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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission file number: 333-11149
ORBCOMM GLOBAL, L.P.
ORBCOMM GLOBAL CAPITAL CORP.
(Exact Name of Registrants as Specified in their Charters)
54-1698039
DELAWARE 54-1841164
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization of Registrants) Identification Nos.)
2455 HORSE PEN ROAD, SUITE 100
HERNDON, VIRGINIA 20171
(Address of Registrants' Principal Executive Offices)
(Zip Code)
(703) 406-6000
(Registrants' Telephone Number, Including Area Code)
Indicate by check mark whether the Registrants: (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports); and (2) have been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS; UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
---------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,826 $ 3,799
Investments 0 390
Other receivables 842 248
Prepaid expenses 1,035 0
Inventory 9,242 6,688
---------------- --------------
Total Current Assets 17,945 11,125
Mobile Communications Satellite System, net 326,742 327,946
Other assets, net 5,756 4,690
Investments in and advances to affiliates 5,681 2,483
Goodwill, net 381 390
---------------- --------------
TOTAL ASSETS $ 356,505 $ 346,634
================ ==============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Current portion of long-term debt $ 903 $ 1,190
Accounts payable and accrued liabilities 11,458 19,255
Accounts payable - Orbital Sciences Corporation 59,304 50,800
---------------- --------------
Total Current Liabilities 71,665 71,245
Revenue participation accrued interest 920 599
Long-term debt 170,000 170,000
---------------- --------------
Total Liabilities 242,585 241,844
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile Partners 61,585 56,520
Orbital Communications Corporation 52,335 48,270
---------------- --------------
Total Partners' Capital 113,920 104,790
---------------- --------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 356,505 $ 346,634
================ ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
3
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS; UNAUDITED)
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
THREE MONTHS ENDED STAGE
MARCH 31, THROUGH
-------------------------------- MARCH 31,
1999 1998 1999
-------------- --------------- ---------------
REVENUES:
Service and product sales $ 514 $ 220 $ 2,623
Distribution fees 0 0 1,000
-------------- --------------- ---------------
Total revenues 514 220 3,623
EXPENSES:
Cost of product sales 490 215 2,517
Engineering expenses 5,268 2,654 35,888
Marketing, administrative and other expenses 7,812 4,304 61,835
-------------- --------------- ---------------
Total expenses 13,570 7,173 100,240
-------------- --------------- ---------------
LOSS FROM OPERATIONS BEFORE DEPRECIATION
AND AMORTIZATION (13,056) (6,953) (96,617)
Depreciation 11,451 1,903 36,045
Goodwill amortization 9 0 9
-------------- --------------- ---------------
LOSS FROM OPERATIONS (24,516) (8,856) (132,671)
OTHER INCOME AND EXPENSES:
Interest income 97 428 10,309
Interest expense and other financial charges (6,500) (210) (10,454)
Equity in net losses of affiliates (2,857) (2,008) (21,458)
-------------- --------------- ---------------
NET LOSS $ (33,776) $ (10,646) $ (154,274)
============== =============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
3
4
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
TOTAL
CASH FLOWS
DURING
DEVELOPMENT
THREE MONTHS ENDED STAGE
MARCH 31, THROUGH
-------------------------------- MARCH 31,
1999 1998 1999
--------------- --------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (33,776) $ (10,646) $ (154,274)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Items not affecting cash:
Depreciation 11,451 1,903 36,045
Goodwill amortization 9 0 9
Amortization of financing fees 209 210 2,186
Equity in net losses of affiliates 2,857 2,008 21,458
--------------- --------------- --------------
SUB-TOTAL (19,250) (6,525) (94,576)
Net changes in non-cash working capital items:
Decrease (increase) in other receivables (594) 285 (842)
Increase in prepaid expenses (1,035) 0 (1,035)
Increase in inventory (2,554) (463) (9,242)
Increase (decrease) in accounts payable and accrued liabilities (7,797) (7,754) 11,458
Increase in accounts payable - Orbital Sciences Corporation 0 0 4,648
Increase in revenue participation accrued interest 321 0 920
--------------- --------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (30,909) (14,457) (88,669)
--------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,743) (11,063) (308,131)
Increase in investments in and advances to affiliates (6,049) (1,045) (27,112)
Purchase of investments 0 (4,313) (190,885)
Proceeds from sale of investments 390 14,289 190,884
Other 0 0 (390)
--------------- --------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (7,402) (2,132) (335,634)
--------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt 0 0 169,475
Repayment of long-term debt (287) (262) (4,096)
Partners' contributions 42,900 20,000 270,700
Financing fees paid (1,275) 0 (4,950)
--------------- --------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 41,338 19,738 431,129
--------------- --------------- --------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 3,027 3,149 6,826
CASH AND CASH EQUIVALENTS:
Beginning of period 3,799 16,106 0
--------------- --------------- --------------
CASH AND CASH EQUIVALENTS:
End of period $ 6,826 $ 19,255 $ 6,826
=============== =============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 11,925 $ 11,950 $ 60,722
=============== =============== ==============
Non-cash capital expenditures $ 8,504 $ 8,377 $ 54,656
=============== =============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
4
5
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) 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. (the "Company"), a
Delaware limited partnership. OCC and Teleglobe Mobile also formed two marketing
partnerships, ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International
Partners, L.P. ("ORBCOMM International"), to market services using the ORBCOMM
low-Earth orbit satellite-based communications system (the "ORBCOMM System") in
the United States and internationally, respectively. In 1995, the Company became
a 98% general partner in ORBCOMM USA, reducing OCC's direct partnership interest
to 2% and eliminating Teleglobe Mobile's direct partnership interest entirely.
Simultaneously, the Company became a 98% general partner in ORBCOMM
International, reducing Teleglobe Mobile's direct partnership interest to 2% and
eliminating OCC's direct partnership interest entirely. In 1998, the Company
purchased the assets of Dolphin Software Systems Inc. ("Dolphin") and
established two wholly owned subsidiaries. Dolphin Information Services Inc., a
Delaware corporation, distributes outside Canada software products that enable
customers to more easily access and manage information obtained from or
regarding their remote or mobile assets using the ORBCOMM system (collectively,
the "Dolphin Software"). Dolphin Software Services ULC, a Nova Scotia unlimited
liability company, develops modifications and enhancements to, and distributes
in Canada, the Dolphin Software. The value attributed to assets acquired from
Dolphin is not material to the Company's total assets.
(2) BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial position
of the Company as of March 31, 1999, the results of its operations and cash
flows for the three-month periods ended March 31, 1999 and 1998, and the period
from June 30, 1993 (date of inception) through March 31, 1999. These condensed
consolidated financial statements are unaudited and do not include all related
footnote disclosures and, therefore, should be read in conjunction with the
audited consolidated financial statements and the footnotes thereto for the year
ended December 31, 1998 filed with the Securities and Exchange Commission.
Operating results for the three months ended March 31, 1999 are not necessarily
indicative of the results of operations expected in the future, although the
Company anticipates a net loss for the year 1999. The Company expects to emerge
from development stage in 1999.
(3) RELATED PARTY TRANSACTIONS
The Company paid Orbital $534,000 and $777,000 for the three months
ended March 31, 1999 and 1998, respectively, and approximately $200,600,000 for
the period June 30, 1993 (date of inception) through December 31, 1998. Payments
were made for work performed pursuant to the ORBCOMM System Design, Development
and Operations Agreement, the ORBCOMM System Procurement Agreement (the
"Procurement Agreement") and the Administrative Services Agreement (for
provision of ongoing administrative support to the Company). Additionally,
Orbital has deferred $59,304,000 and $50,800,000 as of March 31, 1999 and
December 31, 1998, respectively, and has indicated that it will continue to
defer invoicing of certain amounts under the Procurement Agreement and, to the
extent applicable, a new procurement agreement dated as of February 1, 1999
between the Company and Orbital
5
6
ORBCOMM GLOBAL, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(3) RELATED PARTY TRANSACTIONS - (CONTINUED)
until other funding arrangements for the Company are secured.
The Company sold an aggregate of $490,000 and $215,000 of product to
ORBCOMM USA and ORBCOMM International for the three months ended March 31, 1999
and 1998, respectively, and $1,763,000 for the period June 30, 1993 (date of
inception) through December 31, 1998.
(4) LONG-TERM DEBT
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with
Revenue Participation Interest (the "Old Notes"). All of the Old Notes were
exchanged for an equal principal amount of registered 14% Series B Senior Notes
due 2004 with Revenue Participation Interest (the "Notes"). Revenue
Participation Interest represents an aggregate amount equal to 5% of the ORBCOMM
System revenues generated from August 1996 and is payable on the Old Notes and
the Notes on each interest payment date subject to certain covenant
restrictions. The Notes are fully and unconditionally guaranteed on a joint and
several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International,
except that the guarantees are non-recourse to the shareholders and/or partners
of the guarantors, limited only to the extent necessary for each such guarantee
not to constitute a fraudulent conveyance under applicable law.
On the closing of the Old Notes, the Company used $44,800,000 of the
net proceeds from the sale of the Old Notes to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998. All of this investment portfolio was
used to pay semi-annual interest that was due on the Notes through 1998.
The Company also has a $5,000,000 secured note with a financial
institution of which $903,000 and $1,190,000 was outstanding as the current
portion of the long-term debt as of March 31, 1999 and December 31, 1998,
respectively. The note bears interest at a rate of 9.2% per annum, is secured by
equipment located at certain of the U.S. gateway Earth stations and the network
control center and is guaranteed by Orbital.
6
7
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEETS
(IN THOUSANDS; UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
ASSETS
CURRENT ASSETS:
Accounts receivable $ 135 $ 220
Inventory 0 309
Other assets 145 113
Product development 773 569
------------- -------------
TOTAL ASSETS $ 1,053 $ 1,211
============= =============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued liabilities $ 80 $ 717
------------- -------------
Total Current Liabilities 80 717
Amount due to affiliates 16,711 13,342
------------- -------------
Total Liabilities 16,791 14,059
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
ORBCOMM Global, L.P. (15,423) (12,591)
Orbital Communications Corporation (315) (257)
------------- -------------
Total Partners' Capital (15,738) (12,848)
------------- -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 1,053 $ 1,211
============= =============
The accompanying notes are an integral part of these condensed financial
statements.
7
8
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS; UNAUDITED)
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
THREE MONTHS ENDED STAGE
MARCH 31, THROUGH
------------------------------ MARCH 31,
1999 1998 1999
-------------- ------------- --------------
REVENUES:
Service and product sales $ 265 $ 64 $ 1,436
Contract revenues 0 0 4,203
-------------- ------------- --------------
Total revenues 265 64 5,639
EXPENSES:
Cost of sales 240 66 1,683
Marketing expenses 2,915 1,563 19,704
-------------- ------------- --------------
Total expenses 3,155 1,629 21,387
-------------- ------------- --------------
NET LOSS $ (2,890) $ (1,565) $ (15,748)
============== ============= ==============
The accompanying notes are an integral part of these condensed financial
statements.
8
9
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
TOTAL
CASH FLOWS
DURING
DEVELOPMENT
THREE MONTHS ENDED STAGE
MARCH 31, THROUGH
--------------------------- MARCH 31,
1999 1998 1999
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,890) $ (1,565) $ (15,748)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Net changes in non-cash working capital items:
Decrease (increase) in accounts receivable 85 (41) (135)
Decrease in inventory 309 0 0
Increase in other assets (32) (46) (145)
Increase in product development (204) (45) (773)
Increase (decrease) in accounts payable and accrued liabilities (637) (20) 80
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (3,369) (1,717) (16,721)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in amount due to affiliates 3,369 1,717 16,711
Partners' contributions 0 0 10
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,369 1,717 16,721
------------- ------------- -------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS 0 0 0
CASH AND CASH EQUIVALENTS:
Beginning of period 0 0 0
------------- ------------- -------------
CASH AND CASH EQUIVALENTS:
End of period $ 0 $ 0 $ 0
============= ============= =============
The accompanying notes are an integral part of these condensed financial
statements.
9
10
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) 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. (the "Company"), a
Delaware limited partnership. OCC and Teleglobe Mobile also formed two marketing
partnerships, ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International
Partners, L.P. ("ORBCOMM International"), to market services using the ORBCOMM
low-Earth orbit satellite-based communications system (the "ORBCOMM System") in
the United States and internationally, respectively. In 1995, the Company became
a 98% general partner in ORBCOMM USA, reducing OCC's direct partnership interest
to 2% and eliminating Teleglobe Mobile's direct partnership interest entirely.
Simultaneously, the Company became a 98% general partner in ORBCOMM
International, reducing Teleglobe Mobile's direct partnership interest to 2% and
eliminating OCC's direct partnership interest entirely.
(2) BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed financial
statements reflect all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial position of ORBCOMM USA as of
March 31, 1999, the results of its operations and cash flows for the three-month
periods ended March 31, 1999 and 1998, and the period from June 30, 1993 (date
of inception) through March 31, 1999. These condensed financial statements are
unaudited and do not include all related footnote disclosures and, therefore,
should be read in conjunction with the audited financial statements and the
footnotes thereto for the year ended December 31, 1998 filed with the Securities
and Exchange Commission. Operating results for the three months ended March 31,
1999 are not necessarily indicative of the results of operations expected in the
future. ORBCOMM USA expects to emerge from development stage in 1999.
(3) RELATED PARTY TRANSACTIONS
As of March 31, 1999, ORBCOMM USA had a payable of $16,711,000 to
the Company for amounts advanced to support ORBCOMM USA's efforts to establish
commercial and government markets in the United States ($13,660,000 as of
December 31, 1998). ORBCOMM USA is currently in development stage, and still
obtains funds to support operations through non-interest bearing advances from
the Company.
As of December 31, 1998, ORBCOMM USA had a receivable of $318,000
from ORBCOMM International (none as of March 31, 1999).
ORBCOMM USA purchased $168,000 and $42,000 of product from the
Company for the three months ended March 31, 1999 and 1998, respectively, and
$1,402,000 for the period June 30, 1993 (date of inception) through December 31,
1998.
10
11
ORBCOMM USA, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(4) COMMITMENTS AND CONTINGENCIES
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with
Revenue Participation Interest (the "Old Notes"). All of the Old Notes were
exchanged for an equal principal amount of registered 14% Series B Senior Notes
due 2004 with Revenue Participation Interest (the "Notes"). Revenue
Participation Interest represents an aggregate amount equal to 5% of the ORBCOMM
System revenues generated from August 1996 and is payable on the Old Notes and
the Notes on each interest payment date subject to certain covenant
restrictions. The Notes are fully and unconditionally guaranteed on a joint and
several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International,
except that the guarantees are non-recourse to the shareholders and/or partners
of the guarantors, limited only to the extent necessary for each such guarantee
not to constitute a fraudulent conveyance under applicable law.
On the closing of the Old Notes, the Company used $44,800,000 of the
net proceeds from the sales of the Old Notes to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998. All of this investment portfolio was
used to pay semi-annual interest that was due on the Notes through 1998.
11
12
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEETS
(IN THOUSANDS; UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
--------------- --------------
ASSETS
CURRENT ASSETS:
Accounts receivable $ 11,499 $ 1,023
Deferred and prepaid contract costs 18,785 20,879
--------------- --------------
TOTAL ASSETS $ 30,284 $ 21,902
=============== ==============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued liabilities $ 876 $ 530
Deferred revenue 25,794 20,094
--------------- --------------
Total Current Liabilities 26,670 20,624
Amount due to affiliates 9,648 7,389
--------------- --------------
Total Liabilities 36,318 28,013
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile Partners (120) (122)
ORBCOMM Global, L.P. (5,914) (5,989)
--------------- --------------
Total Partners' Capital (6,034) (6,111)
--------------- --------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 30,284 $ 21,902
=============== ==============
The accompanying notes are an integral part of these condensed financial
statements.
12
13
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS; UNAUDITED)
TOTAL
ACCUMULATED
DURING
DEVELOPMENT
THREE MONTHS ENDED STAGE
MARCH 31, THROUGH
------------------------------------------------------------ MARCH 31,
1999 1998 1999
---------------------------- ---------------------------- ----------------------------
REVENUES:
Service and product sales $ 6,150 $ 105 $ 17,157
EXPENSES:
Cost of sales 4,785 89 15,838
Marketing expenses 1,288 501 7,363
---------------------------- ---------------------------- ----------------------------
Total expenses 6,073 590 23,201
---------------------------- ---------------------------- ----------------------------
NET INCOME (LOSS) $ 77 $ (485) $ (6,044)
============================ ============================ ============================
The accompanying notes are an integral part of these
condensed financial statements.
13
14
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
TOTAL
CASH FLOWS
DURING
DEVELOPMENT
THREE MONTHS ENDED STAGE
MARCH 31, THROUGH
--------------------------------- MARCH 31,
1999 1998 1999
------------ ------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 77 $ (485) $ (6,044)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net changes in non-cash working capital items:
Increase in accounts receivable (10,476) 0 (11,499)
Decrease (increase) in deferred and prepaid contract costs 2,094 (3,029) (18,785)
Increase (decrease) in accounts payable and accrued liabilities 346 (191) 876
Increase in deferred revenue 5,700 4,376 25,794
------------ ------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,259) 671 (9,658)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in amount due to affiliates 2,259 (671) 9,648
Partners' contributions 0 0 10
------------ ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,259 (671) 9,658
------------ ------------- -------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS 0 0 0
CASH AND CASH EQUIVALENTS:
Beginning of period 0 0 0
------------ ------------- -------------
CASH AND CASH EQUIVALENTS:
End of period $ 0 $ 0 $ 0
============ ============= =============
The accompanying notes are an integral part of these condensed
financial statements.
14
15
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) 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. (the "Company"), a
Delaware limited partnership. OCC and Teleglobe Mobile also formed two marketing
partnerships, ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International
Partners, L.P. ("ORBCOMM International"), to market services using the ORBCOMM
low-Earth orbit satellite-based communications system (the "ORBCOMM System") in
the United States and internationally, respectively. In 1995, the Company became
a 98% general partner in ORBCOMM USA, reducing OCC's direct partnership interest
to 2% and eliminating Teleglobe Mobile's direct partnership interest entirely.
Simultaneously, the Company became a 98% general partner in ORBCOMM
International, reducing Teleglobe Mobile's direct partnership interest to 2% and
eliminating OCC's direct partnership interest entirely.
(2) BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed financial
statements reflect all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial position of ORBCOMM
International as of March 31, 1999, the results of its operations and cash flows
for the three-month periods ended March 31, 1999 and 1998, and the period from
June 30, 1993 (date of inception) through March 31, 1999. These condensed
financial statements are unaudited and do not include all related footnote
disclosures and, therefore, should be read in conjunction with the audited
financial statements and the footnotes thereto for the year ended December 31,
1998 filed with the Securities and Exchange Commission. Operating results for
the three months ended March 31, 1999 are not necessarily indicative of the
results of operations expected in the future. ORBCOMM International expects to
emerge from development stage in 1999.
(3) RELATED PARTY TRANSACTIONS
As of March 31, 1999, ORBCOMM International had a payable of
$9,648,000 to the Company for amounts advanced to support ORBCOMM
International's efforts to establish commercial markets outside the United
States ($7,071,000 as of December 31, 1998). ORBCOMM International is currently
in development stage, and still obtains funds to support its operations through
non-interest bearing advances from the Company.
As of December 31, 1998, ORBCOMM International had a payable of
$318,000 to ORBCOMM USA (none as of March 31, 1999).
ORBCOMM International purchased $322,000 and $105,000 of product
from the Company for the three months ended March 31, 1999 and 1998,
respectively, and $361,000 for the period June 30, 1993 (date of inception)
through December 31, 1998.
15
16
ORBCOMM INTERNATIONAL PARTNERS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(4) COMMITMENTS AND CONTINGENCIES
Long-Term Debt
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with
Revenue Participation Interest (the "Old Notes"). All of the Old Notes were
exchanged for an equal principal amount of registered 14% Series B Senior Notes
due 2004 with Revenue Participation Interest (the "Notes"). Revenue
Participation Interest represents an aggregate amount equal to 5% of the ORBCOMM
System revenues generated from August 1996 and is payable on the Old Notes and
the Notes on each interest payment date subject to certain covenant
restrictions. The Notes are fully and unconditionally guaranteed on a joint and
several basis by OCC, Teleglobe Mobile, ORBCOMM USA and ORBCOMM International,
except that the guarantees are non-recourse to the shareholders and/or partners
of the guarantors, limited only to the extent necessary for each such guarantee
not to constitute a fraudulent conveyance under applicable law.
On the closing of the Old Notes, the Company used $44,800,000 of the
net proceeds from the sale of the Old Notes to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998. All of this investment portfolio was
used to pay semi-annual interest that was due on the Notes through 1998.
Construction of Gateways
In October 1996, ORBCOMM International entered into agreements with
certain manufacturers for the purchase of twenty gateway Earth stations that
have been or will be installed around the world. During the first quarter of
1999, installation and final acceptance of gateways in Brazil and Argentina
occurred. The related revenue and the associated costs have been properly
reflected in the first quarter condensed consolidated statements of operations.
Additionally, as of March 31, 1999, ORBCOMM International had $18,785,000 of
deferred and prepaid contract costs ($20,879,000 as of December 31, 1998) of
which $11,180,000 represents advance payments to these manufacturers
($12,718,000 as of December 31, 1998). Total commitments under these
manufacturing agreements approximate $22,000,000. Included in deferred and
prepaid contract costs is the portion of engineering direct labor costs that
relates to the construction of gateways. As of March 31, 1999, $1,330,000 of
such costs had been included in deferred and prepaid contract costs ($1,114,000
as of December 31, 1998).
(5) SERVICE LICENSE OR SIMILAR AGREEMENTS
As of March 31, 1999, ORBCOMM International had signed 13 service
license or similar agreements ("SLAs") with international licensees, eight of
which had associated gateway procurement contracts and software license
agreements. The SLAs authorize the international licensees to use the ORBCOMM
System to provide two-way data and messaging communications services in their
designated territories. As of March 31, 1999, $32,508,000 had been received
under these agreements and the associated gateway procurement agreements
($30,868,000 as of December 31, 1998) and $25,794,000 was recorded as deferred
revenue ($20,094,000 as of December 31, 1998). ORBCOMM International is
obligated to construct and deliver eight gateways to certain international
licensees under certain of these agreements (see note 4).
16
17
ORBITAL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA; UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
-------------------- ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10 $ 10
Accounts receivable and other current assets 1,111 1,247
-------------------- ------------------
Total Current Assets 1,121 1,257
Investments in affiliates 59,090 56,111
-------------------- ------------------
TOTAL ASSETS $ 60,211 $ 57,368
==================== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES:
Accounts payable and other accrued liabilities $ 86 $ 724
-------------------- ------------------
Total Current Liabilities 86 724
Due to affiliates 145,383 123,677
-------------------- ------------------
Total Liabilities 145,469 124,401
Non-controlling interest in net assets of consolidated subsidiary (7,712) (6,296)
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, par value $0.01;
8,000,000 shares authorized;
4,798,392 and 4,783,892 shares issued;
4,702,820 and 4,688,320 shares outstanding, respectively 48 48
Additional paid-in capital 591 452
Treasury stock, at cost, 95,572 shares (770) (770)
Accumulated deficit (77,415) (60,467)
-------------------- ------------------
Total Stockholders' Deficit (77,546) (60,737)
-------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 60,211 $ 57,368
==================== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
17
18
ORBITAL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS; UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------------------------------
1999 1998
------------------------ -----------------------
REVENUES:
Service and product sales $ 266 $ 64
EXPENSES:
Cost of product sales 240 66
Marketing, administrative and other expenses 2,919 1,573
------------------- -------------------
Total expenses 3,159 1,639
------------------- -------------------
LOSS FROM OPERATIONS (2,893) (1,575)
OTHER INCOME AND EXPENSES:
Equity in net losses of affiliates (15,472) (4,556)
Non-controlling interest in net losses of
consolidated subsidiary 1,417 767
------------------- -------------------
NET LOSS $ (16,948) $ (5,364)
=================== ===================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
18
19
ORBITAL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------------------------
1999 1998
--------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (16,948) $ (5,364)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Items not affecting cash:
Equity in net losses of affiliates 15,472 4,556
Non-controlling interest in net losses of consolidated subsidiary (1,417) (767)
------------------- -----------------
SUB-TOTAL (2,893) (1,575)
Net changes in non-cash working capital items:
Decrease (increase) in accounts receivable and other current assets 136 (132)
Decrease in accounts payable and other accrued liabilities (638) (10)
------------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (3,395) (1,717)
------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates (18,450) (7,500)
------------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (18,450) (7,500)
------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock to employees 139 103
Net borrowings from affiliates 21,706 9,114
------------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 21,845 9,217
------------------- -----------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS 0 0
CASH AND CASH EQUIVALENTS:
Beginning of period 10 34
------------------- -----------------
CASH AND CASH EQUIVALENTS:
End of period $ 10 $ 34
=================== =================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
19
20
ORBITAL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION
Orbital Communications Corporation ("OCC") is a majority owned and
controlled subsidiary of Orbital Sciences Corporation ("Orbital") and is
included in Orbital's consolidated financial statements. In 1993, OCC and
Teleglobe Mobile Partners ("Teleglobe Mobile"), a partnership established by
affiliates of Teleglobe Inc. ("Teleglobe"), formed ORBCOMM Global, L.P.
("ORBCOMM"), a Delaware limited partnership, and two marketing partnerships,
ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners, L.P.
("ORBCOMM International"). Each of OCC and Teleglobe Mobile is a 50% general
partner in ORBCOMM, and ORBCOMM is a 98% general partner in each of the two
marketing partnerships. Additionally, OCC is a 2% general partner in ORBCOMM
USA, and Teleglobe Mobile is a 2% general partner in ORBCOMM International.
Directly and indirectly, OCC currently holds and controls 51% and 49% of ORBCOMM
USA and ORBCOMM International, respectively. Consequently, OCC consolidates the
financial results of ORBCOMM USA.
(2) BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial position
of OCC as of March 31, 1999, the results of its operations and cash flows for
the three-month periods ended March 31, 1999 and 1998. These condensed
consolidated financial statements are unaudited and do not include all related
footnote disclosures and, therefore, should be read in conjunction with the
audited consolidated financial statements and the footnotes thereto for the year
ended December 31, 1998 filed with the Securities and Exchange Commission. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results of operations expected in the future.
(3) RELATED PARTY TRANSACTIONS
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 arrangement. As of March 31, 1999 and December 31, 1998,
OCC owed Orbital $128,603,000 and $110,287,000, respectively, none of which is
currently payable. As of March 31, 1999 and December 31, 1998, OCC owed ORBCOMM
$69,000 and $48,000, respectively.
ORBCOMM USA currently obtains all of its funding from ORBCOMM via a
non-interest bearing intercompany borrowing arrangement. As of March 31, 1999
and December 31, 1998, ORBCOMM USA owed ORBCOMM $16,711,000 and $13,342,000
respectively, none of which is currently payable.
ORBCOMM USA purchased $168,000 and $42,000 of product from ORBCOMM
for the three months ended March 31, 1999 and 1998, respectively.
(4) COMMITMENTS AND CONTINGENCIES
In August 1996, ORBCOMM and ORBCOMM Global Capital Corp. issued
$170,000,000 senior unsecured notes due in 2004 (the "Notes") to institutional
investors. The Notes bear interest at a fixed rate of 14% and provide for
noteholder participation in future ORBCOMM service revenues. The Notes are fully
and unconditionally guaranteed on a joint and several basis by OCC, Teleglobe
Mobile, ORBCOMM USA and ORBCOMM International. The guarantees are non-recourse
to OCC's shareholders (including Orbital) and Teleglobe Mobile's partners
(including Teleglobe).
20
21
TELEGLOBE MOBILE PARTNERS
(A DEVLOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS; UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 11
Accounts receivable 11,499 1,023
Deferred and prepaid contract costs 18,785 20,879
-------- --------
Total Current Assets 30,285 21,913
Investments in affiliates 63,377 58,467
-------- --------
TOTAL ASSETS $ 93,662 $ 80,380
======== ========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued liabilities $ 975 $ 651
Deferred revenue 25,794 20,094
-------- --------
Total Current Liabilities 26,769 20,745
Amount due to affiliates 9,648 7,389
-------- --------
Total Liabilities 36,417 28,134
Non-controlling interest in net assets of ORBCOMM International
Partners, L.P. (2,956) (2,994)
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Teleglobe Mobile, L.P. 59,599 54,688
Teleglobe Mobile Investment Inc. 602 552
-------- --------
TOTAL PARTNERS' CAPITAL 60,201 55,240
-------- --------
Total Liabilities and Partners' Capital $ 93,662 $ 80,380
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
21
22
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS; UNAUDITED)
TOTAL ACCUMULATED
THREE MONTHS ENDED DURING DEVELOPMENT
MARCH 31, STAGE THROUGH
------------------------ MARCH 31,
1999 1998 1999
-------- -------- ------------------
REVENUES:
Service and product sales $ 6,150 $ 105 $ 17,157
EXPENSES:
Cost of sales 4,785 89 15,838
Marketing, administrative and other expenses 1,316 532 9,937
-------- -------- --------
Total expenses 6,101 621 25,775
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS 49 (516) (8,618)
OTHER INCOME AND EXPENSES:
Interest income 0 20 2,289
Financial charges 0 0 (288)
Equity in net losses of ORBCOMM Global, L.P. (17,043) (5,202) (75,587)
Non-controlling interest in net losses (income) of
ORBCOMM International Partners, L.P. (38) 238 2,961
-------- -------- --------
NET LOSS $(17,032) $ (5,460) $(79,243)
======== ======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
22
23
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
TOTAL CASH
THREE MONTHS ENDED FLOWS DURING
MARCH 31, DEVELOPMENT STAGE
-------------------------- THROUGH MARCH 31,
1999 1998 1999
--------- --------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (17,032) $ (5,460) $ (79,243)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Items not affecting cash:
Equity in net losses of ORBCOMM Global, L.P. 17,043 5,202 75,587
Non-controlling interest in net losses (income) of ORBCOMM
International Partners, L.P. 38 (238) (2,961)
--------- --------- ---------
SUB-TOTAL 49 (496) (6,617)
Net changes in non-cash working capital items:
Increase in accounts receivable (10,476) (2) (11,499)
Decrease (increase) in deferred and prepaid contract costs 2,094 (3,029) (18,785)
Increase (decrease) in accounts payable and accrued liabilities 324 (498) 975
Increase in deferred revenue 5,700 4,376 25,794
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,309) 351 (10,132)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates (21,950) (10,000) (139,975)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (21,950) (10,000) (139,975)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in amount due to affiliates 2,259 (671) 9,648
Partners' contributions 21,990 10,000 140,455
Non-controlling interest in net assets of ORBCOMM
International Partners, L.P. 0 0 5
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,249 9,329 150,108
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (10) (320) 1
CASH AND CASH EQUIVALENTS:
Beginning of period 11 1,439 0
--------- --------- ---------
CASH AND CASH EQUIVALENTS:
End of period $ 1 $ 1,119 $ 1
========= ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
23
24
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION
Teleglobe Mobile Partners, a Delaware general partnership (the
"Partnership"), was formed in 1993 for purposes of acting as a general and a
limited partner in ORBCOMM Global, L.P. (the "Company"), a Delaware limited
partnership providing data and messaging communications services using a
low-Earth orbit satellite-based communications system (the "ORBCOMM System").
The Partnership holds a 50% participation percentage ("Participation
Percentage") in the Company, which in turn holds a 98% Participation Percentage
in each of ORBCOMM USA, L.P. ("ORBCOMM USA") and ORBCOMM International Partners,
L.P. ("ORBCOMM International"), two other partnerships formed to market the
ORBCOMM System. The Partnership also holds directly a 2% Participation
Percentage in ORBCOMM International, bringing its direct and indirect
Participation Percentage in ORBCOMM International to 51%. Consequently, the
Partnership consolidates the financial results of ORBCOMM International.
(2) BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial position
of the Partnership as of March 31, 1999, the results of its operations and cash
flows for the three-month periods ended March 31, 1999 and 1998, and the period
from July 21, 1993 (date of inception) through March 31, 1999. These condensed
consolidated financial statements are unaudited and do not include all related
footnote disclosures and, therefore, should be read in conjunction with the
audited consolidated financial statements and the footnotes thereto for the year
ended December 31, 1998 filed with the Securities and Exchange Commission.
Operating results for the three months ended March 31, 1999 are not necessarily
indicative of the results of operations expected in the future. The Partnership
expects to emerge from development stage in 1999.
(3) RELATED PARTY TRANSACTIONS
As of March 31, 1999, ORBCOMM International had a payable of
$9,648,000 to the Company for amounts advanced to support ORBCOMM
International's efforts to establish commercial markets outside the United
States ($7,071,000 as of December 31, 1998). ORBCOMM International is currently
in development stage, and still obtains funds to support its operations through
non-interest bearing advances from the Company.
As of December 31, 1998, ORBCOMM International had a payable of
$318,000 to ORBCOMM USA (none as of March 31, 1999).
ORBCOMM International purchased $322,000 and $105,000 of product
from the Company for the three months ended March 31, 1999 and 1998,
respectively, and $361,000 for the period June 30, 1993 (date of inception)
through December 31, 1998.
In 1996, the Partnership entered into an administrative services
agreement with Teleglobe. Under this agreement, Teleglobe provides management
services to the Partnership. As of March 31, 1999 and December 31, 1998, the
Partnership owed Teleglobe $52,000 and $74,000, respectively, under this
agreement.
24
25
TELEGLOBE MOBILE PARTNERS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(4) COMMITMENTS AND CONTINGENCIES
Long-Term Debt
In August 1996, the Company and ORBCOMM Global Capital Corp. issued
$170,000,000 aggregate principal amount of 14% Senior Notes due 2004 with
Revenue Participation Interest (the "Old Notes"). All of the Old Notes were
exchanged for an equal principal amount of registered 14% Series B Senior Notes
due 2004 with Revenue Participation Interest (the "Notes"). Revenue
Participation Interest represents an aggregate amount equal to 5% of the ORBCOMM
System revenues generated from August 1996 and is payable on the Old Notes and
the Notes on each interest payment date subject to certain covenant
restrictions. The Notes are fully and unconditionally guaranteed on a joint and
several basis by the Partnership, Orbital Communications Corporation ("OCC"),
ORBCOMM USA and ORBCOMM International, except that the guarantees are
non-recourse to the shareholders and/or partners of the guarantors, limited only
to the extent necessary for each such guarantee not to constitute a fraudulent
conveyance under applicable law.
On the closing of the Old Notes, the Company used $44,800,000 of the
net proceeds from the sale of the Old Notes to purchase a portfolio of U.S.
Government securities to provide for payment in full of interest on the Old
Notes and Notes through August 15, 1998. All of this investment portfolio was
used to pay semi-annual interest that was due on the Notes through 1998.
Construction of Gateways
In October 1996, ORBCOMM International entered into agreements with
certain manufacturers for the purchase of twenty gateway Earth stations that
have been or will be installed around the world. During the first quarter of
1999, installation and final acceptance of gateways in Brazil and Argentina
occurred. The related revenue and the associated costs have been properly
reflected in the first quarter condensed consolidated statements of operations.
Additionally, as of March 31, 1999, ORBCOMM International had $18,785,000 of
deferred and prepaid contract costs ($20,879,000 as of December 31, 1998) of
which $11,180,000 represents advance payments to these manufacturers
($12,718,000 as of December 31, 1998). Total commitments under these
manufacturing agreements approximate $22,000,000. Included in deferred and
prepaid contract costs is the portion of engineering direct labor costs that
relates to the construction of gateways. As of March 31, 1999, $1,330,000 of
such costs had been included in deferred and prepaid contract costs ($1,114,000
as of December 31, 1998).
(5) SERVICE LICENSE OR SIMILAR AGREEMENTS
As of March 31, 1999, ORBCOMM International had signed 13 service
license or similar agreements ("SLAs") with international licensees, eight of
which had associated gateway procurement contracts and software license
agreements. The SLAs authorize the international licensees to use the ORBCOMM
System to provide two-way data and messaging communications services in their
designated territories. As of March 31, 1999, $32,508,000 had been received
under these agreements and the associated gateway procurement agreements
($30,868,000 as of December 31, 1998) and $25,794,000 was recorded as deferred
revenue ($20,094,000 as of December 31, 1998). ORBCOMM International is
obligated to construct and deliver eight gateways to certain international
licensees under certain of these agreements (see note 4).
25
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
In 1993, Orbital Sciences Corporation ("Orbital"), acting through Orbital
Communications Corporation ("OCC"), and Teleglobe Inc., acting through Teleglobe
Mobile Partners ("Teleglobe Mobile"), formed ORBCOMM Global, L.P. ("ORBCOMM").
OCC and Teleglobe Mobile each acquired and currently owns a 50% partnership
interest in us. Concurrently with our formation, OCC and Teleglobe Mobile formed
two marketing partnerships, ORBCOMM USA, L.P. and ORBCOMM International
Partners, L.P., with the exclusive right to market our services in the United
States and internationally, respectively. We are a 98% general partner in each
of ORBCOMM USA and ORBCOMM International, while OCC and Teleglobe Mobile control
the remaining 2% of ORBCOMM USA and ORBCOMM International, respectively. OCC
retains control over the licenses granted to it by the Federal Communications
Commission (the "FCC") for the ORBCOMM system, consistent with FCC regulations.
ORBCOMM Global Capital Corp. ("Capital"), a wholly owned subsidiary of
ours, was formed in July 1996 to act as a co-issuer with us in connection with
the issuance of $170,000,000 aggregate amount of our 14% Senior Notes due 2004
(the "Notes Offering"). Capital has nominal assets and does not conduct any
operations. In 1998, the Company purchased the assets of Dolphin Software
Systems Inc. ("Dolphin") and established two wholly owned subsidiaries. Dolphin
Information Services Inc., a Delaware corporation ("DIS"), distributes outside
Canada software products that enable customers to more easily access and manage
information obtained from or regarding their remote or mobile assets using the
Orbcomm System (collectively, the "Dolphin Software"). Dolphin Software Services
ULC, a Nova Scotia unlimited liability company ("DSS"), develops modifications
and enhancements to, and distributes in Canada, the Dolphin Software.
The value attributed to assets acquired from Dolphin is not material to the
Company's total assets. On February 25, 1999, ORBCOMM formed, ORBCOMM Investment
Corporation, a Delaware corporation, as a wholly owned unrestricted subsidiary
for the purpose making strategic investments in existing and prospective
international service licensees, other service distributors and various third
parties.
ORBCOMM Corporation was formed on June 29, 1998 for the sole purpose of
investing in and acting as one of our general partners in connection with the
initial public offering we anticipated would be conducted in 1998, which
offering was not consummated. ORBCOMM Corporation was merged with and into
ORBCOMM effective March 23, 1999.
We market our services to customers within the United States indirectly
through value-added resellers ("VARs") and directly through internally developed
value-added resellers ("Internal VARs") and internationally through
international service licensees ("International Licensees") that may distribute
our services directly or through a distribution network.
OUR ORGANIZATIONAL STRUCTURE; BASIS OF OUR FINANCIAL REPORTING
Our consolidated financial statements include our accounts and the accounts
of two of our subsidiaries, DIS and DSS. Since OCC and Teleglobe Mobile have
effective control over ORBCOMM USA and ORBCOMM International, respectively, we
account for each of ORBCOMM USA and ORBCOMM International using the equity
method of accounting. We do not consolidate either ORBCOMM USA or ORBCOMM
International, and therefore do not report in our condensed consolidated
financial statements, either of ORBCOMM USA's or ORBCOMM International's assets,
liabilities and operating revenues and expenses. Instead, our proportionate
share of the net income and losses of each of ORBCOMM USA and ORBCOMM
International is recorded under the caption "Equity in net losses of affiliates"
in our condensed consolidated financial statements. Correspondingly, our
26
27
investment in each of ORBCOMM USA and ORBCOMM International is carried at cost,
subsequently adjusted for the proportionate share of net income and losses,
additional capital contributions and distributions under the caption
"Investments in and advances to affiliates." In February 1999, we completed the
purchase of additional shares of ORBCOMM Japan Ltd., our International Licensee
for Japan, increasing our equity interest in ORBCOMM Japan to approximately 32%.
With the purchase of this additional ownership interest, we now account for our
investment in ORBCOMM Japan using the equity method of accounting.
ORBCOMM USA pays to OCC an output capacity charge that is a quarterly fee
equal to 23% of ORBCOMM USA's total service revenues for such calendar quarter
in exchange for the exclusive right to market, sell, lease and franchise all
ORBCOMM system output capacity in the United States and exclusive use of the
tangible assets (including software) of the ORBCOMM system located in the United
States (the "System Assets"). In consideration of the construction and financing
by us of the System Assets, OCC, in turn, pays to us a system charge that is a
quarterly fee equal to the output capacity charge less 1.15% of total aggregate
revenues, defined as the aggregate of ORBCOMM USA's and ORBCOMM International's
total system service revenues ("Total Aggregate Revenues"). If the output
capacity charge as described above is less than 1.15% of Total Aggregate
Revenues, then OCC is not required to pay and does not owe any portion of the
system charge to us.
ORBCOMM International pays to Teleglobe Mobile an international output
capacity charge that is a quarterly fee equal to 23% of ORBCOMM International's
total service revenues for such calendar quarter in exchange for the exclusive
right to market, sell, lease and franchise all ORBCOMM system output capacity
outside the United States. In consideration of the grant by us to Teleglobe
Mobile of the exclusive right to market, sell, lease and franchise all ORBCOMM
system output capacity outside the United States, Teleglobe Mobile, in turn,
pays to us a system charge that is a quarterly fee equal to the international
output capacity charge less 1.15% of Total Aggregate Revenues. If the
international output capacity charge as described above is less than 1.15% of
Total Aggregate Revenues, then Teleglobe Mobile is not required to pay and does
not owe any portion of the system charge to us.
ROLL-OUT OF OUR SERVICES
The ORBCOMM system provides a reliable, cost-effective method of providing
fixed asset monitoring, mobile asset tracking and messaging services to a broad
range of customers around the world. We have launched 28 satellites to date and
expect to launch seven additional satellites in an equatorial plane in 1999.
In November 1998, we formally announced the launch of full commercial
service in North America. The U.S. ground segment, including the network control
center and four gateway Earth stations, is operational. In addition, gateways
located in Italy, Japan, Brazil, Argentina and South Korea have successfully
completed acceptance testing. Our International Licensees for Europe, a portion
of South America and Japan have launched commercial service. Collectively, these
three International Licensees cover approximately 50 countries. During the
remainder of 1999, we expect that our International Licensees for Malaysia,
North Africa, the remaining portion of South America and the south Caribbean
region, Mexico and the north Caribbean region will launch commercial service as
well, subject to completion of the necessary ground infrastructure and receipt
of the necessary regulatory approvals.
REVENUES
We expect to emerge from development stage in 1999. Domestically, we
generate revenues from the direct sale of satellite access and usage to VARs,
which sales to date have been primarily for resale to customers. The pricing of
satellite access and usage is based on many variables, including the
availability
27
28
and cost of substitute services, the cost of providing service and the nature of
the user application. Pricing generally is based on a wholesale pricing
structure that incorporates an initial activation charge, a recurring monthly
charge for access to the ORBCOMM system and a flat-rate fee for usage. By the
end of the third quarter of 1999, we intend to implement usage-sensitive
billing.
We also generate part of our revenues from the sale of data and messaging
communications services and applications developed and distributed by Internal
VARs. The pricing of services provided by the Internal VARs is based on a
pricing structure similar to the VAR pricing structure except that the Internal
VAR pricing structure generates additional revenues from value-added software
and customer services, as well as hardware, provided to the customer.
Internationally, we generate revenues through license fees paid by and
through the sale of gateways to International Licensees. In addition, all
International Licensees in commercial service pay a monthly satellite usage fee
based on a percentage of gross operating revenues. By the end of the third
quarter of 1999, we expect to be able to charge the International Licensees a
monthly satellite usage fee based on the greater of a percentage of gross
operating revenues and a data throughput fee. International Licensees' gross
operating revenues are based on a wholesale pricing structure similar to the
prices charged to VARs, which includes an activation charge, a recurring monthly
access charge and a usage charge. On execution of an agreement, International
Licensees purchase a gateway or gateway components from us pursuant to a gateway
procurement contract or arrange to share a gateway with an International
Licensee that is in close proximity. Cash received under the gateway procurement
contracts is generally accounted for as deferred revenues and recognized when
the gateway has successfully completed acceptance testing. License fees from
service license or similar agreements are generally accounted for as deferred
revenues and recognized over the term of the agreements.
OPERATING EXPENSES
We own and operate the assets, other than the licenses from the FCC, which
are owned by OCC, that comprise the ORBCOMM system. Satellite-based
communications systems are characterized by high initial capital expenditures
and relatively low marginal costs for providing service. On November 30, 1998,
we announced the commencement of full commercial service in North America and
depreciation of the 28-satellite constellation commenced. Additionally, we
incur:
- engineering expenses related to the development and operation of the
ORBCOMM system;
- marketing expenses related to the marketing of our services; and
- general, administrative and other expenses related to the operation of
the ORBCOMM system.
We have also incurred expenses related to the development of Internal VARs,
which are included in our marketing expenses. We anticipate that our expenses
related to the continued development and operation of the Internal VARs,
including the development of applications for customers, will increase
substantially as we expand the marketing and distribution efforts of the
Internal VARs. Cost of product sales includes the cost of sale of subscriber
units sold to customers.
RESULTS OF OPERATION - ORBCOMM
We have generated substantial negative cash flows to date. Our activities
have focused primarily on:
- the acquisition of U.S. regulatory approvals for the operation of the
ORBCOMM system;
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- the design, construction and launch of satellites;
- the design and construction of associated ground network and operating
systems (including associated software);
- the development of subscriber unit manufacturing sources;
- the negotiation of agreements with International Licensees;
- the hiring of key personnel;
- the negotiation of agreements with VARs;
- the development of Internal VARs;
- the development of customer software and hardware applications; and
- preliminary marketing and sales activities associated with our
commercial operations.
In October 1998, we purchased substantially all of the assets of Dolphin
and established two wholly owned subsidiaries, DIS and DSS. It is expected that
most DSS product sales will be to consolidated affiliates. As such, we do not
expect DSS to have a material impact on our financial results.
Revenues. Product sales of $490,000 and $215,000 for the three months ended
March 31, 1999 and 1998, respectively, relate primarily to our sale of
subscriber units to ORBCOMM USA and ORBCOMM International, which units in turn
are sold to customers. The cost of product sales associated with such revenues
was $490,000 and $215,000, respectively.
Expenses. In late 1994, we borrowed $5,000,000, at an interest rate of 9.2%
per annum, pursuant to a Loan and Security Agreement dated December 22, 1994
between us and MetLife Capital Corporation (the "MetLife Note") to help finance
a portion of the ORBCOMM system. In addition, in August 1996, we closed the
Notes Offering. Most of the net proceeds of the Notes Offering were invested
primarily in short-term government securities, with certain restrictions
attached to all of the investment portfolio. A portion of the net proceeds of
the Notes Offering, sufficient to pay when due all remaining interest and
principal payments on the MetLife Note, was deposited into a segregated account.
For the three months ended March 31, 1999 and 1998, we recognized interest
expense and other financial charges of $6,500,000 and $210,000, respectively.
During the construction phase of the ORBCOMM system, we have capitalized
all interest expenses, as well as 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.
We incurred $7,812,000 and $4,304,000 of marketing, administrative and
other expenses for the three months ended March 31, 1999 and 1998, respectively.
We also incurred $5,268,000 and $2,654,000 of ORBCOMM system engineering
expenses for the three months ended March 31, 1999 and 1998, respectively. We
are 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. Marketing, administrative and other
expenses, as well as engineering expenses,
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were higher quarter-over-quarter due in substantial part to costs relating to an
increased number of employees. We also incurred $11,451,000 and $1,903,000 in
ORBCOMM system depreciation expense for the three months ended March 31, 1999
and 1998, respectively. Depreciation expense increased in the first quarter of
1999 as a result of the commencement in November 1998 of full commercial service
in North America, at which time depreciation of the 28-satellite constellation
began. We expect depreciation expense in 1999 to be approximately $49,000,000.
Equity in net losses of affiliates. As of March 31, 1999 and 1998, we
recognized $2,857,000 and $2,008,000 as equity in net losses of affiliates,
respectively, which represents our share of ORBCOMM USA's net losses and ORBCOMM
International's net income (loss) as well as our share of ORBCOMM Japan's net
losses.
RESULTS OF OPERATION - ORBCOMM USA
Revenues. ORBCOMM USA recognized revenues relating to the provision of
products and services of $265,000 and $64,000 for the three months ended March
31, 1999 and 1998, respectively. The costs of sales associated with such
revenues were $240,000 and $64,000, respectively.
Expenses. ORBCOMM USA incurred $2,915,000 and $1,563,000 of marketing
expenses for the three months ended March 31, 1999 and 1998, respectively. The
variance in marketing expenses results primarily from employee-related expenses.
RESULTS OF OPERATION - ORBCOMM INTERNATIONAL
Service license or similar agreements. As of March 31, 1999, ORBCOMM
International had executed 13 service license or similar agreements with
International Licensees, eight of which have associated gateway procurement
contracts and software license agreements. These agreements authorize the
International Licensees to use the ORBCOMM system to provide two-way data and
messaging communications services in their respective territories. As of March
31, 1999, $32,508,000 had been received under these agreements and the
associated gateway procurement contracts ($30,868,000 as of December 31, 1998)
and $25,794,000 was recorded as deferred revenue ($20,094,000 as of December 31,
1998).
Construction of gateways. In October 1996, ORBCOMM International entered
into agreements with certain manufacturers for the purchase of twenty gateway
Earth stations that have been or will be installed around the world. During the
first quarter of 1999, installation and final acceptance of gateways in Brazil
and Argentina occurred. As a result, the related revenue and the associated
costs for construction and delivery of these gateways are reflected in ORBCOMM
International's first quarter 1999 condensed statements of operations.
Expenses. ORBCOMM International incurred $1,288,000 and $501,000 of
marketing expenses for the three months ended March 31, 1999 and 1998,
respectively. The variance in marketing expenses results primarily from
employee-related expenses.
SUPPLEMENTAL DATA
Set forth below is certain supplemental data for the ORBCOMM system
comprising data of ORBCOMM, ORBCOMM USA and ORBCOMM International for the three
months ended March 31, 1999. Such supplemental data should be read in
conjunction with our condensed consolidated financial statements and the
condensed financial statements of ORBCOMM USA and ORBCOMM International, and the
notes thereto located elsewhere in this report.
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SUPPLEMENTAL DATA
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
ORBCOMM ELIMINATION
ORBCOMM ORBCOMM USA INTERNATIONAL ENTRIES TOTAL
------------ ----------- -------------- ------------- -----------
Total revenue(1) $ 514 $ 265 $ 6,150 $ (490) $ 6,439
Interest income 97 0 0 97
Interest expense 6,500 (2) 0 0 6,500
Expenses 25,030 (3) 3,155 6,073 490 33,768
Income (loss) from operations (24,516) (2,890) 77 (27,329)
Net income (loss) (31,019)(4) (2,890) 77 (33,832)
Capital expenditures 10,247 (5) 0 0 10,247
SUPPLEMENTAL DATA
AS OF MARCH 31, 1999
(IN THOUSANDS, EXCEPT FOR SUBSCRIBER UNIT DATA)
ORBCOMM ORBCOMM
ORBCOMM USA INTERNATIONAL TOTAL
----------- ----------- --------------- ------------
Cash and cash equivalents $ 6,826 $ 0 $ 0 $ 6,826
Mobile Communications Satellite System, net 326,742 0 0 326,742
Total debt 170,903 0 0 170,903
Subscriber units(6) 0 4,005 2,061 6,066
- --------------------
(1) ORBCOMM, ORBCOMM USA, and ORBCOMM International are development stage
enterprises.
(2) Includes $209,000 of amortization of deferred financing fees.
(3) Includes depreciation expenses and goodwill amortization of $11,460,000.
(4) Excludes equity in net losses of ORBCOMM USA and ORBCOMM International of
$2,757,000.
(5) Represents capital expenditures, principally for the construction of the
space and ground network system elements.
(6) Represents units that are activated on ORBCOMM's network, some of which may
not be revenue-generating.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred cumulative net losses from inception and have financed our
operations to date primarily with capital contributions from our partners and
through financing activities. For the three months ended March 31, 1999 and
1998, net cash used in operating activities was $30,909,000 and $14,457,000,
respectively, primarily as a result of a net loss (excluding items not affecting
cash for depreciation, amortization and equity in net losses of affiliates) of
$19,250,000 and $6,525,000, respectively. The increased net loss for the three
months ended March 31, 1999, excluding items not affecting cash, is primarily
attributable to higher operating expenses related to the roll-out of global
commercial services and because interest expense is no longer capitalized as it
was during the construction phase of the ORBCOMM system.
Cash flows from investing activities for the three months ended March 31,
1999 used cash of $7,402,000 primarily as a result of additional capital
expenditures and advances to affiliates. In the first quarter of 1999, we
invested $1,743,000 for the design, development and construction of satellites,
launch services and design and construction of the U.S. ground segment,
excluding $8,504,000 of accrued milestone obligations under the September 1995
procurement agreement with Orbital. Further, we advanced, in the aggregate, an
additional $5,629,000 to ORBCOMM USA and ORBCOMM International to support their
marketing activities. For the three months ended March 31, 1998, cash used in
investing activities was $2,132,000, primarily for capital expenditures,
advances to affiliates and purchases and sales of investments.
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Cash flows from financing activities for the three months ended March 31,
1999 and 1998 provided cash of $41,338,000 and $19,738,000, respectively. The
increase quarter-over-quarter is primarily attributable to increased capital
contributions from our current partners, which were $42,900,000 and $20,000,000
for the three months ended March 31, 1999 and 1998, respectively.
Expected future uses of cash include continued increases in staffing,
additional capital expenditures related to the completion of the 35-satellite
enhanced constellation, debt servicing and working capital requirements. In
addition, we intend to continue to increase marketing and product development
expenditures in anticipation of expanded commercial operations. The total cost
of the planned 35-satellite system through December 31, 1999 is expected to be
approximately $337,000,000, excluding amounts under the new procurement
agreement with Orbital, pursuant to which we have agreed to purchase eight
additional satellites and have an option to purchase up to 22 more. Of this
amount:
- - $249,000,000 is for the design, development and construction of the
satellite constellation and launch services;
- - $39,000,000 is for the design and construction of the U.S. ground segment;
- - $17,000,000 is for insurance; and
- - approximately $32,000,000 is for other system costs such as engineering and
billing system costs.
As of February 1, 1999, we signed a new procurement agreement with Orbital
under which we will procure, at a minimum, eight additional satellites and two
separate Pegasus launch vehicles, at a total cost of approximately $70,000,000.
In addition, under this agreement we have the option to procure up to 22
additional satellites and associated launch services using the Pegasus launch
vehicle. We expect that these additional satellites will be used, among other
things, to meet certain of the milestones set forth in the license granted by
the FCC on March 31, 1998 authorizing OCC to launch an additional 12 low-Earth
orbit ("LEO") satellites, as replenishment satellites or as ground spares.
As of March 31, 1999, $305,698,000 had been expended for the ORBCOMM
system, excluding a total of $57,089,000 of interest expenses that have been
capitalized. The foregoing information reflects our current estimate of our
funding requirements for the ORBCOMM system through 1999. Actual amounts may
vary from such estimates for a variety of reasons, including satellite failures.
We expect to continue to generate negative cash flows for at least the next
several quarters. We expect that a portion of our cash requirements will be met
through revenues from operations. Our ability to generate significant revenues
is subject to numerous uncertainties. This year, we expect to receive additional
cash payments related to certain milestones under agreements with our
International Licensees. Our service and equipment contracts are U.S.
dollar-based and, hence, not subject to foreign currency risk. Through March 31,
1999, OCC and Teleglobe Mobile had made capital contributions to us totaling
$270,700,000. While they are not contractually required to do so, our partners
are currently funding our operations. We will require additional capital this
year and may seek to raise such additional capital through additional
contributions or loans from our current partners, other equity or debt
financings or operating lease arrangements or we may seek to enter into
strategic arrangements. We cannot assure you, however, that other equity or debt
financing or operating lease arrangements will be available and, if so, that
they will be available on terms acceptable to us or that strategic arrangements
will be possible and, if so, that they will be possible on terms acceptable to
us.
We have issued $170,000,000 in Notes that mature in August 2004. The Notes
earn a 14% fixed interest as well as a 5% revenue participation interest on
service and certain other revenues. The market price for the Notes may fluctuate
as a function of market interest rate changes, investors' perception of the
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risk and our revenue growth.
RISK FACTORS
Many statements contained in this report are not historical and are
forward-looking in nature. Examples of such forward-looking statements include
statements concerning:
- our operations, funding needs and financing sources;
- our launch and commercial service schedules;
- our cash flows and profitability;
- future regulatory approvals;
- expected characteristics of competing systems; and
- expected actions of third parties such as equipment suppliers, VARs
and International Licensees.
These forward looking statements are inherently predictive and speculative,
and are based on our current views and assumptions regarding future events and
operating performance. The following are some of the risks that could cause
actual results to differ significantly from those expressed or implied by such
statements.
WE HAVE AN UNPROVEN TRACK RECORD
We expect to incur continued net losses. We have incurred cumulative net
losses of approximately $154,300,000 through March 31, 1999 and expect losses to
continue for at least the next several quarters. Our continued business
development will require substantial capital expenditures, most of which we will
incur before we realize significant revenues from the ORBCOMM system. Together
with our operating expenses, these capital expenditures will result in negative
cash flows unless or until we establish an adequate revenue-generating customer
base. We cannot assure you that we will have positive cash flows or that we will
become profitable.
We have a limited operating and financial history. You have limited
operating and financial data on which to evaluate our business performance. We
have conducted full commercial operations for only a limited period of time. Our
ability to provide commercial service globally or even in key markets and to
generate positive operating cash flows will depend on our ability to, among
other things:
- successfully operate and maintain the satellites in the constellation;
- integrate the various ORBCOMM system segments, including the
satellites, the ground and control infrastructure and the hardware and
software used in customer applications;
- develop distribution capabilities within the United States and
licensing and distribution arrangements outside the United States
sufficient to capture and retain an adequate customer base;
- successfully and timely launch an additional plane of satellites to
create an enhanced 35-satellite constellation;
- install the necessary ground infrastructure and obtain the necessary
regulatory and other approvals outside the United States; and
- provide for the timely design, manufacture and distribution of
subscriber units to customers in sufficient quantities, with
appropriate functional characteristics and at competitive prices for
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various applications.
WE WILL HAVE SIGNIFICANT ADDITIONAL FUNDING REQUIREMENTS
Additional funding required to provide global service could be significant.
To complete and maintain the planned 35-satellite enhanced constellation and to
expand global service, we will require significant additional capital
expenditures. We currently expect that the total cost of the planned
35-satellite enhanced constellation from June 30, 1993 (date of inception)
through December 31, 1999 will be approximately $337,000,000, excluding amounts
under the February 1999 procurement agreement with Orbital. Through March 31,
1999, we had spent approximately $305,700,000 on satellite constellation design,
construction and launch services, design and construction of the U.S. ground
segment and insurance and other system costs, excluding approximately
$57,000,000 of capitalized interest. To finance these expenditures, Orbital,
through OCC, and Teleglobe, through Teleglobe Mobile, had invested $270,700,000
in us through March 31, 1999. In addition, we received net proceeds of
approximately $164,000,000 from the Notes Offering and a loan of $5,000,000 from
MetLife. While they are not contractually required to do so, our partners are
currently funding our operations. We will require additional capital this year
and may seek to raise such additional capital through additional contributions
or loans from our current partners, other equity or debt financings or operating
lease arrangements or we may seek to enter into strategic arrangements. We
cannot assure you, however, that other equity or debt financing or operating
lease arrangements will be available and, if so, that they will be available on
terms acceptable to us or that strategic arrangements will be possible and, if
so, that they will be possible on terms acceptable to us.
Developing, marketing and distributing data and messaging communications
services to customers, constructing certain components of the ground
infrastructure or procuring and launching additional satellites may require us
to make significant expenditures that are not currently planned. These
additional expenditures may arise as a result of, among other things:
- a decision to establish additional Internal VARs;
- the requirement that we construct international gateways because the
International Licensees are unable or unwilling to do so; or
- the requirement that we procure and launch satellites to replace
satellites in the event of, for example, an uninsured loss.
Interest expense on the Notes represents a significant cash requirement for
us. We do not expect to be able to generate sufficient cash from operations to
cover all these requirements for at least several more quarters. Moreover, we
may need additional funding to cover delays or increased costs in the future. If
this additional funding becomes necessary, we cannot assure you that additional
funding will be available from the public or private markets or from our
partners on favorable terms or on a timely basis, if at all.
Our substantial debt service obligations could affect our competitiveness.
We have a highly leveraged capital structure. As of March 31, 1999, our
liabilities totaled approximately $243,000,000. Our debt service requirements
could negatively affect our market value because of the following:
- our ability to obtain additional financing for future working capital
needs or for other purposes may be limited;
- a substantial portion of our cash flows from operations will be
dedicated to paying principal and interest on our indebtedness,
thereby reducing funds available for operations and business
expansion; and
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- we may have greater exposure to adverse economic conditions than
competing companies that are not as highly leveraged.
These factors could negatively affect our financial condition and results
of operations.
Restrictive covenants in the indenture could prevent us from taking
otherwise sound business action. The indenture governing our Notes contains
certain restrictive covenants. The restrictions in the indenture affect, and in
some cases significantly limit or prohibit, our ability to, among other things:
- incur additional indebtedness;
- make prepayments of certain indebtedness;
- make distributions;
- make investments;
- engage in transactions with affiliates;
- issue capital stock;
- create liens;
- sell assets; and
- engage in mergers and consolidations.
If we fail to comply with the restrictive covenants in the indenture
governing the Notes, our obligation to repay the Notes may be accelerated.
MARKET DEMAND FOR OUR PRODUCTS AND SERVICES IS NOT CERTAIN
Customer acceptance depends on several factors. The success of the ORBCOMM
system will depend on customer acceptance of our services, which is contingent
on a number of factors, including:
- the number of satellites that are operational at any time;
- completion and performance of the necessary ground infrastructure;
- receipt of the necessary regulatory and other approvals to operate in
a particular country;
- the availability of subscriber units that are compatible with the
ORBCOMM system and meet the varying needs of customers;
- the price of our services and related subscriber units; and
- the extent, availability and price of alternative data and messaging
communications services.
As with any new communications service, we cannot assure you that the
market will accept our services.
In addition, we believe that market acceptance of certain of our services
depends on the design, development and commercial availability of integrated
hardware and software applications that support the specific needs of our target
customers. Each of our VARs, Internal VARs and applications developers is
responsible for developing and/or marketing such applications. To date, nearly
100 applications have been developed by or on behalf of VARs and Internal VARs
for use with the ORBCOMM system. If there is a lack of, or a delay in the
availability of the components necessary to fulfill our customers'
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business requirements, market acceptance of ORBCOMM services could be adversely
affected.
Currently over 100 companies are using or are in the process of evaluating
the ORBCOMM system. Our business plan assumes that our potential customers will
accept certain limitations inherent in satellite communications services. For
example, the ORBCOMM system's line-of-sight limitation, particularly in "urban
canyons," and its limited ability to penetrate buildings and other objects could
limit customers' use of the ORBCOMM system and services. In addition, system
availability will be limited in equatorial regions before the planned
35-satellite enhanced constellation is in commercial operation. In addition to
the limitations that the ORBCOMM system architecture imposes, our services will
not be available in those countries where we or our International Licensees have
not obtained the necessary regulatory and other approvals. Certain potential
customers may find these limitations on the availability of our services to be
unacceptable.
Competition comes from several sources. Competition in the communications
industry is intense, fueled by rapid and continuous technological advances and
alliances among industry participants seeking to use such advances
internationally to capture significant market share. Although currently no other
company is providing the same global, satellite-based commercial data
communications services that we provide, we anticipate that the ORBCOMM system
will face competition from numerous existing and potential alternative
communications services. We expect that potential competitors may include:
- operators or users of other LEO satellite networks similar to
the ORBCOMM system whose satellites operate below 1GHz;
- operators or users of networks of LEO satellites operating above 1GHz
that offer voice telephony as well as data services;
- operators or users of medium-Earth orbit satellite systems that use
satellites with orbits located between 2,000 and 18,000 miles above
the Earth;
- operators or users of geostationary or geosynchronous satellite
systems that use satellites with orbits located approximately 22,300
nautical miles directly above the equator; and
- operators and users of terrestrial-based data communications systems.
If any of our competitors succeeds in marketing and deploying systems with
services having functions and prices similar to those we expect to offer, our
ability to compete in markets served by such competitors may be adversely
affected.
Some of our actual or potential competitors have financial, personnel and
other resources that are substantially greater than our resources. In addition,
a continuing trend toward consolidation and strategic alliances in the
communications industry could give rise to significant new competitors.
Furthermore, any foreign competitor may benefit from subsidies from, or other
protective measures taken by, its home country. Some of these competitors could
develop more technologically advanced systems than the ORBCOMM system or could
provide more efficient or less expensive services than those that we expect to
provide.
We may also face competition in the future from companies using new
technologies including new satellite systems. A number of these new
technologies, even if they are not ultimately successful, could negatively
affect us. Additionally, our business could be adversely affected if competitors
begin or expand their operations or if existing or new communications service
providers are able to penetrate our target markets.
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RELIANCE ON THIRD PARTIES COULD AFFECT OUR OPERATIONS
We will rely heavily on VARs within the United States. In the United
States, we intend to rely heavily on VARs to market and distribute many of our
services to customers. Our success depends, in part, on our ability to attract
and retain qualified VARs. We cannot assure you that we will be able to enter
into VAR agreements for additional markets at the times or on the terms we
expect or that we will be able to retain our existing VARs when the terms of
their respective agreements end.
We believe that for the VARs to successfully market our services, they will
need to design, develop and make commercially available data and messaging
applications that support the specific needs of our target customers. This will
require the VARs to commit substantial financial and technological resources.
Certain VARs are or are likely to be newly formed ventures with limited
financial resources, and these entities may not be successful in designing data
and messaging applications or marketing our services effectively. The inability
of VARs to provide data and messaging applications to customers could negatively
affect market acceptance of our services. Also, if VARs fail to develop data and
messaging applications, we may do so, which will increase our expenses.
Furthermore, our reseller agreements provide that VARs will use all reasonable
commercial efforts to market and distribute our services, but in most cases
these agreements do not require VARs to meet established sales objectives. We
cannot assure you that VARs will successfully develop a market for and
distribute our services.
Although we are developing VARs internally, we currently act primarily as a
wholesaler to VARs. Thus, the cost to customers for our services purchased
through VARs is largely beyond our control. Furthermore, we will have no rights
independently to offer particular data and messaging applications developed by
VARs or to use the associated software unless we enter into appropriate
licensing agreements. By developing Internal VARs, we may create actual or
apparent conflicts with certain VARs, which could adversely affect such VARs'
willingness to invest resources in developing and distributing data and
messaging applications for the ORBCOMM system.
We will rely heavily on International Licensees outside the United States.
Outside the United States, we enter into agreements with International
Licensees. The International Licensees are responsible in their territories for
procuring and installing the necessary gateways, obtaining the necessary
regulatory and other approvals to provide services using the ORBCOMM system and
marketing and distributing our services. We select the International Licensees
primarily by evaluating their ability to market and distribute our services
successfully.
Although we consider many elements in evaluating potential International
Licensees, an individual International Licensee may not satisfy any one or more
of these elements. Our success depends, in part, on our ability to attract and
retain qualified International Licensees. We cannot assure you that we will be
able to enter into agreements with International Licensees for additional
territories at the times or on the terms we expect, or that we will be able to
retain our existing International Licensees when the terms of their respective
agreements end. In addition, each agreement we have executed with an
International Licensee provides that the International Licensee may terminate
the agreement upon one year's written notice, and any International Licensee may
decide to do so. Also, ORBCOMM International has the right under the terms of
these agreements to terminate such agreements based on the non-performance of
the licensee as described therein.
We are required to give one of our International Licensees satellite usage
fee credits as a result of our failure to meet certain ORBCOMM system launch
milestones. Moreover, certain of the agreements grant International Licensees
the right to terminate their agreements if they are unable to obtain the
necessary regulatory and other approvals within certain time parameters. Our
International Licensees may not be successful in obtaining the necessary
regulatory and other approvals, and, even if successful, the
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International Licensees may not develop a market and/or a distribution network
for our services.
Certain International Licensees are or are likely to be newly formed
ventures with limited financial resources. These entities may not be successful
in procuring and installing the necessary gateways, obtaining the necessary
regulatory approvals or successfully marketing and distributing our services.
The general form of our service license agreement does not obligate us or give
us the contractual right to construct the necessary gateway if an International
Licensee is unable or unwilling to construct one. In the future, and if an
International Licensee is unable or unwilling to do so, we may desire to
construct, or finance the construction of, the necessary gateway. However, the
International Licensee or the relevant governmental authority may not permit us
to construct the gateway, or we may not be able to bear the cost of constructing
the gateway, which cost may be significant.
We will rely heavily on subscriber unit manufacturers to satisfy customer
demand. Our success depends in part on manufacturers developing, on a timely
basis, relatively inexpensive subscriber units. While we have executed five
subscriber unit manufacturing agreements and have type approved or are
finalizing type approval of at least ten different subscriber unit models, a
sufficient supply of these subscriber units may not be available to customers at
prices or with functional characteristics that meet customers' needs. As of
March 31, 1999, we had procured for our own inventory, and our customers and
distributors had either received or ordered, a total of over 50,000 subscriber
units. On occasion, we have found it advisable to purchase or to subsidize the
purchase of subscriber units and may do so in the future. Generally, we expect
to sell these subscriber units to VARs, Internal VARs and International
Licensees at prices equal to or greater than cost, although we cannot assure
you that we will be able to do so. The cost of these purchases or subsidies
could be significant. If subscriber unit manufacturers are unable to develop
and manufacture subscriber units successfully at cost-effective prices that
both meet the needs of customers and are available in sufficient numbers,
market acceptance of the ORBCOMM system and the quality of our services could
be affected, which, in turn, could negatively affect our financial condition
and results of operations.
We rely heavily on Orbital for our most important assets. We do not
independently have, and do not intend to acquire, except by contracting with
other parties, the ability to design, construct or launch the ORBCOMM
satellites. Under the September 1995 procurement agreement, we have contracted
with Orbital to provide these services on a fixed-price basis, subject to
adjustments for out-of-scope work. We may terminate this procurement agreement
if Orbital fails to achieve certain milestones within 56 weeks after the
contracted completion date or if Orbital fails to comply materially with any
terms of the procurement agreement. We may not, however, withhold payments under
this procurement agreement solely because Orbital fails to achieve certain
milestones by the dates originally planned. As of February 1, 1999, we executed
a new procurement agreement with Orbital under which we will procure, at a
minimum, among other things, eight additional satellites and two separate
Pegasus launch vehicles, at a total cost of approximately $70,000,000. In
addition, we have an option to procure up to 22 additional satellites and
associated launch services using the Pegasus launch vehicle. Depending on the
product or service being purchased, we are required to pay Orbital a fixed fee,
subject to certain incentive payments and other adjustments or on a time and
materials basis. Under this procurement agreement, we are entitled to withhold
payments from Orbital based on the failure to achieve certain milestones, until
such time as such milestones are achieved or we have waived in writing the
requirement to achieve such milestones.
An adverse effect on Orbital and its business for whatever reason may
adversely affect Orbital's ability to perform under these procurement
agreements. We have not identified any alternate provider of the services
Orbital currently provides. An alternate service provider may not be available
or, if available, may not be available at a cost or on terms acceptable to us.
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We rely heavily on third parties to control access to our proprietary
information. Our success and ability to compete depend to a certain degree on
our proprietary technology, and we depend on Orbital's intellectual property
rights relating to the ORBCOMM system. Under the September 1995 procurement
agreement and the February 1999 procurement agreement, Orbital or its
subcontractors generally own the intellectual property relating to the work
performed by Orbital under the procurement agreements, including the ORBCOMM
satellites, other than certain communications software and the U.S. ground
segment. We rely primarily on copyright and trade secret law to protect our
technology. We currently hold no patents. Our policy is to enter into
confidentiality agreements with our employees, consultants and vendors. These
agreements, where appropriate, obligate the signatory to assign to us
proprietary technology developed during performance under the agreements and
generally to control access to and distribution of our software, documentation
and other proprietary information. Notwithstanding these precautions, it may be
possible for a third party to copy or otherwise obtain and use our software or
other proprietary information without authorization or to develop similar
software independently. In addition, absent the appropriate licensing
agreements, we have no rights independently to offer particular applications
developed by VARs or to use the software included in these applications.
Enforcing intellectual property rights to these products will depend on VARs.
Furthermore, the laws of countries outside the United States may afford us and
the VARs little or no effective protection of our intellectual property. Losing
protection of these intellectual property rights could negatively affect our
financial condition and results of operations.
The steps we have taken may not prevent misappropriation of our technology,
and agreements entered into for that purpose may not be enforceable. In
addition, we may have to resort to litigation in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. This litigation, whether or not
successful, could result in substantial costs and diverted resources, each of
which could negatively affect our financial condition and results of operations.
RISKS RELATED TO SATELLITES COULD AFFECT OUR OPERATIONS
A significant portion of our tangible assets are our low-Earth orbit
satellites and the related ground infrastructure. The loss or failure of
satellites in the constellation could negatively affect us.
Useful life of satellites; Damage to or loss of satellites. There are many
factors that contribute to and may affect the useful life of any satellites,
including our satellites, such as the quality of the satellites' design and
construction and the durability and expected gradual environmental degradation
of their electrical and other components.
The first generation of ORBCOMM satellites have eight-year design lives,
with the exception of the first two satellites to be placed in orbit, each of
which has a design life of four years. We cannot assure you that any satellite
will operate for the full duration of its design life.
In addition, loss of or damage to our satellites may result from a variety
of causes, including:
- electrostatic storms;
- collisions with other objects, including space debris, man-made
objects or certain space phenomena such as comets, meteors or meteor
showers;
- random failure of satellite components; or
- high levels of radiation.
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Also, loss of or damage to our satellites may result from the failure of
the launch vehicle that was to place the satellites in orbit.
The ORBCOMM system was designed to provide for redundancy in the event of
the loss or failure of one or more satellites in the constellation, whether due
to a satellite reaching the end of its design life or some other cause. However,
the loss or failure of satellites in the constellation may cause:
- gaps in service availability;
- significantly degraded service quality;
- increased costs; or
- loss of revenue for the period that service is interrupted or
impaired.
Satellite anomalies. In addition to the factors discussed above, there are
a number of factors that may cause anomalies with respect to the operation or
performance of satellites in orbit. In connection with the deployment of our
satellite constellation, we experienced certain anomalies with respect to
several of our satellites. These anomalies include reduced power levels on
certain satellites and the failure of certain satellites to transmit data to
subscriber units. While we have demonstrated that we are able to bypass the data
transmission anomaly, the coverage footprint of such satellites will be reduced.
Also, implementation of the bypass will require that certain manufacturers
modify certain subscriber communicator models to enable them to work with the
modified satellites. You should also note that:
- anomalies such as those described above, or other anomalies that have
comparable effects, could occur in the future with respect to the
in-orbit satellites or additional satellites launched by us; and
- while the anomalies described above have not materially affected our
business, if we are unable to correct such anomalies, if applicable,
or should additional anomalies occur in the future with respect to the
other in-orbit satellites or additional satellites that we launch,
such events could negatively affect our business.
Launch-related risks. To date, we have successfully launched 28 satellites
into their proper orbits. Under our current timetable, we plan to launch seven
additional satellites on a Pegasus launch vehicle in 1999.
Satellite launches are subject to significant risks, including:
- failure of the launch vehicle due to a crash or explosion, which could
cause disabling damage to or loss of the satellites;
- damage to the satellites during loading into the launch vehicle,
during the launch itself or as the satellites are deployed by the
launch vehicle;
- failure of the satellites to achieve their proper orbits; and
- unreasonable delays related to poor weather conditions or prior launch
failures.
We bear the risk of loss of a launch vehicle and satellites upon release of
the Pegasus launch vehicle from Orbital's L-1011 aircraft. Our insurance against
the loss of a launch vehicle and its satellite payload may be limited.
If our next satellite launch fails, or if we should need to procure launch
services from an alternate provider for any reason, the resulting delays would
increased the costs to deploy the 35-satellite enhanced
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constellation.
Cost increases from satellite enhancements, launch failures and other
sources could negatively affect our financial performance. We could experience
all increase in costs over those currently estimated to be necessary to complete
the 35-satellite enhanced constellation. These additional cost increases could
come from, for example, launch or uninsured satellite failures and further
modifications to all or a portion of the ORBCOMM system design to work out
technical difficulties or to accommodate changes in regulatory requirements.
Significant cost increases related to launching and implementing the planned
35-satellite enhanced constellation could negatively affect our financial
condition and results of operations.
Limited insurance exposes us to significant risks of loss. Our insurance
may not adequately mitigate the adverse effects of a launch failure or a loss of
satellites in-orbit. Unless there is a failure of any of the three planes of
satellites currently in orbit, as discussed below, our insurance program does
not currently cover the next planned Pegasus launch (the "Fourth Pegasus
Launch") with respect to the cost to replace the launch vehicle or the
satellites, although it could be modified to do so. Absent a failure, as
discussed below, we intend to modify our existing insurance program to cover
the cost of replacing the launch vehicle used in the Fourth Pegasus Launch.
Our decision whether to modify our existing insurance program to cover the cost
of replacing the satellites to be launched in the Fourth Pegasus Launch will
depend on, among other things, whether we decide to use any of the additional
satellites we will procure from Orbital pursuant to the February 1999
procurement agreement as ground spares.
We have procured insurance against the in-orbit failure of satellites in
each of the first three planes of eight satellites launched using the Pegasus
launch vehicle. If there is a failure of any of the three planes of eight
satellites currently in orbit, where "failure" is defined as the loss of three
or more satellites in any such plane, our insurance program would cover the
costs of a replacing the launch vehicle and the satellites, as well as the
increased insurance premium thereon, for subsequent launches. In the event such
a failure occurs prior to the Fourth Pegasus Launch, and we decided to launch
the satellites currently intended for the equatorial plane as replacement
satellites, our insurance would cover the cost to procure the launch vehicle
used in the Fourth Pegasus Launch as well as the satellites launched in
connection with the Fourth Pegasus Launch.
We have no insurance against in-orbit satellite failure for the two
satellites that were launched in April 1995 or for the two satellites launched
in February 1998.
Schedule delays could affect our commercial operations in certain areas. In
the past, we have had to delay satellite launches primarily because of
subcontractor late deliveries and enhancements made to the satellites' design
based on, among other things, information we obtained from operating the two
satellites launched in April 1995.
Additional delays in implementing the planned 35-satellite enhanced
constellation could result from a variety of causes, including, among others:
- a delay or failure of the launch of seven satellites planned for 1999;
and
- delays caused by design reviews in the event of a launch vehicle
failure or the loss of a satellite or other event beyond our control.
We cannot assure you that these or other factors, some of which are beyond
our control, will not delay the implementation of the planned 35-satellite
enhanced constellation, which could negatively affect our financial condition
and results of operations.
The costs of maintaining the space segment may outstrip funds generated
from operations. The ORBCOMM satellites, which constitute a substantial portion
of our total assets, have limited useful lives. We anticipate using funds from
operations to develop a second generation of satellites to replenish and expand
the constellation. If sufficient funds from operations are not available and we
are unable to obtain financing for the second generation satellites, we will not
be able to replace the first generation satellites at the end of their useful
lives. We cannot assure you that additional capital would be available to
develop the second generation satellites on favorable terms or on a timely
basis, if at all.
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Lack of adequate security for communications via the Internet could affect
customer acceptance of our services. Like many other modern communications
networks, we currently deliver a substantial portion of data to our customers
over the Internet and expect to continue to use the Internet as a primary
delivery method for data collected from subscriber units and satellites. We
currently take certain measures to ensure the security of customer data, but
despite these measures, persons seeking unauthorized access to our customer data
may be able to gain such access. We believe that if unauthorized access to our
customer data were to occur, or if our potential customers were to perceive that
such unauthorized access was likely, the market for our services would be
negatively affected.
We could experience difficulty integrating all of the components and
sub-components of the ORBCOMM system. While the ORBCOMM system has successfully
transmitted approximately five million messages to date, the ORBCOMM system is
exposed to the risks inherent in any large-scale complex communications system
using advanced technologies. Operating the ORBCOMM system requires that we
design and integrate communications technologies and devices ranging from
satellites operating in space to ground infrastructure located around the world.
Even if built to specifications, the ORBCOMM system may not function as
expected. If any of the diverse and dispersed elements of the system fails to
function and coordinate as required, that failure could delay full deployment of
the ORBCOMM system or render it unable to perform at the quality and capacity
levels required for us to operate our business successfully.
REGULATORY RISKS PRESENT POTENTIAL OBSTACLES TO GLOBAL OPERATION OF THE ORBCOMM
SYSTEM
Obtaining and maintaining the necessary U.S. licenses could cause delays.
Our business may be affected by the regulatory activities of various U.S.
government agencies, primarily the FCC. Although each of OCC's licenses for the
ORBCOMM system (collectively, the "FCC Licenses") is currently valid, the FCC
could revoke these licenses if OCC fails to satisfy certain conditions or to
meet certain prescribed milestones, including:
- the December 2000 milestone by which OCC must have launched 36
satellites;
- the September 2002 milestone by which OCC must launch two of the 12
satellites licensed in March 1998; and
- the March 2004 milestone by which OCC must launch the remaining ten of
these satellites,
unless the FCC grants extensions for accomplishing these milestones. OCC is
required to apply for a license renewal three years before each FCC License
expires. While, based on past experience, OCC believes the FCC generally grants
the renewal applications of existing licensees where the licensee has satisfied
the requirements of the license, it is possible that the FCC will not, in fact,
renew either of the FCC Licenses. Should the FCC revoke or fail to renew the FCC
Licenses, or if OCC fails to satisfy any of the conditions of the FCC Licenses,
such event would negatively affect our financial condition and results of
operations.
The FCC has licensed OCC to operate as a private carrier. Because of our
method of distributing services, we believe that OCC currently is not subject to
the restrictions that apply to common carriers or to providers of Commercial
Mobile Radio Services ("CMRS"). We plan to distribute our services to customers
indirectly through VARs and directly through Internal VARs. In most cases, we
will provide our customers with enhanced services and will not be interconnected
with the public switched telephone network. Therefore, we do not believe that
the FCC will regard these services as common carrier or CMRS. In the future,
however, we may provide services that the FCC deems common carrier or CMRS, or
the FCC may exercise its discretionary authority to apply the common carrier or
CMRS rules to our operations. Applying these rules could negatively affect our
financial condition and results of operations
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by, for instance, subjecting us to rate regulation and certain tariff filing
requirements, limiting some foreign ownership in us and subjecting us to state
regulation, if we were deemed to be a common carrier.
Our financial condition and results of operations could be adversely
affected if the United States adopts new laws, policies or changes in the
interpretation or application of existing laws, policies and regulations that
modify the present regulatory environment.
The failure to obtain regulatory approvals in other countries could hinder
global service offerings. Our business is affected by the regulatory authorities
of the countries in which we or the International Licensees will operate and in
which we plan to offer our services. Our International Licensees will be
required to obtain local regulatory approvals to offer our services, to operate
gateways and to sell subscriber units within their territories. Thus, the
International Licensees must obtain numerous approvals before we can offer full
global coverage. Our current business plan is based on our receiving regulatory
approvals in several foreign jurisdictions by the end 1999, when the final seven
satellites of the planned 35-satellite enhanced constellation are expected to be
launched. To date, 25 countries have granted approvals to provide full
commercial or other limited services using the ORBCOMM system. Certain of these
licenses permit a range of activities including the right to test and
demonstrate or operate the ORBCOMM system on a temporary or otherwise limited
basis. While each International Licensee is responsible for obtaining regulatory
approvals in its territory, each International Licensee may not be successful in
doing so. If any International Licensee is not successful, we will not be able
to offer services in the affected territory.
Although many countries have moved to privatize communications services and
permit competition in providing these services, some countries continue to
require that a government-owned entity provide all communications services.
While we anticipate that substantially all of the International Licensees will
be private entities, we may be required to offer our services through a
government-owned or -controlled entity in those territories where government
monopolies prevail.
Our inability to offer service in a foreign country or countries could
negatively affect our financial condition and results of operations. Regulatory
provisions in countries in which we or the International Licensees seek to
operate may impose impediments on our or the International Licensees'
operations, and such restrictions could be unduly burdensome. Our business may
also be adversely affected by regulatory changes resulting from judicial
decisions and/or the adoption of treaties, legislation or regulations by the
national authorities of countries or territories where we plan to operate the
ORBCOMM system.
Coordination with the International Telecommunications Union ("ITU") poses
risks of delays. Frequency coordination through the ITU is a necessary
prerequisite to obtaining interference protection from other satellite systems.
There is no penalty for launching a satellite system before completing the ITU
coordination process, although protection from interference through this process
is only afforded as of the date that the ITU notifies the ORBCOMM system that
the coordination process has been successfully completed. OCC has completed the
ITU coordination process with respect to the planned 35-satellite enhanced
constellation with all administrations except Russia and France. OCC expects
that it will successfully complete the ITU coordination process with Russia and
France by December 1999, at which time the ORBCOMM system will be fully
registered with the ITU. The FCC has modified OCC's ITU documentation to include
the proposed launch of the 12 additional satellites for which OCC has been
licensed. We do not expect this modification to affect coordination of the
35-satellite system. Moreover, supplemental coordination of these 12 satellites
is not required for countries for which the United States previously completed
coordination.
Any delay in or failure to complete the ITU coordination process
successfully may result in interference to the ORBCOMM system by other mobile
satellite systems operating internationally, and
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this interference could negatively affect our financial condition and results of
operations. Furthermore, International Licensees working with their respective
governments are required to complete ITU coordination of subscriber units and
gateways located in their territories with countries located within distances
determined by ITU recommendations. These coordinations may not be completed
successfully or in a timely manner, which could result in delayed availability
of ORBCOMM services in the affected territories.
OPERATING RISKS COME FROM SEVERAL SOURCES
Multinational operations and developing markets pose unique operating
challenges. Since we expect to derive substantial revenues by providing
communications services globally, we are subject to certain multinational
operating risks, such as:
- changes in domestic and foreign government regulations and
communications standards;
- licensing requirements;
- tariffs or taxes and other trade barriers;
- price, wage and exchange controls;
- political, social and economic instability;
- inflation;
- interest rate and currency fluctuations; and
- U.S. law prohibitions from operating in certain countries.
Many of these risks may be greater in developing countries or regions. In
addition, although we anticipate that the International Licensees will make all
payments in U.S. dollars, the potential lack of available U.S. currency in
certain countries may prevent the International Licensees in those countries
from being able to do so. Because we expect to receive most payments in U.S.
dollars, we do not intend to hedge against exchange rate fluctuations.
OUR BUSINESS IS SUBJECT TO CERTAIN STRUCTURAL AND MARKET RISKS
We are controlled by two strategic partners. We are a limited partnership
whose current partners, OCC and Teleglobe Mobile, each holds 50% of our
partnership interests. Under our current partnership agreement, substantially
all actions taken by us require the approval of at least a majority-in-interest,
i.e., partners holding a majority of the partnership interests. As such, the
partners must agree with respect to any and all decisions that require approval
of a majority-in-interest, or in the event the partners fail to agree, such
failure will result in deadlock between the partners. Such failure of the
partners to agree with respect to any decision requiring the approval of a
majority-in-interest could negatively affect us.
Potential conflicts of interest with Orbital or Teleglobe could negatively
affect us. Orbital and Teleglobe each has a substantial ownership interest in
ORBCOMM. A conflict of interest may exist between us and Orbital under either of
the procurement agreements and the other related agreements between Orbital and
OCC. Also, Orbital is a majority owner of Magellan Corporation, one of our
subscriber unit manufacturers. Under our partnership agreement, transactions
between us and Orbital are subject to the approval of Teleglobe. A conflict of
interest also may exist between us and Teleglobe by virtue of Teleglobe's
majority ownership of ORBCOMM Canada Inc., our International Licensee for
Canada. Any potential conflict of interest between us and either of these
entities could negatively affect our results of operations.
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THE YEAR 2000 POSES CERTAIN RISKS
We have initiated a Year 2000 readiness program, which is being implemented
by a program management office composed of, among others, certain of our senior
managers and certain outside consultants. The program has five phases:
inventory, assessment, remediation, testing and deployment, and our primary area
of focus is the critical system segment, which comprises eight operational areas
including the satellites and the ground infrastructure for the ORBCOMM system.
We have completed an inventory of each product, component or software
program in the critical system segment that uses date fields, contains embedded
systems or that may otherwise be impacted by the Year 2000 issue. All products,
components and software identified in the inventory phase have been assessed to
determine whether they are Year 2000 ready. For products, components or software
obtained from third party vendors, including Orbital, we surveyed each such
vendor to ascertain whether the product, component or software provided by such
vendor is Year 2000 ready, which may include obtaining a certification or
statement from each such vendor regarding Year 2000 readiness. Based on our
efforts to date, we estimate that the eight operational areas are between 60%
and 100% ready.
We have upgraded, repaired, replaced or otherwise brought into readiness
the products, components and software programs in the critical system segment
identified in the assessment phase of the program as being non-Year 2000 ready
and will upgrade, repair, replace or otherwise bring into readiness any
products, components and software programs that may be identified in the testing
phase of the program as being non-Year 2000 ready. We anticipate that for some
custom applications in the critical system segment, we may use replacements to
or upgrades of existing applications that are already in development, which
replacements or upgrades may obviate the need for remediation with respect to
such applications. With respect to those products, components and software
programs identified in the assessment phase of the program as being non-Year
2000 ready, the remediation phase was completed in the first quarter of 1999.
We have prepared a master test plan, which includes, with respect to the
critical system segment, testing within each of the eight operational areas at
both the unit or functional level, followed by end-to-end testing of the entire
ORBCOMM system. We have substantially completed unit level testing. We are
currently in the process of performing functional, or segment-to-segment,
testing. End-to-end testing of the ORBCOMM system will include testing of those
products, components and programs that have been procured from third party
vendors and certified or represented as Year 2000 ready, as well as any
products, components or programs that are subject to routine replacements or
upgrades during the term of the program that are expected to cause such elements
to be Year 2000 ready. We expect that initial system testing will be completed
in the second quarter of 1999 and that final system testing, including testing
of internationally deployed systems that are our responsibility, will be
completed in the third quarter of 1999.
We are encouraging our International Licensees and VARs to implement a
comprehensive Year 2000 readiness program. We have begun and will continue to
identify and assess the extent to which the elements comprising our business
infrastructure, including our applications developed for customers, information
systems, telephone systems, heating, cooling and electrical systems, building
security and other building operations, as well as back-up systems, are Year
2000 ready. To accomplish this, we are surveying the applicable third party
vendors and other entities to ascertain whether their systems are Year 2000
ready, which may include obtaining a certification or statement from each such
vendor or other entity regarding Year 2000 readiness.
The total estimated cost of the program, including the planned cost to
replace systems that are
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impacted by the Year 2000 issue, is not expected to be material to our financial
condition or results of operations. To date, we have not deferred work on any
information technology programs or systems as a result of its efforts in
connection with the program.
In connection with the program, we have initiated communications with our
vendors, customers and other service providers regarding our Year 2000 status.
While uncertainties surrounding the significance and likely impact of the Year
2000 problem make it nearly impossible for us to identify a reasonably likely
worst case scenario for the Year 2000 issue, such scenario could include:
- interruptions or failures of data or messaging communications using
the ORBCOMM system;
- the temporary inability of third parties to pay amounts due to us, and
- the temporary inability of vendors to provide goods or services to us.
We will develop a contingency plan for the ORBCOMM system designed to
address certain of these risks within our control. Our contingency plans will
evolve based upon the results of our unit, functional and end-to-end testing.
Despite our ongoing efforts in connection with the program, we cannot assure you
that we have identified or will identify all Year 2000 affected systems or that
the program will be successfully implemented or implemented on a timely basis.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
On December 18, 1998, ORBCOMM International terminated for
non-performance its service license agreements with SEC
ORBCOMM (Middle East) Ltd. ("SEC ORBCOMM") and CEC
Bosphorus Communications Ltd. ("CEC Bosphorus"), which
agreements together covered 20 countries. On December 23,
1998, SATCOM International Group PLC ("SATCOM"), the
alleged successor-in-interest to SEC ORBCOMM's and CEC
Bosphorus' interests in these agreements, filed an action
(98 Civ. 9095, S.D.N.Y.) claiming that the termination of
these agreements was unjustified. This suit sought damages
and a preliminary and permanent injunction effectively
awarding the licenses to SATCOM. The district court denied
SATCOM's application for a temporary restraining order on
December 28, 1998. Following an evidentiary hearing, on
March 18, 1999, the district court denied SATCOM's request
for a preliminary injunction. While these decisions do not
represent a final adjudication of SATCOM's claims against
ORBCOMM International, the district court, in denying
SATCOM's request for preliminary injunction, ruled that
SATCOM was unlikely to prevail on the merits. ORBCOMM
International has executed an agreement with a new
International Licensee for the countries formerly covered
by these service license agreements.
On April 29, 1999, ORBCOMM Global, L.P. filed a Report on
Form 8-K in connection with a change in accountants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) A complete list of the exhibits required to be
filed with this Report on Form 10-Q is provided in
the Exhibit Index that precedes the exhibits filed
with this report.
(b) Neither of ORBCOMM Global, L.P. or ORBCOMM Global
Capital Corp. has previously been required to
file a Report on Form 8-K under the Act.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
ORBCOMM GLOBAL, L.P.
Date: May 17, 1999 By: /s/ SCOTT L. WEBSTER
---------------------
Scott L. Webster
Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 1999 By: /s/ RICHARD G. TENNANT
-----------------------
Richard G. Tennant
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
ORBCOMM GLOBAL CAPITAL CORP.
Date: May 17, 1999 By: /s/ SCOTT L. WEBSTER
---------------------
Scott L. Webster
President
(Principal Executive Officer)
Date: May 17, 1999 By: /s/ RICHARD G. TENNANT
-----------------------
Richard G. Tennant
Vice President and Treasurer
(Principal Financial Officer)
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EXHIBIT INDEX
The following exhibits are filed as part of this report.
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------
3 Organizational Documents.
3.1(a) Certificate of Limited Partnership of ORBCOMM.
3.2(a) Restated Agreement of Limited Partnership of ORBCOMM.
3.2.1(d) Amendment No. 1 to Restated Agreement of Limited Partnership of ORBCOMM dated December 2, 1996.
3.3(a) Certificate of Limited Partnership of ORBCOMM USA.
3.4(a) Restated Agreement of Limited Partnership of ORBCOMM USA.
3.5(a) Certificate of Limited Partnership of ORBCOMM International.
3.6(a) Restated Agreement of Limited Partnership of ORBCOMM International.
4(a) Indenture, dated as of August 7, 1996, by and among ORBCOMM, Capital, ORBCOMM USA, ORBCOMM
International, OCC, Teleglobe Mobile and Marine Midland Bank.
10 Material Contracts.
10.2(a) Pledge Agreement, dated as of August 7, 1996, by and among ORBCOMM, Capital, and Marine Midland Bank
as Collateral Agent.
10.3(a) International System Charge Agreement, restated as of September 12, 1995, by and among ORBCOMM,
Teleglobe Mobile and ORBCOMM International.
10.4(a) Master Agreement, restated as of September 12, 1995, by and among ORBCOMM, Orbital, ORBCOMM,
Teleglobe and Teleglobe Mobile.
10.4.1(b) Amendment No. 1 to Master Agreement, dated as of February 5, 1997 by and among OCC, Orbital,
Teleglobe and Teleglobe Mobile.
10.5(a) Procurement Agreement, dated as of September 12, 1995, by and between ORBCOMM and Orbital (provided
that Appendix I is incorporated by reference to Exhibit10.24.6 to the Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1993 filed by Orbital on August 13, 1993).
10.5.1(c) Amendment No. 1 to Procurement Agreement dated December 9, 1996 between Orbital and ORBCOMM.
10.5.2(b) Amendment No. 2 to Procurement Agreement dated March 24, 1997 between Orbital and ORBCOMM.
10.5.3(e) Amendment No. 3 to ORBCOMM System Procurement Agreement, dated as of March 31, 1998 by and between
ORBCOMM and Orbital.
10.5.4(e) Amendment No. 4 to ORBCOMM System Procurement Agreement, dated as of March 31, 1998 by and between
ORBCOMM and Orbital.
10.5.5(g) Amendment No. 5 to ORBCOMM System Procurement Agreement, dated as of July 30, 1998 by and between
ORBCOMM and Orbital.
10.5.6(g) Amendment No. 6 to ORBCOMM System Procurement Agreement, dated as of September 21, 1998 by and
between ORBCOMM and Orbital.
10.5.7(g) Amendment No. 7 to ORBCOMM System Procurement Agreement, dated as of December 31, 1998 by and between
ORBCOMM and Orbital.
10.5.8*+ Procurement Agreement, dated as of February 1, 1999, by and between ORBCOMM and Orbital.
10.6(a) Proprietary Information and Non-Competition Agreement, restated as of September12, 1995, by and among
ORBCOMM, Orbital, OCC, Teleglobe, Teleglobe Mobile, ORBCOMM USA, and ORBCOMM International.
10.7(a) System Charge Agreement, restated as of September 12, 1995, by and between OCC and ORBCOMM USA.
10.8(a) System Construction Agreement, restated as of September 12, 1995, by
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and between ORBCOMM and OCC.
10.9(a) Amendment No. 1 to System Construction Agreement, dated as of July 1, 1996, by and between ORBCOMM
and OCC.
10.10(a) Service License Agreement, dated as of December 19, 1995, between ORBCOMM International and
ORBCOMM Canada Inc.
10.12(a) Service License Agreement, dated as of October 15, 1996, between ORBCOMM International and European
Company for Mobile Communicator Services, B.V., ORBCOMM Europe.
10.14(a) Ground Segment Facilities Use Agreement, dated as of December 19, 1995, between ORBCOMM International
and ORBCOMM Canada Inc.
10.15(a) Ground Segment Procurement Contract, dated as of October 15, 1996, between ORBCOMM International and
European Company for Mobile Communicator Services, B.V., ORBCOMM Europe.
10.16(f) Orbital Communications Corporation 1992 Stock Option Plan.
10.17(f) Amended and Restated Administrative Services Agreement, dated as of January 1, 1997 by and between
ORBCOMM and Orbital.
10.19(f) Subscriber Communicator Manufacture Agreement dated as of July 31, 1996 by and between ORBCOMM and
Magellan Corporation.
10.20(f) Reseller Agreement dated as of March 3, 1997 by and between ORBCOMM USA and Orbital Sciences
Corporation (the "Reseller Agreement").
10.20.1(f) Amendment No. 1 to the Reseller Agreement dated as of September 2, 1997.
10.21(f) Employment Agreement dated as of May 15, 1997 by and between ORBCOMM and Robert F. Latham.
10.22(f) Consulting Agreement dated as of March 18, 1998 by and between ORBCOMM and ORBCOMM Canada Inc.
27* Financial Data Schedule of ORBCOMM Global, L.P..
- ----------
* Filed herewith.
+ Confidential Treatment Requested.
(a) Incorporated by reference to the identically numbered exhibit to our
Registration Statement on Form S-4, as amended (Reg. No. 333-11149).
(b) Incorporated by reference to the identically numbered exhibit to our
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 filed
by ORBCOMM on May 14, 1997.
(c) Incorporated by reference to the identically numbered exhibit to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1996
filed by ORBCOMM on March 28, 1997.
(d) Incorporated by reference to Exhibit 10.16.1 of the Annual Report on Form
10-K for the fiscal year ended December 31, 1996 (the "Orbital 1996 Form
10-K") of Orbital, filed by Orbital on March 27, 1997.
(e) Incorporated by reference to the identically numbered exhibit to
Amendment No. 1 to our Registration Statement on Form S-1, as amended
(Reg. No. 333-50599).
(f) Incorporated by reference to the identically numbered exhibit to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
filed by ORBCOMM on March 31, 1998.
(g) Incorporated by reference to the identically numbered exhibit to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1998
filed by ORBCOMM on March 31, 1999.
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