrestrial messaging and data systems including cellular paging
systems. ORBCOMM believes that the ORBCOMM
10
13
System will complement these services, including the cellular and paging
services provided by TIW or TRI, which provide low-cost services primarily in
metropolitan areas where subscriber densities justify construction of radio
towers. Such systems generally do not have sufficient coverage outside
metropolitan areas, making them less attractive to some vertical markets such as
field service operations and trucking, where assets spend large portions of
their operating time outside terrestrial system coverage areas. The ORBCOMM
System presents an attractive complement to tower-based services because it can
provide geographic gap-filler service at affordable costs without the need for
additional infrastructure investment.
It is expected that as terrestrial communications services expand to
regions that are underserved or not served by wireline or cellular services,
demand for ORBCOMM System service in these regions may be reduced. ORBCOMM may
also face competition in the future from companies using new technologies and
new satellite systems. A number of these new technologies, even if they are not
ultimately successful, could have an adverse effect on ORBCOMM. ORBCOMM's
business would be adversely affected if competitors begin operations or existing
or new communications service providers penetrate ORBCOMM's target markets
before completion of the ORBCOMM System. Additionally, as with any
satellite-based system, the ORBCOMM System will function when there is an
unobstructed line-of-sight between the user and one or more of the ORBCOMM
System satellites overhead, and services will not be available inside buildings
or other similar structures. There can be no assurance that these
characteristics will not adversely affect subscriber demand for the ORBCOMM
System.
REGULATION
United States FCC Regulation
Regulatory History of ORBCOMM System. All commercial non-voice,
non-geosynchronous ("NVNG") satellite systems, including Little LEO systems such
as the ORBCOMM System, in the United States are subject to the regulatory
authority of the FCC, which is the U.S. agency with jurisdiction over commercial
uses of the radio spectrum. Little LEOs must obtain an authorization from the
FCC to construct and launch their satellites and to operate their satellites to
provide services in assigned spectrum segments.
On February 28, 1990, OCC filed an application with the FCC for a Little
LEO system and on March 13, 1992 and May 28, 1993, the FCC awarded OCC
experimental licenses to develop and test a limited Little LEO service. These
licenses, plus other licenses previously granted to OCC, permitted the launch of
two satellites, the construction of two ground stations, the development and
production of 1,000 subscriber terminals and the marketing of revenue-producing
services.
On October 20, 1994, the FCC License was issued to OCC. Pursuant to the FCC
License, OCC was granted authority by the FCC to construct, launch and operate
an additional 34 satellites located 775 kilometers above Earth, in four inclined
orbital and two near-polar planes, for the purpose of providing two-way data and
message communications and position determination services in certain specified
segments of the radio frequency spectrum. The FCC License grants OCC the
authority to operate in certain segments of the radio frequency spectrum for its
uplink and downlink functions.
Uplink: 148.0-149.9 MHz
Downlink: 137.0-138.0 MHz and 400.075-400.125 MHz
The FCC License is for private carriage and extends ten years from the
operational date of the first ORBCOMM satellite, FM1, which was April 3, 1995.
The milestone requirements of the FCC License mandate that OCC launch its first
two satellites by December 1998 and its remaining 34 authorized satellites by
December 2000. OCC has already met the first milestone with the launch of its
first two satellites, FM1 and FM2, in April 1995. OCC has set an aggressive
launch schedule for 26 satellites that, if successful, will result in OCC
reaching the second milestone by the end of the first quarter of 1998, subject
to receipt of FCC approval by such date in the event ORBCOMM determines not to
deploy the eight ground spares as a fourth plane. In addition, OCC is required,
three years prior to the expiration of the FCC License, to apply for a license
renewal. Although the FCC has indicated that it is inclined to grant license
renewals, it is not certain that OCC's license would be renewed should it apply.
11
14
Under the terms of a coordination agreement between Starsys and OCC, which
was incorporated into the terms of the FCC License, OCC is required to shut down
its left-hand circular polarization ("LHCP") satellite-to-subscriber downlink
channels under certain circumstances when operation of such channels would
interfere with the Starsys system. To further lessen the possibility of
co-polarization interference, OCC also agreed to modify its frequency plan to
locate its LHCP channels in the lower portion of the 137.0-138.0 MHz band.
Although this agreement only applies to OCC's domestic operations, the FCC
reserved the right to consider extending these coordination provisions to OCC's
international operations if notified of actual sharing difficulties between the
ORBCOMM System and Starsys.
In 1995, the FCC granted OCC licenses to operate four Earth stations in the
continental United States and granted OCC a blanket license to deploy up to
200,000 Subscriber Communicators. Thus, the ORBCOMM System is the only
commercial Little LEO system to be licensed fully for all segments of its system
within the United States.
Second Processing Round. On November 16, 1994, the FCC closed the
application filing period for applications for other proposed NVNG satellite
systems. There are seven NVNG applicants in the second processing round
(including OCC), each of which proposes to operate in all or part of the same
frequencies as the ORBCOMM System in the United States.
In its second round application before the FCC, OCC seeks authorization to
construct 12 more satellites to improve its high-latitude coverage over Alaska,
Canada and Europe, as well as to provide additional capacity and greater
in-orbit redundancy. This proposal would require the FCC to allocate an
additional 90 kHz of spectrum in the 137-138 MHz downlink to OCC. OCC also has
requested use of an additional 50 kHz in the 149.9-150.05 MHz band for a
worldwide gateway uplink. This spectrum, while registered to OCC, is occupied by
Russian military satellite downlinks.
Although the FCC has closed the second processing round for NVNG systems,
it has not yet licensed any of the second round applicants. On October 29, 1996,
the FCC issued a Notice of Proposed Rulemaking (the "Notice") that sets forth
proposed rules for the second licensing round for Little LEO systems. In the
Notice, the FCC indicated that there was sufficient spectrum available for only
one to three additional licensees. Due to the scarcity of spectrum, the FCC
proposed to limit the second processing round to applicants who were not
licensed in the first processing round and are not affiliated with companies
licensed in the first processing round. In addition, to the extent there are
mutually exclusive applicants in the second round, the FCC has sought comments
on whether it should conduct an auction for the available licenses. The FCC
anticipates that it will issue a final order on licensing rules by April 1997
and that it will proceed to licensing promptly thereafter. If the FCC's proposal
to limit the second licensing round to "new" applicants is adopted and upheld,
it would exclude OCC from participation in the second round. If OCC is in fact
excluded from the second licensing round, OCC would likely only obtain
additional spectrum to provide expansion capacity for the ORBCOMM System if
additional spectrum is subsequently allocated for use by Little LEO systems.
Request for Modification of FCC License. On October 20, 1995, OCC
submitted to the FCC a request for modification of the FCC License (the
"Modification Request"), proposing to reduce each of the ORBCOMM System
satellites' subscriber downlinks operating in the 137-138 MHz band from two to
one, while changing the downlink data rate to a selectable rate of either 4.8 or
9.6 kbps, which would reduce the ORBCOMM System's overall bandwidth requirements
by 40 kHz. OCC also proposed to continue to operate at 4.8 kbps in
high-inclination planes, and at 56 kbps in the gateway downlink on all
satellites. The Modification Request would eliminate the need for OCC to shut
down its LHCP when in view of a Starsys Earth station and thus obviate many of
the restrictions imposed on the ORBCOMM System under the terms of the FCC
License. In addition, the Modification Request would facilitate coordination of
the ORBCOMM System with Russian meteorological satellites operating in this
bandwidth and could facilitate OCC's coordination efforts with the proposed
French S/80-1 satellite system. Several of the other second round applicants
have filed comments with the FCC opposing the Modification Request. The
Modification Request has now completed the public comment cycle and OCC believes
that the Modification Request will be granted within the next several months.
Should the FCC fail to grant the Modification Request, it could have a material
adverse effect on the ORBCOMM System.
12
15
International Regulation
ITU Spectrum Allocations. The ORBCOMM System operates both in the United
States and internationally using frequencies allocated for Little LEO systems in
the International Table of Frequency Allocations (the "International Table").
The International Table identifies radio frequency segments that have been
designated for specific radio services by the member nations of the
International Telecommunications Union (the "ITU"). Major portions of the 137 to
150 MHz band and a narrow portion of the spectrum band at 400 MHz have been
allocated on a global basis to Little LEO systems. The specific frequency
allocations for uplink and downlink operations include the following:
Uplink: 148.0-149.9 MHz (1.9 MHz on a primary basis)
Downlink: 137.0-138.0 MHz (675 kHz on a primary basis; 325 kHz on a
secondary basis)
400.15-401.00 MHz (850 kHz on a primary basis)
In addition, 3 MHz of uplink and 3 MHz of downlink frequencies have been
allocated on a secondary basis in the 300 MHz band. The band 400.075-400.125 MHz
licensed for use by the ORBCOMM System already was allocated previously on a
global basis to Time and Frequency Standard service and OCC's planned use of
this bandwidth complies with the regulations governing its use.
A designation of "primary" places the Little LEO systems on an equal
footing with existing users of these frequencies, subject to the provision that
they not interfere with those services or constrain their growth and, with
respect to certain countries and certain frequency bands, that the Little LEO
systems not claim protection from those other services. A "secondary"
designation means that the other users of the same frequencies have priority
over the Little LEO systems and are not required to accommodate or avoid
interference with them.
ITU Coordination. The United States, on behalf of OCC, is required to
coordinate the frequencies used by the ORBCOMM System through the ITU. ITU
frequency coordination is a necessary prerequisite to obtaining interference
protection from other satellite systems. The United States through the FCC, on
behalf of OCC, notified the ITU that the ORBCOMM System was placed in service on
April 3, 1995 and that it has operated without complaints of interference since
that time. The FCC also informed the ITU that OCC has successfully completed its
coordination with all other administrations except Russia and France and the FCC
has notified (registered) the ORBCOMM System with the ITU except for Russia and
France. OCC believes that the Modification Request would facilitate its
coordination efforts with Russia and could facilitate its coordination efforts
with France. OCC expects that it will successfully complete the ITU coordination
process with Russia and with France in 1997, at which time the ORBCOMM System
will be fully registered with the ITU and accorded protection from interference
from any other subsequently developed system.
ITU coordination is also required for the uplink ground segment of the
ORBCOMM System, but is the responsibility of individual administrations.
Depending on the location of particular ground stations, the applicable
coordination distance specified in the ITU procedures may extend across
international boundaries and require coordination by more than one government
authority.
Coordination with Intelsat and Inmarsat. Pursuant to the Intelsat treaty,
international satellite operators are required to demonstrate that they will not
cause economic or technical harm to Intelsat. OCC was notified in March 1995
that this coordination with Intelsat has been completed successfully. The
Inmarsat treaty similarly requires both technical and economic harm
coordination. OCC was notified in October 1995 that it had successfully
completed both technical and economic coordination with Inmarsat.
Regulation of Service Providers. Primary responsibility for obtaining
local regulatory approval to offer ORBCOMM System services in countries outside
the United States will reside with the various International Licensees. The
process for obtaining operating approval in foreign countries generally conforms
to the following model. The International Licensee requests operating authority
from the appropriate national regulatory body, which has the sole authority to
grant an operating license. Obtaining such local regulatory approvals normally
requires, among other things, that the International Licensee demonstrate the
absence of interference to other authorized uses of the spectrum in each
country. In some countries, this process may take
13
16
longer due to heavier shared use of the applicable frequencies and, in certain
other countries, may require reassignment of some existing users. The national
regulatory authority may choose to associate with the ORBCOMM ITU submission.
The national regulatory authority also will be required to submit so-called
Appendix 3 information as required by the ITU Radio Regulations in order to
coordinate and protect ORBCOMM Earth stations in the territory or region from
interference by other ground systems.
ORBCOMM Canada has received authority to operate in Canada and provide
services using the ORBCOMM System. In addition, experimental or provisional
operating authority for the ORBCOMM System has been granted in Japan, Italy,
Germany, France, Russia, Mexico, Venezuela, Colombia, Chile and Korea to several
International Licenses or proposed International Licensees.
ORBCOMM and ORBCOMM International provide technical and regulatory
assistance to International Licensees in pursuing operating authority. The
assistance provided by ORBCOMM and ORBCOMM International includes actual
in-country demonstrations that the ORBCOMM System can share use of the allocated
spectrum with existing users while causing no harmful interference or
constraining operations and growth of those systems. While International
Licensees have been selected, in part, based on their perceived qualifications
to obtain the requisite foreign regulatory authorizations, there can be no
assurance that they will be successful in doing so, and if they are not
successful, service on the ORBCOMM System will not be available in such
countries. In addition, the continued operations of the International Licensees
may be subject to other regulatory requirements and changes in each foreign
jurisdiction.
EMPLOYEES
As of December 31, 1996, the Company had no employees.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings material to its
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company is a Delaware corporation that is a majority owned subsidiary
of Orbital. There is no public trading market for any securities of OCC. To
date, no cash dividends have been paid by OCC to Orbital, and the Company does
not intend to do so in the near future.
There are no distributions required to be made by OCC to the stockholders
of OCC. However, ORBCOMM is required to distribute to its partners, OCC and
Teleglobe Mobile, a minimum annual distribution required by the Partnership
Agreement of ORBCOMM in the amount of (i) 40%, multiplied by the lesser of (a)
such partners' distributive share of ORBCOMM'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, ORBCOMM USA, ORBCOMM International and Marine
Midland Bank, as trustee (the "Indenture") governing the Notes, no additional
cash distributions are permitted to be made to the
14
17
partners of ORBCOMM other than 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 OCC and ORBCOMM and the
selected balance sheet data of OCC and ORBCOMM have been derived from the
financial statements of OCC and 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 audited financial
statements of OCC and ORBCOMM and notes thereto included elsewhere in this
report.
SELECTED FINANCIAL DATA -- OCC
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
Income and Expense Data:
Total Revenues............ $ -- $43,294,715 $24,700,170 $15,652,114 $ 240,248
Equity in earnings
(losses) of ORBCOMM
Global................. -- -- -- 454,222 (8,267,519)
Non-controlling interest
in net loss of ORBCOMM
USA.................... -- -- -- 426,635 1,472,821
Net Income (loss)......... (1,028,328) 1,376,301 -- 10,172 (9,778,975)
DECEMBER 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Investments in affiliates... $ -- $38,426,279 $49,204,239 $62,977,126 $67,667,383
Total assets................ 8,403,747 40,910,943 62,490,854 63,878,349 67,837,857
Total Liabilities........... 9,732,549 40,863,444 62,434,737 870,648 3,920,374
Total Stockholders' equity
(deficit)................ (1,328,802) 47,499 56,117 92,334 9,666,777
SELECTED FINANCIAL DATA -- ORBCOMM
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
-------- --------- ------------
Income and Expense Data:(1)
Total income(2)...................................... $ -- $ 958,415(3) $ 3,974,948(3)
Equity in earnings (losses) of affiliates(4)......... -- (853,270) (4,602,096)
Excess (deficiency) of income over expenses.......... (9,062) 55,202 (19,480,178)
DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996
----------- ----------- ------------ ------------
Balance Sheet Data:
Cash and cash equivalents............. $ -- $ 5,000,000 $ 1,784,950 $ 56,870,424
Investments(5)........................ -- -- -- 96,612,441
Mobile Communications Satellite
System, net(6)..................... 43,924,717 68,646,861 106,989,940 170,033,722
Total assets.......................... 47,665,519 73,646,861 109,029,658 329,509,214
Long-term debt........................ 0 5,000,000 4,174,430 173,269,619
Partners' capital..................... 47,665,519 58,509,418 94,601,239 137,941,554
15
18
- ---------------
(1) For the period June 30, 1993 (date of inception) through December 31, 1993,
there were no income and expense transactions.
(2) ORBCOMM is a development stage enterprise and had no significant system
revenue.
(3) Comprises interest income (expense), net and a non-refundable fee received
from a potential International Licensee.
(4) ORBCOMM accounts for its investments in ORBCOMM USA and ORBCOMM
International using the equity method of accounting.
(5) Includes $13 million of the net proceeds of the Old Notes Offering deposited
by ORBCOMM and Capital into a segregated account to be used solely for
purposes of funding the development and deployment of the ORBCOMM System and
related operating expenses. Also includes approximately $44.8 million in a
segregated account to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998 (the "Pledge Account") and
approximately $3.8 million in a segregated account related to the loan (the
"MetLife Note") provided under the Loan and Security Agreement dated
December 22, 1994 between the Company and MetLife Capital Corporation
("MetLife").
(6) Represents the ORBCOMM System.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In 1993, Orbital, acting through OCC, and Teleglobe, acting through
Teleglobe Mobile formed ORBCOMM. Each of OCC and Teleglobe Mobile owns a 50%
interest in ORBCOMM, with TRI through TR (U.S.A.) Ltd. holding a 30% interest in
Teleglobe Mobile. Concurrently with the formation of ORBCOMM, OCC and Teleglobe
Mobile formed two marketing partnerships, ORBCOMM USA and ORBCOMM International
(collectively, the "Marketing Partnerships"), with the exclusive right to market
the ORBCOMM System in the United States and internationally, respectively.
ORBCOMM is a 98% general and limited partner in each of the Marketing
Partnerships, while OCC and Teleglobe Mobile control the remaining 2% of ORBCOMM
USA and ORBCOMM International, respectively. OCC retains control over the
applicable FCC licenses and the ORBCOMM System, consistent with FCC regulations.
OCC and Teleglobe Mobile invested an aggregate of approximately $160
million in the ORBCOMM project. In addition, on August 7, 1996, ORBCOMM and
Capital completed the Old Notes Offering. In January 1997, all of the Old Notes
were exchanged for the Notes, which are substantially similar to the Old Notes,
except that the Notes are registered under the Securities Act of 1933, as
amended. The Notes are fully and unconditionally guaranteed on a joint and
several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International,
except that the guarantees are nonrecourse to the shareholders and/or partners
of the guarantors, limited only to the extent necessary for each such guarantee
not to constitute a fraudulent conveyance under applicable law.
ORGANIZATIONAL STRUCTURE; FINANCIAL REPORTING
Pursuant to the terms of the partnership agreements for ORBCOMM and the
Marketing Partnerships: (i) OCC and Teleglobe Mobile share equal responsibility
for the operational and financial affairs of ORBCOMM; and (ii) OCC generally
controls the operational and financial affairs of ORBCOMM USA. Accordingly, OCC
consolidates ORBCOMM USA's financial position and results of operations and
accounts for its investment in ORBCOMM using the equity method. Investors are
encouraged to refer to the financial statements of OCC, ORBCOMM and ORBCOMM USA
included elsewhere in this report.
In consideration of the construction and financing of the System Assets,
OCC, pays to ORBCOMM a System Charge that is a quarterly fee equal to the Output
Capacity Charge minus 1.15% of Total Aggregate Revenues, defined as the total of
ORBCOMM USA and ORBCOMM International total system service revenues.
SERVICE ROLL-OUT
The roll-out of ORBCOMM System services will occur in two stages.
Commercial intermittent service commenced in the United States in February 1996.
ORBCOMM USA serves several U.S. market segments
16
19
that can benefit from intermittent data communications services, such as oil and
gas pipeline monitoring, certain environmental monitoring, and tracking and
positioning applications. As additional satellites are added to the
constellation, it will become possible to serve additional market segments such
as certain messaging applications that require real time services. Two
additional satellites are planned to be launched on a Taurus launch vehicle and
an additional eight satellites are planned to be launched on a Pegasus XL launch
vehicle during the third quarter of 1997. Service outside the United States will
be provided as International Licensees receive regulatory approval and build
network ground systems.
To facilitate the introduction and development of commercial service,
ORBCOMM procured several thousand Subscriber Communicators from certain of its
Subscriber Communicator manufacturers. ORBCOMM believes that this inventory will
be sufficient to support certain market sales activities into the second half of
1997.
REVENUE
OCC's revenue is derived from the consolidation of ORBCOMM USA. In
addition, the Company receives contract revenues on sales to ORBCOMM of
communication satellites, launch vehicles and ground systems under Phase 1A and
Phase 1B contracts.
During the period of commercial intermittent service, ORBCOMM USA is
building an initial base of subscribers in the United States through the
negotiation and execution of agreements with Resellers. Resellers purchase
ORBCOMM System services directly from ORBCOMM USA and resell these services to
end-users in a specific industry and/or market.
In the United States, service pricing is based on many variables, including
the availability and cost of substitute services, the cost of providing service
and the nature of the user application. Pricing generally incorporates an
initial registration charge, a recurring monthly charge for access to the
ORBCOMM System and usage charges based on the customer's activity. In charging
for registration, access and usage, ORBCOMM USA has developed a pricing
structure in the United States that suits the initial markets addressed by the
existing two-satellite system. Priority and other real time messaging pricing
will be developed as the full deployment of satellites in the ORBCOMM System
occurs. It is likely that multiple pricing alternatives will be offered in the
United States, including peak/off-peak, volume discounts and annual contract
commitment options.
OPERATING EXPENSES
Pursuant to the Phase 1A ORBCOMM System contract, OCC subcontracted with
Orbital to procure a majority of the communications satellites, launch vehicles
and ground systems, and OCC purchased such hardware and related services
directly from Orbital. OCC also procured U.S. marketing services from ORBCOMM
USA on a cost-reimbursable basis.
In addition, OCC is obligated to pay quarterly to ORBCOMM a System Charge
in consideration of the construction and financing of the ORBCOMM System Assets
by ORBCOMM. Such System Charge is calculated as 23% of ORBCOMM USA's total
aggregate revenues minus 1.15% of Total Aggregate Revenues, as defined above.
RESULTS OF OPERATIONS
OCC consolidates ORBCOMM USA's financial position and results of operations
and accounts for its investment in ORBCOMM using the equity method. Its assets
consist almost exclusively of its interests in ORBCOMM and ORBCOMM USA. Thus,
the following disclosure regarding the results of operations of ORBCOMM and
ORBCOMM USA directly reflect OCC's results of operations.
17
20
ORBCOMM
ORBCOMM commenced commercial intermittent service in the United States on
February 1, 1996 and has generated nominal revenues and negative cash flow to
date. ORBCOMM's activities have focused primarily on the acquisition of
regulatory approvals for operation of the ORBCOMM System, design, construction
and deployment of its initial satellites and associated network systems,
negotiation of agreements with domestic Resellers, execution of Service License
Agreements with International Licensees, identification of potential
International Licensees in countries outside the United States, identification
and authorization of Subscriber Communicator manufacturers and hiring of
management and other key personnel. ORBCOMM expects to continue to generate
negative cash flow through most of 1998.
Income. In 1995, ORBCOMM received a nonrefundable fee from a potential
International Licensee. ORBCOMM recognized this nonrefundable fee over the term
of the relevant agreement. No such fees were received in earlier periods or
during the year ended December 31, 1996.
In late 1994, ORBCOMM received the MetLife Note to help finance a portion
of the ORBCOMM System. In addition, in August 1996, ORBCOMM closed the Old Notes
Offering. The proceeds from the sale of the Old Notes are invested primarily in
short term government securities, with certain restrictions attached to all of
the investment portfolio. In January 1997, all of the Old Notes were exchanged
for the Notes. ORBCOMM recognized interest income on the invested portion of the
MetLife Note and the proceeds of the Old Notes Offering of approximately $58,000
and $3,861,000 for the years ended December 31, 1995 and 1996, respectively. OCC
continues to serve as a guarantor of the Notes.
Expenses. As discussed above, ORBCOMM is in its development stage and does
not anticipate emerging from the development stage until mid-1998. During the
construction phase of the ORBCOMM System, 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 approximately $9,000, $50,000 and $6,933,000 of marketing,
administrative and other expenses for the years ended December 31, 1994, 1995
and 1996, respectively. ORBCOMM incurred approximately $5,453,000 of ORBCOMM
System engineering expenses for the year ended December 31, 1996 (none for the
years ended December 31, 1994 and 1995). 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 approximately $6,199,000 in ORBCOMM
System depreciation expense for the year ended December 31, 1996, as the ORBCOMM
System became available for service in early 1996 (none for the years ended
December 31, 1994 and 1995).
Equity in Earnings (Losses) of Affiliates. ORBCOMM recognized its share of
ORBCOMM USA's and ORBCOMM International's losses, consisting primarily of
marketing expenses, of approximately $853,000 for the year ended December 31,
1995 and approximately $4,602,000 for the year ended December 31, 1996 (none for
the year ended December 31, 1994). Each of ORBCOMM USA and ORBCOMM International
formally began their marketing efforts in 1995 in anticipation of commercial
service in 1996.
ORBCOMM USA
Income. In 1994 and 1995, ORBCOMM USA performed marketing activities for
the U.S. market pursuant to a contract with OCC (the "System Charge Agreement"),
whereby OCC reimbursed ORBCOMM USA for all marketing costs incurred.
Accordingly, ORBCOMM USA recognized contract revenues of approximately
$2,093,000 and $1,360,000 for the years ended December 31, 1994 and 1995,
respectively. The U.S. marketing service portion of the System Charge Agreement
expired in 1995. During
18
21
1996, ORBCOMM USA recognized its first revenues relating to the provision of
products and services of approximately $240,000.
Expenses. ORBCOMM USA incurred approximately $2,984,000 of marketing and
administrative expenses and $262,000 of cost of product sales for the year ended
December 31, 1996, once the ORBCOMM System began operations. Pursuant to the
System Charge Agreement, ORBCOMM USA incurred contract marketing costs of
approximately $2,093,000 and $1,360,000 for the years ended December 31, 1994
and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
OCC obtains virtually all of its funding for its operations and for its
capital investments in ORBCOMM from Orbital via a non-interest bearing
intercompany borrowing agreement. As of December 31, 1995 and December 31, 1996,
OCC owed Orbital $63,000,000 and $75,000,000, respectively, none of which was
payable as of December 31, 1996. As of December 31, 1996, OCC owed $112,000 and
$7,000 to ORBCOMM and ORBCOMM International, respectively.
OCC's and Teleglobe Mobile's total capital commitments to ORBCOMM are
approximately $75,000,000 and $85,000,000, respectively, all of which had been
contributed through December 31, 1996. Capital contributions by OCC and
Teleglobe Mobile through December 31, 1995 were approximately $62,000,000 and
$35,000,000 respectively.
The development of ORBCOMM's business, launch of the initial two satellites
and construction of the network control center and U.S. Gateway have resulted in
substantial capital expenditures during the past several years. Capital
expenditures by ORBCOMM were approximately $25,000,000, $38,000,000, and
$69,000,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
A combination of operating losses and substantial capital expenditures
related to the development of the ORBCOMM System has resulted in negative cash
flow since 1994. Funding of this cash flow deficiency has been accomplished
through capital contributions from OCC and Teleglobe Mobile and through the
proceeds from the Old Notes Offering and the MetLife Note. The Company expects
to have to continue to fund operating losses as ORBCOMM develops and expands its
business. ORBCOMM has set aside a sufficient amount in a segregated account to
provide for payment in full of interest on the Old Notes and Notes through
August 15, 1998. Following August 15, 1998, interest expense on the Notes will
represent a significant cash requirement for ORBCOMM.
The total cost of the construction and deployment of the ORBCOMM System is
estimated to be approximately $258,000,000. Of this amount, approximately
$202,000,000 will be used for the satellite constellation, ground spares and
launch services, approximately $30,000,000 will be used for the U.S. ground
segment, approximately $8,000,000 will be used for insurance and approximately
$18,000,000 will be used for other costs. As of December 31, 1996, approximately
$176,000,000 of this amount had been expended. OCC and Teleglobe Mobile have
invested approximately $160,000,000 in the ORBCOMM project. Such equity
investment, together with the proceeds of the Old Notes Offering and cash
expected to be generated from operations, is expected to allow ORBCOMM to meet
its financial obligations through at least the end of 1997. The Company believes
that a significant portion of cash from ORBCOMM's operations through the end of
1997 will be generated through international license fees obtained by entering
into Service License Agreements. The Company expects that ORBCOMM's capital
requirements in 1998 will be provided by cash flows from operations and,
consistent with the covenants contained in the Indenture governing the Notes,
credit facilities and operating lease arrangements.
19
22
The Notes contain a revenue participation feature providing for payment by
ORBCOMM, on each interest payment date, of interest ("Revenue Participation
Interest") in an aggregate amount equal to 5.0% of System Revenue (as defined in
the Indenture) for the six-month period ending on December 31 or June 30 most
recently completed prior to such interest payment date. ORBCOMM is not required
to pay any Revenue Participation Interest, however, until the Credit Parties
Fixed Charge Coverage Ratio (as defined in the Indenture) for the four
consecutive fiscal quarters last completed prior to such interest payment date
equals or exceeds 2.0:1. 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 nonrecourse to the shareholders and/or
partners of the guarantors.
There are no distributions required to be made by OCC to its stockholders.
However, ORBCOMM is required to distribute to its partners, OCC and Teleglobe
Mobile, a minimum annual distribution required by its Partnership Agreement in
the amount of (i) 40%, multiplied by the lesser of (a) such partners'
distributive share of ORBCOMM'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, no additional cash distributions
are permitted to be made to the partners of ORBCOMM other than those
distributions that satisfy the requirements of the various limitations on
"Restricted Payments" contained in the Indenture.
20
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
ORBITAL COMMUNICATIONS CORPORATION
Independent Auditors' Report.............................. 24
Consolidated Balance Sheets as of December 31, 1995 and
1996................................................... 25
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996....................... 26
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1994, 1995 and 1996... 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996....................... 28
Notes to Consolidated Financial Statements................ 29
ORBCOMM GLOBAL, L.P.
Independent Auditors' Report.............................. 35
Balance Sheets as of December 31, 1995 and 1996........... 36
Statements of Income and Expenses for the Years Ended
December 31, 1994, 1995 and 1996 and Total Accumulated
During Development Stage through December 31, 1996..... 37
Statements of Partners' Capital for the Years Ended
December 31, 1993, 1994, 1995 and 1996................. 38
Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and Total Cash Flows During
Development Stage through December 31, 1996............ 39
Notes to Financial Statements............................. 40
21
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Orbital Communications Corporation:
We have audited the accompanying consolidated balance sheets of Orbital
Communications Corporation and subsidiary as of December 31, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orbital
Communications Corporation and subsidiary as of December 31, 1995 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Washington, D.C.
February 5, 1997
22
25
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ -- $ 141,654
Receivables, billed and billable.......................... 900,296 28,820
Other current assets...................................... 927 --
----------- -----------
Total current assets................................... 901,223 170,474
Investments in affiliates................................. 62,977,126 67,667,383
----------- -----------
TOTAL ASSETS...................................... $63,878,349 $67,837,857
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Accounts payable.......................................... $ 3,592 $ 116,681
Other current liabilities................................. 685,131 554,431
----------- -----------
Total current liabilities.............................. 688,723 671,112
Due to affiliates......................................... 63,519,027 78,728,078
----------- -----------
Total liabilities...................................... 64,207,750 79,399,190
COMMITMENTS AND CONTINGENCIES
NON-CONTROLLING INTEREST IN NET ASSETS OF ORBCOMM USA,
L.P. ..................................................... (421,735) (1,894,556)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $0.01; 8,000,000 shares
authorized;
4,663,122 and 4,730,392 shares issued; 4,660,110 and
4,679,620 shares
outstanding............................................ 46,631 47,304
Additional paid-in capital................................ 86,735 210,230
Treasury stock, 3,012 and 50,772 shares................... (51,204) (155,508)
Retained earnings (deficit)............................... 10,172 (9,768,803)
----------- -----------
Total stockholders' equity (deficit)................... 92,334 (9,666,777)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)...................................... $63,878,349 $67,837,857
=========== ===========
(See accompanying notes to the consolidated financial statements)
23
26
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
Contract revenues................................... $24,700,170 $15,652,114 $ --
Service and product revenues........................ -- -- 240,248
----------- ----------- -----------
Total revenues.................................... 24,700,170 15,652,114 240,248
Direct expenses..................................... 19,230,148 10,851,433 265,731
----------- ----------- -----------
Gross profit (loss)............................... 5,470,022 4,800,681 (25,483)
General and administrative expenses................. 5,470,022 5,671,366 2,958,794
----------- ----------- -----------
Operating income (loss)........................... -- (870,685) (2,984,277)
Equity in earnings (losses) of ORBCOMM Global,
L.P. ............................................. -- 454,222 (8,267,519)
Non-controlling interest in net loss of ORBCOMM
USA, L.P. ........................................ -- 426,635 1,472,821
----------- ----------- -----------
Income (loss) before provision for income taxes... -- 10,172 (9,778,975)
Provision for income taxes.......................... -- -- --
----------- ----------- -----------
NET INCOME (LOSS).............................. $ -- $ 10,172 $(9,778,975)
=========== =========== ===========
(See accompanying notes to the consolidated financial statements)
24
27
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL RETAINED
------------------ PAID-IN TREASURY EARNINGS
SHARES AMOUNT CAPITAL STOCK (DEFICIT) TOTAL
--------- ------- ---------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1993............. 4,650,000 $46,500 $ 999 $ -- $ -- $ 47,499
Shares issued to employees........... 4,186 42 8,576 -- -- 8,618
Net income........................... -- -- -- -- -- --
--------- ------- -------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1994............. 4,654,186 46,542 9,575 -- -- 56,117
Shares issued to employees........... 8,936 89 77,160 -- -- 77,249
Treasury stock purchased............. -- -- -- (51,204) -- (51,204)
Net income........................... -- -- -- -- 10,172 10,172
--------- ------- -------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1995............. 4,663,122 46,631 86,735 (51,204) 10,172 92,334
Shares issued to employees........... 67,270 673 123,495 -- -- 124,168
Treasury stock purchased............. -- -- -- (104,304) -- (104,304)
Net loss............................. -- -- -- -- (9,778,975) (9,778,975)
--------- ------- -------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1996............. 4,730,392 $47,304 $210,230 $(155,508) $(9,768,803) $(9,666,777)
========= ======= ======== ========= =========== ===========
(See accompanying notes to the consolidated financial statements)
25
28
ORBITAL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ -- $ 10,172 $ (9,778,975)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in losses of affiliates.................. -- (454,222) 8,267,519
Non-controlling interest in net loss of ORBCOMM
USA, L.P. .................................... -- (426,635) (1,472,821)
Decrease (increase) in current assets........... (10,765,532) 11,010,397 872,403
Decrease in current liabilities................. (4,027,316) (354,858) (17,611)
Decrease (increase) in deposits, licenses, and
other assets.................................. (36,419) 1,374,995 --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................. (14,829,267) 11,159,849 (2,129,485)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates.......................... (10,777,960) (13,318,665) (12,957,776)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES......... (10,777,960) (13,318,665) (12,957,776)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock to employees.... 8,618 77,249 124,168
Purchases of treasury stock........................ -- (51,204) (104,304)
Net borrowings from affiliates..................... -- 661,354 3,280,977
Net borrowings from Orbital Sciences Corporation... 25,598,609 1,471,417 11,928,074
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES..... 25,607,227 2,158,816 15,228,915
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............ -- -- 141,654
CASH AND CASH EQUIVALENTS:
Beginning of period................................ -- -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS:
End of period...................................... $ -- $ -- $ 141,654
============ ============ ============
(See accompanying notes to the consolidated financial statements)
26
29
\
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE ORBCOMM SYSTEM
Organization and Business
Orbital Communications Corporation ("OCC"), a Delaware corporation, is a
majority owned subsidiary of Orbital Sciences Corporation ("Orbital") and is
included in Orbital's Consolidated Financial Statements. In 1990, Orbital formed
OCC to develop and operate the first satellite-based global two-way data and
messaging communications system. OCC formed ORBCOMM Global, L.P. ("ORBCOMM") in
1993 with Teleglobe Mobile Partners ("Teleglobe Mobile"), an affiliate of
Teleglobe Inc. OCC and Teleglobe Mobile are each 50% general partners in
ORBCOMM. OCC is also a 2% general partner in ORBCOMM USA, L.P. ("ORBCOMM USA"),
while Teleglobe Mobile is a 2% general partner in ORBCOMM International
Partners, L.P. ("ORBCOMM International"), two partnerships formed to market the
ORBCOMM System. ORBCOMM has a 98% non-controlling interest in each of these two
marketing partnerships. Directly and indirectly, OCC currently holds 51% and 49%
of ORBCOMM USA and ORBCOMM International, respectively.
ORBCOMM was formed for the design, development, construction, integration,
test and operation of the ORBCOMM low-Earth orbit satellite communications
system (the "ORBCOMM System"). ORBCOMM intends to construct and implement the
initial 28-satellite ORBCOMM System in two phases: the ORBCOMM Phase 1A System,
consisting of the worldwide network operations center (including the satellite
management system), the U.S. gateway control center, four U.S. gateway Earth
stations and two satellites; and the ORBCOMM Phase 1B System consisting of the
ORBCOMM Phase 1A System, three additional satellite planes each consisting of
eight satellites and one satellite plane consisting of two high-inclination
satellites. From inception through December 1995, OCC was an operating company
with employees working under contract to ORBCOMM. At the beginning of 1996, all
OCC employees transferred to ORBCOMM, ORBCOMM USA, or ORBCOMM International.
Currently, OCC operates as a holding company and has no operations.
ORBCOMM USA has been granted the exclusive right to market, sell, lease and
franchise the ORBCOMM System output capacity in the U.S. and the exclusive use
of the ORBCOMM System assets in the U.S.
The System Charge
In consideration of the construction and financing of the ORBCOMM System
assets by ORBCOMM, OCC is obligated to pay ORBCOMM a system charge equal to 23%
of ORBCOMM USA's total aggregate revenues (the "Output Capacity Charge") minus
1.15% of aggregate system service revenues, defined as the total of ORBCOMM USA
and ORBCOMM International total system service revenues. If the Output Capacity
Charge is less than 1.15% of aggregate system service revenues as described
above, then OCC is not required to pay any portion of the system charge to
ORBCOMM. No such system charges have been incurred to date.
Regulatory Status
Construction and operation of communications satellites in the U.S.
requires licenses from the Federal Communications Commission ("FCC"). OCC has
been granted full operational authority for the ORBCOMM System by the FCC.
Similar licenses are required from foreign regulatory authorities to permit
ORBCOMM System services to be offered outside the U.S. Primary responsibility
for obtaining licenses outside the U.S. will reside with the various
international licensees.
27
30
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of OCC and
ORBCOMM USA (the partnership in which OCC directly or indirectly controls the
general partner interests). All material transactions and accounts among
consolidated entities have been eliminated in consolidation.
Revenue Recognition
OCC recognizes revenues on long-term contracts using the percentage of
completion method of accounting. Accordingly, revenues on long-term fixed-price
contracts are recognized based on costs incurred in relation to total estimated
costs, or based on specific delivery terms and conditions. Anticipated contract
losses are recognized as they become known. OCC currently has no long-term
contracts, but was the primary supplier of the ORBCOMM Phase 1A System through
its April 1995 completion.
ORBCOMM USA provides subscriber communicator hardware to commercial
customers. Revenue is recognized when products are shipped or when customers
have accepted the products or services, depending on contractual terms.
Income Taxes
OCC is included in Orbital's consolidated Federal income tax returns. OCC
determines its provision for income taxes as if it were filing on a separate
return basis.
OCC recognizes income taxes using the asset and liability method. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Cash and Cash Equivalents
OCC considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Investments in Affiliates
OCC uses the equity method of accounting for its investments in and
earnings of affiliates in which OCC has the ability to significantly influence,
but not control, such affiliate's operations. In accordance with the equity
method of accounting, OCC's carrying amount of an investment in an affiliate is
initially recorded at cost and is increased to reflect its share of the
affiliate's income and is reduced to reflect its share of the affiliate's
losses. OCC's investment is also increased to reflect contributions to, and
decreased to reflect
28
31
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
distributions received from, each affiliate. Any excess of the amount of OCC's
investment and the amount of the underlying equity in each affiliate's net
assets is amortized over a period of twenty years.
In 1995, OCC adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), which (i) requires that long-lived assets "to be held and used" be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, (ii) requires that
long-lived assets "to be disposed of" be reported at the lower of carrying
amount or fair value less cost to sell, and (iii) provides guidelines and
procedures for measuring an impairment loss that are significantly different
from previous guidelines and procedures. The effect of adopting SFAS 121 on
income for 1995 and 1996 was not material. OCC's policy is to review its
long-lived assets, including investments in affiliates, for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. OCC recognizes an impairment loss when the sum of
expected future cash flows is less than the carrying amount of the asset.
Fair Value of Financial Instruments
The carrying value of OCC's cash and cash equivalents, receivables, and
accounts payable approximates fair value since all such instruments are
short-term in nature.
Stock Based Compensation
Prior to January 1, 1996, OCC accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Pursuant to APB 25, compensation expense is recorded only to
the extent that the current market price of the underlying stock exceeds the
exercise price on the date of grant. On January 1, 1996, OCC adopted Statement
of Financial Accounting Standards 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), which requires companies to (i) recognize as expense the fair
value of all stock-based awards on the date of grant, or (ii) continue to apply
the provisions of APB 25 and provide pro forma net income for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS 123 had been applied. OCC has elected to continue to apply the
provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123
(See Note 8).
(3) INVESTMENTS IN AFFILIATES
OCC's and Teleglobe Mobile's total capital commitments to ORBCOMM are
approximately $75,275,000 and $84,525,000, respectively, all of which had been
contributed through December 31, 1996. Capital contributions by OCC and
Teleglobe Mobile through December 31, 1995 were approximately $62,000,000 and
$35,000,000, respectively.
Pursuant to the terms of the relevant partnership agreements, (i) OCC and
Teleglobe Mobile share equal responsibility for the operational and financial
affairs of ORBCOMM; (ii) OCC controls the operational and financial affairs of
ORBCOMM USA; and (iii) Teleglobe Mobile controls the operational and financial
affairs of ORBCOMM International. Since OCC is unable to control, but is able to
exercise significant influence over ORBCOMM's and ORBCOMM International's
operating and financial policies, OCC is accounting for its investments in
ORBCOMM and ORBCOMM International using the equity method of accounting. Since
OCC is able to control the operational and financial affairs of ORBCOMM USA, it
consolidates the accounts of ORBCOMM USA.
At December 31, 1996, ORBCOMM had total assets, total liabilities and total
partners' capital of $329,509,000, $191,568,000 and $137,941,000, respectively.
At December 31, 1995, ORBCOMM had total
29
32
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS IN AFFILIATES -- (CONTINUED)
assets, total liabilities and total partner's capital of $109,030,000,
$14,428,000 and $94,602,000, respectively. ORBCOMM collected non-refundable fees
in the amount of approximately $900,000 in 1995 and $100,000 in 1996 from a
potential international licensee (none in 1994) and reported net income (loss)
of approximately ($9,000), $55,000, and ($19,480,000) for the years ended
December 31, 1994, 1995, and 1996, respectively.
Based on its current assessment of the overall business prospects of the
ORBCOMM partnerships and the ORBCOMM System, OCC currently believes its
investment in ORBCOMM is fully recoverable. If in the future, the ORBCOMM
business is not successful, OCC may be required to expense part or all of its
investment.
(4) RELATED PARTY TRANSACTIONS
OCC was the prime contractor of the Phase 1A ORBCOMM System, consisting of
communications satellites, launch vehicles and ground systems, and successfully
launched the Phase 1A ORBCOMM System satellites in April 1995. During 1994 and
1995, OCC recorded contract revenues on sales to ORBCOMM of approximately
$24,700,000 and $15,652,000, respectively. OCC recorded no contract revenues
during 1996.
Pursuant to the Phase 1A ORBCOMM System contract, OCC subcontracted with
Orbital to procure a majority of the communications satellites, launch vehicles,
and ground systems. During 1994 and 1995, OCC purchased hardware and services
totaling approximately $14,660,000 and $4,477,000, respectively, from Orbital.
No such purchases occurred in 1996.
Pursuant to the terms for the ORBCOMM Phase 1B System agreement, ORBCOMM
contracted directly with Orbital to procure additional communications satellites
and launch services. During 1995 and 1996, ORBCOMM purchased hardware and
services from Orbital totaling approximately $23,672,000 and $55,435,000,
respectively. No such purchases occurred in 1994.
OCC also procured U.S. marketing services from ORBCOMM USA on a cost
reimbursable basis through September 1995. In 1994 and 1995, OCC purchased
marketing services totaling approximately $2,093,000 and $1,360,000,
respectively.
OCC obtains virtually all of its funding for its operations and for its
capital investments in ORBCOMM from Orbital via a non-interest bearing
intercompany borrowing agreement. As of December 31, 1995 and December 31, 1996,
OCC owed Orbital $62,858,000 and $74,786,000, respectively, none of which is
currently payable. As of December 31, 1996, OCC owes $112,000 and $7,000 to
ORBCOMM and ORBCOMM International, respectively.
ORBCOMM USA currently obtains all of its funding from ORBCOMM and ORBCOMM
International via non-interest bearing intercompany borrowing agreements. As of
December 31, 1995 and December 31, 1996, ORBCOMM USA owed ORBCOMM approximately
$661,000 and $3,578,000, respectively, none of which is currently payable.
(5) INCOME TAXES
OCC had no current or deferred provision for income taxes for the years
ended December 31, 1994, 1995, and 1996. There are no significant differences
between pre-tax financial statement income and taxable income in 1994, 1995, and
1996.
30
33
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INCOME TAXES -- (CONTINUED)
The differences between the actual taxes and taxes computed at the U.S.
Federal income tax rate of 34% are summarized as follows:
DECEMBER 31,
--------------------
1994 1995 1996
---- ---- ----
U.S. Federal statutory rate............................. -- 34% (34)%
Generation (utilization) of net operating loss
carryforward.......................................... -- (34)% 34%
--- --- ---
Effective Rate.......................................... -- -- --
=== === ===
The tax effects of significant temporary differences at December 31, 1995
and 1996 are as follows:
DECEMBER 31,
-----------------------
1995 1996
-------- -----------
Deferred Tax Assets:
Accrued expenses and other........................ $ 78,000 $ --
Net operating loss carryforward and other......... 3,975,000
Valuation allowance............................... (78,000) (3,975,000)
-------- -----------
$ -- $ --
======== ===========
(6) COMMITMENTS AND CONTINGENCIES
On August 7, 1996, ORBCOMM issued $170,000,000 senior unsecured notes due
2004 (the "Notes") to institutional investors. The Notes bear interest at a
fixed rate of 14% and provide for noteholder participation in future ORBCOMM
service revenues. The Notes are fully and unconditionally guaranteed on a joint
and several basis by OCC and Teleglobe Mobile. The guarantees are nonrecourse to
the shareholders and/or partners of the guarantors.
(7) STOCK OPTION PLAN
OCC adopted a stock option plan in 1992 (the "ORBCOMM Plan"). The ORBCOMM
Plan provides for grants of incentive and non-qualified stock options to
purchase OCC common stock to officers and employees of OCC, ORBCOMM, ORBCOMM
USA, ORBCOMM International, and Orbital. Under the terms of the ORBCOMM Plan,
incentive stock options may not be granted at less than 100% of the fair market
value at the date of grant and non-qualified options may not be granted at less
than 85% of the fair market value of OCC common stock at the date of grant as
determined by a committee consisting of two OCC Board members and two members
appointed by Teleglobe Mobile. The options vest at a rate set forth by the Board
of Directors in each individual option agreement, generally in one-fourth
increments over a four-year period.
Certain provisions of the ORBCOMM Plan require OCC to repurchase, with cash
or promissory notes, the common stock acquired pursuant to the options. The cash
repurchase is restricted by the terms of the Indenture covering the Notes (See
Note 6). During 1996, OCC paid approximately $1,100,000 in cash to repurchase
47,760 shares of common stock acquired by current and former employees resulting
from previously exercised options. These repurchases were funded by (i)
reimbursements from ORBCOMM pursuant to the terms of the Restated Agreement of
Limited Partnership of ORBCOMM Global, L.P. and (ii) contributions from Orbital,
such that the net cash paid to third parties for repurchase of OCC common stock
was no greater than $1,000,000 as required by the Indenture governing the Notes.
31
34
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) STOCK OPTION PLAN -- (CONTINUED)
The following table summarizes the option activity under the ORBCOMM Plan
for the last three years:
WEIGHTED-
NUMBER OF OPTION PRICE AVERAGE OUTSTANDING
SHARES PER SHARE EXERCISE PRICE AND EXERCISABLE
--------- --------------- -------------- ---------------
Outstanding at December 31, 1993.......... 496,274 $ 1.50 - $12.50 $ 3.81 184,966
Granted................................. 118,650 $ 5.25 - $12.50 13.42
Exercised............................... (4,186) $ 1.50 - $14.00 1.76
Canceled or Expired..................... (11,664) $ 1.50 - $13.00 8.17
------- ---------------
Outstanding at December 31, 1994.......... 599,074 $ 1.50 - $14.00 5.64 298,657
Granted................................. -- -- --
Exercised............................... (8,936) $ 1.50 - $13.00 3.87
Canceled or Expired..................... (44,238) $ 1.50 - $13.00 6.74
------- ---------------
Outstanding at December 31, 1995.......... 545,900 $ 1.50 - $14.00 5.56 411,086
Granted................................. 154,500 $17.00 - $25.00 20.50
Exercised............................... (67,270) $ 1.50 - $13.00 2.43
Canceled or Expired..................... (34,300) $ 1.50 - $17.00 13.81
------- ---------------
Outstanding at December 31, 1996.......... 598,830 $ 1.50 - $25.00 $ 9.40 393,903
=======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE
- --------------- ----------- ---------------- -------------- ----------- --------
$ 1.50 - $ 4.00 283,040 5.8 years $ 2.37 283,040 $ 2.37
$ 5.25 - $17.00 248,290 7.5 years $13.18 110,863 $11.33
$25.00 - $25.00 67,500 9.3 years $25.00 0 N/A
------- -------
$ 1.50 - $25.00 598,830 6.9 years $ 9.40 393,903 $ 4.89
(8) STOCK BASED COMPENSATION
On January 1, 1996, OCC adopted SFAS 123. OCC uses the Black-Scholes
option-pricing model to determine the pro forma impact to OCC's net income
(loss). The model utilizes certain information, such as the interest rate on a
risk-free security maturing generally at the same time as the option being
valued, and requires certain assumptions, such as the expected amount of time an
option will be outstanding until it is exercised or it expires, to calculate the
weighted-average fair value per share of stock options granted. This information
and the assumptions used in the option pricing model for 1996 are as follows:
volatility, 30%; dividend yield, zero percent; risk free interest rate, 5.6%;
average expected life, 4.5 years; additional shares available, 20,778; and
weighted-average exercise price per share, $20.50.
OCC recorded compensation expense related to the ORBCOMM Plan of
approximately $47,000 and $32,000 for the years ended December 31, 1994 and
1995, respectively. No stock based compensation expense was recorded in 1996.
Had the company determined compensation cost based on the fair value at the
grant date for its stock options in accordance with the fair value method
prescribed by SFAS 123, OCC's net loss would have been approximately $10,200,000
for the year ended December 31, 1996. Pro forma net loss reflects only options
granted in 1995 and 1996, and therefore may not be representative of the effects
for future periods.
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, 1996 and 1995,
and the related statements of income and expenses, partners' capital, and cash
flows for each of the years in the three year period ended December 31, 1996 and
for the period from June 30, 1993 (date of inception) through December 31, 1996.
These financial statements are the responsibility of ORBCOMM's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ORBCOMM (a development stage
enterprise) as of December 31, 1996 and 1995, and the results of its income and
expenses and its cash flows for each of the years in the three year period ended
December 31, 1996 and for the period from June 30, 1993 (date of inception)
through December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Washington, DC
January 31, 1997
33
36
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,784,950 $ 56,870,424
Short-term available-for-sale investments................. 0 31,433,390
Short-term held-to-maturity investments................... 0 23,335,992
Receivable -- Orbital Communications Corporation.......... 0 114,784
Receivables -- other...................................... 0 637,727
Inventory................................................. 446,684 1,751,270
------------ ------------
Total Current Assets................................... 2,231,634 114,143,587
LONG TERM ASSETS:
Long-term available-for-sale investments.................. 0 20,364,987
Long-term held-to-maturity investments.................... 0 21,478,072
Receivables -- other...................................... 0 517,370
Mobile Communications Satellite System, net of accumulated
depreciation........................................... 106,989,940 170,033,722
Other assets, net......................................... 0 6,137,567
Investments in and advances to affiliates................. (191,916) (3,166,091)
------------ ------------
TOTAL ASSETS...................................... $109,029,658 $329,509,214
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Current portion of long-term debt......................... $ 904,811 $ 991,652
Accounts payable.......................................... 4,037,675 4,610,786
Accrued expenses.......................................... 6,116,314 13,687,255
Deferred revenue.......................................... 100,000 0
------------ ------------
Total Current Liabilities.............................. 11,158,800 19,289,693
Long-term debt............................................ 3,269,619 172,277,967
------------ ------------
Total Liabilities...................................... 14,428,419 191,567,660
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile Partners................................. 33,517,008 73,595,777
Orbital Communications Corporation........................ 61,084,231 64,345,777
------------ ------------
Total Partners' Capital................................ 94,601,239 137,941,554
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL........... $109,029,658 $329,509,214
============ ============
(See accompanying notes to the financial statements)
34
37
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF INCOME AND EXPENSES
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
YEAR ENDED DECEMBER 31, STAGE THROUGH
------------------------------------ DECEMBER 31,
1994 1995 1996 1996
------- --------- ------------ -------------
INCOME:
Product sales.......................... $ 0 $ 0 $ 268,350 $ 268,350
Distribution fees...................... 0 900,000 100,000 1,000,000
Other.................................. 0 0 52,410 52,410
------- --------- ------------ ------------
Total Income........................ 0 900,000 420,760 1,320,760
EXPENSES:
Cost of product sales.................. 0 0 268,350 268,350
Depreciation........................... 0 0 6,198,519 6,198,519
Engineering expenses................... 0 0 5,453,299 5,453,299
Marketing, administrative and other
expenses............................ 9,062 49,943 6,932,862 6,991,867
------- --------- ------------ ------------
Total Expenses...................... 9,062 49,943 18,853,030 18,912,035
------- --------- ------------ ------------
Income (loss) from operations....... (9,062) 850,057 (18,432,270) (17,591,275)
OTHER INCOME AND EXPENSES:
Interest income (expenses), net........ 0 58,415 3,554,188 3,612,603
Equity in earnings (losses) of
affiliates.......................... 0 (853,270) (4,602,096) (5,455,366)
------- --------- ------------ ------------
EXCESS (DEFICIENCY) OF INCOME
OVER EXPENSES.......................... $(9,062) $ 55,202 $(19,480,178) $(19,434,038)
======= ========= ============ ============
(See accompanying notes to the financial statements)
35
38
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF PARTNERS' CAPITAL
ORBITAL
TELEGLOBE MOBILE COMMUNICATIONS
PARTNERS CORPORATION TOTAL
---------------- -------------- ------------
Capital contributions........................ $10,000,000 $38,148,997 $ 48,148,997
Excess (deficiency) of income over
expenses.................................. 0 0 0
Financing fees............................... (241,739) (241,739) (483,478)
----------- ----------- ------------
PARTNERS' CAPITAL, DECEMBER 31, 1993........... 9,758,261 37,907,258 47,665,519
Capital contributions........................ 0 10,852,961 10,852,961
Excess (deficiency) of income over
expenses.................................. (4,531) (4,531) (9,062)
----------- ----------- ------------
PARTNERS' CAPITAL, DECEMBER 31, 1994........... 9,753,730 48,755,688 58,509,418
Capital contributions........................ 24,750,000 13,315,265 38,065,265
Excess (deficiency) of income over
expenses.................................. 27,601 27,601 55,202
Financing fees............................... (1,014,323) (1,014,323) (2,028,646)
----------- ----------- ------------
PARTNERS' CAPITAL, DECEMBER 31, 1995........... 33,517,008 61,084,231 94,601,239
Capital contributions........................ 49,775,000 12,957,777 62,732,777
Excess (deficiency) of income over
expenses.................................. (9,740,089) (9,740,089) (19,480,178)
Unrealized gains on available-for-sale
investments............................... 43,858 43,858 87,716
----------- ----------- ------------
PARTNERS' CAPITAL, DECEMBER 31, 1996........... $73,595,777 $64,345,777 $137,941,554
=========== =========== ============
(See accompanying notes to the financial statements)
36
39
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
TOTAL CASH
FLOWS DURING
DEVELOPMENT
YEAR ENDED DECEMBER 31, STAGE THROUGH
------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
------------ ------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Excess (deficiency) of income over expenses... $ (9,062) $ 55,202 $ (19,480,178) $ (19,434,038)
ADJUSTMENTS TO RECONCILE EXCESS (DEFICIENCY)
OF INCOME OVER EXPENSES TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES:
Depreciation................................ 0 0 6,198,519 6,198,519
Amortization of financing fees.............. 0 0 306,594 306,594
Equity in losses of affiliates.............. 0 833,670 4,602,096 5,435,766
Increase in receivable -- Orbital
Communications Corporation................ 0 0 (114,784) (114,784)
Increase in receivables -- other............ 0 0 (1,155,097) (1,155,097)
Increase in inventory....................... 0 (446,684) (1,304,586) (1,751,270)
Increase in accounts payable................ 2,270,775 1,786,500 573,111 4,630,386
Increase (decrease) in deferred revenue..... 0 100,000 (100,000) 0
Increase (decrease) in accrued expenses..... 7,866,668 (1,750,354) 7,570,941 13,687,255
Decrease in prepaid contract costs.......... 3,740,802 0 0 0
------------ ------------ ------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................. 13,869,183 578,334 (2,903,384) 7,803,331
------------ ------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (24,722,144) (38,343,079) (69,242,301) (176,232,241)
Increase in amount due from affiliates........ 0 (661,354) (1,608,321) (2,269,675)
Purchase of available-for-sale investments.... 0 0 (91,717,823) (91,717,823)
Proceeds from sale of available-for-sale
investments................................. 0 0 40,007,162 40,007,162
Purchase of held-to-maturity investments...... 0 0 (44,814,064) (44,814,064)
------------ ------------ ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES..... (24,722,144) (39,004,433) (167,375,347) (275,026,641)
------------ ------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term
debt........................................ 5,000,000 0 164,475,000 169,475,000
Repayment of long-term debt................... 0 (825,570) (904,811) (1,730,381)
Partners' contributions....................... 10,852,961 38,065,265 62,732,777 159,800,000
Financing fees paid........................... 0 (2,028,646) (938,761) (3,450,885)
------------ ------------ ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................. 15,852,961 35,211,049 225,364,205 324,093,734
------------ ------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 5,000,000 (3,215,050) 55,085,474 56,870,424
CASH AND CASH EQUIVALENTS:
Beginning of period........................... 0 5,000,000 1,784,950 0
------------ ------------ ------------- -------------
CASH AND CASH EQUIVALENTS:
End of period................................. $ 5,000,000 $ 1,784,950 $ 56,870,424 $ 56,870,424
============ ============ ============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid................................. $ 0 $ 425,765 $ 346,526 $ 772,291
============ ============ ============= =============
(See accompanying notes to the financial statements)
37
40
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(1) THE ORBCOMM SYSTEM
Organization
In 1993, Orbital Communications Corporation ("OCC"), a majority owned
subsidiary of Orbital Sciences Corporation ("Orbital"), and Teleglobe Mobile
Partners ("Teleglobe Mobile"), a partnership established by affiliates of
Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P. ("ORBCOMM" or the
"Company"), a Delaware limited partnership.
Pursuant to the terms of the Agreement of Limited Partnership of the
Company between OCC and Teleglobe Mobile (the "Partnership Agreement"), action
by the Company generally requires the approval of General Partners holding a
majority of the Participation Percentages held by the General Partners. OCC and
Teleglobe Mobile each holds 50% of the Participation Percentages in the Company,
with the result that the approval of both OCC and Teleglobe Mobile is generally
necessary for the Company to act.
The Company is a 98% noncontrolling General Partner in ORBCOMM USA, L.P.
("ORBCOMM USA") and ORBCOMM International Partners, L.P. ("ORBCOMM
International"), two partnerships formed to market services using the ORBCOMM
low-Earth orbit satellite communications system (the "ORBCOMM System") in the
United States and internationally, respectively.
The ORBCOMM System Description
The Company was created for the design, development, construction,
integration, testing and operation of the ORBCOMM System. The Company intends to
construct and implement the initial 28 satellite ORBCOMM System in two phases:
the ORBCOMM Phase 1A System, consisting of the worldwide network control center
(including the satellite management system), the U.S. Gateway control center,
four U.S. Earth stations and two satellites; and the ORBCOMM Phase 1B System
consisting of the ORBCOMM Phase 1A System, three additional planes each
consisting of eight satellites and one plane consisting of two high-inclination
satellites.
Orbital is the primary supplier of the communications satellites, launch
vehicles and U.S. ground systems and successfully launched the ORBCOMM Phase 1A
System satellites in April 1995. The ORBCOMM Phase 1A System began commercial
intermittent service in early 1996.
The System Charge
OCC is obligated to pay quarterly to the Company a System Charge in
consideration of the construction and financing of the ORBCOMM System assets by
the Company. Teleglobe Mobile is obligated to pay quarterly to the Company a
System Charge in consideration of the Company's grant to Teleglobe Mobile of the
right to market, sell, lease and franchise all ORBCOMM System output capacity
outside the United States.
Regulatory Status
Construction and operation of communications satellites in the United
States requires licenses from the Federal Communications Commission (the "FCC").
OCC has been granted full operational authority for the ORBCOMM System by the
FCC. Similar licenses are required from foreign regulatory authorities to permit
ORBCOMM System services to be offered outside the United States. Primary
responsibility for obtaining licenses outside the United States will reside with
entities who become International Licensees.
38
41
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company is in its development stage, devoting substantially all of its
efforts to establishing a new communications business. The Company's planned
principal operations are expected to commence in 1998. The accompanying
financial statements have been prepared on the accrual basis of accounting in
conformity with generally accepted accounting principles in the United States.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Depreciation and Recoverability of Long-Lived Assets
Depreciation is provided over an asset's estimated economic useful life
using the straight-line method as follows:
Space Segment Assets: lesser of five years or estimated life of the satellite
Ground Segment Assets: 10 years
Furniture and Equipment: three to 10 years
The Company anticipates depreciating the ORBCOMM System over the estimated
economic useful lives of the various ORBCOMM System components once the ORBCOMM
System is placed in service. The Phase 1A System, which includes the worldwide
network control center (including the satellite management system), the U.S.
Gateway control center, four U.S. Earth stations and two satellites, was placed
in service at the beginning of 1996, at which time the Company began
depreciating those assets. The Company anticipates that the ORBCOMM Phase 1B
System will become fully operational in 1998.
The Company's policy is to review its long-lived assets, including its
satellite systems, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company recognizes impairment losses when the sum of the expected future cash
flows is less than the carrying amount of the asset. Given the inherent
technical and commercial risks within the space communications industry, it is
possible that the Company's current estimate for recovery of the carrying amount
of its assets may change.
Investments in Affiliates
Pursuant to the terms of ORBCOMM USA's and ORBCOMM International's
partnership agreements, OCC controls the operational and financial affairs of
ORBCOMM USA and Teleglobe Mobile controls the operational and financial affairs
of ORBCOMM International. The Company, however, significantly influences both
marketing partnerships. Accordingly, the Company is accounting for its
investments in ORBCOMM USA and ORBCOMM International using the equity method.
Pursuant to the equity method of accounting, the Company's carrying amount
of an investment is initially recorded at cost and is increased to reflect its
share of the affiliate's income, and is reduced to reflect its share of the
affiliate's losses. The Company's investment is also increased to reflect
contributions to, and reduced to reflect distributions from, such affiliates.
39
42
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes
As a partnership, Federal and state income taxes are the direct
responsibility of each partner. Accordingly, no income taxes have been recorded
in the accompanying financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents.
Investments
The Company maintains two investment portfolios characterized by
management's intentions as to future investment activity. Investments classified
as "held-to-maturity" are not intended to be sold prior to maturity and are
carried at cost. Investments not intended to be held until maturity are
classified as "available-for-sale" and carried at fair value with temporary
unrealized gains (losses) charged directly to partners' capital. Investments
with maturities of less than one year are classified as short-term investments.
Investments maturing after one year are classified as long-term investments. The
Company uses the average cost method in determining the basis of investments
sold when computing realized gains (losses).
Inventory
Inventory is stated at the lower of cost, determined on the specific
identification basis, or market and represents subscriber communicators
available for sale to customers.
Fair Value of Financial Instruments
The carrying value of the Company's cash and cash equivalents, receivables,
and accounts payables approximates fair value since all such instruments are
short-term in nature. Fair value for the Company's long-term debt is determined
based on current rates offered for debt of similar remaining maturities. At
December 31, 1995 and 1996, the fair value for the long-term debt approximated
carrying value.
Mobile Communications Satellite System Under Construction
During the construction of the ORBCOMM System, the Company is capitalizing
substantially all such construction costs. The Company is capitalizing a portion
of the engineering direct labor costs that relate to hardware and system design
development and coding of the software products that enhance the operation of
the ORBCOMM System. As of December 31, 1996, approximately $1,244,000 of such
costs have been capitalized (none for the year ended December 31, 1995).
Additionally, interest costs of approximately $426,000 and approximately
$10,030,000 have been capitalized as part of the historical cost of the ORBCOMM
System for the years ended December 31, 1995 and December 31, 1996,
respectively. Additionally, approximately $9,500 of Revenue Participation
Interest (see Note 6, "Long-Term Debt") at the rate of 5% of ORBCOMM System
revenue has been capitalized as of December 31, 1996.
Partners' Capital
In accordance with the Partnership Agreement, Teleglobe Mobile and OCC are
both general and limited partners in the Company. Therefore, limited and general
partner accounts are combined into one single capital account and presented as
such in the balance sheet and statements of Partners' Capital.
40
43
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Revenue Recognition
The Company provided subscriber communicator hardware to ORBCOMM USA and
ORBCOMM International at cost. Revenue is recognized when products are shipped
or when customers have accepted the products or services, depending on
contractual terms. Contract revenues and receivables are recognized and accrued
as contract costs are incurred. Related contract expenses incurred in providing
marketing services in the United States are recognized on the accrual basis of
accounting. The Company generally recognizes distribution fees ratably over the
term of the agreement, or when the Company's obligations under the agreement are
substantially complete.
Reclassification of Prior Years Balances
Certain amounts in the prior year's financial statements have been
reclassified to conform with the current year presentation.
(3) INVESTMENTS
Included in cash and cash equivalents is approximately $54,527,000 of
commercial paper as of December 31, 1996. The fair value of commercial paper
approximates carrying value.
The following table sets forth the aggregate cost and fair values and gross
unrealized gains (losses) of available-for-sale securities as of December 31,
1996 (none for the year ended December 31, 1995):
UNREALIZED
SECURITIES COST GAINS (LOSSES) FAIR VALUE
---------- ----------- -------------- -----------
Short-Term
U.S. Treasury Notes...................... $21,152,137 $53,788 $21,205,925
Commercial Paper......................... 10,229,101 (1,636) 10,227,465
----------- ------- -----------
Total short-term investments.......... 31,381,238 52,152 31,433,390
----------- ------- -----------
Long-Term
U.S. Treasury Notes, maturing 2-5
years................................. 20,329,423 35,564 20,364,987
----------- ------- -----------
Total available-for-sale
investments......................... $51,710,661 $87,716 $51,798,377
=========== ======= ===========
The following table sets forth the aggregate cost and fair values of
held-to-maturity as of December 31, 1996 (none for the year ended December 31,
1995):
UNREALIZED
SECURITIES COST GAINS FAIR VALUE
---------- ----------- ---------- -----------
Short-Term
U.S. Treasury Notes........................ $23,335,992 $ 524,909 $23,860,901
Long-Term
U.S. Treasury Notes, maturing 2-5 years.... 21,478,072 541,807 22,019,879
----------- ---------- -----------
Total held-to-maturity investments...... $44,814,064 $1,066,716 $45,880,780
=========== ========== ===========
Unrealized gains on held-to-maturity investments represent accrued interest
income and unrealized holding gains.
41
44
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) RELATED PARTY TRANSACTIONS
The Company paid Orbital approximately $11,000,000, $38,000,000, and
$56,000,000 for the years ended December 31, 1994, 1995 and 1996, respectively,
and approximately $48,000,000 for the period June 30, 1993 (date of inception)
through December 31, 1993. Payments were made for work performed pursuant to the
ORBCOMM System Design, Development, and Operations Agreement (for the Phase 1A
System), the ORBCOMM System Procurement Agreement (for the Phase 1B System) and
the Administrative Services Agreement (for provision of ongoing support to the
Company).
In 1995, pursuant to the terms of the ORBCOMM System Design, Development
and Operations Agreement, the Company reimbursed OCC $1,375,000 for previous
costs incurred in obtaining the FCC License and other related costs. The Company
capitalized such costs as part of its Mobile Communications Satellite System.
At December 31, 1996, the Company had a receivable of approximately
$112,000 for a bonus payment to the Company's employees paid on behalf of OCC
for employees previously employed by OCC (none for the year ended December 31,
1995).
Certain provisions of the Partnership Agreement require the Company to
reimburse OCC for OCC's repurchase of shares of OCC common stock acquired
pursuant to the OCC 1992 Stock Option Plan ("Stock Option Plan"). During 1996,
the Company reimbursed OCC approximately $1,100,000 under the Stock Option Plan.
Orbital contributed approximately $100,000 to OCC to repurchase such shares.
Therefore, the net cash paid to third parties on repurchase of OCC common stock
was no greater than $1,000,000 per annum as required by the terms of the
Indenture.
(5) MOBILE COMMUNICATIONS SATELLITE SYSTEM
The Company's Mobile Communications Satellite System comprises the
following assets:
DECEMBER 31,
----------------------------
1995 1996
------------ ------------
Space segment................................... $ 76,643,128 $140,999,409
Ground segment.................................. 29,799,853 33,554,094
Software........................................ 546,959 1,678,738
------------ ------------
Total fixed assets.............................. 106,989,940 176,232,241
Less accumulated depreciation................... 0 (6,198,519)
------------ ------------
Total fixed assets, net of depreciation......... $106,989,940 $170,033,722
============ ============
(6) LONG-TERM DEBT
In August 1996, ORBCOMM and ORBCOMM Global Capital Corp. (the "Issuers")
issued $170,000,000 of Senior Notes due in full in 2004 with Revenue
Participation Interest (the "Old Notes"). Revenue Participation Interest
represents an aggregate amount equal to 5% of the ORBCOMM System revenue and is
payable on the Old Notes on each interest payment date subject to certain
covenant restrictions. Interest on the Old Notes accrues at the rate of 14% per
annum and will be payable semi-annually in arrears on February 15 and August 15
each year, commencing on February 15, 1997.
All of the Old Notes have been exchanged for an equal principal amount of
registered 14% Series B Senior Notes due in full in 2004 with Revenue
Participation Interest (the "Notes"). The Notes are substantially similar to the
Old Notes except that the Notes are registered under the Securities Act of 1933,
as amended, and do not bear legends restricting the transfer thereof. The Notes
are fully and unconditionally
42
45
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) LONG-TERM DEBT -- (CONTINUED)
guaranteed on a joint and several basis by OCC, Teleglobe Mobile, ORBCOMM USA
and ORBCOMM International (each a "Guarantor" and collectively the
"Guarantors"), except that the guarantees are non-recourse to the shareholders
and/or partners of the Guarantors, limited only to the extent necessary for each
such guarantee not to constitute a fraudulent conveyance under applicable law.
The guarantee of each Guarantor ranks pari passu in right of payment with all
senior indebtedness of such Guarantor and senior in right of payment to all
indebtedness expressly subordinated to the guarantee of such Guarantor. The
guarantees are non-recourse to the shareholders and/or partners of each
Guarantor and no shareholders or partners of any Guarantors will have any
liability for any claim under the Notes.
On closing, the Company used a portion of the net proceeds from the sale of
the Old Notes, approximately $44,800,000, to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998 (see Note 3, "Investments").
The Company also has a $5,000,000 secured note outstanding with a financial
institution, which bears interest at 9.2% per annum and is due in monthly
principal and interest installments of $104,278 through December 1999. The note
is secured by equipment located at certain of the U.S. Earth stations, network
control center and satellite control center, and is guaranteed by Orbital.
Included in other assets is unamortized financing fees incurred for the
issuance of the Old Notes of approximately $6,138,000 net of approximately
$307,000 amortization cost for the year ended December 31, 1996 (none for the
year ended December 31, 1995). Such costs are being amortized over an eight-year
period.
43
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The Certificate of Incorporation of OCC provides that the management of OCC
is the exclusive responsibility of the Board of Directors. Officers of OCC are
nominated by the President of OCC and elected by the Board of Directors and
exercise such authority as they are granted by the Board of Directors.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of December 31, 1996
regarding the directors and executive officers of OCC.
NAME AGE POSITION
---- --- --------
Alan L. Parker.................................. 57 President
David W. Thompson............................... 42 Director
Bruce W. Ferguson............................... 42 Chairman and Director
Jeffrey V. Pirone............................... 36 Vice President and Chief Financial Officer
Alan L. Parker, 57, has been the President of OCC since its inception in
1990. Mr. Parker has also been the President of ORBCOMM since January 1994 and
Chief Executive Officer since February 1996. Mr. Parker was a member of the U.S.
delegation to World Administrative Radio Conference '92 and the 1993 and 1995
World Radio Conferences ("WRC"). Mr. Parker's experience includes 25 years with
Ford Aerospace and Ford Motor Company. Mr. Parker served as Chairman and CEO of
Ford Aerospace Satellite Services Corporation from 1982 to 1986 and was Vice
President of Marketing and Business Planning of Ford Aerospace Corporation from
1976 to 1986. Prior to 1976, Mr. Parker held several marketing and product
planning positions at Ford, including Car Product Development, Ford of Europe
and Corporate Product Planning and Research.
David W. Thompson, 42, is a director of OCC. Mr. Thompson also is a
co-founder of Orbital and has been its Chairman, President and Chief Executive
Officer since 1982. Prior to 1982, Mr. Thompson was Special Assistant to the
President of Hughes Aircraft Company's Missile Systems Group and was a NASA
project manager and engineer on advanced rocket engines at Marshall Space Flight
Center and on the Viking Mars landing missions at the Jet Propulsion Laboratory.
Bruce W. Ferguson, 42, is the Chairman and is a director of OCC. Mr.
Ferguson also is a co-founder of Orbital and has been Executive Vice President
and General Manager, Communications and Information Services Group since 1993.
Mr. Ferguson was Executive Vice President and Chief Operating Officer of Orbital
from 1989 to 1993, Senior Vice President, Finance and Administration and General
Counsel from 1985 to 1989 and Vice President, Finance and General Counsel from
1982 to 1985. Before co-founding Orbital, Mr. Ferguson was an attorney in the
corporate and securities department of the law firm of Kirkland & Ellis. Mr.
Ferguson is a director of Superconducting Core Technologies, Inc.
Jeffrey V. Pirone, 36, is the Vice President and Chief Financial Officer of
OCC. Mr. Pirone also is the Senior Vice President and Chief Financial Officer of
Orbital. Mr. Pirone came to Orbital in 1991, and prior to that was a Senior
Manager at KPMG Peat Marwick LLP.
44
47
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
No compensation was received by any of the executive officers of the
Company by virtue of serving as an executive officer of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the common equity of the Company as of December 31, 1996.
PERCENTAGE
NAME AND ADDRESS INTEREST
---------------- ----------
Orbital Sciences Corporation.............................. 99.4%
21700 Atlantic Boulevard
Dulles, Virginia 20166
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MASTER AGREEMENT
As of June 30, 1993, Orbital, OCC, Teleglobe and Teleglobe Mobile entered
into the Master Agreement, restated as of September 12, 1995, that sets forth
the principles upon which the parties have agreed to develop, construct and
operate the ORBCOMM System. The Master Agreement subsequently has been amended
and restated and provides for the following:
Covenants Relating to OCC. Orbital and OCC have agreed: (i) to preserve
OCC's corporate existence; (ii) to use all commercially reasonable efforts to
obtain and maintain all material U.S. operating licenses and permits necessary
for the construction, operation and marketing of the ORBCOMM System; (iii) so
long as OCC holds any FCC authorizations, that OCC will (a) remain a subsidiary
of Orbital, other than as a result of options granted under the Orbital
Communications Corporation 1992 Stock Option Plan; (b) carry on no business
other than the construction, operation and marketing of the ORBCOMM System or
business that is in furtherance, or in connection with the expansion of the
ORBCOMM System; (c) remain the sole holder of all FCC authorizations required
for the construction, launch and operation of the ORBCOMM System (other than FCC
authorization for individual user transceivers and FCC authorizations held by
ORBCOMM and ORBCOMM USA); (d) subject to certain exceptions not grant, create,
assume, incur or suffer to exist any lien affecting OCC or any of its property,
rights, revenues or assets; (e) subject to certain exceptions not sell,
transfer, convey, lease or otherwise dispose of any assets; (f) not consolidate,
merge or amalgamate with any other person; (g) subject to certain exceptions in
accordance with the Definitive Agreements, not create, amend or repeal any
by-laws or modify the OCC certificate of incorporation; (h) subject to certain
exceptions in accordance with the Definitive Agreements, not make any loans or
give any financial guarantees for the obligations of any other party; and (i)
not make any assignment for the benefit of creditors or subject OCC to any
bankruptcy or insolvency law or take steps to wind up or terminate OCC's
corporate existence or engage in any financial restructuring. Additionally,
Orbital has agreed, as long as OCC holds the FCC License, not to dispose of any
debt interest in OCC.
Guarantees. Orbital has unconditionally and absolutely guaranteed the full
and punctual payment of all of OCC's payment obligations under the Definitive
Agreements to which OCC is a party. Teleglobe has unconditionally and absolutely
guaranteed the full and punctual payment of all of Teleglobe Mobile's payment
obligations under the Definitive Agreements to which Teleglobe Mobile is a
party.
Change of Control. In the event of a Change in Control of Orbital or
Teleglobe (a "Change of Control Party"), Teleglobe Mobile or OCC, as the case
may be (the "Non-Change of Control Party"), has the option: (i) for a period of
180 days from the Change of Control to require the Change of Control Party to
purchase the Non-Change of Control Party's interest in each of ORBCOMM, ORBCOMM
USA and ORBCOMM International at an aggregate price equal to the greater of (a)
the Non-Change of Control Party's aggregate
45
48
Unrecouped Capital Preferences in such partnerships and (b) the Non-Change of
Control Party's direct Participation Percentage in each such partnership
multiplied by the fair market value (as defined) of each such partnership; or
(ii) to cause the general partners of ORBCOMM to adopt a resolution providing
that, in the event there is a deadlock on a matter requiring the approval of a
Majority in Interest of the partners, the President of ORBCOMM shall be entitled
to decide on such matter by way of casting a vote or otherwise, as deemed
appropriate by the Non-Change of Control Party, notwithstanding any contrary
provision set forth in the ORBCOMM Partnership Agreement. Subject to the receipt
of all necessary government approvals, upon a Change of Control of Orbital,
Orbital agrees to cause OCC to transfer to ORBCOMM USA all FCC licenses then
held by OCC relating to the construction, launch or operation of the ORBCOMM
System.
In the event that OCC should become a common carrier or a CMRS
provider -- either by virtue of a change in the ORBCOMM System's regulatory
classification by the FCC from private-carrier to common-carrier or CMRS status,
or by virtue of a change in its service offerings that would convert OCC from a
private carrier to a common carrier or a CMRS provider -- ORBCOMM USA might be
precluded from acquiring the FCC licenses from OCC, due to the extent of alien
ownership in ORBCOMM USA as a result of Teleglobe Mobile's indirect interest in
ORBCOMM USA.
SYSTEM CONSTRUCTION AGREEMENT
Under the terms of the System Construction Agreement, restated as of
September 12, 1995, ORBCOMM has agreed to develop, construct, deploy, manage and
operate, subject to OCC's ultimate control, the ORBCOMM System satellites and
the System Assets, in consideration for which OCC is obligated to remit to
ORBCOMM, on a quarterly basis, OCC's allocated portion of the System Charge,
provided, however, that, if the Output Capacity Charge for any quarter is less
than 1.15% of Total Aggregate Revenues, then OCC shall not be required to pay
any portion of the System Charge for such calendar quarter.
OCC has granted to ORBCOMM under the System Construction Agreement the
right to market, sell, lease and franchise all output capacity outside the
United States.
ORBCOMM has agreed to indemnify OCC from and against any claim with respect
to an infringement or other violation of any copyright, trademark or patent or
other validly registered enforceable intellectual property right of any third
party for any items constructed by ORBCOMM pursuant to the authority granted in
the System Construction Agreement, but only to the same extent as the
indemnification received by ORBCOMM from Orbital pursuant to the Procurement
Agreement.
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
46
49
aggregate revenues invoiced by it during each calendar quarter. ORBCOMM USA
retains sole discretion to set the fees to be paid by its subscribers, Resellers
and licensees for use of the ORBCOMM System.
Indemnification. OCC and ORBCOMM USA agree to indemnify, defend and hold
harmless each other and their respective successors and assigns against any
liability, damage, loss or expense incurred by or imposed upon them in
connection with any claims, suits, actions, demands or judgments arising out of
any breach of the party's obligations under the System Charge Agreement. In
addition, OCC agrees to indemnify and hold harmless ORBCOMM USA and its
respective successors and assigns from and against any claim with respect to an
infringement or other violation of any copyright, trademark or patent or other
validly registered enforceable intellectual property right of any third party
for any items OCC has authorized ORBCOMM USA to use under the System Charge
Agreement (but only to the same extent as the indemnification received by OCC
from ORBCOMM, if any, under the terms of the System Construction Agreement).
PROPRIETARY INFORMATION AND NON-COMPETITION AGREEMENT
ORBCOMM, Orbital, OCC, Teleglobe, Teleglobe Mobile, ORBCOMM USA and ORBCOMM
International have entered into the Proprietary Information and Non-Competition
Agreement, restated as of September 12, 1995, to protect any confidential and
proprietary information that may be disclosed to one another in connection with
the development, construction, operation and marketing of the ORBCOMM System.
Orbital and Teleglobe entered into the agreement for the additional purpose of
prohibiting direct competition between the two entities in the provision of
certain LEO satellite services during the term of the agreement and for a period
of one year thereafter.
Orbital and Teleglobe agree that for the duration of the agreement and for
one year thereafter, they will not, directly or indirectly or in any capacity,
except in connection with the fulfillment of their respective obligations under
any of the Definitive Agreements: (i) carry on, engage, participate, invest or
have an equity or any financial interest in the marketing, construction,
development or management of any business or enterprise that competes with
Orbital or Teleglobe or their respective affiliates in offering commercial, LEO
non-voice satellite communications services operating in the 137-150 MHz band or
such other frequency allocated to the Little LEO mobile satellite service below
1 GHz, provided, however, OCC and Orbital are permitted to: (a) sell satellites,
launch vehicles, launch services and communications services to non-commercial
entities without limitation; and (b) provide all other entities up to two
satellites every two years and launch vehicles or launch services for up to two
satellites every two years; (ii) assist in or influence the hiring by any person
who competes with Orbital or Teleglobe or their respective affiliates of any
salesman, distributor, or employee of Orbital or Teleglobe or their respective
affiliates, or otherwise cause any person having a business relationship with
Orbital or Teleglobe or their respective affiliates to sever such relationship;
or (iii) employ any person to work on or represent the ORBCOMM System who will
also work on or represent another mobile communications system, without first
notifying the President of ORBCOMM.
Neither of Orbital or Teleglobe will be in default of its obligations under
this portion of the Proprietary Information and Non-Competition Agreement by
virtue of holding for portfolio purposes as a passive investor no more than 5%
of the issued and outstanding public equity securities of a corporation.
Indemnification. Orbital and Teleglobe agree to indemnify and save
harmless one another and their respective affiliates (an "Indemnified Party")
from and against any claims, demands, actions, causes of action, judgments,
damages, losses, liabilities, costs or expenses that may be made against any of
them as a result of, arising out of or relating to any violation, contravention
or breach of the Proprietary Information and Non-Competition Agreement by a
party who is not an Indemnified Party.
Termination. The Proprietary Information and Non-Competition Agreement
shall terminate upon the earlier of OCC or Teleglobe Mobile ceasing to be both a
general and a limited partner of ORBCOMM.
47
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
2. Financial Statement Schedules.
The financial statements listed in the index to the Financial
Statements that appears on page 24 of this Report on Form 10-K are
filed as part of this Report.
Financial statement schedules have been omitted because they are
inapplicable or are not required.
3. Exhibits
The exhibits to this Report on Form 10-K are listed under Item
14(c) below.
(b) Reports on Form 8-K
The Company has not previously been required to file a Report on Form
8-K under the Act.
(c) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ----------------------
(a) 2 Purchase Agreement, dated as of August 2, 1996, by and among
ORBCOMM Global, L.P., ORBCOMM Global Capital Corp., ORBCOMM
USA, L.P., ORBCOMM International Partners, L.P., Orbital
Communications Corporation, Teleglobe Mobile Partners, Bear
Stearns & Co. Inc., J.P. Morgan Securities Inc. and RBC
Dominion Securities Company.
3 Organizational Documents.
* 3.1 Certificate of Incorporation of Orbital Communications
Corporation.
* 3.1.1 Certificate of Amendment of Certificate of Incorporation of
Orbital Communications Corporation dated July 27, 1992.
* 3.1.2 Certificate of Amendment of Certificate of Incorporation of
Orbital Communications Corporation dated December 22, 1992.
* 3.1.3 Certificate of Amendment of Certificate of Incorporation of
Orbital Communications Corporation dated June 15, 1994.
* 3.2 Bylaws of Orbital Communications Corporation.
(a) 4 Indenture, dated as of August 7, 1996, by and among ORBCOMM
Global L.P., ORBCOMM Global Capital Corp., ORBCOMM USA,
L.P., ORBCOMM International Partners, L.P., Orbital
Communications Corporation, Teleglobe Mobile Partners and
Marine Midland Bank.
10 Material Contracts.
(a)10.1 Registration Rights Agreement, dated as of August 7, 1996,
by and among ORBCOMM Global L.P., ORBCOMM Global Capital
Corp., ORBCOMM USA, L.P., ORBCOMM International Partners,
L.P., Orbital Communications Corporation, Teleglobe Mobile
Partners, Bear, Stearns & Co. Inc., J.P. Morgan Securities
Inc. and RBC Dominion Securities Corporation.
(a)10.4 Master Agreement, restated as of September 12, 1995, by and
among Orbital Communications Corporation, Orbital Sciences
Corporation, Teleglobe Inc. and Teleglobe Mobile Partners.
48
51
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ----------------------
(a)10.6 Proprietary Information and Non-Competition Agreement,
restated as of September 12, 1995, by and among ORBCOMM
Global, L.P., Orbital Sciences Corporation, Orbital
Communications Corporation, Teleglobe Inc., Teleglobe Mobile
Partners, ORBCOMM USA, L.P. and ORBCOMM International
Partners, L.P.
(a)10.7 System Charge Agreement, restated as of September 12, 1995,
by and between Orbital Communications Corporation and
ORBCOMM USA, L.P.
(a)10.8 System Construction Agreement, restated as of September 12,
1995, by and between ORBCOMM Global, L.P. and Orbital
Communications Corporation.
(a)10.9 Amendment No. 1 to System Construction Agreement, dated as
of July 1, 1996, by and between ORBCOMM Global, L.P. and
Orbital Communications Corporation.
(b)10.16 Orbital Communications Corporation 1992 Stock Option Plan.
(c)10.16.1 Amendment No. 1 to Orbital Communications Corporation 1992
Stock Option Plan.
* 21 Subsidiaries of the Registrant.
* 27 Financial Data Schedule.
- ---------------
* Filed Herewith.
(a) Incorporated by reference to the identically numbered exhibit to the
Registration Statement on Form S-4 of ORBCOMM Global, L.P. as amended (Reg.
No. 333-11149).
(b) Incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K
of Orbital Sciences Corporation for the fiscal year ended December 31, 1995.
(c) Incorporated by reference to Exhibit 10.8.1 to the Annual Report on Form
10-K of Orbital Sciences Corporation for the fiscal year ended December 31,
1996.
49
52
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON
FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF DULLES, COMMONWEALTH OF VIRGINIA, ON JUNE 25, 1998.
ORBITAL COMMUNICATIONS CORPORATION
BY: /s/ SCOTT WEBSTER
------------------------------------
SCOTT 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 in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ SCOTT WEBSTER Director and President, Orbital June 25, 1998
- --------------------------------------------------- Communications Corporation
SCOTT WEBSTER (Principal Executive Officer)
/s/ JEFFREY V. PIRONE Vice President and Chief Financial June 25, 1998
- --------------------------------------------------- Officer, Orbital Communications
JEFFREY V. PIRONE Corporation (Principal Financial
Officer and Principal Accounting
Officer)
/s/ DAVID W. THOMPSON Director, Orbital June 25, 1998
- --------------------------------------------------- Communications Corporation
DAVID W. THOMPSON
/s/ BRUCE W. FERGUSON Director, Orbital June 25, 1998
- --------------------------------------------------- Communications Corporation
BRUCE W. FERGUSON
50