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EXHIBIT 99
RISK FACTORS
The following risk factors should be carefully considered by prospective
investors in Iridium World Communications Ltd., Iridium LLC or Iridium Operating
LLC. Iridium World Communications Ltd. acts as a member of Iridium LLC, or
"Parent", and has no other business. The business of Iridium Operating LLC, or
"Iridium", constitutes substantially all Parent's business. Factors affecting
the business of Iridium are discussed below. In this exhibit, "we", "our" and
words of similar import mean Iridium. Unless otherwise indicated, the
information contained in this Exhibit is presented as of March 15, 1999.
You are cautioned that the statements in this exhibit have not been
revised to reflect subsequent events or circumstances after the date on which
they were made. The registrants undertake no obligation to update this
information to reflect events or developments that occur or arise after the date
of this report.
RISK OF ERROR IN FORWARD Iridium is transitioning from a development stage company into
LOOKING STATEMENTS an operating company and has no meaningful operating history.
Accordingly, many statements contained in, or incorporated by
Many of the statements reference into, this report are forward looking. Examples
in this report are of these forward looking statements include the statements
Forward looking and actual concerning Iridium's expectations about its:
results may be materially - operations;
different from those - revenues;
expressed or implied by - markets;
these statements. - technical capabilities;
- funding needs;
In particular, you - funding sources;
should recognize that - prospects;
statements about the - regulatory activities (including its ability to obtain or
following topics are forward maintain the authority to operate its satellite services in
looking: virtually any country in the world);
- Iridium's estimates of - pricing of its services;
the amount of its - availability and distribution of phones and pagers;
funding needs; - competitors and their services; and
- Iridium's estimates - equipment suppliers', gateway operators', service
of the amount and providers' and roaming partners' actions.
availability of its
funding sources; Forward looking statements are inherently predictive and
- Iridium's expectations speculative and we cannot assure you that our forward looking
about its ability to statements will prove to be correct. Actual results and
obtain additional developments are likely to be different, and may be materially
financing; different, from those expressed or implied by these state-
- Iridium's expectations ments. You should carefully review the other risk factors set
about its ability to forth herein for a discussion of some of the factors which
generate revenues from could result in any forward looking statement proving to be
commercial operations; inaccurate.
and
- Iridium's expectations In particular, investors should recognize that forward looking
about how much revenue statements are based on a number of assumptions about future
it will generate from events, many of which are beyond our control. For
commercial operations. example, many of the statements in this report assume that
Iridium will transition smoothly from a development stage
The forward looking state- company into an operating company and assume among other
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ments are based on a num- things, that:
ber of assumptions and - there will be a sufficient number of customers for, and
one or more of these usage of, the Iridium System to generate revenues in the
assumptions is likely to amounts and at the times anticipated by Iridium (this
be incorrect. assumption is reflected in many of the forward looking
statements included in, or incorporated by reference in,
this report, including the statements in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations --Liquidity and Capital Resources");
- the Iridium System will provide service acceptable to the
market and will meet all systems specifications set forth in
its development contracts and will have service
characteristics across Iridium's various service offerings
that are at least as favorable as those that Iridium
expects;
- Iridium and its gateways will contract with and train a
sufficient number of service providers to ensure effective
marketing and distribution of Iridium World Services;
- there will be no increased costs under the development and
maintenance contracts for the Iridium System;
- Motorola and Kyocera will manufacture, and Iridium and its
service providers will distribute, a sufficient number of
portable, hand-held phones and pagers for use with the
Iridium System on a timely basis, and Iridium will not
incur any significant additional expenses as a result of
any need to place orders for, or subsidize the sale of, any
Iridium phones and pagers;
- there will continue to be a sufficient number of
operational gateways to maintain the service quality and system
capacity Iridium expects;
- Iridium's satellite navigation software, communications
software and its business support systems software will
continue to function as expected under the various service
demands the Iridium System actually experiences;
- Iridium will contract with, and integrate into its various
operations, a sufficient group of roaming partners to ensure
that Iridium World Roaming Service meets Iridium's market
coverage expectations;
- the operation of the Iridium System will not be impaired by
the loss of satellites or the need to put replacement
satellites in orbit and Iridium will not be required to
bear the costs of satellite replacement;
- in the various jurisdictions in which Iridium operates or
expects to operate, there will be no material change in
legislation or regulations or the administration thereof
that will have an adverse effect on the business of
Iridium, including Iridium's expectation that it will be
able to provide its services on a virtually global basis;
- there will be no material adverse changes in any of
Iridium's existing material contracts or the ability of
Iridium's various contractors to perform their obligations
(including Motorola's ability to perform under the O&M
contract); and
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- the capacity of the Iridium System, as affected by, among
other things, spectrum allocation and customer usage patterns,
will meet or exceed Iridium's expectations.
One or more of these assumptions is likely to be incorrect and,
accordingly, actual results and developments are likely to be
different, and may be materially different from those expressed
or implied by any forward looking statements.
Iridium does not intend to publish updates or revisions of the
forward looking statements included in this report or the materials
incorporated by reference in this report or of this
discussion of some of the factors that could cause actual
results to differ from those expressed or implied in the
forward looking statements.
IRIDIUM IS TRANSITIONING Iridium is transitioning from a development stage company into
FROM A DEVELOPMENT STAGE an operating company. It is extremely important to Iridium's
COMPANY INTO AN OPERATING success that it effects this transition smoothly. This will
COMPANY; IRIDIUM HAS NO require Iridium to complete successfully a number of complex
MEANINGFUL REVENUES OR HIS- tasks for the operation of Iridium's system while
TORY OF OPERATIONS; simultaneously attracting customers and ensuring that they are
IRIDIUM'S FUTURE REVENUES satisfied with Iridium World Services. Iridium has no meaningful
MAY NOT COVER ITS history of operations on which investors can evaluate its
EXPENSES performance and has no significant revenues. In addition, many
of the services Iridium offers are new and there is no
operational service that provides a direct comparison. Further,
Iridium has accumulated significant losses in the development
and construction of the Iridium System and expects to continue
to accumulate significant losses until it has substantial
revenues from operations.
Iridium is a start-up Iridium has incurred significant indebtedness to fund the
company with substantial development and construction of the Iridium System. Until
debt and no meaningful Iridium has substantial revenues from operations, it will rely
operating history or on additional indebtedness to pay its expenses and to make
significant revenues. payments on its indebtedness. We cannot give you any assurance
about:
- Whether or when Iridium will have sufficient customers or
revenues to satisfy its funding requirements or the covenants
in its bank facilities and debt securities.
- Whether Iridium will ever be profitable.
RISK OF HIGHLY LEVERAGED Iridium is a highly leveraged company and has incurred
CAPITAL STRUCTURE substantial indebtedness, including indebtedness that is secured
by its assets. Iridium expects that it will need to incur additional
Iridium had borrowed indebtedness or access other sources of financing. Iridium
approximately currently is not generating any meaningful revenues to fund its
$3.02 billion operations or repay its indebtedness. The amount of debt needed
as of March 1, 1999 to finance the Iridium System could be increased by one or more
and expects to borrow a factors outside Iridium's control, including:
substantial amount of - the inability to generate revenues in the amount and within
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additional funds. Iridium the time frame Iridium expects;
is not currently generating - cost increases for the construction or operation of the
any meaningful revenues Iridium System; and
to fund its operations or - increases in applicable interest rates.
repay its indebtedness.
For example, subscriber levels and revenues from Iridium's
initial commercial operations have been significantly below
Iridium's expectations and, consequently, Iridium is in the
process of revising its expectations of its external funding
requirements, which are likely to increase. For further
discussion of the effects Iridium's slower than anticipated
ramp-up in subscribers and revenues has had and is likely to
have, see "Iridium May Be Unable to Satisfy or May Be
Adversely Constrained By the Covenants in Its Bank Facilities
and Debt Securities".
Iridium's current and future debt service requirements could
have important consequences on its business, including:
- limiting Iridium's ability to obtain additional financing;
- reducing the amount of funds available for operations
because a substantial portion of Iridium's cash flow from
operations will be dedicated to the payment of principal
and interest on its indebtedness; and
- increasing Iridium's sensitivity to adverse economic
conditions.
IRIDIUM MAY BE UNABLE TO In the secured bank facility, Iridium has covenanted, among
SATISFY OR MAY BE ADVERSELY other things, that, as of a series of dates beginning with
CONSTRAINED BY THE COVENANTS March 31, 1999, it will satisfy certain minimum revenue and
IN ITS BANK FACILITIES AND subscriber levels, including the conditions that:
DEBT SECURITIES - at March 31, 1999 it have cumulative cash revenues of at
least $4 million, cumulative accrued revenues of at least $30
million, at least 27,000 Iridium World Satellite Service
subscribers and at least 52,000 total subscribers;
- at June 30, 1999 it have cumulative cash revenues of at
least $50 million, cumulative accrued revenues of at least $150
million, at least 88,000 Iridium World Satellite Service
subscribers and at least 213,000 total subscribers; and
- at September 30, 1999 it have cumulative cash revenues of
at least $220 million, cumulative accrued revenues of at least
$470 million, at least 173,000 Iridium World Satellite
Service subscribers and at least 454,000 total subscribers.
Iridium's subscriber and As a result of various factors, Iridium's subscriber levels and
revenue ramp-up has been revenues for its initial commercial operations have been
significantly slower than significantly below its prior estimates. Accordingly, Iridium
anticipated and Iridium has has requested and received a waiver of compliance with the
sought and received a March 31, 1999 revenue and subscriber conditions from the
limited waiver of the lenders under the secured bank facility. This waiver is
March 31, 1999 minimum conditioned on Iridium's compliance with the March 31,
subscriber and revenue 1999 minimum revenue and subscriber levels by May 31,
covenants in the secured 1999. The waiver does not affect or constitute a waiver of
bank facility. The lenders any other term of the secured bank facility, including the
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under the secured bank minimum revenue and subscriber conditions at June 30, 1999
facility are under no and September 30, 1999. Iridium believes that its slower
obligation to provide than expected subscriber ramp-up and revenue generation
similar waivers or. have been primarily the result of problems with the initial
amendments in the future. distribution of subscriber equipment and the availability of
fully-trained service providers and sales personnel.
Iridium is in the process of revising its revenue and
subscriber estimates in the light of these initial distribution
difficulties. Iridium intends to request an amendment of
the secured bank facility to modify the minimum revenue
and subscriber level covenants and other terms to reflect this
revision. There can be no assurance that the lenders under the
secured bank facility will agree to such an amendment. In
addition, in consideration for agreeing to such an amendment, the
lenders under the secured bank facility may require Iridium
to agree to additional covenants and provide additional
compensation.
If Iridium is unable to Other financial covenants in the secured bank facility require
satisfy the covenants in Iridium to comply with certain financial ratios as of various
the secured bank facility, dates, including maximum debt to total invested capital,
the lenders under the maximum secured debt to earnings, maximum debt to earnings
secured bank facility and minimum interest expense to earnings. For Iridium to satisfy
generally would have the these covenants it will have to make a successful transition
right to declare a default into an operating company and substantially increase
and could pursue various demand for its services.
remedies, including
enforcing their security Various factors, including those discussed in this
interests in substantially Risk Factor exhibit, could prevent Iridium from satisfying
all of the assets of these covenants in the future. If Iridium is unable to
Iridium (which include satisfy the covenants in the secured bank facility, the lenders
the Iridium System under the secured bank facility generally would have the right
and represent to declare a default and could pursue various remedies,
substantially all of including enforcing their security interests in substantially
Iridium's assets) and all of the assets of Iridium (which include the Iridium
Parent's investment in System and represent substantially all of Iridium's
Iridium. assets) and Parent's investment in Iridium.
In addition, Iridium's management is not able to make decisions
freely about certain business matters because the secured bank
facility, the Motorola guaranteed bank facilities and the
indentures relating to its senior notes include certain
covenants that, among other things, restrict the ability of
Iridium and its subsidiaries to:
- dispose of assets;
- incur additional indebtedness;
- incur guarantee obligations;
- prepay other indebtedness or amend other debt instruments;
- pay dividends;
- create liens on assets;
- make investments, loans or advances;
- make acquisitions;
- engage in mergers or consolidations;
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- change the business conducted by Iridium;
- make certain asset or stock dispositions; and
- enter into certain transactions with affiliates and related
persons.
IRIDIUM MAY HAVE Iridium estimates that its funding requirements for 1999 and the
SIGNIFICANT ADDITIONAL two to three years thereafter principally will be driven by the
FUNDING NEEDS costs of operating and maintaining the satellite constellation, the
costs of providing Iridium services and interest expense.
Iridium's actual
funding needs may exceed Iridium estimates that its cash funding requirements for 1999
its estimates, perhaps will be approximately $1.65 billion. Iridium expects that its
substantially, for a financing requirements for the two to three year period following
number of reasons, 1999 will be driven by costs similar in type to those expected
including if Iridium is in 1999. Iridium expects to satisfy its 1999 funding needs from
unable to generate committed funding, revenues and, if necessary, additional
revenues in the amount and external funding. For the two to three years following 1999,
within the time frame it Iridium generally expects to fund its costs from revenues from
expects or if Iridium Operations and, if required, additional financing.
has unexpected cost
increases. These estimates are forward looking and Iridium's actual
funding requirements are likely to differ, and may differ
materially, from these estimates. Iridium's estimated funding
requirements should be viewed in light of the following facts:
- Iridium has no meaningful history of operations or revenues
and there is no operational service that provides a direct
comparison to Iridium;
- Iridium is in the process of revising its subscriber and
revenue estimates because initial sales of Iridium World
Services has been significantly below expectations.
- Iridium's estimates assume, among other things, that
there will be a sufficient number of customers for, and usage
of, the Iridium System to generate substantial revenues;
- The availability of the additional sources of funding
Iridium expects to be able to use is not completely within
Iridium's control and is conditioned on Iridium satisfying
certain conditions; and
- Iridium faces challenges and risks.
Iridium's estimated funding requirements do not reflect any
contingency amounts and may increase, perhaps substantially, in
the event Iridium is unable to generate revenues in the amount
and within the time frame it expects or if Iridium has
unexpected cost increases. Many factors, including the factors
discussed in this section, could adversely affect Iridium's ability
to generate revenues and could increase its costs of operations.
Iridium's current revision of its subscriber and revenue estimates
is likely to increase Iridium's estimates of its funding needs, and
Iridium expects that it may need additional financing. There
can be no assurance that Iridium will be able to obtain
such additional financing on satisfactory terms or at all.
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RISK OF LOW SERVICE The Iridium System is not intended to provide communication
DEMAND BECAUSE OF PRICING, services that compete with land-line telecommunications and
SERVICE QUALITY, EQUIPMENT land-based cellular services. Instead, the Iridium System is
CHARACTERISTICS, COMPETITION designed to complement such services. Iridium World Satellite
AND OTHER MARKET FACTORS Services is priced significantly higher than most land-based
phone services, and Iridium customers are not expected to
discontinue their use of land-based wireless services.
Many market factors, Iridium's estimates of its funding needs assume there will be
including pricing, could substantial demand for Iridium services in 1999
prevent Iridium from and that Iridium will be able to charge a premium over the cost
generating revenue in the of a land-based call for its satellite services because such
amount and within the time services provide global mobility. Iridium currently expects
frame it expects. that its wholesale usage fees for international Iridium World
Satellite Services calls between two countries will result in
suggested retail prices that, in aggregate, are approximately
25% to 30% above the retail prices for land-based voice calling
options that traveling customers could use for a similar call
between the same two countries (e.g., international calling
card and international cellular roaming rates). If demand for
Iridium services is not significant or if the market will not
support such a global mobility premium, Iridium may be unable
to generate sufficient revenues. In addition to pricing, a
number of other market factors, including service quality,
equipment characteristics and competition, could adversely
affect demand for Iridium services.
The price of Iridium's Motorola's multi-mode phone generally has an initial retail
phones and pagers may ad- price of at least $3,000 and Motorola's alphanumeric pager
versely affect customer generally has an initial retail price of at least $600. Iridium
demand for Iridium's expects the retail prices for Kyocera phones and pagers to be
services. similar to the retail prices for Motorola's equipment. These
prices substantially exceed current prices for cellular phones
and pagers and could adversely affect the demand for Iridium's
services because potential customers may be unwilling to make
such a significant investment just to have access to a new
service.
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Iridium does not Under Iridium's pricing strategy it sets wholesale prices for
control its retail its services and its service providers control the price to the
prices and, if they are customer. Service providers may price Iridium services at a
set too high, demand level that is too high, thereby reducing total demand without
for Iridium's services an offsetting increase in per minute revenue to Iridium.
may be adversely Moreover, competition may force Iridium and its service
affected. Prices in the providers to reduce prices below those assumed in Iridium's
telecommunications in- revenue estimates. In addition, pricing for telecommunication
dustry have been services, including long distance rates, has trended downward
dropping, which may in recent years. This downward trend may make it difficult for
adversely affect Iridium to maintain or raise its wholesale prices.
Iridium's ability to
generate revenues.
The Iridium System does not afford the same voice quality,
signal strength and degree of building penetration as mature
land-based cellular or paging systems. This difference in
service quality could adversely affect demand for Iridium
services.
The larger sized The Kyocera and Motorola phones are larger and heavier than
Iridium phones and pagers today's pocket-sized cellular phones and have a significantly
may adversely affect longer and thicker antenna. Motorola's pager is slightly larger
customer demand for than today's standard alphanumeric belt-worn pagers. The larger
Iridium services. size of Iridium's phones and pagers may adversely affect
customer demand for Iridium services.
In addition, competition, including competition from other
satellite systems and from the extension of land-based
telecommunications systems to areas that are currently not
serviced by landline or land-based wireless phone or paging
systems, could reduce demand that might otherwise exist for
Iridium's services.
FACTORS AFFECTING Iridium's ability to generate sufficient operating revenues
CUSTOMER ACCEPTANCE OF will depend upon customer satisfaction with Iridium services.
SATELLITE-BASED SERVICE Iridium believes that customer satisfaction will depend on a
variety of factors, including:
The use of satellites - price of its services, phones and pagers;
in the Iridium System - the technical capabilities of Iridium's equipment;
expands coverage but - the quality of the services Iridium offers, including voice
satellite voice and quality, call completion rates and dropped call rates; and
paging services have - the extent, availability and price of alternative
certain service telecommunications services.
limitations that cus-
tomers may not be Satellite-based communications over the Iridium System
willing to accept. experience degradation in service quality in certain places and
are completely unavailable in some places. In particular:
- Satellite-based services are adversely affected in places
where obstructions, such as buildings and other natural and
man-made obstacles, are positioned between a satellite and
the user.
- These adverse effects on satellite calls increase as the
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obstacles become larger and more densely spaced.
- In densely packed urban areas or inside buildings with
steel construction and metal coated glass common in many
urban high rise buildings (including, in particular, in most
hotels and professional buildings), no meaningful satellite
voice service is available.
- Use of an Iridium phone in a moving automobile for a
satellite call makes the effect of obstructions temporary but
more pronounced because the structure of automobiles tends
to obstruct the satellite signal.
- The actual limitations on satellite-based services vary,
sometimes significantly, as conditions change and as the
satellites move in their orbits.
The Iridium satellite paging service also experiences
degradation in certain places. These limitations on
satellite-based services are more significant than current
limitations on service experienced by customers of land-based
cellular systems and traditional paging systems.
For Iridium to succeed, its customers must accept:
- the service limitations described above;
- higher prices for Iridium's satellite services than the
current prices for cellular and paging services; and
- heavier hand-held phones and larger pagers than those
currently used for most cellular and paging services.
Iridium's customers may not accept these limitations. These
limitations could result in significantly lower sales or lower
usage of Iridium's services than Iridium anticipates.
The Iridium System has not been designed to provide high-speed
data and facsimile transmission capability. As a result,
Iridium expects that the appeal of its facsimile and data
services (which are not expected to be available until
mid-1999) will be limited.
Also, the Iridium System lacks the operational capacity to
provide service to a very large number of customers in
concentrated areas using the system simultaneously.
POTENTIAL UNDERSUPPLY OF PHONES AND PAGERS; Iridium phones and pagers are an essential part of the Iridium
DISTRIBUTION AND SERVICE system. Iridium believes that Motorola's and Kyocera's
PROVIDER CONCERNS inability to manufacture and distribute a significant
number of phones and pagers at the commencement
Insufficient supply of of commercial operations constrained Iridium's initial
Iridium telephones and marketing and distribution efforts. Future undersupplies
pagers could harm of subscriber equipment could adversely affect
Iridium. Iridium's commercial operations and
its ability to generate meaningful revenues.
Distribution Concerns. The initial global distribution of phones
and pagers is one of Iridium's most significant challenges as it
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transitions from a development stage company into an operating
company. While Iridium's service providers, who are responsible
for direct sales to customers, are disparately located across the,
globe the supply sources of phones and pagers are limited.
Getting phones and pagers from production locations to a large
number of service providers spread over the globe is a significant
challenge. Hurdles that must be overcome include customs and
tax clearance in each of the countries to which the phones and
pagers are shipped and coordination with numerous local and regional
distribution channels.
Service Provider Concerns. Iridium believes one of its most
significant challenges is identifying, contracting with, motivating
and training service providers in a number of countries to
identify potential Iridium customers, to accurately inform such
customers about Iridium World Services, to market Iridium
phones and pagers and to distribute the equipment and
provide customer service once sales have been made. Iridium has
also experienced difficulties coordinating sales to customers with
operations that span more than one gateway service territory.
There can be no assurance that Iridium and its gateway operators
and service providers will be able to distribute phones and pagers
to various parts of the world or market Iridium services on an
effective and timely basis. A failure to distribute phones and
pagers and Iridium World Services on a global and timely basis
would adversely affect Iridium.
RISKS RELATING TO LOW DE- There is a risk that sufficient demand for Iridium services will not
MAND FOR PAGERS AND PHONES; materialize in a timely manner unless Iridium and its
POTENTIAL NEED FOR SUBSIDIES gateway operators or service providers subsidize the cost of
Iridium phones and pagers. Neither Iridium nor, to Iridium's
Iridium may have to knowledge, its gateway owners and service providers currently
subsidize the price of plan to provide any such subsidies. The costs associated with
phones and pagers to those subsidies, including Iridium's portion of those costs,
stimulate demand for could be significant. Iridium's current projected funding needs
its services. do not reflect any costs associated with subsidization.
TECHNOLOGY IMPLEMENTATION For the Iridium System to operate properly, Motorola and its
RISKS subcontractors must make a number of sophisticated and diverse
technologies work together -- this is a complex task that has
Integrating the Iridium not been attempted before. This task is further complicated by
system's various the following facts:
technologies, including - the Iridium System is expected to operate 24 hours a day;
software and com- - most of the Iridium System's hardware is in space; and
munications hardware, - system-wide testing, maintenance and repair could adversely
was an extremely complex affect Iridium's ability to provide the service quality it
task and future anticipates.
operations could reveal
serious problems that Iridium believes that the development and implementation of the
cannot be corrected software for the Iridium System was one of the largest and most
without adversely complex software creation and integration tasks ever undertaken
affecting Iridium's in the telecommunications industry. The Iridium System
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services. software, including the software that controls the satellites
and the on-the-ground business support systems necessary for
customer billing, has not been subject to the demands of
commercial operations at the levels Iridium will need to be
successful. This software will have to be reprogrammed if
errors are revealed.
POTENTIAL FOR DELAYED OR The Iridium System is the first satellite-based global personal
IMPAIRED OPERATIONS communications system. However, other companies are
attempting to develop satellite-based systems to compete with
If Iridium's transition Iridium. A significant part of Iridium's strategy is to
from a development capitalize on its first-to-market advantage. If Iridium's
stage company into a transition from a development stage company into an operating
company with company is delayed or its ability to provide the services it
substantial commercial expects is impaired, there likely would be:
operations is delayed - harm to the competitive advantage Iridium expects to
or its ability to achieve under its current strategy;
provide services - delay in Iridium's generation of revenue; and
is impaired, its - a significant effect on Iridium's ability to repay its
ability to generate revenues indebtedness.
and its competitive position
may be materially harmed. A significant delay in Iridium's transition to a company with
substantial commercial operations or a significant impairment
of its ability to provide the services it expects could occur
if:
- significant errors in the design and implementation of the
Iridium System are discovered during commercial operations;
- commercial operations reveal that significant improvements
in service quality are needed if Iridium services are to
generate the demand Iridium expects; or
- a significant number of satellites fail to operate for any
reason. See "-- Risks Related to the Satellites", below.
LIMITED SATELLITE-BASED Iridium's ability to supply satellite-based service depends upon
SERVICE CAPACITY the capacity of the Iridium System. Various factors, including
customer usage patterns, have a significant effect on the Iridium
If Iridium experiences System's capacity for a particular geographic area and on a
unexpected customer system-wide basis. The most important factors include:
usage patterns or its - customer usage patterns; and
available spectrum is - the amount of spectrum (the frequencies at which Iridium is
fully utilized, the ability allowed to operate the Iridium System) available to the Iridium
of customers to place or system.
receive calls may be
adversely affected. Iridium could experience unexpected customer usage patterns
that could exceed the capacity of the Iridium System at one or
more gateways -- similar to an overload of regional circuits
on a land-based system. If Iridium faces significant capacity
issues, its ability to acquire additional spectrum (which can
be thought of as similar to adding more "lines" to a land-based
system) is subject to significant regulatory hurdles. If
adverse usage patterns occur or other significant constraints
are placed on the Iridium System, customers may have difficulty
in placing or receiving calls on the system, which could
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materially and adversely affect Iridium.
RISKS RELATED TO THE A significant portion of Iridium's tangible assets are its low earth
SATELLITES orbit satellites and the related land-based control facilities.
Maintaining this equipment is a complex and costly undertaking
The risk of satellite which has not been attempted previously on a commercial basis.
loss or damage is In particular, the costs of satellite loss or failure are significant.
significant, and the
effect of satellite
losses or damage could The loss or failure of one or more satellites, including
be substantial. temporary losses, that for whatever reason are not promptly
corrected by fixing or replacing the problem satellite, could
cause:
- gaps in service availability;
- significantly degraded service quality;
- increased costs; and
- losses of revenue for the period that service is
interrupted or impaired.
Accordingly, the loss or failure of any satellite or satellites
could materially and adversely affect Iridium. A satellite can
be lost or fail for a variety of reasons, including:
- colliding with something, including space debris, another
man-made object or space phenomena such as comets or
meteors;
- mechanical anomalies or malfunctions; and
- failure of the rocket, by explosion or otherwise, that was
to place the satellite in orbit.
Space debris and other in-space risks. Iridium's satellites operate
in low earth orbit and, as a result, face a higher risk of damage
from space debris than satellites that operate farther away from
the earth.Because objects in low earth orbit are moving at
different speeds, the Iridium satellites can be more readily hit by
space debris -- which can include sand, pebbles, dust and rocks
shed by comets, as well as the remains of man-made objects
floating in space. Even a very small piece of space debris can
cause significant damage to a satellite.
Mechanical Anomalies and Malfunctions. During the initial
deployment of the Iridium System, Iridium experienced problems
or "anomalies" with several of its satellites. Those anomalies,
which in some cases included control problems and the
satellite's failure to function as expected, caused those
satellites to be excluded from Iridium's initial constellation.
You should note that:
- anomalies such as occurred with respect to those
satellites, or other anomalies with comparable effects, could
occur in the future;
- such anomalies could have a significant adverse effect on
Iridium;
- from time to time certain events could occur that may cause
Iridium or Motorola to conclude that one or more
13
malfunctioning satellites should not be included in the satellite
constellation, and the unavailability of such satellite
could have an adverse effect on the operation of the
Iridium System; and
- while Motorola has absorbed the direct financial
consequences of all satellite losses to date, there can be no
assurance Motorola will do so in the future.
The O&M contract with Motorola provides for the operation and
maintenance of Iridium's space assets (including the satellite
constellation) for Iridium's first five years of operation.
Iridium has the option to extend the O&M contract for an
additional two years. Under the O&M contract, Motorola bears
the risk of satellite malfunction, but Iridium bears the risk
of damage to satellites by the acts of third parties, including
the degradation or complete loss of any satellite due to
contact with space debris.
Launch-related risks. Motorola expects that it will need to launch
additional satellites from time to time to maintain
the Iridium System. Accordingly, a launch failure or failures
could have a material adverse effect on Iridium. Satellites are
launched on launch vehicles, or rockets. Launches of satellites
can fail because:
- a rocket crashes, aborts or explodes (which recently
happened to one of Iridium's competitors); or
- satellites are damaged as they are loaded into the rocket,
during the launch, or as they are deployed from the rocket.
In addition, launches can be delayed for many reasons,
including poor weather conditions, other launch failures or
government actions. Placing multiple satellites in each Iridium
launch vehicle significantly increases the risk that a launch
failure will have a material and adverse effect on Iridium.
Life Expectancy of the Satellites; Financial Effect of Loss of Satellites.
Iridium's business plan currently assumes that each of the
satellites will have an average useful life of at least five years
from its initial date of commercial service. Iridium's satellites
may not, however, remain in operation for an average of at least
five years as Iridium expects. If a significant number of satellites
do not remain in operation for the full five years, Iridium's
operations,including its ability to provide service and generate
revenues,could be materially harmed and its costs of operating
will likely increase.
COMPETITION RISKS Certain sectors of the telecommunications industry are highly
competitive in the United States and other countries. The
\Iridium faces direct uncertainties and risks created by this competition are intensified
competition from a by the continuous technological advances that characterize the
variety of operating industry, regulatory developments that affect competition and
14
and planned satellite alliances between industry participants.
systems and land-based
services.
Satellite Services Competitors. While Iridium is the only company that
currently serves the global satellite personal
communications market with hand-held phones and belt-worn
pagers, Iridium anticipates that more than one system may serve
this market in some fashion in the future. Iridium believes that its
most likely direct competition will come from the planned ICO
telecommunications service and from one or more of the other
Federal Communications Commission licensed MSS applicants:
- Loral/Qualcomm Partnership, L.P. (on behalf of Globalstar);
- MCHI (on behalf of Ellipso); and
- Constellation Communications Inc. (on behalf of
ECCO/Aries).
Iridium also expects to encounter competition from Inmarsat,
which currently serves the global satellite communications
market as well as from regional mobile satellite systems, three
of which have been launched (Asia Pacific Mobile
Telecommunications Satellite, Afro-Asian Satellite and PT Asia
Cellular Satellite) and several of which are in the planning
stage.
Other Competitors. Iridium's World Roaming Service
offering, which allows Iridium subscribers to roam onto a
variety of cellular networks, faces competition from existing
and will face additional competition from future land-based
cellular interprotocol roaming services, which provide roaming
services across similar cellular networks. GTE Mobilnet ("GTE")
and Deutsche Telekom Mobil ("DeTeMobil") of Germany
currently offer GlobalRoam, a two-way cellular roaming service
between certain North American cellular networks and cellular
networks in certain European countries. AT&T Wireless Service
of the United States and Vodafone of the United Kingdom offer
CellCard, a service that is very similar to GlobalRoam. Two
other proposed mobile satellite systems, ICO and Globalstar,
and at least one regional geostationary orbit satellite system,
ACeS, have indicated that they may also offer some form of
dual-mode satellite/cellular service, which may include
interprotocol roaming capabilities such as those expected to be
offered by Iridium. In addition, a number of rental services,
primarily in the United States, provide cellular phones to
persons traveling in countries with cellular standards that
differ from the traveler's home market.
Currently, the world's large cellular network owners and
operators are considering adopting a coordinated standard for
future cellular networks. If such a coordinated standard is
agreed upon and new networks are built, Iridium's ability to
provide interprotocol roaming would cease to be an advantage.
15
Iridium does not expect that such systems would be available on
a global basis until sometime after 2002.
COMPETITION FOR SERVICE In addition to competing for customers for its service,
PROVIDERS AND SPECTRUM Iridium also expects to compete with various other
ALLOCATION communications services for local service providers. A failure
to effectively compete with these services could materially and
adversely affect Iridium's ability to effectively market and
distribute its services and equipment.
Iridium will face Furthermore, ICO could have an advantage in obtaining
competition from other spectrum allocations and local operating approvals in a number
services for local of countries because it is affiliated with Inmarsat, an
service providers international satellite organization, and investors in ICO and
Inmarsat include many state-owned telecommunications
companies, which may have influence with the regulatory
authorities in their countries.
RISKS ASSOCIATED WITH The Iridium System's operation is subject to regulation by
LICENSING the United States and other national administrations. This
regulation is pervasive and largely outside Iridium's control.
Iridium cannot Iridium, Motorola and the various gateway owners have made
currently offer its substantial progress in receiving the authorizations necessary
services in every to operate the Iridium System, but a significant number of
country. regulatory authorizations necessary for Iridium to meet its
service coverage objectives have not yet been obtained. In
certain countries in which Iridium expects its customers will
want to use Iridium's services, the authority to offer
Iridium's services and operate Iridium Satellite phones has not
been received, and unless Iridium receives such authorizations,
service in those countries will be limited or will not exist at
all.
Iridium has covenanted In the secured bank facility, Iridium has covenanted, among
in its secured bank other things, that it will maintain, or cause to be maintained,
facility that it will the regulatory authority to offer Iridium World Satellite
maintain the authority Service in a minimum number of countries. While Iridium
to offer Iridium believes it will be able to satisfy this covenant, the
World Satellite Service regulation of satellite voice services generally is outside
in a minimum number of Iridium's control. If Iridium is unable to satisfy this or
countries. Failure to certain other covenants in the secured bank facility, the
satisfy this and other lenders under the secured bank facility generally would have
covenants would give the right to declare a default and could pursue various
the lenders under remedies, including enforcing their security interests in
secured bank facility substantially all of the assets of Iridium (which
the right to declare an include the Iridium System and represent substantially all of
event of default. Iridium's assets) and Parent's investment in Iridium.
You also should carefully consider the information discussed in
"Certain Regulations that Affect Iridium".
RELIANCE ON MOTOROLA, Operation of the Iridium System. Iridium relies extensively
GATEWAY OWNERS AND OTHER on third parties to perform functions critical to its
16
THIRD PARTIES operations. Iridium does not independently have, and does not
intend to acquire, except by contracting with other parties,
Iridium relies the ability to:
extensively on third - develop or produce replacements for the components of the
parties to perform Iridium System;
functions critical to - launch additional or replacement satellites; or
its operations. - operate and maintain the Iridium System.
Currently, Iridium relies on Motorola to provide these critical
functions.
Gateway Operators. Iridium is dependent on the activities
of its gateway operators for its success. Iridium has obtained
commitments from its investors who are gateway operators that
they will continue to use their reasonable best efforts to
perform certain critical functions including:
- obtaining the necessary licenses, if any, from the
jurisdictions in their gateway territories;
- operating their gateways;
- maintaining the connections between the Iridium System and
the PSTNs;
- marketing Iridium Services;
- contracting with, or acting as, service providers; and
- managing relationships with Iridium's customers either
directly or through service providers.
Distribution and Marketing of Iridium Services. Iridium's
success also depends upon the motivation and ability of its
service providers to generate current demand for Iridium
Services, phones and pagers. Service providers are responsible
for the sales of Iridium Services and of Iridium subscriber
equipment to the ultimate consumer. Service providers are, or
are selected by, Iridium's gateway operators. Iridium's
business plan assumes the service providers will make
substantial sales of Iridium phones, pagers and services as
Iridium transitions from a development stage company into an
operating company. However, as a result of many factors,
including the failure of service providers to promote Iridium
services effectively, demand for Iridium services may not be
generated on a timely basis. See "-- Risk of Low Service
Demand Because of Pricing, Service Quality, Equipment
Characteristics, Competition and Other Market Factors" and
"-- Potential Undersupply of Phones and Pagers; Distribution
Concerns".
RISKS ASSOCIATED WITH Iridium has three principal supply contracts (each with
PRINCIPAL SUPPLY CONTRACTS Motorola):
- the space system contract for the design, development,
Iridium's major construction and delivery in orbit of the space segment which
contracts relating to has an aggregate cost of approximately $3.435 billion and
the Iridium System are is substantially complete;
of limited duration, and - the O&M contract, which runs for five years from November,
Motorola's liability 1998 (extendable, at Iridium's option, for an additional two
17
under them is years), covers the operation of the space segment of the
significantly limited. Iridium System, including monitoring, upgrading and
replacing the hardware and software necessary to maintain
specified performance levels, and has an aggregate cost
(subject to certain adjustments) of approximately $2.89
billion over the initial five year term; and
- the terrestrial network development contract for the design
and development of the gateway hardware and software, which
is expected to be complete by year end 1999 and has an
aggregate cost (subject to certain adjustments) of
approximately $356 million.
These contracts are of limited duration and Motorola's
liability under them is significantly limited. The contracts
provide that if Motorola has any liability to Iridium under the
space system contract, the O&M contract, the terrestrial
network development contract or any other contract between
Iridium and Motorola in connection with the Iridium System,
that liability may be limited to $100 million in the aggregate
in virtually all circumstances. In addition, under the space
system contract, Motorola is not required to refund amounts
Iridium previously paid to it. Subject to certain exceptions,
Iridium bears the risk, including additional costs, if any,
resulting from excusable delays under the space system
contract, as well as certain of the risks of loss for
satellites in orbit. The O&M contract and the terrestrial
network development contract have similar provisions regarding
excusable delays, waivers and limitations on liability. See
"Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources"
for a description of certain of Motorola's and Iridium's
obligations under these contracts.
The obligations Motorola is required to perform under these
contracts are highly specialized and, if Motorola becomes
unable to perform its obligations under these contracts, it
would be very difficult, if not impossible, for Iridium to
engage a replacement contractor in a timely manner or at all.
See "-- Reliance on Motorola, Gateway Owners and Other Third
Parties".
CONFLICTS OF INTEREST Motorola has and will have various conflicts of interest
WITH MOTOROLA with Iridium. Motorola is:
- the creator and developer of the concept of the Iridium
Because of Motorola's system;
varying roles with - responsible for the design, construction, operation and
respect to Iridium, maintenance of the Iridium System;
there are a number of - a founding, and the largest single, investor in Iridium;
significant conflicts of interest - a gateway owner;
between Iridium and - Iridium's largest class 1 interest holder (and potentially
Motorola. the largest class A common stock holder in IWCL because class
1interests are exchangeable for class A common stock);
- a holder of warrants to acquire additional substantial
18
membership interests in Iridium;
- the guarantor of a substantial amount of Iridium's borrowings;
and
- entitled to receive significant additional equity and cash
from Iridium for guaranteeing Iridium's borrowings and
permitting Iridium to defer payments under the O&M
contract.
Motorola's Influence on Iridium. Motorola does not by
itself control the Iridium Board of Directors and it is not
permitted to participate in Iridium's decisions or other
actions concerning the space system contract, O&M contract or
the terrestrial network development contract. However, Motorola
could in certain situations exercise significant influence over
Iridium because:
- Motorola currently has the right to appoint 6 of the 27
members of the Iridium Board of Directors and its
representation could increase if it provides further
financial support to Iridium; and
- Motorola could have control over Iridium similar to that of
a creditor through its position as a guarantor of some of
Iridium's borrowings and as a creditor under various
material contracts.
In addition, under the Motorola MOU and the Motorola ARG,
Iridium has agreed with Motorola that, among other things, it
will:
- compensate Motorola for providing guarantees, deferral
rights and other credit support (collectively, the "Motorola
exposure", which generally includes the aggregate amount
guaranteed by or permitted to be deferred by Motorola);
- use its best efforts to reduce the Motorola exposure to no
more than $275 million by the earliest possible date, including
obtaining bank credit agreements not guaranteed by Motorola
and using revenues from operations, if available, to reduce
the available borrowings under the guaranteed credit
facilities;
- not have outstanding in excess of (a) $1.7 billion of
indebtedness for borrowed money that is secured by the assets
of Iridium or (b) $1.62 billion of senior notes;
- not make certain acquisitions without Motorola's consent;
and
- provide Motorola with the right (in addition to Motorola's
rights to representation based on its holdings of class 1
interests) to appoint one additional director to the Board
of Directors of Iridium any time the Motorola exposure
exceeds $275 million and the right to appoint a second
additional director to the Board of Directors of Iridium
any time the Motorola exposure exceeds $750 million.
Motorola's Contractual Relations with Iridium. Motorola
and Iridium entered into the space system contract, the O&M
19
contract and the terrestrial network development contract after
extensive negotiations. The predecessor of Iridium under those
contracts, however, was a wholly owned subsidiary of Motorola
at the time the space system contract and O&M contract were
negotiated and therefore these negotiations were not con-
ducted on an arm's-length basis. Moreover, although these
agreements provide for specific prices, Motorola's obligations
and liabilities are subject to certain limitations which
allocate various risks to Iridium and may have the effect of
increasing the price paid by Iridium. Iridium's payment
obligations under these agreements have comprised, and are
expected to continue to comprise, most of Iridium's expenses.
CONFLICTS OF INTEREST The Iridium Board of Directors consists of representatives
WITH GATEWAY OWNERS of certain of the world's leading telecommunications companies.
Almost all of the members of the Iridium Board of Directors
Iridium has certain have been appointed by investors in Iridium who also are
conflicts of interest gateway owners and service providers. Because Iridium is a
with its gateway owners supplier to the gateways and the service providers, the
and service providers interests of Iridium are expected to conflict in certain
respects with the interests of its gateway owners and the
service providers. For example, this conflict of interest is
relevant when the wholesale prices that Iridium will charge for
satellite airtime and other Iridium Services are set -- some
gateway operators and service providers may prefer prices that
are higher or lower than the system optional prices because
their customers are less or more price sensitive.
YEAR 2000 READINESS Iridium is addressing the Year 2000 issue. The "Year 2000 issue"
DISCLOSURE refers to the fact that many computer software application and
operations programs (including embedded chips) written in the
In a reasonably likely worst past may not properly recognize dates ending in "00" as meaning
case scenario, (i) a power 2000 rather than 1900. This could result in the incorrect
failure at a ground station performance of computer calculations and functionality involving
location could impact Iridium dates. Iridium's Year 2000 Program, or "Y2K Program",
handset to Iridium handset addresses information-technology,
service; or (ii) a call could or "IT", and non-IT problems that
fail to be completed due to a may exist within the Iridium System, including Iridium's
failure in the existing wireless suppliers, roaming partners, service providers and other material
or landline telecom network distributors. The Y2K program encompasses Iridium's space and
for those Iridium services that ground facilities,as well as the relevant operations of Iridium's
depend upon the transmission material suppliers and distributors, and addresses both IT and
of calls over such networks. non-IT systems.
Iridium has established a Iridium has performed an initial inventory of all
program to assess and mitigate Iridium hardware, software and infrastructure, as well as material
these and other risks, but vendors, to identify potential Year 2000 issues and to determine
cannot provide assurance the action required, if any, to correct the problem. Through the
that all actions necessary to gateways, Iridium is contacting its third party roaming partners
correct a Year 2000 problem and service providers to determine the Year 2000 status of their
will be completed in a timely systems, as well as their plans to bring them into compliance. The
manner. assessment of Iridium developed systems and those of Iridium's
key suppliers has been completed. The results have indicated
that necessary upgrades can be installed by, and the Y2K
20
Program substantially completed by, July 1, 1999. The gateways are still
completing their evaluation of their internally developed systems
and the status of this analysis is not finalized. However, Iridium
has every indication that the systems critical to the completion of
an Iridium call from one Iridium handset to another Iridium
handset is expected to be Y2K ready by July 1, 1999. We also
have determined that the systems critical to billing and
settlements are expected to be Y2K ready by July 1, 1999.
In a reasonably likely worst case scenario (i) a power failure at a
ground station location could impact Iridium handset to Iridium
handset service; or (ii) a call could fail to be completed due to a
failure in the existing wireless or landline telecom network for
those Iridium services that depend upon the transmission of calls
over such networks. Iridium has established a program to assess
and mitigate these and other risks, but cannot provide assurance
that all actions necessary to correct a Year 2000 problem will be
completed in a timely manner. Iridium believes that if the Y2K
Program is completed as scheduled, the potential of significant
interruptions of normal operations should be reduced. However,
Iridium cannot assure you that its systems and the systems of
those third parties on which its operation relies will be compliant
in a timely manner or that there will not be a material disruption
of Iridium's business or a material adverse effect on Iridium's
liquidity, financial condition or results of operations because of a
Year 2000 problem.
RISKS ASSOCIATED WITH Iridium intends to make its services available in almost
INTERNATIONAL OPERATIONS AND every country. As a result, Iridium and its gateway operators
DEVELOPING MARKETS and service providers are subject to risks related to each
country's domestic and international policies and risks related
Certain risks related to economic conditions in many regions of the world, such as:
to the domestic and - changes in domestic and foreign government regulations and
international policies telecommunications standards;
and economies of the - licensing requirements, tariffs or taxes and other trade
various countries in which barriers;
Iridium operates could - price, wage and exchange controls;
adversely affect Iridium. - political, social and economic instability;
- inflation; and
- interest rate and currency fluctuations.
Iridium, its gateway operators or service providers could be
adversely affected on a country-specific, regional or
system-wide basis by these factors. See "-- Potential
Undersupply of Phones and Pagers; Distribution Concerns" and
"-- Reliance on Motorola, Gateway Owners and Other Third
Parties".
DEPENDENCE ON KEY MANAGE- Iridium's success depends upon the efforts of its management
MENT AND QUALIFIED PERSONNEL team and its ability to attract and retain qualified management
and personnel. Iridium has no employment contract with any
Iridium relies on key employee and is subject to the possibility of loss of one or
21
employees with whom it more key employees at any time. Iridium also relies upon
does not have several employees of Motorola who play a key role in the
employment agree- performance of Motorola's obligations under the O&M contract.
ments Iridium has no control over the relationship between Motorola
and its employees. The loss of one or more of these key
employees could adversely affect Iridium. In addition,
Iridium's success will be dependent in part upon gateway
operators having qualified personnel at the various gateways to
execute significant aspects of Iridium's licensing, marketing
and distribution efforts.
RISKS ASSOCIATED WITH If significant and rapid growth in demand for Iridium World
GROWTH Services is achieved it would require Iridium and its gateways
to make additions to personnel and management information
Currently, the capacity systems to manage that growth while continuing to meet customer
of the Iridium System service expectations. In addition, because Iridium's assigned
cannot grow above spectrum (frequency band) and satellite infrastructure
certain limits. characteristics set inherent capacity limitations, growth above
certain levels currently is not possible.
RISKS ASSOCIATED WITH IWCL is a Bermuda company. IWCL's Bermuda legal counsel
INCORPORATION UNDER BERMUDA has advised IWCL that uncertainty exists about whether Bermuda
LAW courts will:
- enforce judgments obtained in other jurisdictions
Bermuda law may not (including the United States) against IWCL or its officers or
permit you to sue IWCL directors under the securities laws of those
for certain securities jurisdictions; or
law claims, and you may - entertain actions in Bermuda against IWCL or its officers
not be able to enforce a or directors under the securities laws of other jurisdictions.
U.S. court's judgment
against IWCL. There is no treaty in effect between the United States and
Bermuda providing for enforcement of U.S. judgments. In
addition, there are grounds upon which Bermuda courts may
refuse to enforce judgments of U.S. courts, and certain
remedies available under the U.S. federal securities laws would
not be allowed in Bermuda courts, as they may be contrary to
Bermuda's public policy.
RISK IWCL WILL LOSE MAN- Under the LLC agreement, IWCL has certain special rights
AGEMENT RIGHTS UPON A including:
CHANGE IN CONTROL; - the right to designate two members of the Iridium Board of
IRIDIUM'S INFLUENCE OVER THE Directors, one of whom will act as a Vice Chairman of Iridium;
IWCL BOARD OF DIRECTORS and
- the right to block certain significant transactions
IWCL could lose its involving Iridium.
special management
rights in Iridium if Iridium will have the right to terminate these special rights
there is change in following an IWCL "change in control", which includes
control of IWCL. circumstances in which:
- an entity other than Iridium becomes the beneficial owner
of more than 30% of IWCL's outstanding common stock; or
- there is a change in a majority of the members of IWCL's
22
Board of Directors over a two year period that is not approved
by a vote of 66 2/3% of the members of the IWCL Board then
still in office who were directors at the beginning of the
two year period or whose election or nomination for
election was previously so approved.