10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-33118
ORBCOMM INC.
(Exact name of registrant in its
charter)
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Delaware
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41-2118289
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(State or other jurisdiction
of
incorporation of organization)
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(I.R.S. Employer
Identification Number)
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2115 Linwood Avenue
Fort Lee, New Jersey 07024
(Address of principal
executive offices)
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Registrants telephone number, including area code:
(201) 363-4900
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Common stock, par value
$0.001 per share
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The Nasdaq Stock Market, LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated
Filer o Accelerated
Filer o Non-Accelerated
Filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act) Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant (based on the closing
price reported on the Nasdaq Global Market on December 31,
2006) was $206,301,211.
Shares held by all executive officers and directors of the
registrant have been excluded from the foregoing calculation
because such persons may be deemed to be affiliates of the
registrant.
The number of shares of the registrants common stock
outstanding as of March 19, 2007 was 36,975,088.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for the 2007
Annual Meeting of Stockholders to be held on May 11, 2007
is incorporated by reference in Items 10, 11, 12, 13
and 14 of Part III of this
Form 10-K.
Forward-
Looking Statements
Certain statements discussed in Part I, Item 1.
Business, Part I, Item 3. Legal
Proceedings, Part II, Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this
Annual Report on
Form 10-K
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements generally relate to our plans,
objectives and expectations for future events and include
statements about our expectations, beliefs, plans, objectives,
intentions, assumptions and other statements that are not
historical facts. Such forward-looking statements, including
those concerning the Companys expectations, are subject to
known and unknown risks and uncertainties, which could cause
actual results to differ materially from the results, projected,
expected or implied by the forward-looking statements, some of
which are beyond the Companys control, that may cause the
Companys actual results, performance or achievements, or
industry results, to be materially different from any future
results, performance or achievements expressed or implied by
such forward-looking statements. These risks and uncertainties
include but are not limited to: the substantial losses we have
incurred and expect to continue to incur; demand for and market
acceptance of our products and services and the applications
developed by our resellers; technological changes, pricing
pressures and other competitive factors; the inability of our
international resellers to develop markets outside the United
States; satellite launch failures, satellite launch and
construction delays and in-orbit satellite failures or reduced
performance; the failure of our system or reductions in levels
of service due to technological malfunctions or deficiencies or
other events; our inability to renew or expand our satellite
constellation; political, legal regulatory, government
administrative and economic conditions and developments in the
United States and other countries and territories in which we
operate; changes in our business strategy; and others risks. In
addition, specific consideration should be given to various
factors described in Part I, Item 1A. Risk
Factors and Part II, Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and elsewhere in this
Annual Report on
Form 10-K.
The Company undertakes no obligation to publicly revise any
forward-looking statements or cautionary factors, except as
required by law.
PART I
Overview
We operate the only global commercial wireless messaging system
optimized for narrowband communications. Our system consists of
a global network of 30 low-Earth orbit, or LEO, satellites and
accompanying ground infrastructure. Our two-way communications
system enables our customers and end-users, which include large
and established multinational businesses and government
agencies, to track, monitor, control and communicate
cost-effectively with fixed and mobile assets located anywhere
in the world. Our products and services enable our customers and
end-users to enhance productivity, reduce costs and improve
security through a variety of commercial, government and
emerging homeland security applications. We enable our customers
and end-users to achieve these benefits using a single global
technology standard for
machine-to-machine
and telematic, or M2M, data communications. Our customers have
made significant investments in developing ORBCOMM-based
applications. Examples of assets that are connected through our
M2M data communications system include trucks, trailers,
railcars, containers, heavy equipment, fluid tanks, utility
meters, and pipeline monitoring equipment, marine vessels and
oil wells. Our customers include value-added resellers, or VARs,
original equipment manufacturers, or OEMs, such as Caterpillar
Inc., Komatsu Ltd., Hitachi Construction Machinery Co., Ltd. and
the Volvo Group, service providers, such as the Equipment
Services business of General Electric Company, and government
agencies, such as the U.S. Coast Guard.
Through our M2M data communications system, our customers and
end-users can send and receive information to and from any place
in the world using low-cost subscriber communicators and paying
airtime costs that we believe are the lowest in the industry for
global connectivity. We believe that there is no other satellite
or terrestrial network currently in operation that can offer
global two-way wireless narrowband data service coverage at
comparable cost using a single technology standard worldwide. We
are currently authorized, either directly or indirectly, to
provide our communications services in over 75 countries and
territories in North America, Europe,
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South America, Asia, Africa and Australia. During the year ended
December 31, 2006, we added approximately 112,000 net
billable subscriber communicators (subscriber communicators
currently billing or expected to be billing within 30 to
90 days) on our communications system as compared to
approximately 38,000 net billable subscriber communicators
added during the year ended December 31, 2005, an increase
of approximately 196.2%. As of December 31, 2006, we had
approximately 225,000 billable subscriber communicators
activated on our communication system as compared to
approximately 113,000 as of December 31, 2005 an increase
of approximately 99.1%. We believe that our target markets in
commercial transportation, heavy equipment, fixed asset
monitoring, marine vessel, consumer transportation, and
government and homeland security are significant and growing. We
believe that these markets which are connected to M2M data
communications systems using satellite or cellular networks will
grow to approximately 131.0 million addressable markets by
2012, representing a compound annual growth rate of 40.0% from
17.4 million in 2006. During this time, market penetration
of M2M data communications devices for these target markets is
expected to increase from approximately 1.4% to approximately
8.9% of a total of 1.5 billion vehicles, devices and units
by 2012.
Our unique M2M data communications system is comprised of three
elements: (i) a constellation of 30 LEO satellites in
multiple orbital planes between 435 and 550 miles above the
Earth operating in the Very High Frequency, or VHF, radio
frequency spectrum; (ii) related ground infrastructure,
including 14 gateway earth stations, five regional gateway
control centers and a network control center in Dulles,
Virginia, through which data sent to and from subscriber
communicators are routed; and (iii) subscriber
communicators attached to a variety of fixed and mobile assets
worldwide. See The ORBCOMM Communications System.
Our
Business Strengths and Competitive Advantage
We believe that our focus on M2M data communications is unique
in our industry and will enable us to achieve significant
growth. We believe no other satellite or terrestrial network
currently in operation offers users global two-way wireless
narrowband data communications using a single global technology
standard anywhere in the world at costs comparable to ours. This
provides us with a number of competitive advantages that we
believe will help promote our success, including the following:
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Established global network and proven
technology. We believe our global network and
technology enable us to offer superior products and services to
the end-users of our communications system in terms of
comprehensive coverage, reliability and compatibility. Our
global network provides worldwide coverage, including in
international waters, allowing end-users to access our
communications system in areas outside the coverage of
terrestrial networks, such as cellular, paging and other
wireless networks. Our proven technology offers full two-way M2M
data communication (with acknowledgement of message receipt)
with minimal
line-of-sight
limitations and no performance issues during adverse weather
conditions, which distinguishes us from other satellite
communications systems. Our primary satellite orbital planes
contain six to eight satellites each, providing built-in system
redundancies in the event of a single satellite malfunction. In
addition, our system uses a single global technology standard
and eliminates the need for multiple network agreements and
versions of hardware and software.
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Low cost structure. We have a significant cost
advantage over any potential new LEO satellite system competitor
with respect to our current satellite constellation, because we
acquired the majority of our current network assets from ORBCOMM
Global L.P., referred to as the Predecessor Company, and its
subsidiaries out of bankruptcy for a fraction of their original
cost. In addition, because our LEO satellites are relatively
small and deployed into low-Earth orbit, the constellation is
less expensive and easier to launch and maintain than larger LEO
satellites and large geostationary satellites. We believe that
we have less complex and less costly ground infrastructure and
subscriber communication equipment than other satellite
communications providers. Our low cost satellite system
architecture enables us to provide global two-way wireless
narrowband data communication services to end-users at prices
that we believe are the lowest in the industry for global
connectivity.
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Sole commercial satellite operator licensed in the VHF
spectrum. We are the sole commercial satellite
operator licensed to operate in the 137-150 MHz VHF
spectrum by the FCC or, to our knowledge, any other national
spectrum or radio-telecommunications regulatory agency in the
world. The spectrum that we use was allocated globally by the
International Telecommunication Union, or ITU, for use by
satellite fleets such as ours to provide mobile data
communications service. We are currently authorized, either
directly or
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indirectly, to provide our data communications service in over
75 countries and territories, representing over 60% of the
worlds GDP, in North America, Europe, South America, Asia,
Africa and Australia. VHF spectrum has inherent advantages for
M2M data communications over systems using shorter wavelength
signals. The VHF signals used to communicate between our
satellites and subscriber communicators are not affected by
weather and are less dependent on
line-of-sight
access to our satellites than other satellite communications
systems. In addition, our longer wavelength signals enable our
satellites to communicate reliably over longer distances at
lower power levels. Higher power requirements of commercial
satellite systems in other spectrum bands are a significant
factor in their higher cost and technical complexity.
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Significant market lead over satellite-based
competitors. We believe that we have a
significant market lead in providing M2M data communications
services that meet the coverage and cost requirements in the
rapidly developing asset management and supply chain markets.
The process required to establish a competing satellite-based
system with the advantages of a VHF system includes obtaining
regulatory permits to launch and operate satellites and to
provide communications services, and the design, development and
construction of a communications system. We believe that a
minimum of five years and significant investments in time and
resources would be required for another satellite-based M2M data
communications service provider to develop the capability to
offer comparable services. Our VARs and IVARs have made
significant investments in developing ORBCOMM-based
applications. These applications often require substantial time
and financial investment to develop for commercial use.
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Key distribution and OEM customer
relationships. Our strategic relationships with
key distributors and OEMs have enabled us to streamline our
sales and distribution channels and shift much of the risk and
cost of developing and marketing applications to others. We have
established strategic relationships with key service providers,
such as GE Equipment Services, the worlds largest lessor
of trailers, containers and railcars, and XATA Corporation, a
leading provider of tracking solutions for the trucking
industry, including to Penske Corporation, the leading truck
leasing company in the United States, and major OEMs, such as
Caterpillar, Komatsu, Hitachi and Volvo. We believe our close
relationships with these distributors and OEMs allows us to work
closely with them at all stages of application development, from
planning and design through implementation of our M2M data
communications services, and to benefit from their
industry-specific expertise. By fostering these strong
relationships with distributors and OEMs, we believe that once
we have become so integrated into our customers planning,
development and implementation process, and their equipment, we
anticipate it will be more difficult to displace us or our
communication services. In addition, the fixed and mobile assets
which are tracked, monitored, controlled and communicated with
by these customers generally have long useful lives and the cost
of replacing our communications equipment with an alternative
service providers equipment could be prohibitive for large
numbers of assets.
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Reliable, low cost subscriber
communicators. There are multiple manufacturers
that build subscriber communicators for our network. Through our
Stellar Satellite Communications, Ltd. subsidiary, we have an
arrangement with Delphi Corporation that provides us with
industrial-scale manufacturing capability for the supply of low
cost, reliable, ISO-9001 certified, automotive grade subscriber
communicators. We believe that Delphi possesses the ability to
scale up its manufacturing rapidly to meet additional demand. We
also have arrangements with independent third party
manufacturers who supply our customers and end-users directly
with low cost subscriber communicators. As a result of these
manufacturing relationships, technological advances and higher
volumes, we have significantly reduced the selling price of our
subscriber communicators from approximately $280 per unit
in 2003 to as little as $100 per unit in volume in 2006. In
addition, the cost of communications components necessary for
our subscriber communicators to operate in the VHF band is
relatively low as they are based on readily available FM radio
components.
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Our
Strategy
Our strategy is to leverage our business strengths and key
competitive advantages to increase the number of subscriber
communicators activated on our M2M data communications system,
both in existing and new markets. We are focused on increasing
our market share of customers with the potential for a high
number of connections with lower usage applications. We believe
that the service revenue associated with each additional
subscriber
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communicator activated on our communications system will more
than offset the negligible incremental cost of adding such
subscriber communicator to our system and, as a result,
positively impact our results of operations. We plan to continue
to target multinational companies and government agencies to
increase substantially our penetration of what we believe is a
significant and growing addressable market. To achieve our
objectives, we are pursuing the following business strategies:
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Expand our low cost, multi-channel marketing and distribution
network of resellers. We intend to increase
further the number of resellers that develop, market and
implement their applications together with our communications
services and subscriber communicators to end-users. We are also
focused on increasing the number of OEM and distributor
relationships with leading companies that own, manage or operate
fixed or mobile assets. We are seeking to recruit resellers with
industry knowledge to develop applications that could be used
for industries or markets that we do not currently serve.
Resellers invest their own capital developing applications
compatible with our system, and they typically act as their own
agents and systems integrators when marketing these applications
to end-users, without the need for significant investment by us.
As a result, we have established a low cost marketing and
distribution model that is both easily scalable by adding
additional resellers or large-scale asset deployers, and allows
us to penetrate markets without incurring substantial research
and development costs or sales and marketing costs.
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Expand our international markets. Our
international growth strategy is to open new markets outside the
United States by obtaining regulatory authorizations and
developing markets for our M2M data communications services to
be sold in regions where the market opportunity for our OEM
customers and resellers is greatest. We are currently authorized
to provide our data communications services in over 75 countries
and territories in North America, Europe, South America, Asia,
Africa, Mexico and Australia, directly or indirectly through
seven international licensees and 12 country representatives. We
are currently working with 52 international value-added
resellers, or IVARs, who, generally, subject to certain
regulatory restrictions, have the right to market and sell their
applications anywhere our communications services are offered.
We seek to enter into agreements with strong distributors in
each region. Our regional distributors, which include country
representatives and international licensees, obtain the
necessary regulatory authorizations and develop local markets
directly or by recruiting local VARs. In some international
markets where distribution channels are in the early stages of
development, we seek to bring together VARs who have developed
well-tested applications with local distributors to create
localized solutions and accelerate the adoption of our M2M data
communications services. In addition, we have made efforts to
strengthen the financial positions of certain of our regional
distributors, including several, such as ORBCOMM Europe LLC, who
were former licensees of the predecessor company left weakened
by its bankruptcy, through restructuring transactions whereby we
obtained greater operating control over such regional
distributors. We believe that by strengthening the financial
condition of and our operating control over these established
regional distributors, they will be better positioned to promote
and distribute our products and services and enable us to
achieve our market potential in the relevant regions.
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Further reduce subscriber communicator
costs. We are working with our subscriber
communicator manufacturers to further reduce the cost of our
subscriber communicators, as well as to develop technological
advances, including further reductions in size, improvements in
power management efficiency, increased reliability and enhanced
capabilities. For example, our subscriber communicator supplier
Delphi, and independent supplier Mobile Applitech, Inc., are
developing next-generation subscriber communicators which will
contain custom integrated circuits combining the functionality
of several components, which we believe will lead to reduced
costs. Our ability to offer our customers less expensive
subscriber communicators that are smaller, more efficient and
more reliable is key to our ability to provide a complete low
cost solution to our customers and end-users.
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Reduce network latency. With the expected
launch of our quick-launch and next-generation satellites, we
expect to reduce the time lags in delivering messages and data,
or network latency, in most regions of the world. We believe
this will improve the quality and coverage of our system and
enable us to increase our customer base.
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Introduce new features and services. We will
continue to develop and introduce new features and services to
expand our customer base and increase our revenues. For example,
we have recently developed a broadcast capability that allows
large numbers of subscriber communicators to receive a single
message simultaneously. This represents an efficient delivery
mechanism to address large populations of subscribers with a
single message, such as weather data broadcasts, widespread
alert notifications and demand response applications for
electric utilities. In addition, we have been working closely
with the U.S. Coast Guard to incorporate the ability to
receive marine vessel identification and position data from the
Automatic Identification System, or AIS, an internationally
mandated shipboard broadcast system that aids navigation and
improves maritime safety. We may be able to leverage this work
with AIS to resell, subject in certain circumstances to
U.S. Coast Guard approval, AIS data collected by our
network to other coast guard services and governmental agencies,
as well as companies engaged in security or logistics businesses
for tracking shipping activities or for other navigational
purposes. We also believe that subscriber communicator
technology advances, such as dual-mode devices combining our
subscriber communicators with communications devices for
cellular networks, will broaden our addressable market by
allowing our communications services to serve as an effective
backup system for higher bandwidth terrestrial wireless or
cellular networks or as a back-channel service for terrestrial
or satellite-based broadcast-only networks.
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Provide comprehensive technical support, customer service and
quality control. We have allocated additional
resources to provide customer support for training, integration
and testing in order to assist our VARs and other distributors
in the roll-out of their applications and to enhance end-user
acquisition and retention. We provide our VAR and OEM customers
with access to customer support technicians. We also deploy our
technicians to our VAR and OEM customers to facilitate the
integration of our M2M data communications system with their
applications during the planning, development and implementation
processes and to certify that these applications are compatible
with our system. Our support personnel include professionals
with application development, in-house laboratory and hardware
design and testing capabilities.
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Industry
Overview
Increasingly, businesses and governments face the need to track,
control, and monitor and communicate with fixed and mobile
assets that are located throughout the world. At the same time,
these assets increasingly incorporate microprocessors, sensors
and other devices that can provide a variety of information
about the assets location, condition, operation and
environment and are capable of responding to external commands
and queries. As these intelligent devices proliferate, we
believe that the need to establish two-way communications with
these devices is greater than ever. The owners and operators of
these intelligent devices are seeking low cost and efficient
communications systems that will enable them to communicate with
these devices.
We operate in the
machine-to-machine
and telematics, or M2M, industry, which includes various types
of communications systems that enable intelligent machines,
devices and fixed or mobile assets to communicate information
from the machine, device or fixed or mobile asset to and from
back-office information systems of the businesses and government
agencies that track, monitor, control and communicate with them.
These M2M data communications systems integrate a number of
technologies and cross several different industries, including
computer hardware and software systems, positioning systems,
terrestrial and satellite communications networks and
information technologies (such as data hosting and report
generation).
There are three main components in any M2M data communications
system:
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Fixed or mobile assets. Intelligent or
trackable assets include devices and sensors that collect,
measure, record or otherwise gather data about themselves or
their environment to be used, analyzed or otherwise disseminated
to other machines, applications or human operators and come in
many forms, including devices and sensors that:
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Report the location, speed and fuel economy data from trucks and
locomotives;
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Monitor the location and condition of trailers, railcars and
marine shipping containers;
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Report operating data and usage for heavy equipment;
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Monitor fishing vessels to enforce government regulations
regarding geographic and seasonal restrictions;
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Report energy consumption from a utility meter;
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Monitor corrosion in a pipeline;
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Monitor fluid levels in oil storage tanks;
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Measure water delivery in agricultural pipelines;
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Detect movement along international borders; and
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Monitor environmental conditions in agricultural facilities.
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Communications network. The communications
network enables a connection to take place between the fixed or
mobile asset and the back-office systems and users of that
assets data. The proliferation of terrestrial and
satellite-based wireless networks has enabled the creation of a
variety of M2M data communications applications. Networks that
are being used to deliver M2M data include terrestrial
communications networks, such as cellular, radio paging and WiFi
networks, and satellite communications networks, utilizing
low-Earth-orbit or geosynchronous satellites.
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Back-office application or user. Data
collected from a remote asset is used in a variety of ways with
applications that allow the end-user to track, monitor, control
and communicate with these assets with a greater degree of
control and with much less time and expense than would be
required to do so manually.
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Market
Opportunity
Commercial
transportation
Large trucking and trailer leasing companies require
applications that report location, engine diagnostic data,
driver performance, fuel consumption, compliance, rapid
decelerations, fuel taxes, driver logs and zone adherence in
order to manage their truck fleets more safely and efficiently
and to improve truck and trailer utilization.
Truck and trailer fleet owners and operators, as well as truck
and trailer OEMs, are increasingly integrating M2M data
communications systems into their trucks and trailers. In the
near future, as older analog cellular wireless networks
currently used in truck and trailer tracking are phased out,
end-users will need to migrate to alternative communications
systems and we expect that an increasing number of customers
will be seeking long-term solutions for their M2M data
communications needs as they make their replacement decisions.
Although trailer tracking is in the early stages of adoption, it
represents a significantly larger potential market as we
estimate that there are approximately three trailers to every
truck. The trailer market also requires additional applications,
such as cargo sensor reporting, load monitoring, control of
refrigeration systems and door alarms. Future regulations may
require position tracking of specific types of cargo, such as
hazardous materials, and could also increase trailer tracking
market opportunities. The railcar market also requires many of
these same applications and many trailer applications using M2M
data communications system can easily be translated to the
railcar market.
Heavy
equipment
Heavy equipment fleet owners and leasing companies seeking to
improve fleet productivity and profitability require
applications that report diagnostic information, location
(including for purposes of geo-fencing),
time-of-use
information, emergency notification, driver usage and
maintenance alerts for their heavy equipment, which may be
geographically dispersed, often in remote, difficult to reach
locations. Using M2M data communications systems, heavy
equipment fleet operators can remotely manage the productivity
and mechanical condition of their equipment fleets, potentially
lowering operating costs through preventive maintenance. OEMs
can also use M2M applications to better anticipate the
maintenance and spare parts needs of their customers, expanding
the market for more higher-margin spare parts orders for the
OEMs. Heavy equipment OEMs are increasingly integrating M2M data
communications systems into their equipment at the factory or
offering them as add-on options through certified after-market
dealers.
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Since the heavy equipment market is dominated by a small number
of OEMs, M2M data communications service providers targeting
this market segment focus on building relationships with these
OEMs, such as Caterpillar, Komatsu, Hitachi and Volvo.
Fixed
asset monitoring
Companies with widely dispersed fixed assets require a means of
collecting data from remote assets to monitor productivity,
minimize downtime and realize other operational benefits, as
well as managing and controlling the functions of such assets,
for example, the remote operation of valves and electrical
switches. M2M data communications systems can provide industrial
companies with applications for automated meter reading, oil and
gas storage tank monitoring, pipeline monitoring and
environmental monitoring, which can reduce operating costs for
these companies, including labor costs, fuel costs, and the
expense of
on-site
monitoring and maintenance.
Marine
vessels
Marine vessels have a need for satellite-based communications
due to the absence of reliable terrestrial-based coverage more
than a few miles offshore. M2M data communications systems may
offer features and functions to luxury recreational marine
vessels and commercial fishing vessels, such as onboard
diagnostics and other marine telematics, alarms, requests for
assistance, security, location reporting and tracking,
e-mail and
two-way messaging, catch data and weather reports. In addition,
owners and operators of commercial fishing and other marine
vessels are increasingly subject to regulations governing, among
other things, commercial fishing seasons and geographic
limitations, vessel tracking, safety systems, and resource
management and protection using various M2M communications
systems.
Government
and homeland security
Governments worldwide are seeking to address the global terror
threat by monitoring land borders and hazardous materials, as
well as marine vessels and containers. In addition, modern
military and public safety forces use a variety of applications,
particularly in supply chain management, logistics and support,
which could incorporate our products and services. For example,
approximately 9 million maritime shipping containers from
overseas arrive annually at U.S. ports of entry and only 5%
of these containers, which are considered high risk, are
inspected, according to Forbes Magazine. Increasingly, there is
a need to monitor these vessels for homeland security and M2M
data communications systems could be used in applications to
address homeland security requirements, such as tracking and
monitoring these vessels and containers. In early 2003, we
successfully conducted a study with Northrop Grumman Corporation
on behalf of the Port Authority of New York and New Jersey to
demonstrate our systems ability to monitor the status of
door seals on commercial shipping containers.
M2M communications systems can also be used in applications to
address infiltration across land borders, for example,
monitoring seismic sensors placed along the border to detect
incursions. We may also be able to leverage our work with AIS to
resell, subject in certain circumstances to U.S. Coast
Guard approval, AIS data collected by our network to other coast
guard services and governmental agencies.
Consumer
transportation
Automotive companies are seeking a means to address the growing
need for safety systems in passenger vehicles and to broadcast a
single message to multiple vehicles at one time. Within the
automotive market, there is no single communications technology
that satisfies the need for 100% coverage, high reliability and
low cost. An example of an automotive safety application is a
system that has the ability to detect and report the deployment
of a vehicles airbag, triggering the dispatch of an
ambulance, tow truck or other necessary response personnel. Many
automotive safety systems currently in service are based on
analog cellular communications networks, many of which are being
phased-out over the next several years in favor of digital
cellular networks. In addition, terrestrial cellular
communications systems have substantial dead zones,
where network coverage is not available, and are difficult to
manage globally, as vehicles may pass through multiple coverage
areas, requiring the system to roam across a number
of different cellular carriers networks. With emerging
technology, satellite-based automotive safety systems may be
able to provide near-real-time message delivery with minimal
network latencies, thereby
7
providing a viable alternative to cellular-based systems. In
addition, many cellular-based automotive safety systems adopted
or being adopted lack backwards compatibility that could limit
their overall functionality.
While our system currently has latency limitations which make it
impractical for us to address this market fully, we believe that
our existing network may be used with dual-mode devices,
combining our subscriber communicators with communications
devices for cellular networks, allowing our communications
services to function as an effective
back-up
system by filling the coverage gaps in current cellular or
wireless networks used in consumer transportation applications.
In addition, we may undertake additional capital expenditures
beyond our current capital plan in order to expand our satellite
constellation and lower our latencies to the level that
addresses the requirements of resellers and OEMs developing
applications for this market if we believe the economic returns
justify such an investment. We believe we can supplement our
satellite constellation within the lead time required to
integrate applications using our communications service into the
automotive OEM product development cycle.
Products
And Services
Our principal products and services are satellite-based data
communications services and subscriber communicators. Our
communications services are used by businesses and government
agencies that are engaged in tracking, monitoring, controlling
or communicating with fixed or mobile assets globally. Our low
cost, industrially-rated subscriber communicators are embedded
into many different assets for use with our system. Our products
and services are combined with industry or customer specific
applications developed by our VARs which are sold to their
end-user customers.
We do not generally market to end-users directly; instead, we
utilize a cost-effective sales and marketing strategy of
partnering with VARs, IVARs, international licensees and country
representatives. These resellers, which are our direct
customers, market to end-users.
Satellite
communications services
We provide global two-way M2M data communications services
through our satellite-based system. We focus our communications
services on narrowband data applications. These data messages
are typically sent by a remote subscriber communicator through
our satellite system to our ground facilities for forwarding
through an appropriate terrestrial communications network to the
ultimate destination. Our system, typically combined with
industry- or customer-specific applications developed by our
resellers, permits a wide range of fixed and mobile assets to be
tracked, monitored, controlled and communicated with from a
central point.
We typically derive subscription-based recurring revenue from
our VAR customers based upon the number of subscriber
communicators activated on, and the amount of data transmitted
through, our communications system. Customers pay between $1 and
$60 in monthly service charges to access our communications
system (in addition to a one-time provisioning fee ranging from
$0 to $30) which we believe is the lowest price point currently
available for global two-way connectivity.
8
The following table sets forth selected customers,
representative applications and the benefits of such
applications for each of our addressed markets:
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Market
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Select Customers/End-Users
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Representative Applications
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Key Benefits
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Commercial
transportation
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DriverTech
GE Equipment Services
Crossbridge Solution
Volvo Group
XATA Corporation
Fleet Management Services
Air IQ
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Position reporting
Units diagnostic monitoring
Compliance / tax reporting
Cargo monitoring
Systems control
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Improve fleet productivity and profitability
Enable efficient, centralized fleet management
Ensure safe delivery of shipping cargo
Allow real-time tracking of unit maintenance requirements
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Heavy equipment
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Caterpillar, Inc.
Hitachi Construction . Machinery Co., Ltd.
Komatsu Ltd.
Volvo Group
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Position reporting
Unit diagnostic monitoring
Usage tracking
Emergency notification
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Improve fleet productivity and profitability
Allow OEMs to better anticipate the maintenance and spare parts needs of their customers
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Fixed asset monitoring
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American Innovations, Ltd.
Automata, Inc.
GE Equipment Services
Electronic Sensors, Inc.
Metrix Networks, Inc.
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Unit diagnostic monitoring
Usage tracking
Systems control
Automated meter reading
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Provide method for managing, controlling, and collecting data from remote sites
Improve maintenance services productivity and profitability
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Marine vessels
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Metocean Data Systems Ltd.
Recreational boaters*
Sasco Inc.
Skymate, Inc.
Volvo Group/Penta*
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Position reporting
Two-way messaging
Unit diagnostic monitoring
Weather reporting
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Ensure vessel compliance with regulations
Create a low cost information channel to disseminate critical weather and safety information
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Government and homeland
security
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National Oceanic and Atmospheric Administration*
U.S. Coast Guard
U.S. Customs and Border Protection*
U.S. Marine Corps*
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Container tracking
Environmental monitoring
Automatic Identification System development
Border monitoring
Vehicle tracking
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Provide efficient monitoring of changing environmental conditions
Address increasing need to monitor vessels in U.S. waters
Minimize security threats and secure border
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* |
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Represents an end-user from which we directly dervive revenue
through VARs or other resellers. |
Subscriber
communicators
Our wholly owned subsidiary, Stellar, markets and sells
subscriber communicators manufactured by Delphi directly to our
customers. We also earn royalties from the manufacture of
subscriber communicators by third parties for the issuance of
unique serial numbers which enable such devices to connect to
our M2M data communications system. To ensure the availability
of subscriber communicators having different functional
capabilities in sufficient quantities to meet demand, we have
provided extensive design specifications and technical and
engineering support to our manufacturers. In addition, because
we maintain backwards compatibility, subscriber communicators
produced by former manufacturers are still in use with our
system today.
Stellar currently sells two models of subscriber communicators,
the DS 100 and the DS 300, which are manufactured by Delphi.
Delphi is now Stellars sole manufacturing source for
subscriber communicators and it is developing next-generation
subscriber communicators which will contain a custom integrated
circuit combining the functionality of several components.
9
Customers
We market and sell our products and services directly to OEM and
government customers and indirectly through VARs, IVARs,
international licensees and country representatives. Other than
GE Equipment Services, which represented approximately 49.5% of
our revenues for fiscal 2006, no other customer accounted for
more than 10% of our total sales in fiscal 2006.
Key
Strategic Relationships
Delphi
Automotive Systems LLC
In May 2004, we entered into a Cooperation Agreement with
Stellar and Delphi Corporation, a tier-one automotive components
supplier that designs, manufacturers and supplies advanced
automotive grade subscriber communicators for Stellar for use
with our communications system. Pursuant to the agreement, and
subject to limited exceptions, Delphi Corporations Delphi
Automotive System LLC subsidiary, or Delphi, is the sole
supplier of newly developed subscriber communicators for
Stellar. Delphi Corporation has a right of first refusal
following termination of the agreement to supply Stellar with
new products developed under the Cooperation Agreement. The
initial term of the agreement was until December 31, 2005
and it has been extended by mutual written agreement of the
parties until December 31, 2007. Although Delphi is
currently subject to bankruptcy proceedings, it manufactures our
subscriber communicators in Mexico with non-unionized labor, and
as a result, we do not believe that such bankruptcy proceedings
should impact our contract with Delphi Corporation. This
relationship provides Stellar access to Delphis
substantial technical and manufacturing resources, which we
believe enables Stellar to continue to lower the cost of our
subscriber communicators while at the same time providing
improved features. Delphi began commercial production of two new
models which significantly reduced the selling price from
approximately $280 per unit in 2003 to as little as
$100 per unit in volume in 2006. Several of Stellars
customers are now in the process of full commercial roll-out
using these less costly, new generation subscriber
communicators. In addition to providing a lower-cost subscriber
communicators with higher reliability, we believe that Delphi
also has the capability to increase production rapidly to meet
additional demand as Stellar expands its business.
General
Electric Company
We have a significant customer relationship with General
Electric Company, or GE, that provides access to a wide array of
sales channels and extends to several divisions and businesses,
including GE Equipment Services, which includes Trailer Fleet
Services, its Penske Truck Leasing joint venture, Rail Services
and its GE Asset Intelligence LLC subsidiary, or AI, among
others. All of these GE Equipment Services divisions directly or
indirectly sell applications utilizing our M2M data
communications services and subscriber communicators
manufactured by Stellar. As a result, GE Equipment Services has
a number of different sales channels for the distribution of our
asset monitoring and tracking products either to third party
end-users or to other GE divisions who are end-users.
GE Equipment Services has made a strong commitment to us as a
strategic partner by developing applications that use our M2M
data communications system. Our largest GE customer is the AI
subsidiary of GE Equipment Services, which is dedicated to M2M
data communications applications and which renewed its IVAR
agreement with us through 2009. In March 2006, AI placed orders
with our Stellar subsidiary for subscriber communicator units
which will be used to support deployments of 46,000 trailers for
Wal-Mart Stores, Inc. On October 10, 2006, our Stellar
subsidiary entered into an agreement with AI to supply up to
412,000 units of in-production and future models of
Stellars subscriber communicators from August 1, 2006
through December 31, 2009 to support AIs applications
utilizing our M2M data communications system. Of the total
volume level under the agreement, 270,000 units are
non-cancelable except under specified early termination
provisions of the agreement, including (1) the termination
of the Cooperation Agreement with Delphi without a replacement
agreement with respect to the design and manufacture of
subscriber communicators between the same or related parties,
(2) a default by us to meet certain obligations under a
reseller agreement with AI or (3) the closure of AIs
business and its permanently ceasing to sell telematics products
and services. The overall contract value at the full volume
level would be approximately $57.0 million, subject to
adjustment for additional engineering work, substitution of
subscriber communicator models or other modifications pursuant
to the terms of the agreement, and excludes any service
10
revenues that we may derive from the activation and use of these
subscriber communicators on our M2M data communications system
under our separate pre-existing reseller agreement with AI.
AIs first application, VeriWise, enables GEs
customers to track and monitor their trailer assets and
shipments throughout the world. GE Rail Services is also
integrating our M2M data communications system into its RailWise
application for railcars. GE Equipment Services European
division offers RailWise and we expect GE Equipment Services to
begin marketing both VeriWise and RailWise into other
international markets, including Mexico. Penske Truck Leasing
also uses our M2M data communications system to monitor
tractor-trailers, and other GE businesses are monitoring many
different types of assets, including GE Healthcares
portable MRI machines, locomotives for GE Rail, tractor-trailers
for Penske Truck Leasing, and portable electric generators for
GE Energy.
U.S. Coast
Guard
In May 2004, we were awarded a contract by the U.S. Coast
Guard to develop and demonstrate the ability to receive, collect
and forward AIS data over our satellite system, or the Concept
Validation Project. Our Coast Guard demonstration satellite is
expected to be launched during 2007 and will carry an AIS
receiver in addition to our standard communications payload. We
plan to outfit our subsequent satellites with AIS capability and
may be able to leverage this work to resell, subject in certain
circumstances to U.S. Coast Guard approval, AIS data
collected by our network to other coast guard services and
governmental agencies, as well as companies engaged in security
or logistics businesses for tracking shipping activities or for
other navigational purposes. AIS is a shipboard broadcast system
that transmits a marine vessels identification and
position to aid navigation and improve maritime safety. The
International Maritime Organization has mandated the use of AIS
on all Safety of Life at Sea (SOLAS) vessels, which are vessels
over 300 tons. Current terrestrial-based AIS networks provide
limited coverage and are not able to provide the expanded
coverage capability desired by the U.S. Coast Guard. By
using our satellite system, the U.S. Coast Guard is
expected to be able to collect and process AIS data well beyond
the coast of the United States in a cost effective and timely
fashion. As of December 31, 2006, the U.S. Coast Guard
has paid us the full contract price of $7.2 million,
primarily for the construction and launch of an AIS-enabled
demonstration satellite, excluding additional amounts which may
become payable if the U.S. Coast Guard elects to receive
additional maintenance and AIS data transmission services under
the contract. Such payments are included in deferred revenue
prior to the launch of the demonstration satellite.
Sales,
Marketing and Distribution
We generally market our satellite communications services
through VARs and internationally through IVARs, international
licensees and country representatives. The following chart shows
how our low cost, multi-channel distribution network is
structured:
VARs and IVARs. We are currently working with
130 VARs and IVARs and seek to continue to increase the number
of our VARs and IVARs as we expand our business. The role of the
VAR or IVAR is to develop tailored applications that utilize our
system and then market these applications, through non-exclusive
licenses, to specific,
11
targeted vertical markets. VARs and IVARs are responsible for
establishing retail pricing, collecting airtime revenue from
end-users and for providing customer service and support to
end-users. Our relationship with a VAR or IVAR may be direct or
indirect and may be governed by a reseller agreement between us,
the international licensee or country representative, on the one
hand, and the VAR or IVAR on the other hand, that establishes
the VARs or IVARs responsibilities with respect to
the business, as well as the cost of satellite service to the
VAR or IVAR. VARs and IVARs are responsible for their own
development and sales costs. VARs and IVARs typically have
unique industry knowledge, which permits them to develop
applications targeted for a particular industry or market. Our
VARs and IVARs have made significant investments in developing
ORBCOMM-based applications. These applications often require
significant time and financial investment to develop for
commercial use. By leveraging these investments, we are able to
minimize our own research and development costs, increase the
scale of our business without increasing overhead and diversify
our business risk among many sales channels. VARs and IVARs pay
fees for access to our system based on the number of subscriber
communicators they have activated on the network and on the
amount of data transmitted. VARs and IVARs are also generally
required to pay a one-time fee for each subscriber communicator
activated on our system and for other administrative charges.
VARs and IVARs then typically bill end-users based upon the full
value of the application and are responsible for customer care
to the end-user.
We are currently working with 59 IVARs. Generally, subject to
certain regulatory restrictions, the IVAR arrangement allows us
to enter into a single agreement with any given IVAR and allows
the IVARs to pay directly to us a single price on a single
invoice in a single currency for worldwide service, regardless
of the territories they are selling into, thereby avoiding the
need to negotiate prices with individual international licensees
and country representatives. We pay our international licensees
and country representatives a commission on revenues received
from IVARs from each subscriber communicator activated in a
specific territory. The terms of our reseller agreements with
IVARs typically provide for a three-year initial term that is
renewable for additional three year terms. Under these
agreements, the IVAR is responsible for promoting their
applications in their respective territory, providing sales
forecasts and provisioning information to us, collecting airtime
revenue from end-users and paying invoices rendered by us. In
addition, IVARs are responsible for providing customer support
and maintaining sufficient inventory of subscriber communicators
in their respective territories.
International licensees and country
representatives. We generally market and
distribute our services outside the United States and Canada
primarily through international licensees and country
representatives, including through our subsidiary, Satcom
International Group plc., which has entered into country
representative agreements with our affiliated international
licensee, ORBCOMM Europe LLC, covering the United Kingdom,
Ireland and Switzerland and a service license agreement covering
substantially all of the countries of the Middle East and a
significant number of countries of Central Asia. In addition,
ORBCOMM Europe and Satcom have entered into an agreement
obligating ORBCOMM Europe to enter into a country representative
agreement for Turkey with Satcom, if the current country
representative agreement for Turkey expires or is terminated for
any reason. We rely on these third parties to establish business
in their respective territories, including obtaining and
maintaining necessary regulatory and other approvals, as well as
managing local VARs. In addition, we believe that our
international licensees and country representatives, through
their local expertise, are able to operate in these territories
in a more efficient and cost-effective manner. We currently have
agreements covering over 160 countries and territories through
our seven international licensees and 12 country
representatives. As we seek to expand internationally, we expect
to continue to enter into agreements with additional
international licensees and country representatives,
particularly in Asia and Africa. International licensees and
country representatives are generally required to make the
system available in their designated regions to VARs and IVARs.
In territories with multiple countries, it is typical for our
international licensees to appoint country representatives.
Country representatives are
sub-licensees
within the territory. They perform tasks assigned by the
international licensee. In return, the international licensees
are responsible for, among other things, operating and
maintaining the necessary gateway earth stations within their
designated regions, obtaining the necessary regulatory approvals
to provide our services in their designated regions, and
marketing and distributing our services in such regions.
Country representatives are entities that obtain local
regulatory approvals and establish local marketing channels to
provide ORBCOMM services in their designated countries. As a
U.S. company, we are not legally
12
qualified to hold a license to operate as a telecommunications
provider in some countries and our country representative
program permits us to serve many international markets. In some
cases, a country representative enters into a joint venture with
us. In other cases, the country representative is an independent
entity that pays us fees based on the amount of airtime usage on
our system. Country representatives may distribute our services
directly or through a distribution network made up of local VARs.
Subject to certain limitations, our service license agreements
grant to the international licensee, among other things, the
exclusive right (subject to our right to appoint IVARs) to
market services using our satellite system in a designated
region and a limited right to use certain of our proprietary
technologies and intellectual property.
International licensees and country representatives who are
appointed by us pay fees for access to the system in their
region based on the number of subscriber communicators activated
on the network in their territory and the amount of data
transmitted through the system. We may adjust pricing in
accordance with the terms of the relevant agreements. We pay
international licensees and country representatives a commission
based on the revenue we receive from IVARs that is generated
from subscriber communicators that IVARs activate in their
territories.
We have entered into or are negotiating new service license or
country representative agreements with several international
licensees and country representatives, respectively, including
former licensees of the Predecessor Company and new groups
consisting of affiliates of former licensees of the Predecessor
Company. Until new service license agreements are in place, we
will operate in those regions where a licensee has not been
contracted either pursuant to letters of intent entered into
with such licensee or pursuant to the terms of the original
agreements with the Predecessor Company, as is currently the
case in Japan, South Korea and Morocco. There can be no
assurance we will be successful in negotiating new service
license or country representative agreements.
Subscriber
communicators
Our subsidiary, Stellar, markets and sells subscriber
communicators manufactured by Delphi directly to customers. We
also earn royalties from the manufacture of subscriber
communicators by third parties for the issuance of unique serial
numbers which enable such devices to connect to our M2M data
communications system. We currently have a Cooperation Agreement
with Stellar and Delphis parent, Delphi Corporation,
pursuant to which Delphi has agreed to provide manufacturing
support for Stellar subscriber communicators. We believe that
declining prices for our subscriber communicators have opened
further the market for ORBCOMM-based applications. We will seek
to increase the functionality, variety and reliability of our
subscriber communicators, while at the same time providing cost
savings to end-users.
Competition
Currently, we are the only commercial provider of below
1 GHz band, or little LEO, two-way data satellite services
optimized for narrowband. However, we are not the only provider
of data communication services, and we face competition from a
variety of existing and proposed products and services.
Competing service providers can be divided into three main
categories: terrestrial tower-based, low-Earth orbit mobile
satellite and geostationary satellite service providers.
Terrestrial
tower-based networks
While terrestrial tower-based networks are capable of providing
services at costs comparable to ours, they lack seamless global
coverage. Terrestrial coverage is dependent on the location of
tower transmitters, which are generally located in densely
populated areas or heavily traveled routes. Several data and
messaging markets, such as long-haul trucking, railroads, oil
and gas, agriculture, utility distribution and heavy
construction, have significant activity in sparsely populated
areas with limited or no terrestrial coverage. In addition,
there are many different terrestrial systems and protocols, so
service providers must coordinate with multiple carriers to
enable service in different coverage areas. In some geographic
areas, terrestrial tower-based networks have gaps in their
coverage and may require a
back-up
system to fill in such coverage gaps.
13
Low-Earth
orbit mobile satellite service providers
Low-Earth orbit mobile satellite service providers operating
above the 1 GHz band, or big LEO systems, can provide data
connectivity with global coverage that can compete with our
communications services; however, to date, the focus of big LEO
satellite service providers has been primarily on
circuit-switched communications tailored for voice traffic,
which, by its nature, is less efficient for the transfer of
short data messages because they require a dedicated circuit
that is time and bandwidth intensive when compared to the amount
of information transmitted. Additionally, a circuit-switched
network does not support multicast or broadcast messaging for
the transmission of the same data to multiple users. These
systems are still in the early stages with respect to the
development of data terminals and integration of applications
and they entail significantly higher costs for the satellite
fleet operator and the end-users. Our principal big LEO mobile
satellite service competitors are Globalstar, Inc. and Iridium
Holdings LLC.
Geostationary
satellite service providers
Geostationary satellite system operators can offer services that
compete with ours. Certain pan-regional or global systems
(operating in the L or S bands), such as Inmarsat plc, are
designed and licensed for mobile high-speed data and voice
services. However, the equipment cost and service fees for
narrowband, or small packet, data communications with these
systems is significantly more expensive than for our system.
Some companies, such as the OmniTracs subsidiary of QUALCOMM
Incorporated, which uses SESs satellites (operating in C
and Ku bands), have developed technologies to use their
bandwidth for mobile applications. We believe that the equipment
cost and service fees for narrowband data communications using
these systems are also significantly higher than ours, and that
these geostationary providers cannot offer global service with
competitive communications devices and costs. In addition, these
geostationary systems have other limitations that we are not
subject to. For example, they require a clear line of sight
between the communicator equipment and the satellite, are
affected by adverse weather or atmospheric conditions, and are
vulnerable to catastrophic single point failures of their
satellites with limited backup options.
Research
and Development
VARs incur the majority of research and development costs
associated with developing applications for end-users. Although
we provide assistance and development expertise to our VARs,
such as certifying applications for use with our communications
system, we do not engage in significant research and development
activities of our own. With respect to development of our
next-generation satellites, we do not incur direct research and
development costs; however, we contract with third parties who
undertake research and development activities in connection with
supplying us with satellite payloads, buses and launch vehicles.
We have invested and continue to invest in development of
advanced features for our subscriber communicator hardware. For
instance, Stellar paid approximately $0.4 million and
$0.5 million to Delphi in 2006 and 2005, respectively, in
connection with the development of next-generation subscriber
communicators that should provide increased functionality at a
lower cost.
Backlog
The backlog of subscriber communicators at our Stellar
subsidiary as of December 31, 2006 was 413,652 units,
or approximately $58.5 million, as compared with a backlog
of 55,085 units, or approximately $10.8 million as of
December 31, 2005. We believe that approximately
$9.6 million of the backlog as of December 31, 2006
will be filled during fiscal 2007. Although we believe that the
orders included in backlog are firm, certain orders may be
cancelled without penalty.
In addition, our pre-bill backlog, which represents
subscriber communicators activated at the customers
request for testing prior to putting the units into actual
service, was 23,986 units as of December 31, 2006, as
compared with a pre-bill backlog of 12,421 units as of
December 31, 2005. We believe that the majority of units
that comprise our pre-bill backlog will be billable within a
one-year period. We are not able to determine pre-bill backlog
in dollars because the service costs for each subscriber
communicator varies by customer.
14
Orbcomm
Communications System
Overview
Our data communications services are provided by our proprietary
two-way satellite system, which is designed to provide
near-real-time and
store-and-forward
communication to and from both fixed and mobile assets around
the world.
Our system has three operational segments:
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The space segment, which consists of a constellation of 30
operational satellites in multiple orbital planes between 435
and 550 miles above the Earth (four primary planes of six
to eight satellites each operating in the VHF band; and two
polar planes of one satellite each);
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The ground and control segment, which consists of fourteen
operational gateway earth stations that send signals to and
receive signals from the satellites, five gateway control
centers that process message traffic and forward it through the
gateway earth stations to the satellites or to appropriate
terrestrial communications networks for transmission to the
back-office application or end-user and the network control
center (including two of the five gateway control centers)
located in Dulles, Virginia, which monitors and manages the flow
of information through the system and provides the command,
control and telemetry functions to optimize satellite
availability; and
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The subscriber segment, which consists of the subscriber
communicators used by end-users to transmit and receive messages
to and from their assets and our satellites.
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For most applications using our system, data is generated by an
end-user application and transferred to a subscriber
communicator, which reformats the data and transmits it to the
next satellite that comes into view. The data is routed by the
satellite to the next gateway earth station it successfully
connects to, which in turn forwards it to the associated gateway
control center. Within the gateway control center, the data is
processed and forwarded to its ultimate destination after
acknowledgement to the subscriber communicator that the entire
data message content has been received. The destination may be
another subscriber communicator, a corporate resource management
system, any personal or business Internet
e-mail
address, a pager or a cellular phone. In addition, data can be
sent in the reverse direction (a feature which is utilized
by many applications to remotely control assets).
When a satellite is in view of and connected to a gateway earth
station at the time it receives data from a subscriber
communicator, a transmission is initiated to transfer the data
in what we refer to as near-real-time mode. In this
near-real-time mode, the data is passed immediately
from a subscriber communicator to a satellite and onto the
gateway earth station to the appropriate control center for
routing to its final destination. When a satellite is not
immediately in view of a gateway earth station, the satellite
switches to a
store-and-forward
mode to accept data in GlobalGram format. These
GlobalGrams are short messages (consisting of data of up to
approximately 200 bytes) and are stored in a satellite until it
can connect through a gateway earth station to the appropriate
control center. The automatic mode-switching capability between
near-real-time service and GlobalGram service allows the
satellite network to be available to subscriber communicators
worldwide regardless of their location.
End-user data can be delivered by the gateway control center in
a variety of formats. Communications options include private and
public communications links to the control center, such as
standard Internet, dedicated telephone company and VPN-based
transports. Data can also be received via standard
e-mail
protocols with full delivery acknowledgement as requested, or
via our Internet protocol gateway interface in HTML and XML
formats. Wherever possible, our system makes use of existing,
mature technologies and conforms to internationally accepted
standards for electronic mail and web technologies.
System
Status
Satellite
Health
The majority of our current satellite fleet was put into service
in the late 1990s and has an estimated operating life of
approximately nine to twelve years due to software updates.
Since 2002, we have implemented several operational changes and
software updates which we believe may extend the operational
lives of our current satellite
15
fleet by an average of 1.5 to 2.5 years. We believe that
our satellite performance remains stable and sufficient for the
use of our customers. Our satellite availability, or the
percentage of time that a satellite is available to pass
commercial traffic, was 96.2% for the year ended
December 31, 2006. Twenty-three of the thirty operational
satellites have aggregate average availability over 99.4%. With
the high probability of several satellites in view at any one
time, especially in the primary coverage area, and the constant
motion of the satellites, the time a satellite is unavailable is
relatively insignificant.
Due to our satellite constellation architecture, which consists
of numerous independent satellites, our space segment is
inherently redundant and service quality is not significantly
affected by individual satellite failures. Our system has
experienced minor degradation over time, equal to less than 0.5%
over the past four years (excluding four satellites that have
slightly lower commercial service capability). The last
mission-ending failure occurred in October 2000, prior to our
acquisition of the satellite constellation, when a satellite
experienced a processor malfunction. These failures are less
than anticipated failure rates and demonstrate the benefits of
distributed satellite system architecture like ours.
Gateway
Health
We believe that the functionality of the ground segment of our
system remains stable and sufficient for the use of our
customers. The gateway earth stations in the United States are
performing well. Several infrastructure upgrades have been
completed over the past few years including software upgrades
which improved power conditioning and remote monitoring.
In general, our international gateway control centers are
stable. Our gateway control centers located in Brazil, Korea and
Japan have all regularly exceeded 98% availability on a
month-to-month
basis. In addition, our international gateway earth stations are
performing well. Significant effort and resources have been
applied in Argentina, Brazil, Malaysia and Morocco in 2006 to
improve global availability and reliability to the ORBCOMM
system. While we intend to continue to proactively provide
preventative maintenance and training to the international
operators of gateway earth station and gateway control center
segments, we believe that our international ground segment
components remain sufficient to provide a consistent level of
availability and quality for the use of our customers.
Network
Capacity
In 2005, we conducted an analysis to investigate the utilization
of our communication channels. Various metrics were used in
evaluating the different elements of the communication protocol.
The efficiency of the satellites random access subscriber
receivers was measured as the ratio of successfully received
inbound communication packets to the number of attempts made by
subscriber communicators. In the beginning of 2006, the average
value of this ratio was approximately 30%, which is lower than
the expected ratio of between 60% and 80%. Throughout 2006, a
number of improvements were made to raise this performance ratio
to just over 60%. Several additional modifications are in
process, which we believe will improve the ratio further over
the next several months. Failed messaging transactions do not
result in lost messages, but do require subscriber communicators
to re-initiate message transmissions. For the user, this could
translate to longer delays, while for the system it could result
in more attempts to send messages to the satellites, which could
increase latency issues during periods of greater message
traffic.
Regulation
of the System in the United States
FCC
authorization
Any entity seeking to construct, launch, or operate a commercial
satellite system in the United States must first be licensed by
the FCC. ORBCOMM License Corp., a wholly owned subsidiary of
ours, holds the satellite constellation license originally
issued to the Predecessor Company in 1994 (which we refer to as
the Space Segment License). The Space Segment License authorizes
construction, launch and operation of a constellation of 36
initial and twelve additional little LEO satellites to:
(1) operate four United States gateway earth stations; and
(2) deploy and operate up to 1,000,000 subscriber
communicators in the United States.
16
As we launch our quick-launch and next-generation satellites, we
may seek to continue operating our existing first-generation
satellites to the extent they are still able to provide
functionality. This may require us to seek FCC authorization for
short-term experimental licenses or special temporary authority,
or (STA), to continue to operate these
first-generation satellites if we exceed our currently
authorized 48 satellite limit.
Our Coast Guard demonstration satellite, expected to be launched
during 2007, carries a standard ORBCOMM payload in addition to
the AIS receiver for the U.S. Coast Guard. Our current FCC
license permits the operation of replacement satellites that are
technically identical to those already licensed, but
because the Coast Guard demonstration satellite is planned to be
launched to a different orbit than our currently licensed
constellation, we will need to apply for a modification of our
satellite constellation license to operate the Coast Guard
demonstration satellite as part of our constellation. There can
be no assurance that the modification will be granted on a
timely basis or at all. In addition, as a result of the
ambiguity over what constitutes a technically
identical replacement satellite, in March 2006 we
submitted an application to the FCC for authorization to operate
the Coast Guard demonstration satellite under an experimental
license. In October 2006, we received a notice from the FCC that
this application was being dismissed without prejudice for
purely administrative reasons and requesting that we resubmit
our application as a modification application to incorporate the
Coast Guard demonstration satellite into our satellite
constellation license, which we intend to file by the end of
March 2007. In the event that we believe we will not be able to
obtain FCC approval of the modification prior to the launch of
the Coast Guard demonstration satellite, we will apply to the
FCC for an STA to operate the Coast Guard demonstration
satellite both with respect to the AIS receiver and download of
AIS data and as part of the satellite constellation for our
communications system. The STA would be valid for six months and
may be renewed, if necessary, until such time as our
modification application is granted.
License
renewal
The initial term of the Space Segment License ends on
April 10, 2010. We timely filed the renewal application for
the Space Segment License on March 2, 2007, in accordance
with the FCCs little LEO space segment license renewal
rules. The current FCC licenses for the United States gateway
earth stations and subscriber communicators expire on
May 17, 2020 and June 12, 2020, respectively. Although
the FCC has indicated that it is positively disposed towards
granting license renewals to a little LEO licensee that complies
with little LEO licensing policies, there can be no assurance
that our Space Segment License renewal will be granted.
FCC
license conditions
We believe that our system is currently in full compliance with
all applicable FCC rules, policies, and license conditions.
Although we did not construct and launch the additional twelve
satellites authorized in the second processing round by the
FCC-imposed March 2004 deadline, we timely filed for a
three-year extension of the deadline. The FCC has not yet acted
on that extension request, and there can be no assurance the FCC
will grant the extension, in which case we would need to
re-apply for authority to expand our satellite constellation
above the originally-authorized 36 satellites. Alternatively,
the FCC could establish new construction and launch milestones
as part of the modification for the quick-launch and next
generation satellites. We believe that we will continue to be
able to comply with all applicable FCC requirements, although we
cannot assure you that it will be the case. Our next-generation
satellites will have additional capabilities, and the
transmission characteristics will differ from our current
satellites. These new satellites may also operate on additional
frequency ranges beyond those authorized in our current license.
The use of additional frequencies
and/or
transmission differences of the new satellites would render them
not technically identical to our current satellites.
As a result, a license modification will be required for our
next-generation satellites and our quick-launch satellites. In
the past, we have applied for, and have been granted, several
license modifications and do not have any reason to believe that
the FCC will deny such a modification application in the future.
There is no assurance, however, that the FCC will grant any
future modification applications on a timely basis or at all.
Access in the United States to certain portions of the uplink
and downlink spectrum assigned to our system was made subject to
possible future spectrum sharing arrangements with as many as
four other little LEO systems that the FCC conditionally
authorized in March 1998. There are currently no other little
LEO licensees authorized in our spectrum. While other entities
could seek to be licensed in the little LEO service by the FCC,
to our knowledge no
17
new applications have been submitted to date. If any one or more
new entities are licensed and do in fact proceed with system
deployment in accordance with the previously established FCC
requirements, we believe that there would be no material adverse
effect on our system operations, although we cannot assure you
it will be the case.
Non-common
carrier status
All of our systems FCC licenses authorize service
provision on a non-common carrier basis. As a
result, the system and the services provided thereby have been
subject to limited FCC regulations, but not the obligations,
restrictions and reporting requirements applicable to common
carriers or to providers of Commercial Mobile Radio Services, or
CMRS. There can be no assurance, however, that in the future, we
will not be deemed by the FCC to provide services that are
designated common carrier or CMRS, or that the FCC will not
exercise its discretionary authority to apply its common carrier
or CMRS rules and regulations to us or our system. If this were
to occur, we would be subject to FCC obligations that include
record retention requirements, limitations on use or disclosure
of customer proprietary network information and
truth-in-billing
regulations. In addition, we would need to obtain FCC approval
for foreign ownership in excess of 25 percent and authority
under Section 214 of the Communications Act of 1934, as
amended, to provide international services. Finally, we would be
subject to additional reporting obligations with regard to
international traffic and circuits, and Equal Employment
Opportunity compliance.
United
States import and export control regulations
We are subject to U.S. import and export control laws and
regulations, specifically the Arms Export Control Act, the
International Traffic in Arms Regulations, the Export
Administration Regulations and the trade sanctions laws and
regulations administered by the U.S. Department of the
Treasurys Office of Foreign Assets Control. We believe
that we have obtained all the specific authorizations currently
needed to operate our business and believe that the terms of the
relevant licenses are sufficient given the scope and duration of
the activities to which they pertain.
Regulation
of our System in Other Countries
Communications
services
We, the relevant international licensee
and/or the
relevant international licensees country representative in
each country outside the United States must obtain the requisite
local regulatory authorization before the commencement of
service in that country. The process for obtaining the
applicable regulatory authorization varies from country to
country, and in some instances may require technical studies or
actual experimental field tests under the direction
and/or
supervision of the local regulatory authority. Failure to obtain
or maintain any requisite authorizations in any given country or
territory could mean that services may not be provided in that
country or territory.
Certain countries continue to require that some or all
telecommunications services be provided by a government-owned or
controlled entity. Therefore, under such circumstances, we may
be required to offer our services through a government-owned or
controlled entity.
To date the provision of services has been authorized by
regulators in jurisdictions where regulatory authority is
required in over 75 countries and territories in North America,
Europe, South America, Asia, Africa, Mexico and Australia. As
part of our international initiative, we are in the process of
seeking or assessing the prospect of obtaining regulatory
authority in other countries and territories, including China,
India and Russia. Because our satellites are licensed by the
FCC, the scope of the local regulatory authority in any given
country or territory outside of the United States (with the
exception of countries where gateway earth stations are located)
is generally limited to the operation of subscriber communicator
equipment, but may also involve additional restrictions or
conditions. Based on available information, we believe that the
regulatory authorizations obtained by us, our international
licensees
and/or their
country representatives are sufficient for the provision of
commercial services in the subject countries and territories,
subject to continuing regulatory compliance. We also believe
that additional local service provision authorizations may be
obtained in other countries and territories in the near future.
18
Non-U.S. gateway
earth stations
To date, in addition to those in the United States, gateway
earth stations have been authorized and deployed in Argentina,
Australia, Brazil, Curaçao, Italy, Japan, Kazakhstan,
Malaysia, Morocco and South Korea. Gateway earth stations are
generally licensed on an individual facility basis. This process
normally entails radio frequency coordination within the country
of operation for the specific frequencies to be used in the
designated geographic location of the subject gateway earth
station. This domestic frequency coordination is in addition to
any international coordination that may be required, as
determined by the proximity of the gateway earth station
location to foreign borders (see International
Regulation of Our System). Based on the best available
information, we believe that each of the above-listed gateway
earth stations authorizations is sufficient for the provision of
our commercial services in the areas served by the relevant
facilities. We will need additional gateway earth station
authorizations in other countries as we install additional
gateway earth stations around the world.
Equipment
standards
Each manufacturer of the applicable subscriber communicator is
contractually responsible to obtain and maintain the
governmental authorizations necessary to operate their
subscriber communicators in each jurisdiction. Most countries
generally require all radio transmission equipment used within
their borders to comply with operating standards that may
include specifications relating to required minimum acceptable
levels for radiated power, power density and spurious emissions
into adjacent frequency bands not allocated for the intended
use. Technical criteria established by telecommunications
equipment standards issued by the FCC
and/or the
European Telecommunications Standards Institute, or ETSI, are
generally accepted,
and/or
closely duplicated by domestic equipment approval regulations in
most countries. All current models of subscriber communicators
comply with established FCC standards and many comply with ETSI
standards.
International
Regulation of our System
Our use of certain orbital planes and related system radio
frequency assignments, as licensed by the FCC, is subject to the
frequency coordination and registration process of the ITU. In
order to protect satellite systems from harmful radio frequency
interference from other satellite communications systems, the
ITU maintains a Master International Frequency Register, or
MIFR, of radio frequency assignments and their associated
orbital locations. Each ITU member state (referred to as an
administration) is required by treaty to give notice of,
coordinate and register its proposed use of radio frequency
assignments and associated orbital locations with the ITUs
Radio communication Bureau.
The FCC serves as the notifying administration for the United
States and is responsible for filing and coordinating our
allocated radio frequency assignments and associated orbital
locations for the system with both the ITUs Radio
communication Bureau and the national administrations of other
countries in each satellites service region. While the
FCC, as our notifying administration, is responsible for
coordinating the system, in practice the satellite licensee is
generally responsible for identifying any potential interference
concerns with existing systems or those enjoying date priority
and to coordinate with such systems. If we are unable to reach
agreement and finalize coordination, the FCC would then assist
with such coordination.
When the coordination process is completed, the ITU formally
enters each satellite systems orbital and frequency use
characteristics in the MIFR. Such registration notifies all
proposed users of frequencies that the registered satellite
system is protected from interference from subsequent or
non-conforming uses by other nations. In the event disputes
arise during coordination, the ITUs radio regulations do
not contain mandatory dispute resolution or enforcement
mechanisms and dispute resolution procedures are based on the
willingness of the parties concerned to reach a mutually
acceptable agreement voluntarily. Neither the ITU specifically,
nor international law generally, provides clear remedies if this
voluntary process fails.
The FCC has notified the ITU that our system was initially
placed in service in April 1995 and that it has operated without
any substantiated complaints of interference since that time.
The FCC has also informed the ITU that our system has
successfully completed its coordination with all countries other
than Russia. We expect that we will successfully complete the
ITU coordination process with Russia in the near future, at
which time the complete system will be formally registered in
the MIFR.
19
If design modifications to future system satellites entail
substantial changes to the frequency utilization by the subject
system component(s), additional international coordination may
be required or reasonably deemed advisable. However, we believe
that ITU coordination can be successfully completed in all
circumstances where such coordination is required, although we
cannot assure you that we will successfully complete such ITU
coordination. Failure to complete requisite ITU coordination
could have a material adverse effect on our business.
Regardless, to date, and to our best knowledge, the system has
not caused harmful interference to any other radio system, or
suffered harmful interference from any other radio system.
Intellectual
Property
We use and hold intellectual property rights for a number of
trademarks, service marks and logos for our system. We have one
main mark ORBCOMM which is
registered in over 125 countries. In addition, we currently own
or have applied for four patents relating to various aspects of
our system, and at any time we may file additional patent
applications in the appropriate countries for various aspects of
our system.
We believe that all intellectual property rights used in our
system were independently developed or duly licensed by us, by
those we license the rights from or by the technology companies
who supplied portions of our system. We cannot assure you,
however, that third parties will not bring suit against us for
patent or other infringement of intellectual property rights.
Our patents cover various aspects of the protocol employed by
our subscriber communicators. In addition, certain intellectual
property rights to the software used by the Stellar subscriber
communicators is cross-licensed between Stellar and Delphi.
Employees
As of December 31, 2006, we had 99 full-time
employees, 26 of whom are at our Fort Lee, New Jersey
headquarters and 73 of whom are at our Dulles, Virginia network
control center and offices. Our employees are not covered by any
collective bargaining agreements and we have not experienced a
work stoppage since our inception. We believe that our
relationship with our employees is good.
Corporate
Information
Our principal executive offices are located at 2115 Linwood
Avenue, Fort Lee, New Jersey 07024, and our telephone
number is
(201) 363-4900.
Our website is www.orbcomm.com and information contained
on our website is not included as a part of, or incorporated by
reference into, this Annual Report on
Form 10-K.
Our annual, quarterly, and other reports, and amendments to
those reports can be obtained through the Investor Relations
section of our website or from the Securities and Exchange
Commission at www.sec.gov.
Executive
Officers of the Registrant:
Certain information regarding our executive officers is provided
below:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
|
Jerome B. Eisenberg
|
|
|
67
|
|
|
Chairman of the Board, Chief
Executive Officer and President
|
Robert G. Costantini
|
|
|
47
|
|
|
Executive Vice President and Chief
Financial Officer
|
Marc Eisenberg
|
|
|
40
|
|
|
Chief Operating Officer
|
Emmett Hume
|
|
|
53
|
|
|
Executive Vice President,
International
|
John J. Stolte, Jr.
|
|
|
47
|
|
|
Executive Vice
President Technology and Operations
|
Jerome B. Eisenberg has been our Chairman of the Board
since January 2006, and our Chief Executive Officer and
President since December 2004. Mr. Eisenberg has been a
member of our board of directors since February 2004 and the
board of directors of ORBCOMM LLC and ORBCOMM Holdings LLC since
2001.
20
Between 2001 and December 2004, Mr. Eisenberg held a number
of positions with ORBCOMM Inc. and with ORBCOMM LLC, including,
most recently, Co-Chief Executive Officer of ORBCOMM Inc.
Mr. Eisenberg has worked in the satellite industry since
1993 when he helped found Satcom. From 1987 to 1992, he was
President and CEO of British American Properties, an investment
company funded by European and American investors that acquired
and managed various real estate and industrial facilities in
various parts of the U.S. Prior thereto, Mr. Eisenberg
was a partner in the law firm of Eisenberg, Honig &
Folger; CEO and President of Helenwood Manufacturing Corporation
(presently known as Tennier Industries), a manufacturer of
equipment for the U.S. Department of Defense with 500
employees; and Assistant Corporate Counsel for the City of New
York. Mr. Eisenberg is the father of Marc Eisenberg.
Robert G. Costantini is our Executive Vice President and
Chief Financial Officer, a position he has held since
October 2, 2006. From October 2003 until September 2006, he
served as Chief Financial Officer, Senior Vice President and
Corporate Secretary of First Aviation Services Inc., an aviation
services company providing aircraft parts and maintenance
services. From 1999 to 2003, Mr. Costantini was the Chief
Financial Officer of FocusVision Worldwide, Inc., a technology
company providing video transmission services. From 1986 to
1989, he was Corporate Controller and from 1989 to 1999 he was
Vice-President Finance of M.T. Maritime Management
Corp., a global maritime transportation company.
Mr. Costantini started his career with Peat Marwick,
Mitchell & Co. Mr. Costantini is a Certified
Public Accountant, Certified Management Accountant, and a member
of the bar of New York and Connecticut.
Marc Eisenberg is our Chief Operating Officer, a position
he has held since February 27, 2007. From June 2006 to
February 2007, he was our Chief Marketing Officer. From March
2002 to June 2006, he was our Executive Vice President, Sales
and Marketing. He was a member of the board of directors of
ORBCOMM Holdings LLC from May 2002 until February 2004. Prior to
joining ORBCOMM, from 1999 to 2001, Mr. Eisenberg was a
Senior Vice President of Cablevision Electronics Investments,
where among his duties he was responsible for selling
Cablevision services such as video and internet subscriptions
through its retail channel. From 1984 to 1999, he held various
positions, most recently as the Senior Vice President of Sales
and Operations with the consumer electronics company The Wiz,
where he oversaw sales and operations and was responsible for
over 2,000 employees and $1 billion a year in sales.
Mr. Eisenberg is the son of Jerome B. Eisenberg.
Emmett Hume is our Executive Vice President,
International, a position he has held since August 2004.
Immediately prior to that, Mr. Hume was a member of our
board of directors from February 2004 to July 2004. From
November 2001 to June 2004, he was Senior Vice President, Global
Service Development at SES (formerly named SES Global
S.A.), a Luxembourg-based satellite services company. From
December 1997 until November 2001, he was Senior Vice President
Marketing and Business Development at General Electrics
Americom satellite business unit, which was acquired by SES in
2001, where he was responsible for regulatory affairs and
spectrum coordination. Mr. Hume has over 15 years of
experience with terrestrial and satellite wireless data service
providers, and has served on the board of a number of industry
ventures.
John J. Stolte, Jr. is our Executive Vice President,
Technology and Operations, a position he has held since April
2001. From January to April 2001, he held a similar position
with ORBCOMM Global L.P. Mr. Stolte has over 20 years
of technology management experience in the aerospace and
telecommunications industries. Prior to joining ORBCOMM Global
L.P., Mr. Stolte held a number of positions at Orbital
Sciences Corporation from September 1990 to January 2001, most
recently as Program Director, where he was responsible for
design, manufacturing and launch of the ORBCOMM satellite
constellation. From 1982 to 1990, Mr. Stolte worked for
McDonnell Douglas in a number of positions including at the
Naval Research Laboratory where he led the successful
integration, test and launch of a multi-billion dollar defense
satellite.
21
Set forth below and elsewhere in this Annual Report on
Form 10-K
are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the
forward-looking statements contained in this Annual Report on
Form 10-K.
Any of these risks could also materially and adversely affect
our business, financial condition or the price of our common
stock. Because of the following factors, as well as other
variables affecting our operating results, past financial
performance should not be considered as a reliable indicator of
future performance and investors should not use historical
trends to anticipate results or trends in future periods.
Risks
Relating to Our Business
We are
incurring substantial operating losses and net losses. We
anticipate additional future losses. We must significantly
increase our revenues to become profitable.
We have had annual net losses since our inception, including a
net loss of $11.2 million for fiscal year 2006 and at
December 31, 2006, we had an accumulated deficit of
$59.8 million. Our future results will continue to reflect
significant operating expenses, including expenses associated
with expanding our sales and marketing efforts, maintaining the
infrastructure to operate as a public company and product
development for our subscriber communicator products for use
with our system. As a result, we anticipate additional operating
losses and net losses in the future. The continued development
of our business also will require additional capital
expenditures for, among other things, the development,
construction and launch of additional satellites, including more
capable next-generation satellites, the development of more
advanced subscriber communicators for use with our system and
the installation of additional gateway earth stations and
gateway control centers around the world. Accordingly, as we
make these capital investments, our future results will include
greater depreciation and amortization expense which reflect the
full cost of acquiring these new assets.
In order to become profitable, we must achieve substantial
revenue growth. Revenue growth will depend on acceptance of our
products and services by end-users in current markets, as well
as in new geographic and industry markets. Although we have
implemented a number of expense reduction initiatives to reduce
our operating expenses, expense reductions alone, without
revenue growth, will not enable us to achieve profitability. We
may not become profitable and we may not be able to sustain such
profitability, if achieved.
We may
need additional capital, which may not be available to us when
we need it on favorable terms, or at all.
If our future cash flows from operations are less than expected
or if our capital expenditures exceed our spending plans, our
existing sources of liquidity, including cash and cash
equivalents on hand, the expected proceeds from the liquidation
of our marketable securities and cash generated from sales of
our products and services may not be sufficient to fund our
anticipated operations, capital expenditures (including the
deployment of additional satellites), working capital and other
financing requirements. If we continue to incur operating losses
in the future, we may need to reduce further our operating costs
or obtain alternate sources of financing, or both, to remain
viable and, in particular, to fund the design, production and
launch of additional satellites, including a next-generation of
more capable satellites. We may choose to raise additional
capital through the sale of additional equity securities, which
may result in dilution to our stockholders.
We
incur significant costs as a result of operating as a public
company, and our management devotes substantial time to new
compliance initiatives.
We incur significant legal, accounting and other expenses as a
public company, including costs resulting from regulations
regarding corporate governance practices. For example, the
listing requirements of The Nasdaq Global Market require that we
satisfy certain corporate governance requirements relating to
independent directors, audit committees, distribution of annual
and interim reports, stockholder meetings, stockholder
approvals, solicitation of proxies, conflicts of interest,
stockholder voting rights and codes of conduct. Our management
and other personnel devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations
have increased our legal and financial compliance costs and will
make some activities more time-consuming and costly.
22
For example, these rules and regulations could make it more
difficult for us to attract and retain qualified persons to
serve on our board of directors, our board committees or as
executive officers.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal control over
financial reporting and disclosure controls and procedures. In
particular, for the year ending December 31, 2008, we must
perform system and process evaluation and testing of our
internal control over financial reporting to allow management
and our independent registered public accounting firm to report
on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act. Our testing, or the subsequent testing by our independent
registered public accounting firm, may reveal deficiencies in
our internal control over financial reporting that are deemed to
be material weaknesses. Our compliance with Section 404
will require that we incur substantial expense and expend
significant management time on compliance-related issues.
If
end-users do not accept our services and the applications
developed by VARs or we cannot obtain the necessary regulatory
approvals or licenses for particular countries or territories,
we will fail to attract new customers and our business will be
harmed.
Our success depends on end-users accepting our services, the
applications developed by VARs, and a number of other factors,
including the technical capabilities of our system, the
availability of low cost subscriber communicators, the receipt
and maintenance of regulatory and other approvals in the United
States and other countries and territories in which we operate,
the price of our services and the extent and availability of
competitive or alternative services. We may not succeed in
increasing revenue from the sale of our products and services to
new and existing customers. Our failure to significantly
increase the number of end-users will harm our business.
Our business plan assumes that potential customers and end-users
will accept certain limitations inherent in our system. For
example, our system is optimized for small packet, or
narrowband, data transmissions, is subject to certain delays in
the relay of messages, referred to as latencies, and may be
subject to certain
line-of-sight
limitations between our satellites and the end-users
subscriber communicator. In addition, our system is not capable
of handling voice traffic. Certain potential end-users,
particularly those requiring full time, real-time communications
and those requiring the transmission of large amounts of data
(greater than eight kilobytes per message) or voice traffic, may
find such limitations unacceptable.
In addition to the limitations imposed by the architecture of
our system, our failure to obtain the necessary regulatory and
other approvals or licenses in a given country or territory will
preclude the availability of our services in such country or
territory until such time, if at all, that such approvals or
licenses can be obtained. Certain potential end-users requiring
messaging services in those countries and territories may find
such limitations unacceptable.
We
face competition from existing and potential competitors in the
telecommunications industry, including numerous terrestrial and
satellite-based network systems with greater resources, which
could reduce our market share and revenues.
Competition in the telecommunications industry is intense,
fueled by rapid, continuous technological advances and alliances
between industry participants seeking to capture significant
market share. We face competition from numerous existing and
potential alternative telecommunications products and services
provided by various large and small companies, including
sophisticated two-way satellite-based data and voice
communication services and next-generation digital cellular
services, such as GSM and 3G. In addition, a continuing trend
toward consolidation and strategic alliances in the
telecommunications industry could give rise to significant new
competitors, and any foreign competitor may benefit from
subsidies from, or other protective measures by, its home
country. Some of these competitors may provide more efficient or
less expensive services than we are able to provide, which could
reduce our market share and adversely affect our revenues and
business.
Many of our existing and potential competitors have
substantially greater financial, technical, marketing and
distribution resources than we do. Additionally, many of these
companies have greater name recognition and more established
relationships with our target customers. Furthermore, these
competitors may be able to adopt more aggressive pricing
policies and offer customers more attractive terms than we can.
23
We
have a limited operating history, which makes it difficult to
evaluate your investment in us.
We have conducted commercial operations only since April 2001,
when we acquired substantially all of our current communications
system from ORBCOMM Global L.P. and its subsidiaries. Our
prospects and ability to implement our current business plan,
including our ability to provide commercial two-way data
communications service in key markets on a global basis and to
generate revenues and positive operating cash flows, will depend
on our ability to, among other things:
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successfully construct, launch, place in commercial service,
operate and maintain our quick-launch and next-generation
satellites in a timely and cost-effective manner;
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develop licensing and distribution arrangements in key markets
within and outside the United States sufficient to capture and
retain an adequate customer base;
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install the necessary ground infrastructure and obtain and
maintain the necessary regulatory and other approvals in key
markets outside the United States through our existing or future
international licensees to expand our business internationally;
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provide for the timely design, manufacture and distribution of
subscriber communicators in sufficient quantities, with
appropriate functional characteristics and at competitive
prices, for various applications; and
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Given our limited operating history, there can be no assurance
that we will be able to achieve these objectives or develop a
sufficiently large revenue-generating customer base to achieve
profitability. In particular, because we acquired a fully
operational satellite constellation and communications system
from ORBCOMM Global L.P. and its subsidiaries, our current
management team has limited experience with managing the design,
construction and launch of a satellite system.
We
rely on third parties to market and distribute our services to
end-users. If these parties are unwilling or unable to provide
applications and services to end-users, our business will be
harmed.
We rely on VARs to market and distribute our services to
end-users in the United States and on international licensees,
country representatives, VARs and IVARs, outside the United
States. The willingness of companies to become international
licensees, country representatives, VARs and IVARs (which we
refer to as resellers) will depend on a number of factors,
including whether they perceive our services to be compatible
with their existing businesses, whether they believe we will
successfully deploy next-generation satellites, whether the
prices they can charge end-users will provide an adequate
return, and regulatory restrictions, if any. We believe that
successful marketing of our services will depend on the design,
development and commercial availability of applications that
support the specific needs of the targeted end-users. The
design, development and implementation of applications require
the commitment of substantial financial and technological
resources on the part of these resellers. Certain resellers are,
and many potential resellers will be, newly formed or small
ventures with limited financial resources, and such entities
might not be successful in their efforts to design applications
or effectively market our services. The inability of these
resellers to provide applications to end-users could have a
harmful effect on our business, financial condition and results
of operations. We also believe that our success depends upon the
pricing of applications by our resellers to end-users, over
which we have no control.
Defects
or errors in applications could result in end-users not being
able to use our services, which would damage our reputation and
harm our financial condition.
VARs, IVARs, international licensees and country representatives
must develop applications quickly to keep pace with rapidly
changing markets. These applications have long development
cycles and are likely to contain undetected errors or defects,
especially when first introduced or when subsequent versions are
introduced, which could result in the disruption of our services
to the end-users. While we sometimes assist our resellers in
developing applications, we have limited ability to accelerate
development cycles to avoid errors and defects in their
applications. Such disruption could damage our reputation as
well as the reputation of the respective resellers, and result
in lost customers, lost revenue, diverted development resources,
and increased service and warranty costs.
24
Because
we depend on a significant customer for a substantial portion of
our revenues, the loss of this customer could seriously harm our
business.
GE Equipment Services, a significant customer, represented 49.5%
and 31.4% of our revenues in 2006 and 2005, respectively,
primarily from sales to GE Asset Intelligence LLC, or AI, a
subsidiary of GE Equipment Services, of subscriber communicators
by our Stellar subsidiary. We expect GE Equipment Services to
continue to represent a substantial part of our revenues in the
near future. As a result, the loss of this customer, which could
occur at any time, could have a material adverse effect on our
business, financial condition and results of operations.
If our
international licensees and country representatives are not
successful in establishing their businesses outside of the
United States, the prospects for our business will be
limited.
Outside of the United States, we rely largely on international
licensees and country representatives to establish businesses in
their respective territories, including obtaining and
maintaining necessary regulatory and other approvals as well as
managing local VARs. International licensees and country
representatives may not be successful in obtaining and
maintaining the necessary regulatory and other approvals to
provide our services in their assigned territories and, even if
those approvals are obtained, international licensees
and/or
country representatives may not be successful in developing a
market
and/or
distribution network within their territories. Certain of the
international licensees
and/or
country representatives are, or are likely to be, newly formed
or small ventures with limited or no operational history and
limited financial resources, and any such entities may not be
successful in their efforts to secure adequate financing and to
continue operating. In addition, in certain countries and
territories outside the United States, we rely on international
licensees and country representatives to operate and maintain
various components of our system, such as gateway earth
stations. These international licensees and country
representatives may not be successful in operating and
maintaining such components of our communications system and may
not have the same financial incentives as we do to maintain
those components in good repair.
Some
of our international licensees and country representatives are
experiencing significant operational and financial difficulties
and have in the past defaulted on their obligations to
us.
Many of our international licensees and country representatives
were also international licensees and country representatives of
the Predecessor Company and, as a consequence of the bankruptcy
of ORBCOMM Global L.P., they were left in many cases with
significant financial problems, including significant debt and
insufficient working capital. Certain of our international
licensees and country representatives (including in Japan,
Korea, Malaysia, parts of South America and to a lesser extent,
Europe) have not been able to successfully or adequately
reorganize or recapitalize themselves and as a result have
continued to experience significant material difficulties,
including the failure to pay us for our services. To date,
several of our licensees and country representatives have had
difficulty in paying their usage fees and have not paid us or
have paid us at reduced rates, and in cases where collectibility
is not reasonably assured, we have not reflected invoices issued
to such licensees and country representatives in our revenues or
accounts receivable. The ability of these international
licensees and country representatives to pay their obligations
to us may be dependent, in many cases, upon their ability to
successfully restructure their business and operations or raise
additional capital. In addition, we have from time to time had
disagreements with certain of our international licensees
related to these operational and financial difficulties. To the
extent these international licensees and country representatives
are unable to reorganize
and/or raise
additional capital to execute their business plans on favorable
terms (or are delayed in doing so), our ability to offer
services internationally and recognize revenue will be impaired
and our business, financial condition and results of operations
may be adversely affected.
We
rely on a limited number of manufacturers for our subscriber
communicators. If we are unable to, or cannot find third parties
to, manufacture a sufficient quantity of subscriber
communicators at a reasonable price, the prospects for our
business will be negatively impacted.
The development and availability on a timely basis of relatively
inexpensive subscriber communicators are critical to the
successful commercial operation of our system. Our Stellar
subsidiary, relies on a contract manufacturer, Delphi Automotive
Systems LLC, or Delphi, a subsidiary of Delphi Corporation, to
produce subscriber communicators. Our customers may not be able
to obtain a sufficient supply of subscriber communicators at
price points or with functional characteristics and reliability
that meet their needs. An inability to successfully develop and
manufacture subscriber communicators that meet the needs of
customers and are available
25
in sufficient numbers and at prices that render our services
cost-effective to customers could limit the acceptance of our
system and potentially affect the quality of our services, which
could have a material adverse effect on our business, financial
condition and results of operations.
Delphi Corporation filed for bankruptcy protection in October
2005. Our business may be materially and adversely affected if
Stellars agreement with Delphi Corporation is terminated
or modified as part of Delphi Corporations reorganization
in bankruptcy or otherwise. If our agreements with third party
manufacturers are, or Stellars agreement with Delphi
Corporation is, terminated or expire, our search for additional
or alternate manufacturers could result in significant delays,
added expense and an inability to maintain or expand our
customer base. Any of these events could require us to take
unforeseen actions or devote additional resources to provide our
services and could harm our ability to compete effectively.
There are currently three manufacturers of subscriber
communicators, including Quake Global, Inc., Mobile Applitech,
Inc. and our Stellar subsidiary. As part of our arbitration
proceeding instituted against Quake Global, Inc. discussed in
Part I, Item 3, Legal Proceeding
Quake Global, Inc., we are seeking a declaration that we
have the right to terminate our manufacturing agreement with
Quake. In January 2007, we terminated our manufacturing
agreement with Quake as a result of Quakes failure to pay
past-due royalty fees. In March 2007, in anticipation of
the parties negotiating a more permanent business arrangement,
we entered into an interim agreement with Quake for a term of
two months for Quake to continue supplying subscriber
communicators to our customers. An inability to reach a mutually
acceptable long-term arrangement with Quake for it to continue
to supply subscriber communicators to our customers such as
Caterpillar, Inc., Komatsu Ltd., Hitachi Construction Co., Ltd.
and Volvo Group, whether as a subcontractor, through a new
manufacturing agreement, or similar alternative arrangement,
could result in significant delays in these customers activating
subscriber communicators on our communications system, added
expense for these customers and our inability to maintain or
expand our customer base.
We
depend on recruiting and retaining qualified personnel and our
inability to do so would seriously harm our
business.
Because of the technical nature of our services and the market
in which we compete, our success depends on the continued
services of our current executive officers and certain of our
engineering personnel, and our ability to attract and retain
qualified personnel. The loss of the services of one or more of
our key employees or our inability to attract, retain and
motivate qualified personnel could have a material adverse
effect on our ability to operate our business and our financial
condition and results of operations. We do not have key-man life
insurance policies covering any of our executive officers or key
technical personnel. Competitors and others have in the past,
and may in the future, attempt to recruit our employees. The
available pool of individuals with relevant experience in the
satellite industry is limited, and the process of identifying
and recruiting personnel with the skills necessary to operate
our system can be lengthy and expensive. In addition, new
employees generally require substantial training, which requires
significant resources and management attention. Even if we
invest significant resources to recruit, train and retain
qualified personnel, we may not be successful in our efforts.
Our
management team is subject to a variety of demands for its
attention and rapid growth and litigation could further strain
our management and other resources and have a material adverse
effect on our business, financial condition and results of
operations.
We currently face a variety of challenges, including maintaining
the infrastructure and systems necessary for us to operate as a
public company, addressing our pending litigation matters and
managing the recent rapid expansion of our business. Our recent
growth and expansion has increased our number of employees and
the responsibilities of our management team. Any litigation,
regardless of the merit or resolution, could be costly and
divert the efforts and attention of our management. As we
continue to expand, we may further strain our management and
other resources. Our failure to meet these challenges as a
result of insufficient management or other resources could have
a material adverse effect on our business, financial condition
and results of operations.
26
We may
be subject to litigation proceedings that could adversely affect
our business.
We may be subject to legal claims or regulatory matters
involving stockholder, consumer, antitrust and other issues. As
discussed in Part I, Item 3. Legal
Proceedings, we are currently engaged in a number of
litigation matters. Litigation is subject to inherent
uncertainties, and unfavorable rulings could occur. An
unfavorable ruling could include money damages or, in cases for
which injunctive relief is sought, an injunction prohibiting us
from manufacturing or selling one or more products. If an
unfavorable ruling were to occur, it could have a material
adverse effect on our business and results of operations for the
period in which the ruling occurred or future periods.
Our
business is characterized by rapid technological change and we
may not be able to compete with new and emerging
technologies.
We operate in the telecommunications industry, which is
characterized by extensive research and development efforts and
rapid technological change. New and advanced technology which
can perform essentially the same functions as our service
(though without global coverage), such as next-generation
digital cellular networks (GSM and 3G), direct broadcast
satellites, and other forms of wireless transmission, are in
various stages of development by others in the industry. These
technologies are being developed, supported and rolled out by
entities that may have significantly greater resources than we
do. These technologies could adversely impact the demand for our
services. Research and development by others may lead to
technologies that render some or all of our services
non-competitive or obsolete in the future.
Because
we operate in a highly regulated industry, we may be subjected
to increased regulatory restrictions which could disrupt our
service or increase our operating costs.
System operators and service providers are subject to extensive
regulation under the laws of various countries and the rules and
policies they adopt. These rules and policies, among other
things, establish technical parameters for the operation of
facilities and subscriber communicators, determine the
permissible uses of facilities and subscriber communicators, and
establish the terms and conditions pursuant to which our
international licensees and country representatives operate
their facilities, including certain of the gateway earth
stations and gateway control centers in our system. These rules
and policies may also require our international licensees and
country representatives to cut-off the data passing through the
gateway earth stations or gateway control centers without
notifying us or our end-users, significantly disrupting the
operation of our communications system. These rules and policies
may also regulate the use of subscriber communicators within
certain countries or territories. International and domestic
licensing and certification requirements may cause a delay in
the marketing of our services and products, may impose costly
procedures on our international licensees and country
representatives, and may give a competitive advantage to larger
companies that compete with our international licensees and
country representatives. Possible future changes to regulations
and policies in the countries in which we operate may result in
additional regulatory requirements or restrictions on the
services and equipment we provide, which may have a material
adverse effect on our business and operations. Although we
believe that we or our international licensees and country
representatives have obtained all the licenses required to
conduct our business as it is operated today, we may not be able
to obtain, modify or maintain such licenses in the future.
Moreover, changes in international or domestic licensing and
certification requirements may result in disruptions of our
communications services or alternatively result in added
operational costs, which could harm our business. Our use of
certain orbital planes and VHF assignments, as licensed by the
FCC, is subject to the frequency coordination and registration
process of the ITU. In the event disputes arise during
coordination, the ITUs radio regulations do not contain
mandatory dispute resolution or enforcement mechanisms and
neither the ITU specifically, nor does international law
generally, provide clear remedies in this situation.
Our
business would be negatively impacted if the FCC revokes or
fails to renew or amend our licenses.
Our FCC licenses a license for the satellite
constellation, separate licenses for the four U.S. gateway
earth stations and a blanket license for the subscriber
communicators are subject to revocation if we fail
to satisfy certain conditions or to meet certain prescribed
milestones. While the FCC satellite constellation license is
valid until April 10, 2010), we are required, slightly more
than three years prior to the expiration of the FCC satellite
constellation license (i.e., by March 12, 2007, to
apply for a license renewal with the FCC. The renewal
application was filed with the FCC on March 2, 2007. The
U.S. gateway earth station and subscriber communicator
licenses will
27
expire in 2020. Renewal applications for the gateway earth
station and subscriber communicator licenses must be filed
between 30 and 90 days prior to expiration. There can be no
assurance that the FCC will in fact renew our FCC licenses. If
the FCC revokes or fails to renew our FCC licenses, or if we
fail to satisfy any of the conditions of our FCC licenses, such
action could have a material adverse impact on our business. In
addition, because our new satellites are not likely to be
considered technically identical replacement
satellites, we will be required to apply to the FCC for a
modification of our satellite constellation license for the
Coast Guard demonstration satellite, the quick-launch satellites
and the next-generation satellites. In addition, because the FCC
may not act on our application prior to the scheduled launch of
the Coast Guard demonstration satellite, we may also have to
seek STA to operate that satellite until the FCC acts on the
underlying modification application. There can be no assurance
that any such modification(s) will be granted on a timely basis,
or at all. Finally, our business could be adversely affected by
the adoption of new laws, policies or regulations, or changes in
the interpretation or application of existing laws, policies and
regulations that modify the present regulatory environment.
Our
business would be harmed if our international licensees and
country representatives fail to acquire and retain all necessary
regulatory approvals.
Our business is affected by the regulatory authorities of the
countries in which we operate. Due to foreign ownership
restrictions in various jurisdictions around the world,
obtaining local regulatory approval for operation of our system
is the responsibility of our international licensees
and/or
country representatives in each of these licensed territories.
In addition, in certain countries regulatory frameworks may be
rudimentary or in an early stage of development, which can make
it difficult or impossible to license and operate our system in
such jurisdictions. There can be no assurance that our
international licensees
and/or
country representatives will be successful in obtaining any
additional approvals that may be desirable and, if they are not
successful, we will be unable to provide service in such
countries. Our inability to offer service in one or more
important new markets, particularly in China or India, would
have a negative impact on our ability to generate more revenue
and would diminish our business prospects.
There
are numerous risks inherent to our international operations that
are beyond our control.
International telecommunications services are subject to country
and region risks. Most of our coverage area and some of our
subsidiaries are outside the Unites States. As a result, we are
subject to certain risks on a
country-by-country
(or
region-by-region)
basis, including changes in domestic and foreign government
regulations and telecommunications standards, licensing
requirements, tariffs or taxes and other trade barriers,
exchange controls, expropriation, and political and economic
instability, including fluctuations in the value of foreign
currencies which may make payment in U.S. dollars more
expensive for foreign customers or payment in foreign currencies
less valuable for us. Certain of these risks may be greater in
developing countries or regions, where economic, political or
diplomatic conditions may be significantly more volatile than
those commonly experienced in the United States and other
industrialized countries.
We do
not currently maintain in-orbit insurance for our
satellites.
We do not currently maintain in-orbit insurance coverage for our
satellites to address the risk of potential systemic anomalies,
failures or catastrophic events affecting the existing satellite
constellation. We may obtain launch insurance for future
launches of our U.S. Coast Guard demonstration,
quick-launch and next-generation satellites. However, any
determination as to whether we procure insurance, including
in-orbit and launch insurance, will depend on a number of
factors, including the availability of insurance in the market
and the cost of available insurance. We may not be able to
obtain insurance at reasonable costs. Even if we obtain
insurance, it may not be sufficient to compensate us for the
losses we may suffer due to applicable deductions and
exclusions. If we experience significant uninsured losses, such
events could have a material adverse impact on our business,
financial condition and results of operations.
28
Risks
Related to our Technology
We do
not currently have
back-up
facilities for our network control center. In the event of a
general failure at our network control center, our system will
be disrupted and our operations will be harmed.
The core control segment of our system is housed at our network
control center in Dulles, Virginia. We currently do not have
back-up
facilities for certain essential command and control functions
that are performed by our network control center, and as a
result, our system and business operations remain vulnerable to
the possibility of a failure at our network control center.
There would be a severe disruption to the functionality of our
system in the event of a failure at our network control center.
Although we plan to install a
back-up
network control center within the next year, there can be no
assurance that we will be able to complete the installation on a
timely basis or that such a
back-up
network would eliminate disruption to our system in the event of
a failure.
New
satellites are subject to launch failures, the occurrence of
which can materially and adversely affect our
operations.
Satellites are subject to certain risks related to failed
launches. Launch failures result in significant delays in the
deployment of satellites because of the need both to construct
replacement satellites, and to obtain other launch
opportunities. We intend to conduct satellite launches in the
future both to replace existing satellites and to augment the
existing constellation in order to expand the messaging capacity
of our network and improve the service level of our network. Our
intended launch of six quick-launch satellites in a single
mission to supplement and ultimately replace our existing Plane
A satellites is important to maintain adequate service levels
and to provide additional capacity for future subscriber growth.
A failure or delay of our quick-launch mission could materially
adversely affect our business, financial condition and results
of operations until a replacement launch can be conducted, which
would be at least nine to twelve months later. Any launch
failures of our next-generation satellites would result in
delays of at least six to nine months until additional
satellites under construction are completed and their launches
are achieved. Such delays would have a negative impact on our
future growth and would materially and adversely affect our
business, financial condition and results of operations.
Our
satellites have a limited operating life. If we are unable to
deploy replacement satellites, our services will be
harmed.
The majority of our first-generation satellites was placed into
orbit beginning in 1997. The last of our first-generation
satellites was launched in late 1999. Our first-generation
satellites have an average operating life of approximately nine
to twelve years. We plan to launch six quick-launch satellites
by the end of 2007 to supplement and ultimately replace our
existing Plane A satellites and to finance further development
and an initial launch of our next-generation satellites in 2009.
In addition to supplementing and replacing our first-generation
satellites, these next-generation satellites would also expand
the capacity of our communications system to meet forecasted
demand as we grow our business. We anticipate using cash and
cash equivalents on hand, the liquidation of our marketable
securities and funds generated from operations to pay for costs
relating to future satellites.
We are
dependent on a limited number of suppliers to provide the
payload, bus and launch vehicle for our quick-launch and
next-generation satellites and any delay or disruption in the
supply of these components and related services will adversely
affect our ability to replenish our satellite constellation and
adversely impact our business, financial condition and results
of operations.
We recently entered into agreements with Orbital Sciences
Corporation to supply us with the payloads of our six
quick-launch satellites, and with OHB-System AG to supply the
buses and related integration and launch services for these
quick-launch satellites with options for two additional buses
and related integration services. In addition, we will need to
enter into arrangements with outside suppliers to provide us
with the three different components for our next-generation
satellites: the payload, bus and launch vehicle. Our reliance on
these suppliers for their services involves significant risks
and uncertainties, including whether our suppliers will provide
an adequate supply of required components of sufficient quality,
will charge the agreed upon prices for the components or will
perform their obligations on a timely basis. If any of our
suppliers becomes financially unstable, we may have to find a
new supplier. There are a limited number of suppliers for
communication satellite components and
29
related services and the lead-time required to qualify a new
supplier may take several months. There is no assurance that a
new supplier will be found on a timely basis, or at all, if any
one of our suppliers ceases to supply their services for our
satellites.
If we do not find a replacement supplier on a timely basis, we
may experience significant delays in the launch schedule of our
quick-launch and next-generation satellites and incur additional
costs to establish an alternative supplier. Any delay in our
launch schedule could adversely affect our ability to provide
communications services, particularly as the health of our
current satellite constellation declines and we could lose
current or prospective customers as a result of service
interruptions. The loss of any of our satellite suppliers or
delay in our launch schedule could have a material adverse
effect on our business, financial condition and results of
operations.
Once
launched and properly deployed, our satellites are subject to
significant operating risks due to various types of potential
anomalies.
Satellites utilize highly complex technology and operate in the
harsh environment of space and, accordingly, are subject to
significant operational risks while in orbit. These risks
include malfunctions, or anomalies, that may occur
in our satellites. Some of the principal satellite anomalies
include:
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Mechanical failures due to manufacturing error or defect,
including:
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Mechanical failures that degrade the functionality of a
satellite, such as the failure of solar array panel deployment
mechanisms;
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Antenna failures that degrade the communications capability of
the satellite;
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Circuit failures that reduce the power output of the solar array
panels on the satellites;
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Failure of the battery cells that power the payload and
spacecraft operations during daily solar eclipse
periods; and
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Communications system failures that affect overall system
capacity.
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Equipment degradation during the satellites lifetime,
including:
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Degradation of the batteries ability to accept a full
charge;
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Degradation of solar array panels due to radiation; and
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General degradation resulting from operating in the harsh space
environment.
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Deficiencies of control or communications software, including:
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Failure of the charging algorithm that may damage the
satellites batteries;
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Problems with the communications and messaging servicing
functions of the satellite; and
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Limitations on the satellites digital signal processing
capability that limit satellite communications capacity.
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We have experienced, and may in the future experience, anomalies
in some of the categories described above. The effects of these
anomalies include, but are not limited to, degraded
communications performance, reduced power available to the
satellite in sunlight
and/or
eclipse, battery overcharging or undercharging and limitations
on satellite communications capacity. Some of these effects may
be increased during periods of greater message traffic and could
result in our system requiring more than one attempt to send
messages before they get through to our satellites. Although
these effects do not result in lost messages, they could lead to
increased messaging latencies for the end-user and reduced
throughput for our system. While we have already implemented a
number of system adjustments and have commenced enhancement
projects to mitigate these effects and address these latency
issues, and have plans to launch additional satellites which we
expect will improve system performance and throughput, and
increase overall system capacity, we cannot assure you that
these actions will succeed or adequately address the effects of
any anomalies in a timely manner or at all.
30
A total of 35 satellites were launched by ORBCOMM Global L.P.
and of these, a total of 30 remain operational. The five
satellites that are not operational experienced failures early
in their lifetime, and the last mission-ending satellite failure
affecting our system occurred in October 2000, prior to our
acquisition of the satellite constellation. The absence of these
five satellites slightly increases system latency and slightly
decreases overall capacity, although these system performance
decreases have not materially affected our business, as our
business model already reflects the fact that we acquired only
30 operational satellites in 2001. While certain software
deficiencies may be corrected remotely, most, if not all, of the
satellite anomalies cannot be corrected once the satellites are
placed in orbit. We may experience anomalies in the future,
whether of the types described above or arising from the failure
of other systems or components, and operational redundancy may
not be available upon the occurrence of such an anomaly.
Technical
or other difficulties with our gateway earth stations could harm
our business.
Our system relies in part on the functionality of our gateway
earth stations, some of which are owned and maintained by third
parties. While we believe that the overall health of our gateway
earth stations remains stable, we may experience technical
difficulties or parts obsolescence with our gateway earth
stations which may negatively impact service in the region
covered by that gateway earth station. Certain problems with
these gateway earth stations can reduce their availability and
negatively impact the performance of our system in that region.
For example, the owner of the Malaysian gateway earth station
has been unable to raise sufficient capital to properly maintain
this gateway earth station. We are also experiencing commercial
disputes with the entities that own the gateway earth stations
in Japan and Korea. In addition, due to regulatory and licensing
constraints in certain countries in which we operate, we are
unable to wholly-own or majority-own some of the gateway earth
stations in our system located outside the United States. As a
result of these ownership restrictions, we rely on third parties
to own and operate some of these gateway earth stations. If our
relationship with these third parties deteriorates or if these
third parties are unable or unwilling to bear the cost of
operating or maintaining the gateway earth stations, or if there
are changes in the applicable domestic regulations that require
us to give up any or all of our ownership interests in any of
the gateway earth stations, our control over our system could be
diminished and our business could be harmed.
Our
system could fail to perform or perform at reduced levels of
service because of technological malfunctions or deficiencies or
events outside of our control which would seriously harm our
business and reputation.
Our system is exposed to the risks inherent in a large-scale,
complex telecommunications system employing advanced technology.
Any disruption to our services, information systems or
communication networks or those of third parties into which our
network connects could result in the inability of our customers
to receive our services for an indeterminate period of time.
Satellite anomalies and other technical and operational
deficiencies of our communications system described in this
Annual Report on
Form 10-K
could result in system failures or reduced levels of service. In
addition, certain components of our system are located in
foreign countries, and as a result, are potentially subject to
governmental, regulatory or other actions in such countries
which could force us to limit the operations of, or completely
shut down, components of our system, including gateway earth
stations or subscriber communicators. Any disruption to our
services or extended periods of reduced levels of service could
cause us to lose customers or revenue, result in delays or
cancellations of future implementations of our products and
services, result in failure to attract customers or result in
litigation, customer service or repair work that would involve
substantial costs and distract management from operating our
business. The failure of any of the diverse and dispersed
elements of our system, including our satellites, our network
control center, our gateway earth stations, our gateway control
centers or our subscriber communicators, to function and
coordinate as required could render our system unable to perform
at the quality and capacity levels required for success. Any
system failures or extended reduced levels of service could
reduce our sales, increase costs or result in liability claims
and seriously harm our business.
31
Risks
Related to an Investment in our Common Stock
The
trading price of our common stock maybe adversely affected
market volatility
The trading price of our common stock has been and may continue
to be volatile and purchasers of our common stock could incur
substantial losses. Further, our common stock has a limited
trading history. Factors that could affect the trading price of
our common stock include:
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liquidity of the market in, and demand for, our common stock;
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changes in expectations as to our future financial performance
or changes in financial estimates, if any, of market analysts;
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actual or anticipated fluctuations in our results of operations,
including quarterly results;
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our financial performance failing to meet the expectations of
market analysts or investors;
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our ability to raise additional funds to meet our capital needs;
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the outcome of any litigation by or against us, including any
judgments favorable or adverse to us;
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conditions and trends in the end markets we serve and changes in
the estimation of the size and growth rate of these markets;
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announcements relating to our business or the business of our
competitors;
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investor perception of our prospects, our industry and the
markets in which we operate;
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changes in our pricing policies or the pricing policies of our
competitors;
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loss of one or more of our significant customers;
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changes in governmental regulation;
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changes in market valuation or earnings of our
competitors; and
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general economic conditions.
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In addition, the stock market in general, and The Nasdaq Global
Market and the market for telecommunications companies in
particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate
to the operating performance of particular companies affected.
These broad market and industry factors may materially harm the
market price of our common stock, regardless of our operating
performance.
In the past, following periods of volatility in the market price
of a companys securities, securities
class-action
litigation has often been instituted against that company. Such
litigation, if instituted against us, could result in
substantial costs and a diversion of managements attention
and resources, which could materially harm our business,
financial condition, future results and cash flow.
If
securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock will continue to depend
in part on the research and reports that securities or industry
analysts publish about us or our business, including securities
analysts employed by our underwriters who are currently
prohibited under rules of the NASD from publishing research
about us or our business for a limited period of time. If we do
not continue to maintain adequate research coverage or if one or
more of the analysts who covers us downgrades our stock or
publishes inaccurate or unfavorable research about our business,
our stock price would likely decline. If one or more of these
analysts ceases coverage of our company or fails to publish
reports on us regularly, demand for our stock could decrease,
which could cause our stock price and trading volume to decline.
32
A
significant portion of our outstanding common stock will soon be
released from restrictions on resales and may be sold in the
market in the near future. Future sales of shares by existing
stockholders could cause our stock price to
decline.
As of December 31, 2006, we had 36,923,715 shares of
common stock outstanding. The 9,230,800 shares sold in our
initial public offering are freely tradable without restriction
or further registration under federal securities laws unless
purchased by our affiliates. Approximately 75% shares of
common stock held by our directors and executive officers and
certain of our stockholders (and any shares purchased or
acquired by them, whether pursuant to options or warrants to
purchase common stock, restricted stock units or stock
appreciation rights or otherwise, after our initial public
offering) are subject to
lock-up
agreements with UBS Securities LLC and will be available for
sale in the public market beginning 180 days after
November 2, 2006, subject to extension under certain
circumstances, assuming they have satisfied the one-year holding
period under Rule 144 of the Securities Act of 1933, as
amended, and will be subject to certain volume limitations under
Rule 144. UBS Securities LLC and we may jointly waive the
lock-up
provisions. All other outstanding shares of common stock not
sold in our initial public offering are subject to the
lock-up
agreements may be sold under Rule 144, subject to certain
volume limitations, assuming they have satisfied the one-year
holding period.
We are
subject to anti-takeover provisions which could affect the price
of our common stock.
Our amended and restated certificate of incorporation and our
bylaws contain provisions that could make it difficult for a
third party to acquire us without the consent of our board of
directors. These provisions do not permit actions by our
stockholders by written consent and require the approval of the
holders of at least
662/3%
of our outstanding common stock entitled to vote to amend
certain provisions of our amended and restated certificate of
incorporation and bylaws. In addition, these provisions include
procedural requirements relating to stockholder meetings and
stockholder proposals that could make stockholder actions more
difficult. Our board of directors is classified into three
classes of directors serving staggered, three-year terms and may
be removed only for cause. Any vacancy on the board of directors
may be filled only by the vote of the majority of directors then
in office. Our board of directors have the right to issue
preferred stock with rights senior to those of the common stock
without stockholder approval, which could be used to dilute the
stock ownership of a potential hostile acquirer, effectively
preventing acquisitions that have not been approved by our board
of directors. Delaware law also imposes some restrictions on
mergers and other business combinations between us and any
holder of 15% or more for our outstanding common stock. Although
we believe these provisions provide for an opportunity to
receive a higher bid by requiring potential acquirers to
negotiate with our board of directors, these provisions apply
even if the offer may be considered beneficial by some
stockholders and may delay or prevent an acquisition of our
company.
Item 1B. Unresolved
Staff Comments
None
We currently sublease approximately 7,000 square feet of
office space in Fort Lee, New Jersey and lease
approximately 25,000 square feet of office space in Dulles,
Virginia. In addition, we currently own and operate six gateway
earth stations at the following locations, four situated on
owned real property and two on real property subject to
long-term leases:
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Gateway
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Real Property Owned or Leased
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Lease Expiration
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St. Johns, Arizona
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Owned
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n/a
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Arcade, New York
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Owned
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n/a
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Curaçao, Netherlands Antilles
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Owned
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n/a
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Rutherglen Vic, Australia
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Owned
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n/a
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Ocilla, Georgia
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Leased
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March 12, 2013
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East Wenatchee, Washington
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Leased
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May 4, 2008
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33
We currently own or lease real property sufficient for our
business operations, although we may need to own or lease
additional real property in the future.
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Item 3.
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Legal
Proceedings
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Quake
Global, Inc.
On February 24, 2005, Quake Global, Inc. filed a four-count
action for damages and injunctive relief against ORBCOMM LLC,
our wholly owned subsidiary, Stellar, and Delphi Corporation, in
the U.S. District Court for the Central District of
California, Western Division (the Complaint). The
Complaint alleges antitrust violations, breach of contract,
tortuous interference and improper exclusive dealing
arrangements. Quake claims damages in excess of $15 million
and seeks treble damages, costs and reasonable attorneys
fees, unspecified compensatory damages, punitive damages,
injunctive relief and that we be required to divest ourselves of
the assets we had acquired from Stellar and reconstitute a new
and effective competitor. On April 21, 2005, we filed a
motion to dismiss or to compel arbitration and dismiss or stay
the proceedings, which the District Court denied. On
July 19, 2005, we and Stellar took an interlocutory appeal
as of right to the Court of Appeals for the Ninth Circuit from
the denial of our motion to dismiss. The appeal has been fully
briefed and the parties are awaiting oral argument to be
scheduled by the Ninth Circuit.
On December 6, 2005, we filed our answer and counterclaims
to Quakes Complaint. The parties are currently engaged in
discovery; the discovery cut-off date is June 8, 2007. A
pre-trial conference is scheduled for November 19, 2007, at
which time a trial date will be set.
On December 21, 2006, we served a Notice of Default on
Quake for its failure to pay past-due royalty fees. Under our
Subscriber Communicator Manufacturing Agreement, Quake had
30 days to cure that default, but failed to do so. In
addition, we demanded in this Notice of Default that Quake post
security as required by the Subscriber Communicator
Manufacturing Agreement, which Quake also failed to do.
Accordingly, on January 30, 2007, we terminated our
Subscriber Communicator Manufacturing Agreement with Quake. On
February 12, 2007, Quake sought leave to file and serve a
proposed supplemental complaint in the U.S. District Court
for the Central District of California, alleging that the recent
termination was a monopolizing and tortious act by the
Company. On March 9, 2007, we filed an opposition to
Quakes motion to file a supplemental complaint, asserting
that any dispute over the legality of the January 30 termination
is subject to arbitration. Quakes supplemental complaint
is scheduled to be heard on April 9, 2007. In March 2007,
we entered into an interim agreement with Quake for a term of
two months for Quake to continue to supply Subscriber
Communicators to our customers.
Separately, we served notices of default upon Quake in July and
September 2005 and in June, August and December, 2006 under our
Subscriber Communicator Manufacturing Agreement. On
September 23, 2005, we commenced an arbitration with the
American Arbitration Association seeking (1) a declaration
that we have the right to terminate our Subscriber Communicator
Manufacturing Agreement with Quake; (2) an injunction
against Quakes improperly using the fruits of
contractually-prohibited non-segregated modem design and
development efforts in products intended for use with the
systems of our competitors; and (3) damages. Quake has
filed an answer with counterclaims to our claims in the
arbitration. As part of Quakes counter claims, it claims
damages of at least $50 million and seeks attorney fees and
expenses incurred in connection with the arbitration. On
August 28, 2006, we amended our statement of claims in the
arbitration to add the claims identified in the June and August
2006 notices of default. On December 15, 2006 we amended
our statement of claims in the arbitration to add the claims
identified in the December 14, 2006 notice of default. On
February 7, 2007, we sought leave to amend our statement of
claims in the arbitration seeking a declaration that the
Companys exercise of its contractual termination right
under the Subscriber Communicator Manufacturing Agreement was
lawful and proper in all respects, including but not limited to
under the terms of the Subscriber Communicator Manufacturing
Agreement and the laws of the United States. On
February 23, 2007, Quake filed its reply papers opposing
such amended statement of claims. On March 10, 2007, the
arbitration panel determined to allow us to amend our statement
of claims in the arbitration seeking a declaration that our
exercise of our contractual termination right under the
Subscriber Communicator Manufacturing Agreement was proper as a
contractual matter but declined jurisdiction as to antitrust
issues related to such termination. The arbitration hearing is
currently rescheduled for July 2007.
34
Separately, in connection with a pending legal action between
Quake and Mobile Applitech, Inc, or MobiApps, relating to a RF
application specific integrated circuit, or ASIC, developed
pursuant to a Joint Development Agreement between Quake and
MobiApps, Quake sent us a letter dated July 19, 2006
notifying us that we should not permit or facilitate MobiApps to
market or sell subscriber communicators for use on our
communications system or allow MobiApps subscriber
communicators to be activated on our communications system and
that failure to cease and desist from the foregoing actions may
subject us to legal liability and allow Quake to seek equitable
and monetary relief. On August 4, 2006, our ORBCOMM LLC
subsidiary filed a motion to intervene in the pending action
between Quake and MobiApps in the U.S. District Court for
the District of Maryland (Greenbelt Division) seeking a
declaration as to (1) whether MobiApps has the right to use
the ASIC product in subscriber communicators it manufactures for
use on our communications system, and (2) whether we can
permit or facilitate MobiApps to market or sell subscriber
communicators using the ASIC product for our communications
system
and/or allow
such subscriber communicators to be activated on our
communications system. On August 7, 2006, the Maryland
District Court transferred that action to the U.S. District
Court for the Southern District of California. On
October 20, 2006, ORBCOMM moved to intervene in the
Southern District of California action and filed a
Complaint-In-Intervention
therein, seeking the relief it had requested in the Maryland
District Court. ORBCOMMs Motion to Intervene was granted
on January 4, 2007. Under the terms of our agreement with
MobiApps, we will be indemnified for our expenses incurred in
connection with this action related to the alleged violations of
Quakes proprietary rights. On February 15, 2007,
Quake filed its answer to the
Complaint-In-Intervention
and counterclaims against intervenor ORBCOMM, alleging that
ORBCOMM interfered with Quakes contractual relations and
conspired with MobiApps to misappropriate Quakes
proprietary information. ORBCOMM LLC has sent notice to
Quakes counsel that ORBCOMM LLC believes the assertion of
these counterclaims violates Rule 11 of the Federal Rules
of Civil Procedure.
ORBCOMM
Asia Limited
On September 30, 2005, ORBCOMM Asia Limited, or OAL,
delivered to us, ORBCOMM Holdings LLC, ORBCOMM LLC, Jerome
Eisenberg, our Chairman of the Board, Chief Executive Officer
and President, and Don Franco, a former officer of ours, a
written notice of its intention to arbitrate certain claims of
breach of contract and constructive fraud related to the
Memorandum of Understanding dated May 8, 2001 and seeking
an award of $3.2 million in actual and compensatory damages
and $5 million in punitive damages and an award of damages
for lost profits in an amount to be established. We believe OAL
is approximately 90% owned by Gene Hyung-Jin Song, who is also a
stockholder of ours. On October 13, 2005, we, ORBCOMM
Holdings LLC, ORBCOMM LLC, Jerome Eisenberg and Don Franco
received notification from the International Centre for Dispute
Resolution, a division of the American Arbitration Association,
that it had received the demand for arbitration from OAL. On
October 19, 2005, ORBCOMM Inc., ORBCOMM Holdings LLC,
ORBCOMM LLC, Jerome Eisenberg and Don Franco filed a petition,
by order to show cause, in New York Supreme Court seeking a stay
of the arbitration as to all parties other than OAL and ORBCOMM
LLC on the ground that those parties were not signatories to the
Memorandum of Understanding which contains the arbitration
provision upon which the arbitration was based and which
provides for final and binding arbitration. By order dated
January 31, 2006, the Supreme Court of the State of New
York permanently stayed the arbitration as to all parties other
than ORBCOMM LLC and OAL. The arbitration hearing on the claims
between OAL and ORBCOMM LLC was held on June 8, 2006.
On June 30, 2006, the arbitration panel entered an award
denying OALs claims in their entirety and awarding ORBCOMM
LLC attorneys fees and costs of approximately $250,000. On
August 9, 2006, OAL made partial payment of the award in
the amount of $120,000 and on December 4, 2006, OAL paid
the remaining balance.
We are subject to various other claims and assessments in the
normal course of our business. While it is not possible at this
time to predict the outcome of the litigation discussed above
with certainty and while some lawsuits, claims or proceedings
may be disposed of unfavorably to us, based on its evaluation of
matters which are pending or asserted our management believes
the disposition of such matters will not have a material adverse
effect on our business, financial condition or results of
operations. An unfavorable ruling could include money damages or
injunctive relief. There is the possibility of a material
adverse impact on the results of operations of the period in
which the matter is ultimately resolved, if it is resolved
unfavorably, or in the period in which an unfavorable outcome
becomes probable and reasonably estimable.
35
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Item 4.
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Submission
of Matters to Vote of Security Holders
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a) |
In October 2006, in connection with our initial public offering,
stockholders acted by written consent in lieu of a special
meeting of the stockholders to approve the following matters:
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1)
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A 2-for-3
reverse stock split applicable to all issued and outstanding
shares of our common stock as well as the conversion ratios of
our Series A and Series B preferred stock.
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2)
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The adoption upon completion of our initial public offering of
the Amended and Restated Certificate of Incorporation, which
among other things, (i) increases the number of authorized
shares of our common stock to 250,000,000, (ii) authorizes
up to 50,000,000 shares of preferred stock, with such
rights and preferences as may be designated by our Board of
Directors without further action by our stockholders,
(iii) provides for a classified board of directors,
(iv) eliminates the ability of stockholders to take action
by written consent or call special meetings of stockholders and
(v) provides for a supermajority requirement for
stockholders to amend specified provisions of our certificate of
incorporation and bylaws.
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b) |
In October 2006, in connection with our initial public offering,
our Series B preferred stockholders acted by written
consent in lieu of a special meeting of the stockholders to
approve the automatic conversion of the Series B preferred
stock into shares of common stock, upon the closing of our
initial public offering at an initial public offering price per
share of not less than $11.00.
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PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Price of
our Common Stock
Our common stock has traded on The Nasdaq Global Market under
the symbol ORBC since our initial public offering on
November 3, 2006. Prior to that time, there was no public
market for our common stock.
The following sets forth the high and low closing bid price of
our common stock, as reported on The Nasdaq Global Market:
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High
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Low
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2006:
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Fourth Quarter (beginning on
November 3, 2006)
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$
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11.10
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$
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7.03
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As of March 19, 2007 there were 121 holders of record
of our common stock.
Initial
Public Offering and Use of Proceeds from Sales of Registered
Securities
On November 8, 2006, we closed our initial public offering
of 9,230,800 shares of common stock at a price of
$11.00 per share. The offer and sale of all of the shares
in the offering were registered under the Securities Act of
1933, as amended, pursuant to a registration statement on
Form S-1,
as amended (Registration
No. 333-134088),
which was declared effective by the SEC on November 2,
2006. The managing underwriters of this offering were UBS
Securities LLC, Morgan Stanley & Co. Incorporated, Banc
of America Securities LLC and Cowen and Company, LLC. There were
no selling stockholders in the offering.
As a result of the initial public offering, we received net
proceeds of approximately $89.5 million after deducting
underwriters discounts and commissions of
$7.1 million and offering costs of $4.3 million. From
the net proceeds we paid accumulated and unpaid dividends to the
holders of Series B preferred stock totaling
$7.5 million, a $3.6 million contingent purchase price
payment relating to the acquisition of our interest in Satcom
International Group plc. (the Satcom Transaction)
and $10.1 million to the holders of Series B preferred
stock in connection with obtaining consents required to convert
the Series B preferred stock into common stock. Of the
$3.6 million payment relating to the Satcom Transaction, we
paid $1.5 million to Mr. Jerome Eisenberg, our
Chairman and Chief Executive Officer, who owned approximately
11.1% of our common stock immediately prior to our initial
public
36
offering and $2.1 million to the Estate of Don Franco,
which owned approximately 23.2% of our common stock immediately
prior to our initial public offering. Of the $10.1 million
payment to the holders of Series B preferred stock, we paid
$4.4 million to PCG Satellite Investments LLC, which owned
approximately 19.0% of our Series B preferred stock
immediately prior to our initial public offering and we paid
$1.6 million to Ridgewood Satellite LLC, which owned
approximately 15.6% of our Series B preferred stock
immediately prior to our initial public offering. In addition,
upon completion of the initial public offering, all outstanding
shares of Series A and B preferred stock automatically
converted into an aggregate of 21,383,318 shares of common
stock. We intend to use the remaining net proceeds from our
initial public offering to provide working capital and fund
capital expenditures, primarily related to the deployment of
additional satellites, which will be comprised of our
quick-launch and next-generation satellites. As of
December 31, 2006, we had not used any of the net proceeds
for such purposes. Pending such uses, we are investing the net
proceeds in short-term interest bearing cash equivalents and
floating rate redeemable municipal debt securities.
Sales of
Unregistered Securities
During the year ended December 31, 2006, we issued an
aggregate of 619,580 shares of common stock upon the
exercise of warrants to purchase common stock at a per share
exercise prices ranging from $2.33 to $4.26. We received
aggregate gross proceeds of $1,547,327 from the exercise of
these warrants.
Dividend
Payments
Common stock: We have never declared or paid
cash dividends on shares of our common stock.
Series A preferred stock: Pursuant to the
terms of our Series A preferred stock, upon the issuance of
the Series B preferred stock in December 2005, we paid all
accumulated and unpaid dividends totaling $8.0 million to
the holders of the Series A preferred stock in January 2006.
Series B preferred stock: Pursuant to the
terms of our Series B preferred stock, accumulated and
unpaid dividends on the Series B preferred stock become
payable in cash upon the conversion of the Series B
preferred stock into common stock upon completion of an initial
public offering at a price of not less then $12.78 per
share. On October 12, 2006, we obtained written consents of
holders who collectively held in excess of two-thirds of the
Series B preferred stock, to the automatic conversion of
the Series B preferred stock into shares of common stock,
upon the closing of an initial public offering at a price per
share of not less than $11.00. In consideration for the holders
of the Series B preferred stock providing their consents,
we agreed to make a contingent payment to all of the holders of
the Series B preferred stock if the price per share of the
initial public offering was between $11.00 and $12.49 per
share, determined as follows: (i) 12,014,227 (the number of
shares of our common stock into which all of the shares of the
Series B preferred stock convert at the current conversion
price) multiplied by (ii) the difference between
(a) $6.045 and (b) the quotient of (I) the
initial public offering price divided by (II) 2.114. On
November 8, 2006, we closed our initial public offering at
a price of $11.00 per share and paid accumulated and unpaid
dividends totaling $7.5 million to the holders of the
Series B preferred stock and $10.1 million to the
holders of Series B preferred stock in connection with
obtaining consents required for the conversion of the
Series B preferred stock into our common stock.
We did not make any dividend payments in 2005 on our
Series A and Series B preferred stock.
Dividend
Policy
Our board of directors currently intends to retain all available
funds and future earnings to support operations and to finance
the growth and development of our business and does not intend
to pay cash dividends on our common stock for the foreseeable
future. Our board of directors may, from time to time, examine
our dividend policy and may, in its absolute discretion, change
such policy.
Securities
Authorized for Issuance under Equity Compensation
Plans
Reference is made to Equity Compensation Plan, in
our 2007 Proxy Statement which information is hereby
incorporated by reference.
37
Stock
Performance Graph
The graph set forth below compares the cumulative total
shareholder return on our common stock between November 3,
2006 (the date of our initial public offering) and
February 28, 2007, with the cumulative total result of
(i) the Russell 2000 Index and (ii) the NASDAQ
Telecommunications Index, over the same period. This graph
assumes the investment of $100 on November 3, 2006 in our
common stock, the Russell 2000 Index and the NASDAQ
Telecommunications Index, and assumes the reinvestment of
dividends, if any. The graph assumes the initial value of our
common stock on November 3, 2006 was the closing sales
price of $7.75 per share.
The comparisons shown in the graph below are based on historical
data. We caution that the stock price performance show in the
graph below is not necessarily indicative of, nor is it intended
to forecast, the potential future performance of our common
stock. Information used in the graph was obtained from Research
Data Group, a source believed to be reliable, but we are not
responsible for any errors or omissions in such information.
COMPARISON
OF 4 MONTH CUMULATIVE TOTAL RETURN
Among ORBCOMM Inc., The Russell 2000 Index
And The NASDAQ Telecommunications Index
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11/3/06
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12/29/06
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2/28/07
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ORBCOMM
Inc.
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$
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100.00
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$
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113.81
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$
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166.19
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Russell 2000
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100.00
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102.97
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|
|
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103.87
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NASDAQ
Telecommunications
|
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100.00
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108.78
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108.32
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38
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Item 6.
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data should be
read together with the information under Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the related notes which are included elsewhere in this Annual
Report on
Form 10-K.
We have derived the consolidated statement of operations data
for the years ended December 31, 2006, 2005 and 2004 and
the consolidated balance sheet data as of December 31, 2006
and 2005 from our audited consolidated financial statements,
which are included elsewhere in this Annual Report on
Form 10-K.
We have derived the consolidated statement of operations data
for the years ended December 31, 2003 and 2002 and the
consolidated balance sheet data as of December 31, 2004,
2003 and 2002 from our audited consolidated financial
statements, which are not included in this Annual Report on
Form 10-K.
Our historical results are not necessarily indicative of future
results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Consolidated Statement of Operations Data:
|
|
2006(1)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Service revenues
|
|
$
|
11,561
|
|
|
$
|
7,804
|
|
|
$
|
6,479
|
|
|
$
|
5,143
|
|
|
$
|
3,083
|
|
Product sales
|
|
|
12,959
|
|
|
|
7,723
|
|
|
|
4,387
|
|
|
|
1,938
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
24,520
|
|
|
|
15,527
|
|
|
|
10,866
|
|
|
|
7,081
|
|
|
|
3,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of services
|
|
|
8,714
|
|
|
|
6,223
|
|
|
|
5,884
|
|
|
|
6,102
|
|
|
|
6,812
|
|
Costs of product sales
|
|
|
12,092
|
|
|
|
6,459
|
|
|
|
4,921
|
|
|
|
1,833
|
|
|
|
96
|
|
Selling, general and administrative
|
|
|
15,731
|
|
|
|
9,344
|
|
|
|
8,646
|
|
|
|
6,577
|
|
|
|
5,792
|
|
Product development
|
|
|
1,814
|
|
|
|
1,341
|
|
|
|
778
|
|
|
|
546
|
|
|
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
38,351
|
|
|
|
23,367
|
|
|
|
20,229
|
|
|
|
15,058
|
|
|
|
13,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(13,831
|
)
|
|
|
(7,840
|
)
|
|
|
(9,363
|
)
|
|
|
(7,977
|
)
|
|
|
(9,871
|
)
|
Other income (expense), net
|
|
|
2,616
|
|
|
|
(1,258
|
)
|
|
|
(3,026
|
)
|
|
|
(5,340
|
)
|
|
|
(913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary gain
|
|
|
(11,215
|
)
|
|
|
(9,098
|
)
|
|
|
(12,389
|
)
|
|
|
(13,317
|
)
|
|
|
(10,784
|
)
|
Extraordinary gain on
extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,215
|
)
|
|
$
|
(9,098
|
)
|
|
$
|
(12,389
|
)
|
|
$
|
(13,317
|
)
|
|
$
|
(4,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common
shares(2)
|
|
$
|
(29,646
|
)
|
|
$
|
(14,248
|
)
|
|
$
|
(14,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.80
|
)
|
|
$
|
(2.51
|
)
|
|
$
|
(2.57
|
)
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
10,601
|
|
|
|
5,683
|
|
|
|
5,658
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Consolidated Balance Sheet Data:
|
|
2006(1)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
62,139
|
|
|
$
|
68,663
|
|
|
$
|
3,316
|
|
|
$
|
78
|
|
|
$
|
166
|
|
Marketable securities
|
|
|
38,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
|
100,887
|
|
|
|
65,285
|
|
|
|
8,416
|
|
|
|
(19,389
|
)
|
|
|
(5,461
|
)
|
Satellite network and other
equipment, net
|
|
|
29,131
|
|
|
|
7,787
|
|
|
|
5,243
|
|
|
|
3,263
|
|
|
|
4,354
|
|
Intangible assets, net
|
|
|
7,058
|
|
|
|
4,375
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
148,093
|
|
|
|
89,316
|
|
|
|
20,888
|
|
|
|
7,198
|
|
|
|
6,701
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,107
|
|
|
|
3,699
|
|
Note payable related
party
|
|
|
879
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred
stock
|
|
|
|
|
|
|
112,221
|
|
|
|
38,588
|
|
|
|
|
|
|
|
|
|
Stockholders equity
(deficit) (membership interests)
|
|
|
128,712
|
|
|
|
(42,654
|
)
|
|
|
(28,833
|
)
|
|
|
(15,547
|
)
|
|
|
(4,730
|
)
|
|
|
|
(1) |
|
On November 8, 2006, we completed our initial public
offering of 9,230,800 shares of common stock at a price of
$11.00 per share. After deducting underwriting discounts
and commissions and offering expenses we received proceeds of
approximately $89.5 million. From these net proceeds we
paid accumulated and unpaid dividends totaling $7.5 million
to the holders of Series B preferred stock, a
$3.6 million contingent purchase price payment relating to
the acquisition of our interest in Satcom International Group
plc and $10.1 million to the holders of Series B
preferred stock in connection with obtaining consents required
for the conversion of the Series B preferred stock into
common stock. All outstanding shares of Series A and B
preferred stock automatically converted into
21,383,318 shares of common stock. |
|
(2) |
|
The net loss applicable to common shares for the year ended
December 31, 2004 is based on our net loss for the period
from February 17, 2004, the date on which the members of
ORBCOMM LLC contributed all of their outstanding membership
interests in exchange for shares of our common stock, through
December 31, 2004. Net loss attributable to the period from
January 1, 2004 to February 16, 2004 (prior to the
Company becoming a corporation and issuing its common shares),
has been excluded from the net loss applicable to common shares.
As a result, net loss per common share for 2004 is not
comparable to net loss per common share for 2006 and 2005. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with our Consolidated Financial Statements and Notes
which appear elsewhere in this Annual Report on
Form 10-K.
This discussion contains forward- looking statements that
involve risks, uncertainties and assumptions. Our actual results
could differ materially from those anticipated in these forward-
looking statements as a result of various factors, including
those set forth in Part I, Item 1A. Risk
Factors and elsewhere in this Annual Report on
Form 10-K.
Organization
ORBCOMM LLC was organized as a Delaware limited liability
company on April 4, 2001 and on April 23, 2001, we
acquired substantially all of the non-cash assets and assumed
certain liabilities of ORBCOMM Global L.P. and its subsidiaries,
which had filed for relief under Chapter 11 of the
U.S. Bankruptcy Code. The assets acquired from ORBCOMM
Global L.P. and its subsidiaries consisted principally of the
in-orbit satellites and supporting U.S. ground
infrastructure equipment that we own today. At the same time,
ORBCOMM LLC also acquired the FCC licenses required to own and
operate the communications system from a subsidiary of Orbital
Sciences Corporation, which was not in bankruptcy, in a related
transaction. Prior to April 23, 2001, ORBCOMM LLC did not
have any operating activities. We were formed as a Delaware
corporation in October 2003 and on February 17, 2004, the
members of ORBCOMM LLC contributed all of their outstanding
membership interests in ORBCOMM LLC to us in exchange for shares
of our common stock, representing ownership interests in us
equal in proportion to their prior ownership interest in ORBCOMM
LLC. As a result of, and immediately following the contribution,
40
ORBCOMM LLC became a wholly owned subsidiary of ours. We
continued the historical business, operations and management of
ORBCOMM LLC. We refer to this transaction as the
Reorganization. Prior to February 17, 2004, we
did not have any operating activities.
Overview
We operate the only global commercial wireless messaging system
optimized for narrowband communications. Our system consists of
a global network of 30 low-Earth orbit, or LEO, satellites and
accompanying ground infrastructure. Our two-way communications
system enables our customers and end-users, which include large
and established multinational businesses and government
agencies, to track, monitor, control and communicate
cost-effectively with fixed and mobile assets located anywhere
in the world. Our products and services enable our customers and
end-users to enhance productivity, reduce costs and improve
security through a variety of commercial, government and
emerging homeland security applications. We enable our customers
and end-users to achieve these benefits using a single global
technology standard for
machine-to-machine
and telematic, or M2M, data communications. Our customers have
made significant investments in developing ORBCOMM-based
applications. Examples of assets that are connected through our
M2M data communications system include trucks, trailers,
railcars, containers, heavy equipment, fluid tanks, utility
meters, pipeline monitoring equipment, marine vessels and oil
wells. Our customers include value-added resellers, or VARs,
original equipment manufacturers, or OEMs, such as Caterpillar
Inc., Komatsu Ltd., Hitachi Construction Machinery Co., Ltd. and
the Volvo Group, service providers, such as the Equipment
Services business of General Electric Company, and government
agencies, such as the U.S. Coast Guard.
We believe that the most important factor for our success is the
addition of billable subscriber communicators (subscriber
communicators activated and currently billing or expected to be
billing within 30 to 90 days) on our system. We are focused
on increasing our market share of customers with the potential
for a high number of connections with lower usage applications.
We believe that the service revenues associated with additional
billable subscriber communicators on our communications system
will more than offset the negligible incremental cost of adding
such subscriber communicators to our system and, as a result,
positively impact our results of operations. During the year
ended December 31, 2006, we added approximately
112,000 net billable subscriber communicators on our
communications system compared to approximately 38,000 net
billable subscriber communicators added during the year ended
December 31, 2005, an increase of approximately 196.2%. As
of December 31, 2006, we had approximately 225,000 billable
subscriber communicators on our communications system as
compared to approximately 113,000 as of December 31, 2005,
an increase of approximately 99.1%.
2006 Highlights
The following sets forth certain developments in our business
during 2006:
|
|
|
|
|
On November 8, 2006, we closed our initial public offering
in which we sold 9,230,800 shares of common stock at a
price of $11.00 per share and all outstanding shares of our
Series A and Series B preferred stock automatically
converted into an aggregate of 21,383,318 shares of common
stock;
|
|
|
|
On October 10, 2006, our Stellar subsidiary entered into an
agreement with GE Asset Intelligence, LLC, or AI, a subsidiary
of GE Equipment Services, to supply up to 412,000 units of
in-production and future models of Stellars subscriber
communicators from August 1, 2006 through December 31,
2009 to support AIs applications utilizing our M2M data
communications system. Of the total volume level under the
agreement, 270,000 units are non-cancelable except under
specified early termination provisions of the agreement. The
overall contract value at the full volume level would be
approximately $57.0 million, subject to adjustment for
additional engineering work, substitution of subscriber
communicator models or other modifications pursuant to the terms
of the agreement, and excludes any service revenues that we may
derive from the activation and use of these subscriber
communicators on our M2M data communications system under our
separate pre-existing reseller agreement with AI;
|
|
|
|
On September 20, 2006, Volvo Trucks North America announced
that it will make its Volvo Link Sentry monitoring application,
which utilizes our M2M data communications system, standard for
all Volvo trucks with its US07 engines, which are expected
to go on sale beginning in the first quarter of 2007;
|
41
|
|
|
|
|
On June 5, 2006, we entered into an agreement with
OHB-System AG to supply the buses and related integration and
launch services for our six quick-launch satellites, with
options for two additional satellite buses and related
integration services. The price for the six satellite buses and
related integration and launch services is $20 million, or
up to a total of $24.2 million if the options for the two
additional satellite buses and related integration services are
exercised on or before June 5, 2007, subject to certain
price adjustments for late penalties and on-time or early
delivery incentives. In addition, under the agreement,
OHB-System AG will provide preliminary services relating to the
development, demonstration and launch of our next-generation
satellites at a cost of $1.35 million;
|
|
|
|
On April 21, 2006, we entered into an agreement with
Orbital Sciences Corporation to supply us with the payloads for
our six quick-launch satellites. The price for the payloads is
$17 million, subject to price adjustments for late
penalties and on-time or early delivery incentives;
|
|
|
|
On April 7, 2006, Hitachi Construction Machinery Co., Ltd.
entered into an IVAR agreement with us to support Hitachis
newly launched Global
e-Service
Business, making it the fourth major heavy equipment OEM to
choose us for data communications;
|
|
|
|
On March 14, 2006, the Trailer Fleet Services and Asset
Intelligence divisions of GE Equipment Services announced an
agreement under which GE Equipment Services will supply Wal-Mart
Stores, Inc. with trailer tracking technology for its fleet of
46,000
over-the-road
trailers using our M2M data communications system and
|
|
|
|
In November and December 2005 and January 2006, we completed our
Series B preferred stock financing totaling
$72.5 million led by Pacific Corporate Group (PCG), which
funded $30 million. New investors, in addition to PCG,
included investment firms MH Equity Investors and Torch Hill
Capital. Several existing investors also participated in these
financings, including Ridgewood Capital, OHB Technology A.G.,
Northwood Ventures LLC and our senior management. In January
2006, we paid all accumulated and unpaid dividends on our
Series A preferred stock, totaling $8.0 million, of
which $1.3 million was reinvested by holders of our
Series A preferred stock in shares of our Series B
preferred stock financing. All of our outstanding preferred
stock was converted to common stock upon completion of our IPO.
|
EBITDA
EBITDA is defined as earnings before interest income (expense),
provision for income taxes and depreciation and amortization. We
believe EBITDA is useful to our management and investors in
evaluating our operating performance because it is one of the
primary measures used by us to evaluate the economic
productivity of our operations, including our ability to obtain
and maintain our customers, our ability to operate our business
effectively, the efficiency of our employees and the
profitability associated with their performance; it also helps
our management and investors to meaningfully evaluate and
compare the results of our operations from period to period on a
consistent basis by removing the impact of our financing
transactions and the depreciation and amortization impact of
capital investments from our operating results. In addition, our
management uses EBITDA in presentations to our board of
directors to enable it to have the same measurement of operating
performance used by management and for planning purposes,
including the preparation of our annual operating budget.
EBITDA is not a performance measure calculated in accordance
with accounting principles generally accepted in the United
States, or GAAP. While we consider EBITDA to be an important
measure of operating performance, it should be considered in
addition to, and not as a substitute for, or superior to, net
loss or other measures of financial performance prepared in
accordance with GAAP and may be different than EBITDA measures
presented by other companies.
42
The following table reconciles our net loss to EBITDA for the
periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
(In thousands)
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net loss
|
|
$
|
(11,215
|
)
|
|
$
|
(9,098
|
)
|
|
$
|
(12,389
|
)
|
Interest income
|
|
|
(2,582
|
)
|
|
|
(66
|
)
|
|
|
(49
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense(a)
|
|
|
237
|
|
|
|
308
|
|
|
|
1,318
|
|
Depreciation and amortization
|
|
|
2,373
|
|
|
|
1,982
|
|
|
|
1,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(11,187
|
)
|
|
$
|
(6,874
|
)
|
|
$
|
(9,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes amortization of deferred debt issuance costs and debt
discount of approximately $0, $31, $722, for the years 2006,
2005 and 2004, respectively. |
EBITDA in 2006 decreased by $4.3 million over 2005. This
decrease was due to an increase in operating expenses of
$9.3 million to support the growth of the business, which
was partially offset by higher net service revenues of
$3.8 million and a higher gross profit from product sales
of $1.4 million. Operating expenses increased due to an
increase in staffing as we prepared to become a public company,
an increase in stock-based compensation of $3.7 million
resulting from the granting of restricted stock units and stock
appreciation rights in October 2006, litigation expenses and
consulting fees related to preparing for compliance with Section
404 of the Sarbanes-Oxley Act.
EBITDA in 2005 improved by $2.8 million over 2004. This
improvement in 2005 occurred despite significant spending that
did not exist in 2004 for litigation ($1.0 million),
product development to develop the improved DS 300 and DS
100 subscriber communicators ($0.5 million), and additional
costs to expand accounting and other administrative function
($0.3 million) as we prepared for operating as a public
company.
We expect negative EBITDA to continue in 2007.
Revenues
We derive product revenues primarily from sales of subscriber
communicators to our resellers (i.e., our VARs, IVARs,
international licensees and country representatives) and direct
customers, as well as other products, such as subscriber
communicator peripherals (antennas, cables and connector kits),
and in 2006 and 2005 we recognized revenues upon the
installation of a gateway earth station sold pursuant to a
contract entered into in 2003. We derive service revenues from
our resellers and direct customers from utilization of
subscriber communicators on our communications system. These
service revenues generally consist of a one-time activation fee
for each subscriber communicator activated for use on our
communications system and monthly usage fees. Usage fees that we
charge our customers are based upon the number, size and
frequency of data transmitted by the customer and the overall
number of subscriber communicators activated by each customer.
Revenues for usage fees from currently billing subscriber
communicator units are recognized on an accrual basis, as
services are rendered, or on a cash basis, if collection from
the customer is not reasonably assured at the time the service
is provided. Usage fees charged to our resellers and direct
customers are charged primarily at wholesale rates based on the
overall number of subscriber communicators activated by them and
the total amount of data transmitted by their customers. For one
international licensee customer, we charge usage fees as a
percentage of the international licensees revenues.
Service revenues also include royalties paid by subscriber
communicator manufacturers and fees from professional and
administrative services.
43
During 2004, we entered into an agreement with the
U.S. Coast Guard, to design, develop, launch and operate a
single satellite in connection with the Concept Validation
Project. Under the terms of the agreement, title to the
demonstration satellite remains with us, however the
U.S. Coast Guard will be granted a non-exclusive, royalty
free license to use the designs, processes and procedures
developed under the contract in connection with any of our
future satellites that are AIS-enabled. We are permitted under
the agreement, and intend, to use the Coast Guard demonstration
satellite to provide services to other customers, subject to
receipt of a modification of our current license or special
temporary authority from the FCC. The agreement also provides
for post-launch maintenance and AIS data transmission services
to be provided by us to the U.S. Coast Guard for an initial
term of 14 months. At its option, the U.S. Coast Guard
may elect to receive maintenance and AIS data transmission
services for up to an additional 18 months subsequent to
the initial term. The deliverables under the agreement do not
qualify as separate units of accounting and as a result,
revenues from the agreement will be recognized ratably
commencing upon the launch of the demonstration satellite
(expected in 2007) over the expected life of the customer
relationship.
We do not expect our historical revenue mix to be indicative of
our future revenue. As the number of billable subscriber
communicators activated for use on our communications system
increases, we expect service revenues to become our most
significant revenue component, followed by revenues from sales
of subscriber communicators and other equipment, and fees from
professional services. We define billable subscriber
communicators as subscriber communicators activated and
currently billing (which excludes pre-bill units and includes
units which are accounted for on a cash basis) or expected to be
billing within 30 to 90 days. Our pre-bill units consist of
subscriber communicators activated at the customers
request for testing prior to putting the units into actual
service.
Operating
expenses
We own and operate a 30-satellite constellation, six of the
fourteen gateway earth stations and two of the five gateway
control centers. Satellite-based communications systems are
typically characterized by high initial capital expenditures and
relatively low marginal costs for providing service. Because we
acquired substantially all of our existing satellite and network
assets from ORBCOMM Global L.P. for a fraction of their original
cost in a bankruptcy court-approved sale, we benefit from lower
amortization of capital costs than if the assets were acquired
at ORBCOMM Global L.P.s original cost. We plan on the
construction and deployment of additional satellites. This
increased equipment cost, reflected at full value, along with
our planned acquisition of additional gateway earth stations and
gateway control centers will cause our depreciation expense, a
component of cost of services, to increase relative to the
depreciation of our current communications system. Other than
this increased depreciation, the marginal cost to operate our
communications system is relatively low.
We currently depreciate our satellite system over approximately
five years, the estimated remaining life of our current
communications system at the time of its acquisition in 2001.
Our current satellites became fully depreciated during the
fourth quarter of 2006. However, since 2002, we have implemented
several operational changes and software demonstration updates
which we believe may extend the operational lives of our current
satellite fleet by an average of 1.5 to 2.5 years beyond
this time. We currently anticipate that when additional
satellites are placed into service, they will be depreciated
over up to ten years (other than the Coast Guard demonstration
satellite which will be depreciated over six years),
representing the estimated operational lives of the satellites.
We incur engineering expenses associated with the operation of
our communications system and the development and support of new
applications, as well as sales, marketing and administrative
expenses related to the operation of our business. Our largest
recurring expenses are costs associated with our employees. Over
the next several years, we expect to increase headcount from 99
employees as of December 31, 2006 to approximately 145
employees by 2010.
Capital
expenditures
The majority of our current fleet of satellites was put in
service in the late 1990s and has an estimated operating life of
approximately nine to twelve years. We plan to launch additional
satellites to supplement and ultimately replace our current
fleet in order to continue to provide our communications
services in the future. For the year
44
ended 2006 we spent $22.4 million on capital expenditures,
of which $1.4 million was for the Coast Guard demonstration
satellite and $17.4 million was for the quick-launch and
next-generation satellites. For the years ended 2005 and 2004 we
spent, $4.1 million and $2.5 million, respectively, on
capital expenditures, of which, $3.5 million and
$1.7 million, respectively, were for the Coast Guard
demonstration satellite.
Our current intention is to replenish our constellation in a
number of phases. First, we are under contract with the
U.S. Coast Guard to conduct a demonstration test to
validate the ability of an ORBCOMM satellite to receive AIS
signals from marine vessels over 300 tons. The satellite is in
the final integration and test phase, with a launch expected to
occur during 2007. Second, we intend to launch six
quick-launch satellites by the end of 2007 to
supplement our Plane A satellites with satellites with slightly
upgraded communication capability compared to our current first
generation satellites. Finally, we intend to launch
next-generation satellites with increased communications
capabilities in 2009. We have started the procurement activities
for the next-generation satellites and are planning to award the
next-generation satellite and launch services contract in 2007.
As a result, through a series of up to five launches, we intend
to replenish the existing constellation of satellites, which
depending on the capabilities of the replacement satellites, may
require fewer satellites than we currently have. Flexibility in
the number of satellites per launch, the number of satellites
inserted into each plane and target plane will allow us to
modify our plans within just a few months before launch. In
addition, we intend to require our satellite manufacturers to
include options for additional satellites that can be launched
on an accelerated schedule if the market demands such an
increase or if lower latencies are required or to mitigate a
launch failure.
Since 2002, we have implemented several operational changes and
software demonstration updates which we believe may extend the
operational lives of our current satellite fleet by an average
of 1.5 to 2.5 years. The expected replacement launch dates
for our current satellite fleet begin in 2007 and extend until
through 2010. As a result, we have flexibility with respect to
the future deployment of replacement satellites, providing us
with more control over the timing of our capital investments in
our next-generation of satellites, including the ability to
accelerate or delay the timing of capital expenditures
contemplated by our capital plan, as described above.
Critical
Accounting Policies and Estimates
Our discussion and analysis of our results of operations,
liquidity and capital resources are based on our consolidated
financial statements which have been prepared in conformity with
accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates and judgments,
including those related to revenue recognition, costs of
revenues, accounts receivable, satellite network and other
equipment, capitalized development costs, intangible assets,
debt issuance costs and debt discount, convertible redeemable
preferred stock, valuation of deferred tax assets and the value
of securities underlying stock-based compensation. We base our
estimates on historical and anticipated results and trends and
on various other assumptions that we believe are reasonable
under the circumstances, including assumptions as to future
events. These estimates form the basis for making judgments
about the carrying values of assets and liabilities that are not
readily apparent from other sources. By their nature, estimates
are subject to an inherent degree of uncertainty. Actual results
may differ from our estimates and could have a significant
adverse effect on our results of operations and financial
position. We believe the following critical accounting policies
affect our more significant estimates and judgments in the
preparation of our consolidated financial statements.
Revenue
recognition
We recognize revenues when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable
and collectibility is reasonably assured. Our revenue
recognition policy requires us to make significant judgments
regarding the probability of collection of the resulting
accounts receivable balance based on prior history and the
creditworthiness of our customers. In instances where collection
is not reasonably assured, revenue is recognized when we receive
cash from the customer.
Revenues generated from the sale of subscriber communicators and
other products are either recognized when the products are
shipped or when customers accept the products, depending on the
specific contractual terms. Sales
45
of subscriber communicators and other products are not subject
to return and title and risk of loss pass to the customer at the
time of shipment. Sales of subscriber communicators are
primarily to VARs and IVARs and are not bundled with service
arrangements. Revenues from sales of gateway earth stations and
related products are recognized only upon customer acceptance
following installation. Revenues from the activation of
subscriber communicators are initially recorded as deferred
revenues and are, thereafter, recognized ratably over the term
of the agreement with the customer, generally three years.
Revenues generated from monthly usage and administrative fees
and engineering services are recognized when the services are
rendered. Upfront payments for manufacturing license fees are
initially recorded as deferred revenues and are recognized
ratably over the term of the agreements, generally ten years.
Revenues generated from royalties under our subscriber
communicator manufacturing agreements are recognized when we
issue to a third party manufacturer upon request a unique serial
number to be assigned to each unit manufactured by such third
party manufacturer.
Amounts received prior to the performance of services under
customer contracts are recognized as deferred revenues and
revenue recognition is deferred until such time that all revenue
recognition criteria have been met.
For arrangements with multiple obligations (e.g.,
deliverable and undeliverable products, and other post-contract
support), we allocate revenues to each component of the contract
based upon objective evidence of each components fair
value. We recognize revenues allocated to undelivered products
when the criteria for product revenues set forth above are met.
If objective and reliable evidence of the fair value of the
undelivered obligations is not available, the arrangement
consideration allocable to a delivered item is combined with the
amount allocable to the undelivered item(s) within the
arrangement. Revenues are recognized as the remaining
obligations are fulfilled.
Out-of-pocket
expenses incurred during the performance of professional service
contracts are included in costs of services and any amounts
re-billed to clients are included in revenues during the period
in which they are incurred. Shipping costs billed to customers
are included in product sales revenues and the related costs are
included as costs of product sales.
Under our agreement with the U.S. Coast Guard with respect
to the Concept Validation Project and related services described
under Overview Revenues, the
deliverables do not qualify as separate units of accounting and
as a result, revenues from the agreement will be recognized
ratably commencing upon the launch of the demonstration
satellite (expected in 2007) over the expected life of the
customer relationship.
We, on occasion, issue options to purchase our equity securities
or the equity securities of our subsidiaries, or issue shares of
our common stock as an incentive in soliciting sales commitments
from our customers. The grant date fair value of such equity
instruments is recorded as a reduction of revenues on a pro-rata
basis as products or services are delivered under the sales
arrangement.
Costs
of revenues
Costs of product sales includes the purchase price of products
sold, shipping charges, costs of warranty obligations, payroll
and payroll related costs for employees who are directly
associated with fulfilling product sales and depreciation and
amortization of assets used to deliver products. Costs of
services is comprised of payroll and related costs, including
stock-based compensation, materials and supplies, depreciation
and amortization of assets used to provide services. Our most
significant estimates and judgments regarding the costs of
revenues are provisions for estimated expenses related to
product warranties, which we make at the time products are sold.
These estimates and judgments are made using historical
information on the nature and frequency of such expenses.
Accounts
receivable
Accounts receivable are due in accordance with payment terms
included in our negotiated contracts. Amounts due are stated net
of an allowance for doubtful accounts. Accounts that are
outstanding longer than the contractual payment terms are
considered past due. We make ongoing assumptions and judgments
relating to the collectibility of our accounts receivable to
determine our required allowances based on a number of factors
such as the age of the receivable, credit history of the
customer, historical experience and current economic conditions
that may affect a customers ability to pay. Past
experience may not be indicative of future collections; as a
result, allowances for doubtful accounts may deviate from our
estimates as a percentage of accounts receivable and sales.
46
Satellite
network and other equipment
Satellite network and other equipment are stated at cost, less
accumulated depreciation and amortization. We use judgment to
determine the useful life of our satellite network based on the
estimated operational life of the satellites and periodic
reviews of engineering data relating to the operation and
performance of our satellite network.
Satellite network includes the costs of our constellation of
satellites, and the ground and control segments, which consists
of gateway earth stations, gateway control centers and the
network control center (the Ground Segment).
Assets under construction primarily consists of costs relating
to the design, development and launch of the Coast Guard
demonstration satellite, payload, bus and launch procurement
agreements for our quick-launch satellites and upgrades to our
infrastructure and Ground Segment. Once these assets are place
in service they will be transferred to satellite network and
other equipment and then depreciation and amortization will be
recognized using the straight-line method over the estimated
lives of the assets. No depreciation has been charged on these
assets as of December 31, 2006.
Long-lived
assets
We evaluate long-lived assets, including license rights, under
the provisions of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of.
Management reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of assets may not be recoverable. In connection with this
review, we reevaluate the periods of depreciation and
amortization. We recognize an impairment loss when the sum of
the future undiscounted net cash flows expected to be realized
from the asset is less than its carrying amount. If an asset is
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset
exceeds its fair value, which is determined using the projected
discounted future net cash flows. We measure fair value by
discounting estimated future net cash flows using an appropriate
discount rate. Considerable judgment by the Company is necessary
to estimate the fair value of the assets and accordingly, actual
results could vary significantly from such estimates. Our most
significant estimates and judgments relating to the long-lived
asset impairments include the timing and amount of projected
future cash flows and the discount rate selected to measure the
risks inherent in future cash flows.
Capitalized
development costs
Judgments and estimates occur in the calculation of capitalized
development costs. We evaluate and estimate when a preliminary
project stage is completed and at the point when the project is
substantially complete and ready for use. We base our estimates
and evaluations on engineering data. We capitalize the costs of
acquiring, developing and testing software to meet our internal
needs. Capitalization of costs associated with software obtained
or developed for internal use commences when both the
preliminary project stage is completed and management has
authorized further funding for the project, based on a
determination that it is probable that the project will be
completed and used to perform the function intended. Capitalized
costs include only (1) external direct cost of materials
and services consumed in developing or obtaining internal-use
software, and (2) payroll and payroll-related costs for
employees who are directly associated with, and devote time to,
the internal-use software project. Capitalization of such costs
ceases no later than the point at which the project is
substantially complete and ready for its intended use. Internal
use software costs are amortized once the software is placed in
service using the straight-line method over periods ranging from
three to five years.
Debt
issuance costs and debt discount
We account for the intrinsic value of beneficial conversion
rights arising from the issuance of convertible debt instruments
with conversion rights that are
in-the-money
at the commitment date pursuant to Emerging Issues Task Force
(EITF) Issue
No. 98-5
and EITF Issue
No. 00-27.
The value is based on the relative fair value of the detachable
convertible instrument and the associated debt, is allocated to
additional
paid-in-capital
(or members
47
deficiency prior to the Reorganization) and recorded as a
reduction in the carrying value of the related debt. The
intrinsic value of beneficial conversion rights is amortized to
interest expense from the issuance date through the earliest
date the underlying debt instrument can be converted using the
effective interest method.
Warrants issued in connection with debt financing agreements are
valued using the relative fair value method and allocated to
additional paid-in capital (or members deficiency prior to
the Reorganization) and recorded as a reduction in the carrying
value of the related debt. This discount is amortized to
interest expense using the effective interest method from the
issuance date through the term of the related loan.
If debt is repaid, or converted to preferred or common stock,
prior to the full amortization of the related issuance costs,
beneficial conversion rights or debt discount, the remaining
balance of such items is recorded as a loss on extinguishment of
debt.
We estimate the fair value of warrants relating to debt
issuances using judgments and estimates involving;
(1) volatility, based on a peer group analysis,
(2) the estimated value of our common stock on the date the
warrants are issued, (3) the contractual term of the
warrants, (4) the risk free interest rate, based on the
contractual term of the warrants, and (5) an expected
dividend yield.
Income
taxes
Prior to February 17, 2004, our consolidated financial
statements did not include a provision for federal and state
income taxes because ORBCOMM LLC was treated as a partnership
for federal and state income tax purposes. As such, we were not
subject to any income taxes, as any income or loss through that
date was included in the tax returns of our individual members.
On February 17, 2004, as a result of the Reorganization, we
became a C corporation for income tax purposes and
adopted the provisions of SFAS No. 109, Accounting
for Income Taxes. Under these guidelines, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. Judgment is applied in determining whether the
recoverability of our deferred tax assets will be realized in
full or in part. A valuation allowance is established for the
amount of deferred tax assets that are determined not to be
realizable. Realization of our deferred tax assets may depend
upon our ability to generate future taxable income. Based upon
this analysis, we established a 100% valuation allowance for our
net deferred tax assets.
Loss
contingencies
We accrue for costs relating to litigation, claims and other
contingent matters when such liabilities become probable and
reasonably estimable. Such estimates may be based on advice from
third parties or on managements judgment, as appropriate.
Actual amounts paid may differ from amounts estimated, and such
differences will be charged to operations in the period in which
the final determination of the liability is made. Management
considers the assessment of loss contingencies as a critical
accounting policy because of the significant uncertainty
relating to the outcome of any potential legal actions and other
claims and the difficulty of predicting the likelihood and range
of the potential liability involved, coupled with the material
impact on our results of operations that could result from legal
actions or other claims and assessments.
Share-based
compensation
Our share-based compensation plans consist of the 2004 Stock
Option Plan and the 2006 Long-Term Incentives Plan. The 2004
Stock Option Plan, adopted in 2004, provides for the grants of
non-qualified and incentive stock options to officers,
directors, employees and consultants. The 2006 Long-Term
Incentives Plan, approved by our stockholders in September 2006,
provides for the grants of non-qualified stock options, stock
appreciation rights (SARs), common stock, restricted
stock, restricted stock units (RSUs), performance
units and performance shares to our employees and non-employee
directors.
48
Prior to January 1, 2006, stock-based compensation
arrangements with our employees have been accounted for in
accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, using the intrinsic
value method of accounting which requires charges to stock-based
compensation expense for the excess, if any, of the fair value
of the underlying stock at the date an employee stock option is
granted (or at an appropriate subsequent measurement date) over
the amount the employee must pay to acquire the stock.
Share-Based
Awards Granted Prior to January 1, 2006
In 2004, we granted options to employees to purchase a total of
1,528,332 shares of common stock at exercise prices ranging
from $2.33 to $4.26 per share, which were approved by our
board of directors. We did not engage independent appraisers to
determine fair value of our common stock; instead we used the
sales prices of Series A preferred stock issued in
arms-length transactions with unaffiliated parties in
February and August 2004. As such, we determined that the fair
value of our common stock underlying stock options issued in
2004 to be $4.26 per share. We did not grant any options in
2005.
For the years ended December 31, 2005 and 2004, we recorded
the intrinsic value per share as stock-based compensation
expense over the applicable vesting period, using the
straight-line method. Stock-based awards to non-employees prior
to January 1, 2006 are accounted for under the provisions
of SFAS No. 123, Accounting for Stock-based
Compensation (SFAS 123), and EITF Issue
No. 96-18,
Accounting for Equity Instruments Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods
or Services.
We estimated the fair value of these stock options using
judgments and estimates involving; (1) volatility, based on
a peer group analysis, (2) the estimated value of our
common stock on the grant date, (3) the expected life of
the option, (4) the risk free interest rate, based on the
expected life of the option, and (5) an expected dividend
yield.
During the years ended December 31, 2005 and 2004, we
recognized $0.2 million and $1.5 million of
stock-based compensation for the 2004 stock option grants
pursuant to the intrinsic value method under APB Opinion
No. 25, respectively. Had we applied fair value recognition
to these stock option grants, with the value of each option
grant estimated on the date of the grant using an option pricing
model, the impact would have been increases to our net loss
applicable to common shares of $0.3 million and
$0.9 million for the years ended December 31, 2005 and
2004, respectively.
Information on our stock option grants during 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted-Average
|
|
|
Fair Value of
|
|
|
Weighted-Average
|
|
Grant Date
|
|
Granted
|
|
|
Exercise Price
|
|
|
Common Stock
|
|
|
Intrinsic Value
|
|
|
February 17, 2004
|
|
|
1,361,664
|
|
|
$
|
2.93
|
|
|
$
|
4.26
|
|
|
$
|
1.34
|
|
July 6, 2004
|
|
|
83,333
|
|
|
$
|
4.26
|
|
|
$
|
4.26
|
|
|
$
|
|
|
December 3, 2004
|
|
|
83,333
|
|
|
$
|
4.26
|
|
|
$
|
4.26
|
|
|
$
|
|
|
On January 1, 2006, we adopted SFAS No. 123
(Revised 2004) Share-Based Payment
(SFAS 123(R)), which requires the measurement
and recognition of stock-based compensation expense for all
share-based payment awards made to employees and directors based
on estimated fair values. We adopted SFAS 123(R) using the
modified prospective transition method using the Black-Scholes
option pricing model as the most appropriate model for
determining the estimated fair value for all share-based payment
awards. Under that transition method, stock-based compensation
expense recognized for the year ended December 31, 2006
includes stock-based compensation expense for all share-based
payments granted prior to, but not vested as of, January 1,
2006, based on the grant-date fair value estimated in accordance
with the original provisions of SFAS No. 123, and
stock-based compensation expense for all share-based payments
granted on or after January 1, 2006, based on the
grant-date fair value, estimated in accordance with provisions
of SFAS 123(R).
SFAS 123(R) requires us to estimate the fair value of
share-based payment awards based on estimated fair values. The
value of the portion of the award that is ultimately expected to
vest is recognized as expense over the requisite service period.
For awards with performance conditions, we make an evaluation at
the grant date and future periods as to the likelihood of the
performance targets being met. Compensation expense is adjusted
in future
49
periods for subsequent changes in the expected outcome of the
performance conditions until the vesting date. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In accordance with the
modified prospective transition method, prior periods have not
been restated to reflect, and do not include, the impact of
SFAS 123(R).
Share-Based
Awards Granted on or Subsequent to January 1,
2006
In February 2006, we granted an option to an employee to
purchase 50,000 shares of our common stock. The fair value
of the share-based award was estimated on the date of grant
using the Black-Scholes option pricing model using the following
assumptions: expected volatility of 44.50% based on the stock
volatility for comparable publicly traded companies; estimated
fair value of our common stock on the date of grant of
$15.00 per share; expected life of the option of four
years, giving consideration to the contractual term and vesting
schedule; risk-free interest rate of 4.64% based on the
U.S. Treasury yield curve at the time of the grant over the
expected term of the stock option grant; and zero dividend
yield. The exercise price of these options was $4.88 per
share and the estimated fair value of these options was
$11.16 per share.
We determined the fair value of our common stock underlying
stock options issued in February 2006 to be $15.00 per
share. At the time options were issued in February 2006, we
concluded that the fair value of our common stock had increased
significantly to $15.00 per share, as a result of the
completion of the Series B preferred stock financing,
recent developments in our business, our projected financial
performance and the commencement of the process for our initial
public offering, which was completed in 2006. In reaching our
conclusion, we took into account a number of factors, including:
(i) the $6.045 conversion price of our Series B
preferred stock issued in December 2005 and January 2006, after
giving effect to the
2-for-3
reverse stock split effected in October 2006; (ii) our
improved liquidity due to the receipt of net proceeds from the
Series B preferred stock financing, resulting in cash and
cash equivalents of over $60 million in the beginning of
2006, which would permit us to continue to fund working capital
and a portion of our capital expenditure plan; (iii) recent
business developments which we believed improved our operations
and prospects, including substantial net increases in billable
subscriber communicators activated on our system during the
fourth quarter of 2005 and the beginning of the first quarter of
2006 and customer wins with large resellers such as GE Equipment
Services; (iv) the then-current and projected increases in
our revenues and gross margins; (v) preliminary estimated
price ranges related to the commencement of our process for our
initial public offering completed in November 2006; and
(vi) a discounted cash flow analysis of our projected
financial results.
We also considered the following factors in assessing the fair
value: the fact that our common stock was an illiquid security
of a private company without a trading market; the likelihood of
a liquidity event, such as an initial public offering; and
potential risks and uncertainties in our business. We made such
determination by considering a number of factors including the
conversion price of our Series A and B preferred stock
issued December 2005 and January 2006, recent business
developments, a discounted cash flow analysis of its projected
financial results, and preliminary estimated price ranges
related to the commencement of our process for a potential
public offering.
We did not obtain a contemporaneous valuation from an unrelated
valuation specialist. Determining the fair value of our common
stock requires making complex and subjective judgments and is
subject to assumptions and uncertainties. We believe that we
have used reasonable methodologies, approaches and assumptions
consistent with the American Institute of Certified Public
Accountants Practice Guide, Valuation of
Privately-Held-Company Equity Securities Issued as
Compensation to determine the fair value of our common
stock.
As a result of adopting SFAS 123(R), we applied a
forfeiture rate of 6% to the stock options expected to vest as
of December 31, 2006, which includes all stock options
granted prior to, but not vested as of, January 1, 2006,
based on the grant-date fair value estimated in accordance with
the original provisions of SFAS No. 123, and
stock-based compensation expense for all stock options granted
subsequent to January 1, 2006, based on the grant-date fair
value. The forfeiture rate was based on voluntary and
involuntary termination behavior as well as analysis of actual
option forfeitures.
As of December 31, 2006, $0.4 million of total
unrecognized stock-based compensation expense related to stock
options issued to employees is expected to be recognized over a
weighted average term of 1.83 years. The
50
intrinsic value of our options outstanding as of
December 31, 2006 was $8.4 million, of which
$8.0 million related to vested options and
$0.4 million related to unvested options.
In October 2006, the Compensation Committee of our board of
directors approved the issuance of 1,059,280 restricted stock
units (RSUs) to our employees. Upon vesting, subject
to payment of withholding taxes, employees are entitled to
receive an equivalent number of our common shares. An aggregate
of 532,880 RSUs are time-based awards that vest in three equal
installments, subject to continued employment on January 1,
2007, 2008 and 2009. An aggregate of 526,400 RSUs are
performance-based awards that will vest upon attainment of
various operational and financial performance targets
established for each of fiscal 2006, 2007 and 2008 by our
Compensation Committee or our board of directors and continued
employment by the employee through dates that our Compensation
Committee has determined that the performance targets have been
achieved.
In October 2006, our Compensation Committee has established
performance targets for fiscal 2006 and, for the grants to
certain individuals, the performance targets for fiscal 2007
with respect to an aggregate of 258,044 performance-based RSUs.
Accordingly, these performance-based RSUs were considered
granted for accounting purposes upon issuance.
At December 31, 2006, we have estimated that the
performance targets will be achieved at a rate of 71% resulting
in 183,834 performance-based RSUs vesting in 2007 and 2008. The
remaining 264,123 performance-based RSUs, net of cancellations
totaling 4,233, relate to 2007 and 2008 performance targets and
are not considered granted for accounting purposes because our
Compensation Committee has not yet established performance
targets.
The grant date fair value of the time- and performance-based
RSUs was determined using the price of our common stock sold in
our initial public offering.
All of the time-based RSUs that were subject to continued
employment on January 1, 2007 vested. At December 31,
2006, $3.9 million of total unrecognized compensation cost
related to the time-based RSUs granted to employees which is
expected to be recognized ratably through January 1, 2009.
At December 31, 2006, we had $1.0 million of total
unrecognized compensation costs related to the performance-based
RSUs granted to employees, of which $0.9 million is
expected to be recognized in the first quarter of 2007 and the
remaining balance of $0.1 million is expected to be
recognized from March 2007 through January 2008.
In October 2006, our Compensation Committee approved the
issuance of 413,334 stock appreciation rights (SARs)
to certain executive officers. An aggregate of 66,667 are
time-based SARs that vest in three equal installments subject to
being employed on January 1, 2007, 2008 and 2009. The grant
date fair value of these SARS was $5.41 per share. An
aggregate of 346,666 are performance-based SARs that will vest
in three equal installments upon attainment of certain financial
performance targets established for each of fiscal 2006, 2007
and 2008 by our Compensation Committee or our Board of Directors
and continued employment by the executive officers through the
dates our Compensation Committee has determined that the
performance targets have been achieved.
Our Compensation Committee has established performance targets
for December 31, 2006 with respect to an aggregate of
115,555 performance-based SARs. Accordingly, these SARs are
considered granted for accounting purposes upon issuance. As of
December 31, 2006, we estimate that these performance
targets will be achieved at a rate of 88%, resulting in 101,731
performance-based SARs vesting in March 2007. The grant date
fair value of these SARs was $5.18 per share. At
December 31, 2006, the remaining 231,111 performance-based
SARs are not considered granted for accounting purposes because
our Compensation Committee has not yet established performance
targets for fiscal 2007 and 2008.
The fair value of all time- and performance-based SARs granted
in 2006 was estimated on the date of grant using the
Black-Scholes option pricing model using the following
assumptions: expected volatility of 43.85% based on the stock
volatility for comparable publicly traded companies; expected
life of 5.5 and 6 years utilizing the
simplified method based on the average of the
vesting term and the contractual term of the stock appreciation
rights; risk-free interest rate of 4.66% based on the
U.S. Treasury yield curve at the time of the grant over the
expected term of the SARs; and a zero dividend yield.
51
The average exercise price of the SARs granted in 2006 was
$11.00 which was equal to the price of our common stock sold in
our initial public offering. At December 31, 2006, the
aggregate intrinsic value for SARs outstanding and expected to
vest was nil.
All of the time-based SARs that were subject to continued
employment on January 1, 2007 vested. At December 31,
2006, $0.2 million of total unrecognized compensation cost
related to the time-based SARs issued to executive officers is
expected to be recognized ratably through January 1, 2009.
At December 31, 2006, $0.3 million of total
unrecognized compensation cost related to the performance-based
SARs granted to executive officers is expected to be recognized
in the first quarter of 2007.
In December 2006, our board of directors gave employees and
executive officers an option to defer vesting for the RSUs and
SARs awards. Certain employees accepted the option to defer
vesting, subject to continued employment to May 21, 2007,
2008 and 2009 relating to their RSUs, which created a
modification in accordance with SFAS 123(R). A total of
269,926 time-based-RSU awards and performance-based awards were
modified. However, no additional compensation cost was
recognized at the date of the modification, as these awards were
expected to vest under the original vesting terms and our common
stock on the date of modification was lower than the fair market
value at the grant date.
We recognized $3.9 million of stock-based compensation
expense for all share-based payment arrangements during the year
ended December 31, 2006. We expect that our planned use of
share-based payment arrangements will result in significant
increases in our stock-based compensation expense in future
periods. We have not recognized, and do not expect to recognize
in the near future, any tax benefit related to employee
stock-based compensation expense as a result of the full
valuation allowance on our net deferred tax assets and net
operating loss carryforwards.
Results
of Operations
Revenues
The table below presents our revenues (in thousands) for the
years ending December 31, 2006, 2005 and 2004, together
with the percentage of total revenue represented by each revenue
category:
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Years Ended December 31,
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2006
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2005
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2004
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% of
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% of
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% of
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Total
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Total
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Total
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Service revenues
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$
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11,561
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47.2
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%
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$
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7,804
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50.3
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%
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$
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6,479
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59.6
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%
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Product sales
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12,959
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52.8
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%
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7,723
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49.7
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%
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4,387
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40.4
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%
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$
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24,520
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100.0
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%
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$
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15,527
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100.0
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%
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$
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10,866
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100.0
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%
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2006 vs. 2005: Total revenues for 2006
increased $9.0 million or 57.9% to $24.5 million from
$15.5 million in 2005. This increase was due to an increase
in service revenues of $3.8 million and product sales of
$5.2 million. Excluding revenue recognized from the sale of
the gateway earth station of $0.2 million and
$2.1 million in 2006 and 2005, respectively, 2006 revenues
increased $11.0 million or 81.8% over 2005.
2005 vs. 2004: Total revenues for 2005
increased $4.7 million, or 42.9%, to $15.5 million
from $10.9 million in 2004. This increase was due to an
increase in service revenues of $1.3 million and product
sales of $3.3 million.
Service
revenues
2006 vs. 2005: Service revenues increased
$3.8 million in 2006, or 48.1%, to $11.6 million, or
approximately 47.2% of total revenues, from $7.8 million,
or approximately 50.3% of total revenues in 2005. This increase
was primarily due to an increase in the number of billable
subscriber communicators activated on our communications system.
In 2006, we added approximately 112,000 net billable
subscriber communicators to our communications system compared
to approximately 38,000 net billable subscriber
communicators added in 2005, an increase of 196.2%. At
December 31, 2006, we had approximately 225,000 billable
subscriber
52
communicators activated on our communications system compared to
approximately 113,000 billable subscriber communicators at
December 31, 2005, an increase of approximately 99.1%.
2005 vs. 2004: Service revenues increased
$1.3 million in 2005, or 20.5%, to $7.8 million, or
approximately 50.3% of total revenues, from $6.5 million,
or approximately 59.6% of total revenues in 2004. This increase
was primarily due to an increase in the number of billable
subscriber communicators activated on our communications system.
In 2005, we added approximately 38,000 net billable
subscriber communicators to our communications system compared
to approximately 27,000 net billable subscriber
communicators added in 2004, an increase of approximately 38.7%.
At December 31, 2005, we had approximately 113,000 billable
subscriber communicators activated on our communications system
compared to approximately 75,000 billable subscriber
communicators at December 31, 2004, an increase of 50.3%.
For 2006, 2005 and 2004, the number of billable subscriber
communicators grew at a faster pace than our total service
revenues due in part to customary lags between subscriber
communicator activations and recognition of service revenues
from these units. Consistent with our strategy to focus on
customers with the potential for a high number of connections
with lower usage applications, we experienced an increase in the
mix of lower revenue per subscriber communicator applications
and negotiated a lower priced plan with a customer in order to
accommodate revisions to its applications. The increase in the
number of billable subscriber communicators was primarily by
customers with trailer tracking, heavy equipment monitoring and
in-cab truck monitoring applications. We expect the
growth rate of service revenues in 2007 to increase over the
growth rate in 2006, as service revenues for increased number of
subscriber communicators activated in prior years are recognized.
Product
sales
2006 vs. 2005: Revenue from product sales
increased $5.2 million in 2006, or 67.8%, to
$13.0 million, or approximately 52.8% of total revenues,
from $7.7 million, or approximately 49.7% of total revenues
in 2005. Included in product sales in 2006 and 2005 is
$0.2 million and $2.1 million, respectively, of
revenue recognized from the sale of a gateway earth station
which occurred in 2003. We recognized the revenue from the sale
of the gateway earth station upon installation, customer
acceptance and when collectibility was reasonably assured. Sales
of subscriber communicators and other equipment, excluding the
gateway earth station sale, increased $7.2 million or
128.7% in 2006. This increase was entirely derived from sales of
subscriber communicators and related peripheral equipment.
Subscriber communicator units sold in 2006 increased to
approximately 76,000 units as compared to approximately
27,000 units sold in 2005, an increase of approximately
178.0%. This growth was partially offset by a 19.8% decrease in
the average selling price of subscriber communicators which
resulted from our release in the second half of 2005 of two
lower-priced, higher performance subscriber communicators (DS
300 and DS 100 models). These two subscriber communicator models
represented approximately 68,000 or 90.2% and approximately
9,000, or 34.0%, of the total units sold in 2006 in 2005,
respectively. Based on orders received, as well as ongoing
discussions with existing and potential new customers, we expect
product revenues from sales of subscriber communicators to
increase in 2007 compared to 2006.
2005 vs. 2004: Revenue from product sales
increased $3.3 million during 2005, or 76.0%, to
$7.7 million, or approximately 49.7% of total revenues,
from $4.4 million, or approximately 40.4% of total
revenues, in 2004. Of this increase, $2.1 million was due
to revenue recognized in 2005 from the sale of a gateway earth
station which occurred in 2003. Sales of subscriber
communicators and other equipment, excluding the gateway earth
station, increased $1.2 million, or 27.6%, during 2005.
Subscriber communicator units sold in 2005 increased to
approximately 27,000 units from approximately
19,000 units sold in 2004, an increase of approximately
43.0%. This growth was partially offset by a 7.3% decrease in
the average selling price of subscriber communicators which
resulted from our release, in the second half of 2005, of two
lower-priced, higher performance subscriber communicators (DS
300 and DS 100 models).
Costs
of services
Costs of services include the expenses associated with our
engineering groups, the repair and maintenance of our ground
infrastructure, the depreciation associated with our
communications system and the amortization of licenses acquired
through our acquisition of Satcom in October 2005.
53
2006 vs. 2005: Cost of services increased by
$2.5 million, or 39.9%, to $8.7 million in 2006 from
$6.2 million in 2005. This increase was primarily due to
increased headcount in our engineering groups, which added
$1.1 million of costs including an increase of
$0.4 million in stock-based compensation expense resulting
from the adoption of SFAS 123(R) on January 1, 2006
using the modified prospective transition method, higher
equipment maintenance costs of $0.7 million as we made
improvements to our existing system infrastructure and the
amortization of licenses acquired in our acquisition of Satcom
of $0.7 million. Included in our costs of services in 2005
is the stock-based compensation expense that was being
recognized over the vesting periods for stock options that were
granted to employees in 2004 having an exercise price per share
less than the fair value of our common stock at the date of
grant. These amounts were not significant in 2005. We expect
costs of services as a percentage of service revenues to
decrease in 2007.
2005 vs. 2004: Costs of services increased by
$0.3 million, or 5.8%, to $6.2 million in 2005 from
$5.9 million in 2004. The increase was primarily related to
higher equipment maintenance and depreciation as we made
improvements to our existing system infrastructure and acquired
an additional operational gateway earth station in Curaçao.
Included in our costs of services is the stock-based
compensation expense that is being recognized over the vesting
periods for stock options that were granted to employees in 2004
having an exercise price per share less than the fair value of
our common stock at the date of grant. These amounts were not
significant in 2004.
Costs
of product sales
Costs of product sales include the cost of subscriber
communicators and related peripheral equipment, as well as the
operational costs to fulfill customer orders, including costs
for employees related to our Stellar subsidiary.
2006 vs. 2005: Costs of product sales
increased by $5.6 million, or 85.9%, to $12.1 million
in 2006 from $6.5 million in 2005. Product cost represented
90.3% of the cost of product sales in 2006, which increased by
$5.5 million, or 102.0% to $10.9 million in 2006 from
$5.4 million in 2005. Product cost also includes
$0.2 million of installation costs associated with the sale
of the gateway earth station recognized in 2005, which did not
have a carrying value. Excluding the 2003 gateway earth station
sale recognized in 2006 and 2005, which had a gross margin of
$0.2 million and $1.9 million, respectively, we had a
gross profit from product sales (revenues from product sales
minus costs of product sales) of $0.7 million for 2006 as
compared to a gross loss from product sales of $0.7 million
for 2005. The gross profit from product sales for 2006 was
reduced by an inventory impairment charge of $0.3 million
due to unanticipated lower demand for our older ST 2500 model
subscriber communicators because of the rapid acceptance of our
newer DS 300 and DS 100 models. In 2005, our subscriber
communicators (other than obsolete units) were sold at prices
above their direct acquisition costs but the volume was not
enough to cover the costs associated with distribution,
fulfillment and customer service costs. Stock-based compensation
expense was $0.1 million in 2006 as compared to nil in
2005. In 2007, we expect gross profit margins to be comparable
to 2006.
2005 vs. 2004: Costs of product sales
increased by $1.5 million, or 31.3%, to $6.5 million
in 2005 from $4.9 million in 2004. Product cost represented
84.0% of the cost of product sales in 2005 and 85.0% in 2004.
Equipment cost increased by $1.2 million to
$5.4 million in 2005 from $4.2 million in 2004,
primarily as a result of the increase in subscriber communicator
sales volume. Costs also include $0.2 million of
installation costs associated with the sale of a gateway earth
station recognized in 2005, which did not have any carrying
value. Excluding the gateway earth station sale recognized in
2005, which had a gross margin of $1.9 million, we had a
gross loss from product sales of $0.7 million and
$0.5 million in 2005 and 2004, respectively. The gross loss
in product sales in 2005 and 2004 was related to increase in
staffing to manage the Stellar business acquired in 2003. Our
subscriber communicators (other than obsolete units) are sold
for prices above their direct acquisition costs but the volume
of subscriber communicators sold in 2004 did not offset the
distribution, fulfillment and customer service costs associated
with completing customer orders.
Selling,
general and administrative expenses
Selling, general and administrative expenses relate primarily to
compensation and associated expenses for employees in general
management, sales and marketing and finance, as well as outside
professional fees related to preparing for compliance with
Section 404 of the Sarbanes-Oxley Act, recruiting fees,
litigation expenses and regulatory matters.
54
2006 vs. 2005: Selling general and
administrative expenses increased $6.4 million, or 68.4%,
to $15.7 million in 2006 from $9.3 million in 2005.
This increase is primarily due to a $0.9 million increase
in professional service fees, primarily related to consulting
fees related to preparing for compliance with Section 404
of the Sarbanes-Oxley Act and other professional fees,
regulatory matters and investor relations and a
$5.1 million increase in payroll costs due to increased
headcount as we prepared to become a public company including an
increase of $3.2 million in stock-based compensation
resulting primarily from the granting of restricted stock units
and stock appreciation rights in October 2006. In 2005,
stock-based compensation was $0.2 million.
2005 vs. 2004: Selling, general and
administrative expenses increased $0.7 million, or 8.1%, to
$9.3 million in 2005 from $8.6 million in 2004. This
increase is primarily due to a $1.7 million increase in
professional service fees, mostly related to litigation and a
$0.6 million increase in payroll costs related to staff
expansion during 2005, offset by a decrease of $1.3 million
in stock-based compensation. Included in selling, general and
administrative expenses is the stock-based compensation expense
that is being recognized over the vesting periods for stock
options that were issued to employees in 2004 having an exercise
price per share less than the fair value of our common stock at
the date of grant. Stock-based compensation was
$1.5 million and $0.2 million in 2005 and 2004,
respectively.
In 2007, we expect the growth rate of selling, general and
administrative expenses to moderate, excluding stock-based
compensation, over the prior year growth rates, as significant
costs were incurred in 2006 to build the infrastructure to be a
public company.
In 2007, we expect stock-based compensation to increase from
2006 primarily due to the timing as to the achievement of
certain 2006 performance targets in March 2007 plus achievement
of the 2007 performance targets established in February 2007 by
our Compensation Committee.
Product
development expenses
Product development expenses consist primarily of the expenses
associated with the staff of our engineering development team,
along with the cost of third parties that are contracted for
specific development projects.
2006 vs. 2005: Product development expenses
increased $0.5 million, or 35.3%, to $1.8 million in
2006 from $1.3 million in 2005. This increase is primarily
due to $0.3 million paid to third parties performing design
work for future satellites and an increase in payroll costs of
$0.2 million primarily due to increased headcount including
an increase of $0.1 million in stock-based compensation. In
2005 stock-based compensation was not significant. Based on
planned projects, product development expenses in 2007 are
expected to be comparable to 2006.
2005 vs. 2004: Product development expenses
increased $0.5 million, or 72.4%, to $1.3 million in
2005 from $0.8 million in 2004. This increase is due to
$0.5 million paid to Delphi in 2005 for the joint
development of new subscriber communicators (DS 300 and DS 100
models) that we began selling in the third quarter of 2005.
Included in our product development expenses in 2004 is
stock-based compensation that is being recognized over the
vesting periods for stock options that were granted to employees
in 2004 having an exercise price per share less than the fair
value of our common stock at the date of grant. These amounts
were not significant in 2004.
Other
income (expense)
Other income (expense) is comprised primarily of interest income
from our cash and cash equivalents, which consists of interest
bearing instruments, including commercial paper, and our
investments in floating rate redeemable municipal debt
securities classified as
available-for-sale
marketable securities, foreign exchange gains, interest expense,
the amortization of the fair value of beneficial conversion
features of warrants and issuance costs and loss on the
extinguishment of our notes payable.
2006 vs. 2005: Other income was
$2.6 million in 2006 compared to other expense of
$1.3 million in 2005. In 2006, interest income was
$2.6 million compared to less than $0.1 million in
2005. This increase was due to increased investment balances
resulting from the proceeds received from the issuance of our
Series B preferred stock in December 2005 and January 2006
and net proceeds received from our initial public offering
completed in November 2006. We expect that interest income will
increase then gradually decrease as cash is used for our capital
expenditures, working capital purposes and to fund operating
losses. In 2006, foreign exchange gains was
55
$0.3 million compared to nil in 2005. This increase was due
to a full year of operations of foreign subsidiaries that we
acquired in October 2005. In 2006, interest expense was
$0.2 million compared to $0.3 million in 2005. In
2005, we had a loss on extinguishment of notes payable of
$1.0 million, which was related to the conversion of the
bridge notes issued in November and December 2005 having
unamortized costs associated with debt issuance costs that were
expensed upon conversion of the notes payable into Series B
preferred stock.
2005 vs. 2004: In 2005 and 2004, other expense
consisted of interest expense and loss on extinguishment of
debt. Interest expense decreased $1.0 million to
$0.3 million in 2005 from $1.3 million in 2004. This
decrease is due to having a lower average of notes payable
outstanding during 2005 than during 2004. The loss on
extinguishment of notes payable decreased $0.8 million to
$1.0 million in 2005 from $1.8 million in 2004. The
loss on extinguishment in 2004 was related to the conversion of
notes having unamortized costs, associated with warrants and
beneficial conversion features including issuance costs in the
amount of $1.8 million, which were expensed upon conversion
of the notes into Series A preferred stock.
Net
loss and net loss applicable to common shares
2006 vs. 2005: As a result of the items
described above, we had a net loss of $11.2 million in
2006, compared to a net loss of $9.1 million in 2005, an
increase in the net loss of $2.1 million. Our net loss
applicable to common shares (net loss adjusted for dividends
required on shares of preferred stock and accretion in preferred
stock carrying value) was $29.6 million in 2006, as
compared to $15.4 million in 2005, an increase, of
$14.2 million. This increase was primarily related to the
$10.1 million payment to our holders of the Series B
preferred stock in connection with obtaining consents required
for the automatic conversion of the Series B preferred
stock in connection with our initial public offering.
2005 vs. 2004: As a result of the items
described above, we had a net loss of $9.1 million in 2005,
compared to a net loss of $12.4 million in 2004, a decrease
of $3.3 million. Our net loss applicable to common shares
(net loss adjusted for dividends required on shares of preferred
stock and accretion in preferred stock carrying value) totaled
$14.2 million in 2005 and $14.5 million in 2004. The
net loss attributable to the period from January 1, 2004 to
February 16, 2004, prior to our becoming a corporation and
issuing shares of common stock, has been excluded from our net
loss applicable to common shares for 2004 as we were a limited
liability company.
Liquidity
and Capital Resources
Overview
Our liquidity requirements arise from our working capital needs
and to fund capital expenditures to support our current
operations, and facilitate growth and expansion. Since our
inception, we have financed our operations primarily through
private placements of debt, convertible redeemable preferred
stock, membership interests and common stock. We have incurred
losses from operations since inception, including a net loss of
$11.2 million in 2006 and as of December 31, 2006 we
have an accumulated deficit of $59.8 million. As of
December 31, 2006, our primary source of liquidity
consisted of cash, cash equivalents and marketable securities,
consisting of floating rate redeemable municipal debt
securities, totaling $100.9 million.
Initial
Public Offering
On November 8, 2006, we completed our initial public
offering of 9,230,800 shares of common stock at a price of
$11.00 per share. After deducting underwriters
discounts and commissions and offering expenses we received
proceeds of approximately $89.5 million. From these net
proceeds we paid accumulated and unpaid dividends totaling
$7.5 million to the holders of Series B preferred
stock, a $3.6 million contingent purchase price payment
relating to the acquisition of Satcom and a $10.1 million
payment to the holders of Series B preferred stock in
connection with obtaining consents required for the automatic
conversion of the Series B preferred stock into common
stock upon completion of the IPO. As a result all outstanding
shares of Series A and B preferred stock converted into
21,383,318 shares of common stock.
56
Operating
activities
Cash used in our operating activities in 2006 was
$8.9 million resulting from a net loss of
$11.2 million, offset by adjustments for non-cash items of
$6.4 million and $4.1 million used for working
capital. Adjustments for non-cash items primarily consisted of
$2.4 million for depreciation and amortization,
$0.3 million for inventory impairments and
$3.9 million for stock-based compensation. Working capital
activities primarily consisted of a net use of cash of
$1.2 million for an increase in accounts receivable
primarily related to the increase in our revenues and the timing
of collections, a use of cash of $2.0 million for
inventories primarily related to the increase in our revenues
due to the strong demand of our newer DS 300 and DS 100 model
subscriber communicators and a net use of cash of
$2.9 million for a decrease in accounts payable and accrued
expenses primarily related to payments for professional fees in
connection with our Series B stock financing and our
initial public offering. The uses of cash described above were
offset by sources of cash from an increase of $1.5 million
in deferred revenue primarily related to billings we rendered in
connection with our Coast Guard demonstration satellite
scheduled for launch during 2007 and a decrease of
$0.5 million in advances to a contract manufacturer.
Cash provided by our operating activities in 2005 was
$3.6 million resulting from a net loss of
$9.1 million, offset by adjustments for non-cash items of
$3.5 million and $9.3 million generated by working
capital. Adjustments for non-cash items primarily consisted of
$2.0 million for depreciation and amortization,
$1.0 million for loss on extinguishment of debt and
$0.2 million for stock-based compensation. Working capital
activities primarily consisted of a source of cash from a
decrease of $3.0 million in advances to contract
manufacturer related to the production of our ST 2500 subscriber
communicator model, and an increase of $3.3 million in
deferred revenue primarily related to billings we rendered in
connection with our Coast Guard demonstration satellite
scheduled for launch during the second quarter of 2007 and an
increase of $2.9 million to accounts payable and accrued
liabilities primarily related to the increase in professional
fees in connection with our Series B stock financing and
our initial public offering.
Cash used in our operating activities in 2004 was
$16.1 million resulting from a net loss of
$12.4 million, offset by adjustments for non-cash items of
$6.2 million and $9.9 million used in working capital.
Adjustments for non-cash items primarily consisted of
$1.5 million for depreciation and amortization,
$1.5 million for stock-based compensation,
$1.8 million for loss on extinguishment of debt and
$0.7 million for amortization of deferred debt issuance
costs and debt discount. Working capital primarily consisted of
a net use of cash resulting from a $4.4 million increase in
accounts receivable related to our Coast Guard demonstration
satellite and a increase in revenues, $1.5 million increase
in inventories, a $3.6 million increase in advances to
contract manufacturer, which are both related to the increase in
our revenues, and a $2.6 million decrease in accounts
payable and accrued liabilities primarily related to payroll tax
payments. The uses of cash described above were offset by a
source of cash from an increase of $3.2 million in deferred
revenue primarily related to billings rendered in connection
with our Coast Guard demonstration satellite scheduled for
launch during 2007.
Investing
activities
Cash used in our investing activities in 2006 was
$64.8 million resulting from capital expenditures of
$22.4 million and purchases of marketable securities
consisting of floating rate redeemable municipal debt securities
totaling $43.9 million and a contingent purchase price
payment of $3.6 million relating to the acquisition of
Satcom offset by sales of marketable securities of
$5.0 million. Capital expenditures included
$1.4 million for the Coast Guard demonstration satellite
and $17.4 million for the quick-launch and next-generation
satellites and $3.6 million of improvements to our internal
infrastructure and Ground Segment.
Cash used in our investing activities in 2005 was
$4.0 million resulting primarily from capital expenditures
of $3.5 million for the Coast Guard demonstration satellite
and $0.5 million of improvements to our internal
infrastructure.
Cash used in our investing activities in 2004 was
$2.5 million resulting primarily from capital expenditures
of $1.7 million for the Coast Guard demonstration
satellite, $0.4 million to upgrade our gateway earth
stations and $0.4 million of improvements to our internal
infrastructure.
57
All of our costs incurred with the construction of the Coast
Guard demonstration satellite and our quick-launch satellites
are recorded as assets under construction in our consolidated
financial statements. As of December 31, 2006, we have
incurred $23.6 million of such costs with $6.6 million
of costs related to the construction of the Coast Guard
demonstration satellite and $17.0 million related to our
quick-launch satellites
Financing
activities
Cash provided by our financing activities in 2006 was
$67.5 million resulting primarily from $89.5 million
in net proceeds received from our initial public offering of our
common stock, after deducting underwriters discounts and
commissions and offering costs. In connection with our initial
public offering, we made payments of accumulated and unpaid
dividends totaling $7.5 million to the holders of our
Series B preferred stock and a $10.1 million payment
to the holders of Series B preferred stock in connection
with obtaining consents required for the automatic conversion of
the Series B preferred stock into common stock upon
completion of the IPO. We also received net proceeds of
$1.4 million from the issuance of an additional
260,895 shares of Series B preferred stock, after
deducting issuance costs, and proceeds of $1.5 million from
the issuance of an aggregate of 619,580 shares of common
stock upon the exercise of warrants to purchase common stock at
per share exercise prices ranging from $2.33 to $4.26. We made
dividend payments to our Series A preferred stock holders
totaling $8.0 million in January of 2006.
Cash provided by our financing activities in 2005 was
$65.7 million resulting from $25.0 million in gross
proceeds received from the issuance of convertible notes in
November and December 2005, offset by deferred financing costs
payments of $1.0 million. In December, 2005, we issued
17.6 million shares of Series B preferred stock, which
included the conversion of the convertible notes into
Series B preferred stock and we received additional net
proceeds of $41.7 million, after deducting issuance costs
of $4.3 million.
Cash provided by our financing activities in 2004 was
$21.8 million resulting from $1.3 million received in
proceeds received from the issuance of bridge notes prior to our
Reorganization. Concurrent with our Reorganization on
February 17, 2004, we entered into Series A preferred
stock private placement and received net proceeds of
$24.2 million after deducting issuance costs of
$2.6 million. These proceeds were offset by repayments of
convertible notes and notes payable totaling $3.5 million
that were issued prior to 2004.
Future
Liquidity and Capital Resource Requirements
We expect cash flows from operating activities, along with our
existing cash and cash equivalents and marketable securities
will be sufficient to provide working capital and fund capital
expenditures, which primarily includes the deployment of
additional satellites for the next 12 months. In 2007, we
expect to incur between $65.0 million and
$75.0 million of additional capital expenditures primarily
for our quick-launch and next-generation satellites.
Contractual
Obligations
The following table summarizes our contractual obligations at
December 31, 2006 and the effect that those obligations are
expected to have on our liquidity and cash flows in future
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by Period
|
|
|
|
|
|
|
Less than
|
|
|
1 to
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
3 Years
|
|
|
3 Years
|
|
|
|
(In thousands)
|
|
|
Quick-launch procurement agreements
|
|
$
|
20,500
|
|
|
$
|
18,400
|
|
|
$
|
2,100
|
|
|
$
|
|
|
Operating leases
|
|
|
1,853
|
|
|
|
995
|
|
|
|
858
|
|
|
|
|
|
Gateway earth station purchase
obligation
|
|
|
944
|
|
|
|
944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,297
|
|
|
$
|
20,339
|
|
|
$
|
2,958
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Quick-launch
procurement agreements
On April 21, 2006, we entered into an agreement with
Orbital Sciences Corporation to supply the payloads for our six
quick-launch satellites. The price of the six payloads is
$17 million, subject to price adjustments for late
penalties and on-time or early delivery incentives. As
December 31, 2006, we had made payments totaling
$10.5 million pursuant to this agreement.
On June 5, 2006, we entered into an agreement with
OHB-System AG, an affiliate of OHB Technology A.G., to design,
develop and manufacture six satellite buses, integrate such
buses with the payloads to be provided by Orbital Sciences
Corporation, and launch the six integrated satellites. The price
for the six satellite buses and related integration and launch
services is $20 million and payments under the agreement
are due upon specific milestones achieved by OHB-System AG. If
OHB-System AG meets specific on-time delivery milestones, we
would be obligated to pay up to an additional $1.0 million.
In addition, OHB-System AG will provide preliminary services
relating to the development, demonstration and launch of our
next-generation satellites at a cost of $1.35 million. We
have the option, exercisable on or before June 5, 2007, to
require OHB-System AG to design, develop and manufacture up to
two additional satellite buses and integrate two satellite
payloads at a cost of $2.1 million per satellite. As of
December 31, 2006, we have made payments totaling
$6.0 million pursuant to this agreement.
Related
parties
The information in Part III, Item 13, Certain
Relationships and Related Transactions, is incorporated
herein by reference.
Off-
Balance sheet Arrangements
None
Recent
Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) an interpretation of FASB
Statement No. 109, Accounting for Income Taxes.
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in
accordance with SFAS 109 and prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 will be effective for us beginning January 1,
2007. We do not believe that the adoption of FIN 48 will
have a material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157), to
define fair value, establish a framework for measuring fair
value in conformity with accounting principles generally
accepted in the United Sates of America, which expands
disclosures about fair value measurements. SFAS 157
requires quantitative disclosures using a tabular format in all
periods (interim and annual) and qualitative disclosures about
the valuation techniques used to measure fair value in all
annual periods. SFAS 157 will be effective for us beginning
January 1, 2008. We are currently evaluating the impact
this standard will have on our consolidated financial statements.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements When Quantifying Misstatements in Current
Year Financial Statements (SAB 108).
SAB 108 requires analysis of misstatements using both an
income statement (rollover) approach and a balance sheet (iron
curtain) approach in assessing materiality and provides for a
one-time cumulative effect transition adjustment. SAB 108
is effective for fiscal years ending on or after
November 15, 2006. The adoption of SAB 108 did not have a
material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 expands opportunities
to use fair value measurements in financial reporting and
permits entities to choose to measure many financial instruments
and certain other items at fair value. SFAS 159 will
59
be effective for us on January 1, 2008. We are currently
evaluating the impact of adopting SFAS 159 on our consolidated
financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
rate risk
Interest rate risk is not material because our notes payable
have a fixed interest rate.
Effects
of inflation risk
Overall, we believe that the impact of inflation risk on our
business will not be significant.
Foreign
currency risk
We expect that an increasing percentage of our revenues will be
derived from sources outside of the United States, which will
subject us to foreign currency risk. The majority of our
existing contracts require our customers to pay us in
U.S. dollars. However, our licensees, country
representatives and resellers generally derive their revenues
from their customers outside of the United States in local
currencies. Accordingly, changes in exchange rates between the
U.S. dollar and such local currencies could make the cost
of our services uneconomic for our customers and we may be
required to reduce our rates to make the cost of our services
economical in certain markets. In addition, currency controls,
trade restrictions and other disruptions in the currency
convertibility or foreign currency exchange markets could
negatively impact the ability of our customers to obtain
U.S. dollars with which to pay our fees.
It is also possible in the future that we may not be able to
contractually require that our service fees be paid in
U.S. dollars in which case we will be exposed to foreign
currency risks directly.
Concentration
of credit risk
Our customers are primarily commercial organizations
headquartered in the United States. Accounts receivable are
generally unsecured. In 2006, 2005 and 2004, one customer, GE
Equipment Services accounted for 49.5%, 31.4% and 37.2% of our
consolidated revenues, respectively. We have no bad debt expense
from this customer. In 2005, we recognized $2.1 million, or 13%
of our consolidated revenues, upon installation of a gateway
earth station sold pursuant to a contract entered into with
LeoSat LLP in 2003.
Vendor
risk
Currently, substantially all of our subscriber communicators are
manufactured by a contract manufacturer, Delphi Automotive
Systems LLC, a subsidiary of Delphi Corporation, which is under
bankruptcy protection. Our communicators are manufactured by a
Delphi affiliate in Mexico, which we do not believe will be
impacted by the Delphi bankruptcy.
Market
rate risk
As of December 31, 2006, we held investments in marketable
securities consisting of floating rate redeemable municipal debt
securities totaling $38.9 million. We classify our
marketable securities as
available-for-sale.
The primary objectives of our investment activities are to
preserve capital, maintain sufficient liquidity to meet
operating requirements while at the same time maximizing income
we receive from our investments without significantly increasing
our risk. However, our marketable securities totaling
$38.9 million as of December 31, 2006 may be subject
to market risk and will fall in value if market interest rates
increase. These marketable securities are priced and
subsequently traded as short-term investments because of the
interest rate reset feature. Interest rates are reset through an
auction process at predetermined periods ranging from 28 to
35 days. Due to the short period between the interest rate
reset dates, we believe that our exposure to interest rate risk
is not significant. A hypothetical 1% movement in market
interest rates would not have a significant impact on the fair
value of our marketable securities.
60
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The consolidated financial statements of ORBCOMM Inc., and
subsidiaries including the notes thereto and the report thereon,
is presented beginning at
page F-1
of this
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
In July, 2005, we dismissed J.H. Cohn LLP as our principal
accountants and engaged Deloitte & Touche LLP, as our
independent auditors. The decision to change independent
auditors was recommended by our Audit Committee and approved by
our board of directors. We did not consult with Deloitte &
Touche LLP regarding any matters prior to its engagement.
Item 9A. Controls
and Procedures
Disclosure
Controls and Procedures
In connection with preparation of this Annual Report on From
10-K, we
carried out an evaluation, under the supervision and with the
participation of our management including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of December 31, 2006. The term disclosure controls
and procedures, as defined in
Rules 13a-15(e)
and 15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its
principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating
the cost-benefit relationship of possible controls and
procedures. Based on the evaluation of our disclosure controls
and procedures as of December 31, 2006, our Chief Executive
Officer and Chief Financial Officer concluded that, as of such
date, our disclosure controls and procedures were effective.
Internal
Control over Financial Reporting
This annual report on
Form 10-K
does not include a report of managements assessment
regarding internal control over financial reporting or an
attestation report of the companys registered public
accounting firm due to a transition period established by rules
of the Securities and Exchange Commission for newly public
companies.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during the fiscal quarter ended
December 31, 2006 that have materially affected, or is
reasonably likely to materially affect, our internal controls
over financial reporting.
Remediation
of Material Weaknesses in Internal Control identified in
2005
The following material weaknesses in our internal control over
financial reporting were identified and communicated to us by
our independent registered public accounting firm in connection
with the audit of our consolidated financial statements for the
year ended December 31, 2005:
|
|
|
|
|
Inadequate internal communication procedures between our
management and the internal accounting staff on significant
and/or complex transactions;
|
|
|
|
A lack of thorough and rigorous review of contractual documents
supporting complex transactions;
|
61
|
|
|
|
|
A significant number of adjustments to our 2005 and 2004
financial statements, the recording of which resulted in
material changes to our results of operations for each year;
|
|
|
|
The absence of formal internal control procedures and the
attendant control framework required to enforce those
procedures; and
|
|
|
|
An insufficient number of qualified accounting personnel,
specifically within the external financial reporting area.
|
During 2006, to remediate these material weaknesses and improve
the effectiveness of our internal controls, we took the
following actions:
|
|
|
|
|
Hired a new Chief Financial Officer and key senior accounting
and finance employees;
|
|
|
|
Established weekly updates from our technical operations team to
provide enhanced communications throughout the Company;
|
|
|
|
Established weekly finance meetings, which include all key
finance employees, to address significant and/or complex
transactions;
|
|
|
|
Established procedures to ensure that all relevant documents and
contracts relating to business transactions are sent to the
accounting department for thorough review to provide improved
reporting capability;
|
|
|
|
Formalized the monthly closing process, which includes and
account reconciliation process for all balance sheet and income
statement accounts and a review of reconciliations by accounting
management; and
|
|
|
|
Engaged a national consulting firm to assist us with complying
with the Sarbanes-Oxley Act. We are also in the process of
implementing an integrated accounting and financial system
infrastructure, which we believe will allow management to report
on, and our independent registered public accounting firm to
attest to, our internal controls, as required by the management
certification and auditor attestation requirements mandated by
the Sarbanes-Oxley Act. We are performing system and process
evaluation and are in the process of remediation and
re-documentation of our internal control system.
|
Management believes these actions have remediated the material
weaknesses identified by our independent registered public
accounting firm in connection with the audit for the year ended
December 31, 2005.
|
|
Item 9B.
|
Other
information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Identification
of Directors
Reference is made to the information regarding directors under
the heading Election of Directors (Proposal 1)
in the Proxy Statement for our 2007 Annual Meeting of
stockholders to be held on May 11, 2007, ( the 2007
Proxy Statement), which information is hereby incorporated
by reference.
Identification
of Executive Officers
Reference is made to the information regarding executive
officers under the heading Executive Officers of the
Registrant in Part I, Item 1 of this Annual
Report on
Form 10-K.
Identification
of Audit Committee and Audit Committee Financial
Expert
Reference is made to the information regarding directors under
the heading Election of Directors (Proposal 1) Board
of Directors and Committees Audit Committee in
our 2007 Proxy Statement, which information hereby is
incorporated by reference.
62
Material
Changes to Procedures for Recommending Directors
Reference is made to the information regarding directors under
the heading Election of Directors (Proposal 1)
in our 2007 Proxy Statement, which information is hereby
incorporated by reference.
Compliance
with Section 16(a) of the Exchange Act
Reference is made to the information under the heading
Section 16(a) Beneficial Ownership Reporting
Compliance Board of Directors and Committees
in our 2007 Proxy Statement, which information is hereby
incorporated by reference.
Code of
Ethics
We have adopted a code of ethics, or Code of Business Conduct,
to comply with the rules of the SEC and Nasdaq. Our Code of
Business Conduct applies to our directors, officers and
employees, including our principal executive officer and senior
financial officers. A copy of our Code of Business Conduct is
maintained on our website at www.orbcomm.com.
|
|
Item 11.
|
Executive
Compensation
|
Reference is made to the information under the heading
Executive Compensation in our 2007 Proxy Statement,
which information is hereby incorporated by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Beneficial
Ownership
Reference is made to the information under the heading
Security Ownership of Certain Beneficial Owners and
Management in our 2007 Proxy Statement, which information
is hereby incorporated by reference.
Equity
Compensation Plan Information
Reference is made to the information under the heading
Equity Compensation Plan Information in our 2007
Proxy Statement, which information is hereby incorporated by
reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
ORBCOMM
EUROPE
We have entered into a service license agreement covering 43
jurisdictions in Europe and a gateway services agreement with
ORBCOMM Europe LLC, a company in which we indirectly own a 25.5%
interest. The service license agreement and the gateway services
agreement with ORBCOMM Europe contain terms and conditions
substantially similar to the service license agreements and the
gateway services agreements we have and expect to enter into
with other licensees, except for certain more favorable pricing
terms. ORBCOMM Europe is owned 50% by Satcom International Group
plc. (Satcom) and 50% by OHB Technology A.G.
(OHB Technology). We own a 51% interest in Satcom.
Subsequent to the acquisition of our 51% interest in Satcom,
Satcom and ORBCOMM Europe are consolidated affiliates in our
consolidated financial statements.
OHB Technology is a substantial stockholder and a direct
investor of ours and its Chief Executive Officer is on our board
of directors. In addition, Satcom has been appointed by ORBCOMM
Europe as a country representative for the United Kingdom,
Ireland and Switzerland. ORBCOMM Deutschland and Technikom
Polska, affiliates of OHB Technology, have been appointed by
ORBCOMM Europe as country representatives for Germany and
Poland, respectively. OHB Technology is also a 34% stockholder
of Elta S.A. the country representative for France. These
entities hold the relevant regulatory authority and
authorization in each of these jurisdictions. In addition,
ORBCOMM Europe and Satcom have entered into an agreement
obligating ORBCOMM Europe to enter into a country representative
agreement for Turkey with Satcom, if the current country
representative agreement for Turkey expires or is terminated for
any reason.
63
In connection with the organization of ORBCOMM Europe and the
reorganization of our business in Europe, we agreed to grant
ORBCOMM Europe approximately $3.7 million in air time
credits. The amount of the grant was equal to the amount owed by
ORBCOMM Global L.P. to the European Company for Mobile
Communications Services N.V. (MCS), the former
licensee for Europe of ORBCOMM Global L.P. ORBCOMM Europe, in
turn, agreed to issue credits in the aggregate amount of the
credits received from us to MCS and its country representatives
who were stockholders of MCS. Satcom, as a country
representative for the United Kingdom, Ireland and Switzerland,
received airtime credits in the amount of $580,200. ORBCOMM
Deutschland, as country representative for Germany, received
airtime credits of $449,800. Because approximately
$2.8 million of the airtime credits were granted to
stockholders of MCS who are not related to us and who continue
to be country representatives in Europe, we believe that
granting of the airtime credits was essential to permit ORBCOMM
Europe to reorganize the ORBCOMM business in Europe. The airtime
credits have no expiration date. As of December 31, 2006
approximately $2.7 million of the credit granted by us to
ORBCOMM Europe remained unused.
SATCOM
INTERNATIONAL GROUP PLC.
Satcom is our 51%-owned consolidated subsidiary which
(i) owns 50% of ORBCOMM Europe, (ii) has entered into
country representative agreements with ORBCOMM Europe, covering
the United Kingdom, Ireland and Switzerland, and (iii) has
entered into a service license agreement with us, covering
substantially all of the countries of the Middle East and a
significant number of countries of Central Asia, and a gateway
services agreement with us. In addition, ORBCOMM Europe and
Satcom have entered into an agreement obligating ORBCOMM Europe
to enter into a country representative agreement for Turkey with
Satcom, if the current country representative agreement for
Turkey expires or is terminated for any reason. We believe that
the service license agreement and the gateway services agreement
between us and Satcom contain terms and conditions substantially
similar to those which we have and expect to enter into with
other unaffiliated licensees. As of December 31, 2006,
Satcom owed us unpaid fees of approximately $188,000.
We acquired our 51% interest in Satcom from Jerome Eisenberg,
our Chief Executive Officer, and Don Franco, a former officer of
ours, who immediately prior to the October 2005 reorganization
of Satcom, together owned directly or indirectly a majority of
the outstanding voting shares of Satcom and held a substantial
portion of the outstanding debt of Satcom. On October 7,
2005, pursuant to a contribution agreement entered into between
us and Messrs. Eisenberg and Franco in February 2004, we
acquired all of their interests in Satcom in exchange for
(1) an aggregate of 620,000 shares of our
Series A preferred stock and (2) a contingent cash
payment in the event of our sale or initial public offering. The
contribution agreement was entered into in connection with our
February 2004 reorganization in order to eliminate any potential
conflict of interest between us and Messrs. Eisenberg and
Franco, in their capacities as officers of ours. The contingent
payment would equal $2 million, $3 million or
$6 million in the event the proceeds from our sale or the
valuation in our IPO exceeds $250 million,
$300 million or $500 million, respectively, subject to
proration for amounts that fall in between these thresholds. On
November 8, 2006, upon completion of our IPO, we made a
contingent payment of approximately $3.6 million.
Immediately prior to, and as a condition to the closing of, the
Satcom acquisition, Satcom and certain of its stockholders and
noteholders, consummated a reorganization transaction whereby
95% of the outstanding principal of demand notes, convertible
notes and certain contract debt was converted into equity, and
accrued and unpaid interest on such demand and convertible notes
was acknowledged to have been previously released. This
reorganization included the conversion into equity of the demand
notes and convertible notes of Satcom held by
Messrs. Eisenberg and Franco in the principal amounts of
approximately $50,000 and $6,250,800, respectively, and the
release of any other debts of Satcom owed to them.
As of December 31, 2006, ORBCOMM Europe had a note payable
to Satcom in the amount of 1,466,920 ($1,902,190). This
note has the same payment terms as the note payable from ORBCOMM
Europe to OHB Technology described below under
OHB Technology A.G. and carries a zero
interest rate. For accounting purposes, this note has been
eliminated in the consolidation of ORBCOMM Europe and Satcom
with ORBCOMM Inc. We own 51% of Satcom, which in turn owns 50%
of ORBCOMM Europe.
We have provided Satcom with a $1.0 million line of credit
for working capital purposes pursuant to a revolving note dated
as of December 30, 2005. The revolving loan bears interest
at 8% per annum and was originally
64
schedule to mature on December 30, 2006, and is secured by
all of Satcoms assets, including its membership interest
in ORBCOMM Europe. As of December 31, 2006 and 2005, Satcom
had $465,000 and $0, respectively, outstanding under this line
of credit. On December 22, 2006, we extended the maturity
date to December 31, 2007.
OHB
TECHNOLOGY A.G.
On May 21, 2002, we entered into an IVAR agreement with OHB
Technology (formerly known as OHB Teledata A.G.) whereby OHB
Technology has been granted non-exclusive rights to resell our
services for applications developed by OHB Technology for the
monitoring and tracking of mobile tanks and containers. As of
June 30, 2006, OHB Technology did not owe us any unpaid
service fees.
In an unrelated transaction, on March 10, 2005, we entered
into an ORBCOMM concept demonstration satellite bus, integration
test and launch services procurement agreement with OHB-System
AG (an affiliate of OHB Technology), whereby OHB-System AG will
provide us with overall concept demonstration satellite design,
bus module and payload module structure manufacture, payload and
bus module integration, assembled satellite environmental tests,
launch services and on-orbit testing of the bus module for the
Concept Validation Project.
OHB Technology owns 2,682,457 shares of our common stock,
and warrants to purchase 86,542 shares of our common stock
representing approximately 6.7% of our total shares on a fully
diluted basis. For as long as the Series A preferred stock
was outstanding, OHB had the right to appoint a representative
to our board of directors. Marco Fuchs was initially OHB
Technologys representative on our board of directors. In
addition, SES and OHB Technology jointly had the right to
appoint a representative to our board of directors. Robert
Bednarek was SESs and OHB Technologys joint
representative on our board of directors. On February 27,
2007, Mr. Bednarek resigned, effective immediately, as a
member of our board of directors in connection with SESs
agreement to sell its 5.5% equity position in us to General
Electric Company as part of a larger pending transaction in
which SES has agreed to buy back GEs 19.5% equity position
in SES. Mr. Bednarek served as a member of our Nominating
and Corporate Governance Committee. Mr. Bednareks
term as a Class II director was scheduled to expire at our
2008 annual meeting of stockholders.
In connection with the acquisition of an interest in Satcom (see
Satcom International Group plc. above),
we recorded an indebtedness to OHB Technology arising from a
note payable from ORBCOMM Europe to OHB Technology. At
December 31, 2006 the principal balance of the note payable
is 1,138,410 ($1,502,005) and it has a carrying value of
$879,000. This note does not bear interest and has no fixed
repayment term. Repayment will be made from the distribution
profits (as defined in the note agreement) of ORBCOMM Europe.
The note has been classified as long-term and we do not expect
any repayments to be required prior to December 31, 2007.
On June 5, 2006, we entered into an agreement with
OHB-System AG, an affiliate of our shareholder OHB Technology,
to design, develop and manufacture for us six satellite buses,
integrate such buses with the payloads to be provided by Orbital
Sciences Corporation, and launch the six integrated satellites
to complete our quick launch program., with options
for two additional satellite buses and related integration
services exercisable on or before June 5, 2007. The price
for the six satellite buses and related integration and launch
services is $20 million, or up to a total of
$24.2 million if the options for the two additional
satellite buses and related integration services are exercised,
subject to certain price adjustments for late penalties and
on-time or early delivery incentives. As of December 31,
2006, we have made payments totaling $6.0 million pursuant
to this agreement. In addition, under the agreement, OHB-System
AG will provide preliminary services relating to the
development, demonstration and launch of our next-generation
satellites at a cost of $1.35 million.
ORBCOMM
ASIA LIMITED
On May 8, 2001, we signed a memorandum of understanding
with OAL outlining the parties intention to enter into a
definitive service license agreement on terms satisfactory to us
covering Australia, China, India, New Zealand, Taiwan and
Thailand. Although the parties commenced negotiations toward
such an agreement, a definitive agreement was never concluded
and the letter of intent terminated by its terms. We believe OAL
is approximately 90% owned by Gene Hyung-Jin Song, a stockholder
of ours who owns shares of our common stock, representing less
than 1% of our total shares on a fully diluted basis. OAL owns
786,588 shares of our common stock, representing 1.9% of
our total shares on a fully diluted basis. It is currently our
intention to consider operating
65
service licenses
and/or
country representative agreements for these territories on a
country by country basis as prospective parties demonstrate the
ability, from a financial, technical and operations point of
view, to execute a viable business plan. During 2003, 2004 and
2005, OAL owed us amounts for costs related to the storage in
Virginia of gateway earth stations owned by OAL. On
September 14, 2003, OAL pledged certain assets to us to
ensure OALs debt to us would be paid (Pledge
Agreement). On August 29, 2005, we foreclosed on a
warehousemans lien against OAL and took possession of
three of the four gateway earth stations being stored by OAL in
Virginia in satisfaction of the outstanding amounts owed to us
by OAL. We continue to store the remaining gateway earth station
owned by OAL in Virginia and as of December 31, 2006 no
amounts were owed to us related to this storage. In addition, we
and OAL had a dispute that was recently decided in our favor in
arbitration. See Part 1, Item 3, Legal
Proceedings.
ORBCOMM
JAPAN LIMITED
To ensure that regulatory authorizations held by ORBCOMM Japan
Limited (OJ) in Japan were not jeopardized at the
time we purchased the assets from ORBCOMM Global L.P., and with
the understanding that a new service license agreement would be
entered into between the parties, we assumed the service license
agreement entered into between ORBCOMM Global L.P. and OJ. We
and OJ undertook extensive negotiations for a new service
license agreement from early 2002 until 2004 but were unable to
reach agreement on important terms. We believe Mr. Gene
Hyung-Jin Song is the beneficial owner of approximately 38% of
OJ. On September 14, 2003, OAL pledged certain assets to us
pursuant to a Pledge Agreement to ensure that certain amounts
owed by OJ to us under the existing service license agreements
would be paid. On January 4, 2005, we sent a notice of
default to OJ for its failure to remain current with payments
under the service license agreement and subsequently terminated
the agreement when the default was not cured. On March 31,
2005, OJ made a partial payment of the amount due of $350,000.
In 2005, we agreed to a standstill (the Standstill
Agreement) under the Pledge Agreement (including as to OAL
and Korea ORBCOMM Limited (KO)) and conditional
reinstatement of the prior service license agreement, subject to
our receiving payment in full of all debts owed by OJ, KO and
OAL to us by December 15, 2005 and certain operational
changes designed to give us more control over the Japanese and
Korean gateway earth stations. The outstanding amounts owed by
OJ to us were not repaid as of December 15, 2005 and as of
December 31, 2006 and 2005, OJ owed us approximately
$343,000 and $385,000 in unpaid fees, respectively. On
February 22, 2006, we sent a notice of default to OJ for
its failure to satisfy its obligations under the Standstill
Agreement including its failure to make the required payments
under the service license agreement and if the defaults are not
cured in the near future, we intend to terminate the agreement
as a result of such default.
KOREA
ORBCOMM LIMITED
To ensure that regulatory authorizations held by KO in South
Korea were not jeopardized at the time ORBCOMM LLC purchased the
assets from the ORBCOMM Global L.P., and with the understanding
that a new service license agreement would be entered into
between the parties, we assumed the service license agreement
entered into between ORBCOMM Global L.P. and KO. We and KO
undertook extensive negotiations for a new service license
agreement from early 2002 until 2004 but were unable to reach
agreement on important terms. We believe Mr. Gene Hyung-Jin
Song is the beneficial owner of approximately 33% of KO. On
September 14, 2003, OAL pledged certain assets to us to
ensure that certain amounts owed to us by KO under the existing
service license agreement would be paid. On January 4,
2005, we sent a notice of default to KO for its failure to
remain current with payments under the service license agreement
and subsequently terminated the agreement when the default was
not cured. In 2005, we agreed to a standstill with respect to
the default by KO as part of the Standstill Agreement and
conditional reinstatement of the prior service license
agreement. The outstanding amounts owed by KO to us were not
repaid as of December 15, 2005 and as of December 31,
2006 and 2005, KO owed us approximately $116,000 and $149,000 in
unpaid service fees, respectively. On April 5, 2006, we
sent a notice of default to KO for its failure to comply with
the Standstill Agreement and if the defaults are not cured in
the near future, we intend to terminate the service license
agreement as a result of such defaults.
66
SISTRON
INTERNATIONAL LLC
In connection with the Series A preferred stock financing
discussed below under Series A and
Series B Preferred Stock Financings, Messrs. J.
Eisenberg and Franco sold all of their interest in Sistron
International LLC, a reseller that had developed an application
for the electric utility industry, to us for a purchase price
equal to their cash investment in Sistron of approximately
$0.4 million, paid in 84,942 shares of Series A
preferred stock issued at the same purchase price per share as
paid by investors in the Series A preferred stock financing.
SES
GLOBAL S.A.
On February 17, 2004, we entered into an IVAR Agreement
with SES Global S.A. (SES) whereby SES has been
granted exclusive rights during the initial term of the
agreement to resell our services for return channel applications
developed by SES for the
Direct-to-Home
TV market. As of December 31, 2006, SES did not owe us any
unpaid service fees. SES owns SES Participations (formerly named
SES Global Participations S.A.), the holder of
2,000,001 shares of our common stock representing
approximately 4.8% of our total shares on a fully diluted basis.
In addition, SES Global and OHB Technology jointly had the right
to appoint a representative to our board of directors. Robert
Bednarek was SESs and OHB Technologys representative
on our board of directors. On February 27, 2007,
Mr. Bednarek resigned, effective immediately, as a member
of our board of directors in connection with SESs
agreement to sell its 5.5% equity position in us to GE as part
of a larger pending transaction in which SES S.A. has agreed to
buy back GEs 19.5% equity position in SES.
Mr. Bednarek served as a member of our Nominating and
Corporate Governance Committee . Mr. Bednareks term
as a Class II director was scheduled to expire at our 2008
annual meeting of stockholders.
SERIES A
AND SERIES B PREFERRED STOCK FINANCINGS
On February 17, 2004, we completed a private placement of
Series A convertible redeemable preferred stock at a
purchase price of $2.84 per share, or an aggregate of
approximately $17.9 million, to SES, Ridgewood Satellite
LLC (including conversion of the note issued to Ridgewood
Satellite LLC) OHB Technology, Northwood Ventures LLC and
Northwood Capital Partners LLC, entities with whom individuals
who were directors at the time of the Series A financing
were affiliated and Jerome Eisenberg, our Chairman and Chief
Executive Officer. All shares outstanding shares of
Series A convertible preferred stock automatically
converted into shares of our common stock in connection with our
IPO.
In November and December 2005 and January 2006, we completed
private placements in the amount of approximately
$72.5 million, consisting of 10% convertible promissory
notes due February 16, 2010, warrants to purchase our
common stock, and our Series B convertible redeemable
preferred stock to PCG Satellite Investments, LLC (an affiliate
of the Pacific Corporate Group), MH Investors Satellite LLC (an
affiliate of MH Equity Investors), entities with whom
individuals who were directors at the time of the Series B
financing were affiliated and several existing investors,
including Ridgewood Capital, OHB Technology, Northwood Ventures
LLC, and several members of senior management.
The Series A preferred stock holders were entitled to
receive a cumulative 12% annual dividend. The Series A
preferred stock dividend was eliminated upon the issuance of the
Series B preferred stock in December 2005. In January 2006,
we paid all accumulated dividends on its Series A preferred
stock totaling $8.0 million. Holders of the Series B
preferred stock were entitled to receive a cumulative 12%
dividend annually payable in cash in arrears. On
November 8, 2006, upon the closing of its IPO, we paid all
accumulated dividends on its Series B preferred stock
totaling $7.5 million.
On October 12, 2006, we obtained written consents of
holders who collectively held in excess of two-thirds of the
Series B preferred stock, to the automatic conversion of
the Series B preferred stock into shares of common stock,
upon the closing of an initial public offering at a price per
share of not less than $11.00. In consideration for the holders
of the Series B preferred stock providing their consents,
we agreed to make a contingent payment to all of the holders of
the Series B preferred stock if the price per share of the
initial public offering was between $11.00 and $12.49 per share,
determined as follows: (i) 12,014,227 (the number of shares
of our common stock into which all of the shares of the
Series B preferred stock would convert at the then-current
conversion price) multiplied by (ii) the difference between
(a) $6.045 and (b) the quotient of (I) the
initial public offering price divided by (II) 2.114.
67
On November 8, 2006, we closed the IPO at a price of $11.00
per share and made a $10.1 million payment to the holders
of Series B preferred stock in connection with obtaining
consents required for the automatic conversion of the
Series B preferred stock into our common stock.
Certain purchasers of the Companys Series B preferred
stock were obligated to purchase an additional
10,297,767 shares of Series B preferred stock in March
2007 at $4.03 per share, unless a qualified sale or a qualified
initial public offering occurred prior to that time. These
rights were terminated upon the closing of the IPO.
REGISTRATION
RIGHTS AGREEMENT
On December 30, 2005, and in connection with the
Series B preferred stock financing described above, we
entered into a Second Amended and Restated Registration Rights
Agreement with the Series B preferred stock investors and
existing holders of our Series A preferred stock and common
stock who were parties to the Amended and Restated Registration
Rights Agreement dated February 17, 2004.
Beginning any time after the first to occur of eighteen months
after December 30, 2005 and six months after an initial
public offering of our common stock or, after the fifth
anniversary of the date of the agreement, certain holders of
common stock (including common stock issued upon the conversion
of Series A preferred stock and Series B preferred
stock) will have the right to demand, at any time or from time
to time, that we file up to two registration statements
registering the common stock. Only holders of (i) at least
two-thirds of the registrable securities (generally our common
stock and common stock issued upon conversion of our preferred
stock and warrants) outstanding as of the date of the our IPO,
(ii) at least 35% of the registrable securities outstanding
as of the date of the demand or (iii) a specified number of
holders of common stock issued upon conversion of our
Series B preferred stock may request a demand registration.
In addition, certain holders will be entitled to an additional
demand registration statement on
Form S-3
covering the resale of all registrable securities, provided that
we will not be required to effect more than one such demand
registration statement on
Form S-3
in any twelve month period or to effect any such demand
registration statement on
Form S-3
if any such demand registration statement on
Form S-3
will result in an offering price to the public of less than
$20 million. Notwithstanding the foregoing, after we
qualify to register our common stock on
Form S-3,
Sagamore Hill Hub Fund Ltd. and its affiliates
(collectively, Sagamore) and PCG Satellite
Investments, LLC, CALPERS/PCG Corporate Partners, LLC and their
affiliates (the PCG Entities) will have separate
rights to additional demand registrations that would be eligible
for registration on
Form S-3;
provided, that we will not be required to effect more than one
such demand registration requested by Sagamore or the PCG
Entities, as the case may be, on
Form S-3
in any twelve month period and that Sagamore or the PCG
Entities, as the case may be, will pay the expenses of such
registration if such registration shall result in an aggregate
offering price to the public of less than $1 million.
Certain investors also have preemptive rights and piggyback
registration rights as specified in our Second Amended and
Restated Registration Rights Agreement.
Reference is made to the information under the heading
Election of Directors (Proposal 1) Board
of Directors and Committees in our 2007 Proxy Statement,
which information is hereby incorporated by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Reference is made to the information under the heading
Ratification of Selection of Independent Registered Public
Accounting Firm (Proposal 2) Principal
Accountant Fees in our 2007 Proxy Statement, which
information is hereby incorporated by reference.
68
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statements Schedules
|
(a)(1) Financial
Statements
See Index to Consolidated Financial Statements appearing on
page F-1.
(a)(2) Financial
Statement Schedules
Schedule II-
See Index to Consolidated Financial Statements appearing on
page F-1
Financial statement schedules not filed herein have been omitted
as they are not applicable or the required information or
equivalent information has been included in the financial
statements or the notes thereto.
(a)(3) Exhibits
See Exhibit Index attached hereto and incorporated by
reference herein.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, ORBCOMM Inc. has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fort Lee, State
of New Jersey, on March 27, 2007.
ORBCOMM Inc.
|
|
|
|
By:
|
/s/ Jerome
B. Eisenberg
|
Jerome B. Eisenberg
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed on March 27, 2007 by the
following persons in the capacities indicated:
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ Jerome
B. Eisenberg
Jerome
B. Eisenberg
|
|
Chairman of the Board and Chief
Executive Officer, and Director (principal executive officer)
|
|
|
|
/s/ Marco
Fuchs*
Marco
Fuchs
|
|
Director
|
|
|
|
/s/ Ronald
Gerwig*
Ronald
Gerwig
|
|
Director
|
|
|
|
/s/ Timothy
Kelleher*
Timothy
Kelleher
|
|
Director
|
|
|
|
/s/ Hans
E.W. Hoffmann*
Hans
E.W. Hoffmann
|
|
Director
|
|
|
|
/s/ Gary
H. Ritondaro*
Gary
H. Ritondaro
|
|
Director
|
|
|
|
/s/ Robert
G. Costantini
Robert
G. Costantini
|
|
Executive Vice President and Chief
Financial Officer
(principal financial and accounting officer)
|
|
|
|
|
|
*By:
|
|
/s/ Christian
G. LeBrun
Christian
G. LeBrun, Attorney-in-Fact**
|
|
|
|
**By authority of the power of
attorney filed as Exhibit 24 hereto.
|
70
INDEX TO
CONSOLIDATED FINANCIAL STATEMEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-41
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ORBCOMM Inc.
Fort Lee, New Jersey
We have audited the accompanying consolidated balance sheets of
ORBCOMM Inc. and subsidiaries (the Company) as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, changes in membership interests and
stockholders equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2006. Our
audits also included the information included in the financial
statement schedule listed in the Index at
page F-1.
These consolidated financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2006 and 2005, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the information included in the
financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
As discussed in Note 3 to the consolidated financial
statements, the Company changed its method of accounting for
stock-based compensation to adopt the provisions of Statement of
Financial Accounting Standards No. 123(R), Share-Based
Payment, effective January 1, 2006.
/s/ DELOITTE &
TOUCHE LLP
New York, New York
March 27, 2007
F-2
ORBCOMM
Inc.
Consolidated
Balance Sheets
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
62,139
|
|
|
$
|
68,663
|
|
Marketable securities
|
|
|
38,850
|
|
|
|
|
|
Accounts receivable, net of
allowances for doubtful accounts of $297 and $671 as of
December 31, 2006 and December 31, 2005 (includes
amounts due from related parties of $459 as of December 31,
2006 and $543 as of December 31, 2005)
|
|
|
5,185
|
|
|
|
3,550
|
|
Inventories
|
|
|
3,528
|
|
|
|
2,747
|
|
Advances to contract manufacturer
|
|
|
177
|
|
|
|
701
|
|
Prepaid expenses and other current
assets
|
|
|
1,354
|
|
|
|
727
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
111,233
|
|
|
|
76,388
|
|
Long-term receivable
related party
|
|
|
372
|
|
|
|
472
|
|
Satellite network and other
equipment, net
|
|
|
29,131
|
|
|
|
7,787
|
|
Intangible assets, net
|
|
|
7,058
|
|
|
|
4,375
|
|
Other assets
|
|
|
299
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
148,093
|
|
|
$
|
89,316
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE
REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
(DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,438
|
|
|
$
|
2,330
|
|
Accrued liabilities
|
|
|
4,915
|
|
|
|
8,198
|
|
Current portion of deferred revenue
|
|
|
2,083
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,436
|
|
|
|
11,103
|
|
Note payable related
party
|
|
|
879
|
|
|
|
594
|
|
Deferred revenue, net of current
portion
|
|
|
8,066
|
|
|
|
8,052
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
19,381
|
|
|
|
19,749
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred
stock:
|
|
|
|
|
|
|
|
|
Series A, par value $0.001;
15,000,000 shares authorized as of December 31, 2005;
none and 14,053,611 shares issued and outstanding as of
December 31, 2006 and 2005 (liquidation preference value of
$8,027 as of December 31, 2005)
|
|
|
|
|
|
|
45,500
|
|
|
|
|
|
|
|
|
|
|
Series B, par value $0.001;
30,000,000 shares authorized as of December 31, 2005;
none and 17,629,999 shares issued and outstanding as of
December 31, 2006 and 2005 (liquidation preference value of
$71,049 as of December 31, 2005)
|
|
|
|
|
|
|
66,721
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
(deficit):
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001;
250,000,000 shares authorized as of December 31, 2006;
36,923,715 and 5,690,017 shares issued and outstanding as
of December 31, 2006 and 2005
|
|
|
37
|
|
|
|
6
|
|
Additional paid-in capital
|
|
|
188,917
|
|
|
|
5,882
|
|
Accumulated other comprehensive
(loss) income
|
|
|
(395
|
)
|
|
|
90
|
|
Accumulated deficit
|
|
|
(59,847
|
)
|
|
|
(48,632
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
128,712
|
|
|
|
(42,654
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible
redeemable preferred stock and stockholders equity
(deficit)
|
|
$
|
148,093
|
|
|
$
|
89,316
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
ORBCOMM
Inc.
Consolidated
Statements of Operations
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
11,561
|
|
|
$
|
7,804
|
|
|
$
|
6,479
|
|
Product sales
|
|
|
12,959
|
|
|
|
7,723
|
|
|
|
4,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
24,520
|
|
|
|
15,527
|
|
|
|
10,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and
expenses(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of services
|
|
|
8,714
|
|
|
|
6,223
|
|
|
|
5,884
|
|
Costs of product sales
|
|
|
12,092
|
|
|
|
6,459
|
|
|
|
4,921
|
|
Selling, general and administrative
|
|
|
15,731
|
|
|
|
9,344
|
|
|
|
8,646
|
|
Product development
|
|
|
1,814
|
|
|
|
1,341
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses
|
|
|
38,351
|
|
|
|
23,367
|
|
|
|
20,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(13,831
|
)
|
|
|
(7,840
|
)
|
|
|
(9,363
|
)
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,582
|
|
|
|
66
|
|
|
|
49
|
|
Other income
|
|
|
271
|
|
|
|
|
|
|
|
|
|
Interest expense, including
amortization of deferred debt issuance costs and debt discount
of $31 and $722 in 2005 and 2004
|
|
|
(237
|
)
|
|
|
(308
|
)
|
|
|
(1,318
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
(1,016
|
)
|
|
|
(1,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,616
|
|
|
|
(1,258
|
)
|
|
|
(3,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,215
|
)
|
|
$
|
(9,098
|
)
|
|
$
|
(12,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common
shares (Note 5)
|
|
$
|
(29,646
|
)
|
|
$
|
(14,248
|
)
|
|
$
|
(14,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.80
|
)
|
|
$
|
(2.51
|
)
|
|
$
|
(2.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
10,601
|
|
|
|
5,683
|
|
|
|
5,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Related party
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
374
|
|
|
$
|
566
|
|
|
$
|
517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
62
|
|
|
$
|
66
|
|
|
$
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Stock-based
compensation included in costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of services
|
|
$
|
425
|
|
|
$
|
7
|
|
|
$
|
31
|
|
Costs of product sales
|
|
|
71
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,355
|
|
|
|
183
|
|
|
|
1,436
|
|
Product development
|
|
|
94
|
|
|
|
11
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,945
|
|
|
$
|
201
|
|
|
$
|
1,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
membership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
other
|
|
|
|
|
|
interests and
|
|
|
|
|
|
|
Membership interest units
|
|
|
Common Stock
|
|
|
paid-in
|
|
|
comprehensive
|
|
|
Accumulated
|
|
|
stockholders
|
|
|
Comprehensive
|
|
|
|
Units
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
income
|
|
|
deficit
|
|
|
equity (deficit)
|
|
|
loss
|
|
|
Balances, January 1,
2004
|
|
|
8,486,901
|
|
|
$
|
11,495
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(27,042
|
)
|
|
$
|
(15,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrants and
beneficial conversion rights related to convertible bridge notes
|
|
|
|
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of ORBCOMM LLC
membership interest units into common stock of ORBCOMM Inc.
|
|
|
(8,486,901
|
)
|
|
|
(12,331
|
)
|
|
|
5,657,934
|
|
|
|
6
|
|
|
|
12,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with
the sale of Series A redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series A
convertible redeemable preferred stock in connection with the
acquisition of Sistron International LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(362
|
)
|
|
|
|
|
|
|
(103
|
)
|
|
|
(465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Series A preferred stock
dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,318
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock
issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,516
|
|
|
|
|
|
|
|
|
|
|
|
1,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in exchange for
services rendered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,389
|
)
|
|
|
(12,389
|
)
|
|
$
|
(12,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
5,657,934
|
|
|
|
6
|
|
|
|
10,695
|
|
|
|
|
|
|
|
(39,534
|
)
|
|
|
(28,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
|
|
|
|
|
|
|
|
32,083
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Series A preferred stock
dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,709
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock
issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(441
|
)
|
|
|
|
|
|
|
|
|
|
|
(441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,098
|
)
|
|
|
(9,098
|
)
|
|
$
|
(9,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
|
|
|
|
|
|
90
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
5,690,017
|
|
|
|
6
|
|
|
|
5,882
|
|
|
|
90
|
|
|
|
(48,632
|
)
|
|
|
(42,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock
issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(854
|
)
|
|
|
|
|
|
|
|
|
|
|
(854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B preferred stock
dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,467
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public offering of common
stock, net of underwriters discounts and commissions and
offering costs
|
|
|
|
|
|
|
|
|
|
|
9,230,800
|
|
|
|
9
|
|
|
|
89,473
|
|
|
|
|
|
|
|
|
|
|
|
89,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible
reedemable Series A and B preferred stock into common stock
|
|
|
|
|
|
|
|
|
|
|
21,383,318
|
|
|
|
21
|
|
|
|
106,492
|
|
|
|
|
|
|
|
|
|
|
|
106,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consent payment to holders of
Series B preferred stock for the automatic conversion into
common stock in connection with IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,111
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
619,580
|
|
|
|
1
|
|
|
|
1,557
|
|
|
|
|
|
|
|
|
|
|
|
1,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,945
|
|
|
|
|
|
|
|
|
|
|
|
3,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,215
|
)
|
|
|
(11,215
|
)
|
|
$
|
(11,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(485
|
)
|
|
|
|
|
|
|
(485
|
)
|
|
|
(485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31,
2006
|
|
|
|
|
|
$
|
|
|
|
|
36,923,715
|
|
|
$
|
37
|
|
|
$
|
188,917
|
|
|
$
|
(395
|
)
|
|
$
|
(59,847
|
)
|
|
$
|
128,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
ORBCOMM
Inc.
Consolidated
Statements of Cash Flows
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,215
|
)
|
|
$
|
(9,098
|
)
|
|
$
|
(12,389
|
)
|
Adjustments to reconcile net loss
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in allowance for doubtful
accounts
|
|
|
(374
|
)
|
|
|
82
|
|
|
|
427
|
|
Inventory impairments
|
|
|
361
|
|
|
|
115
|
|
|
|
56
|
|
Depreciation and amortization
|
|
|
2,373
|
|
|
|
1,982
|
|
|
|
1,480
|
|
Amortization of deferred debt
issuance costs and debt discount
|
|
|
|
|
|
|
31
|
|
|
|
722
|
|
Accretion on notes
payable related party
|
|
|
131
|
|
|
|
33
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
1,016
|
|
|
|
1,757
|
|
Stock-based compensation
|
|
|
3,945
|
|
|
|
201
|
|
|
|
1,516
|
|
Warrants issued in exchange for
services
|
|
|
|
|
|
|
|
|
|
|
248
|
|
Changes in operating assets and
liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,161
|
)
|
|
|
1,014
|
|
|
|
(4,437
|
)
|
Inventories
|
|
|
(1,964
|
)
|
|
|
(642
|
)
|
|
|
(1,528
|
)
|
Advances to contract manufacturer
|
|
|
524
|
|
|
|
3,046
|
|
|
|
(3,572
|
)
|
Prepaid expenses and other current
assets
|
|
|
(95
|
)
|
|
|
(366
|
)
|
|
|
(896
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(2,913
|
)
|
|
|
2,902
|
|
|
|
(2,612
|
)
|
Deferred revenue
|
|
|
1,522
|
|
|
|
3,325
|
|
|
|
3,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
(8,866
|
)
|
|
|
3,641
|
|
|
|
(16,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(22,357
|
)
|
|
|
(4,066
|
)
|
|
|
(2,491
|
)
|
Purchase of marketable securities
|
|
|
(43,850
|
)
|
|
|
|
|
|
|
|
|
Sale of marketable securities
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
Contingent purchase price payment
made in connection with the acquisition of Satcom International
Group plc.
|
|
|
(3,631
|
)
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of
cash acquired
|
|
|
|
|
|
|
33
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(64,838
|
)
|
|
|
(4,033
|
)
|
|
|
(2,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of bank debt
|
|
|
|
|
|
|
|
|
|
|
(104
|
)
|
Proceeds from issuance of
Series A preferred stock net of issuance costs of $2,595
|
|
|
|
|
|
|
|
|
|
|
24,227
|
|
Proceeds from issuance of
Series B preferred stock net of issuance costs of $113 and
$4,328
|
|
|
1,465
|
|
|
|
41,702
|
|
|
|
|
|
Proceeds from issuance of common
stock in connection with initial public offering, net of
underwriters discounts and commissions and offering costs
of $11,447
|
|
|
90,092
|
|
|
|
|
|
|
|
|
|
Payment made to holders of
Series B preferred stock for consent to the automatic
conversion into common stock in connection with the initial
public offering
|
|
|
(10,111
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
10% convertible bridge notes
|
|
|
|
|
|
|
25,019
|
|
|
|
1,250
|
|
Proceeds from exercise of common
stock warrants
|
|
|
1,558
|
|
|
|
|
|
|
|
|
|
Payment of Series A preferred
stock dividends
|
|
|
(8,027
|
)
|
|
|
|
|
|
|
|
|
Payment of Series B preferred
stock dividends
|
|
|
(7,467
|
)
|
|
|
|
|
|
|
|
|
Repayment of 10% convertible
bridge notes
|
|
|
|
|
|
|
|
|
|
|
(922
|
)
|
Repayment of 18% convertible
bridge notes
|
|
|
|
|
|
|
|
|
|
|
(2,341
|
)
|
Repayment of note payable to
Eurovest Holdings Ltd.
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
Payments for deferred financing
costs
|
|
|
|
|
|
|
(1,047
|
)
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
67,510
|
|
|
|
65,674
|
|
|
|
21,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
|
|
(330
|
)
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(6,524
|
)
|
|
|
65,347
|
|
|
|
3,238
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
68,663
|
|
|
|
3,316
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
62,139
|
|
|
$
|
68,663
|
|
|
$
|
3,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
disclosures (Note 18):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
|
$
|
187
|
|
|
$
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
|
|
Note 1.
|
Organization
and Business
|
ORBCOMM Inc. (ORBCOMM or the Company), a
Delaware corporation, is a satellite-based data communication
company that operates a two-way global wireless data messaging
system optimized for narrowband data communication. The Company
provides these services through a constellation of 30 owned and
operated low-Earth orbit satellites and accompanying ground
infrastructure through which small, low power, fixed or mobile
subscriber communicators (Communicators) can be
connected to other public or private networks, including the
Internet (collectively, the ORBCOMM System). The
ORBCOMM System is designed to enable businesses and government
agencies to track, monitor, control and communicate with fixed
and mobile assets located nearly anywhere in the world.
The Company was formed in October 2003. On February 17,
2004, the members of ORBCOMM LLC contributed all of their
outstanding membership interests to the Company in exchange for
5,657,934 shares of common stock of the Company. As a
result, ORBCOMM LLC became a wholly owned subsidiary of the
Company (such transaction, in combination with the issuances of
preferred stock pursuant to the Stock Purchase Agreement
discussed below, is referred to as the
Reorganization). The Reorganization was accounted
for as a reverse acquisition of the Company by ORBCOMM LLC and a
related issuance of Series A preferred stock. Accordingly,
the historical consolidated financial statements of ORBCOMM LLC
became the historical consolidated financial statements of the
Company. ORBCOMM LLC, formerly a majority-owned subsidiary of
ORBCOMM Holdings LLC (Holdings), was organized as a
limited liability company in Delaware on April 4, 2001. On
April 23, 2001, ORBCOMM LLC acquired substantially all of
the non-cash assets and assumed certain liabilities of ORBCOMM
Global L.P. and its subsidiaries (the Predecessor
Company), which had filed petitions for relief under
Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware on
September 15, 2000. The Predecessor Company was a limited
partnership formed by Orbital Communications Corporation, a
subsidiary of Orbital Sciences Corporation, and Teleglobe Mobile
Partners, a subsidiary of Teleglobe Holdings Corporation.
The Reorganization included the closing of a Stock Purchase
Agreement (the Stock Purchase Agreement) among
ORBCOMM, ORBCOMM LLC and certain investors pursuant to which the
following occurred:
|
|
|
|
|
ORBCOMM issued 5,392,606 shares of Series A
convertible redeemable voting preferred stock
(Series A preferred stock) to new investors at
a price of $2.84 per share, and received gross proceeds
totaling $15,315.
|
|
|
|
Certain note holders of ORBCOMM LLC entered into agreements to
contribute the principal balances and accrued interest of their
notes, totaling $10,967, to ORBCOMM in exchange for
3,861,703 shares of Series A preferred stock at a
price of $2.84 per share.
|
|
|
|
Holders of warrants to purchase 2,736,997 membership interest
units of ORBCOMM LLC, representing all of the issued and
outstanding warrants of ORBCOMM LLC, entered into agreements to
contribute such warrants to ORBCOMM in exchange for warrants,
with substantially the same terms and conditions, to purchase
1,824,665 shares of common stock of ORBCOMM. The warrants
have exercise prices ranging from $2.33 per share to
$4.26 per share and expire starting November 2007 through
February 2009.
|
|
|
|
In August 2004, ORBCOMM issued an additional
4,051,888 shares of Series A preferred stock to new
and existing investors at $2.84 per share, pursuant to the
Stock Purchase Agreement and received gross proceeds of $11,507.
In connection with the sales of the Series A preferred
stock in February and August 2004, ORBCOMM incurred aggregate
issuance costs of $2,595.
|
|
|
Note 2.
|
Initial
Public Offering
|
On November 8, 2006, the Company closed its initial public
offering (IPO) of 9,230,800 shares of common
stock at a price of $11.00 per share. The Company received
net proceeds of approximately $89,500 from the IPO, after
deducting underwriters discounts and commissions and
offering costs of which $600 has not been paid as of
December 31, 2006. From the net proceeds, the Company paid
accumulated and unpaid dividends totaling $7,467 to the holders
of Series B preferred stock, contingent purchase price
consideration of $3,631 relating to the Satcom
F-7
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
Transaction (see Note 7) and $10,111 to the holders of
Series B preferred stock in connection with obtaining
consents required for the automatic conversion of the
Series B preferred stock into common stock (see
Note 12). All outstanding shares of Series A and B
preferred stock automatically converted into an aggregate of
21,383,318 shares of common stock upon completion of the
IPO.
The Company has incurred losses from inception including a net
loss $11,215 in 2006 and as of December 31, 2006, the
Company has an accumulated deficit of $59,847. As of
December 31, 2006, the Companys primary source of
liquidity consisted of cash and cash equivalents and marketable
securities, which the Company believes will be sufficient to
provide working capital and fund capital expenditures, which
primarily include the deployment of additional satellites which
will be comprised of the quick-launch and next-generation
satellites for the next twelve months.
|
|
Note 3.
|
Summary
of Significant Accounting Policies
|
Principles
of consolidation
The accompanying consolidated financial statements include the
accounts of the Company, its wholly owned and majority-owned
subsidiaries, and investments in variable interest entities in
which the Company is determined to be the primary beneficiary.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Investments in entities over which the Company has the ability
to exercise significant influence but does not have a
controlling interest are accounted for under the equity method
of accounting. The Company considers several factors in
determining whether it has the ability to exercise significant
influence with respect to investments, including, but not
limited to, direct and indirect ownership level in the voting
securities, active participation on the board of directors,
approval of operating and budgeting decisions and other
participatory and protective rights. Under the equity method,
the Companys proportionate share of the net income or loss
of such investee is reflected in the Companys consolidated
results of operations. Although the Company owns interests in
companies that it accounts for pursuant to the equity method,
the investments in those entities had no carrying value as of
December 31, 2006 and 2005, and the Company had no equity
in the earnings or losses of those investees for the years ended
December 31, 2006, 2005 and 2004. Non-controlling interests
in companies are accounted for by the cost method where the
Company does not exercise significant influence over the
investee. The Companys cost basis investments had no
carrying value as of December 31, 2006 and 2005.
Use of
estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenues and expenses at
the date of the consolidated financial statements and during the
reporting periods, and to disclose contingent assets and
liabilities at the date of the consolidated financial
statements. Actual results could differ from those estimates.
The most significant estimates relate to the allowances for
doubtful accounts, the useful lives and impairment of the
Companys satellite network, other equipment and license
rights, inventory valuation, the fair value of acquired assets,
the fair value of securities underlying share-based payment
arrangements and the realization of deferred tax assets.
Revenue
recognition
Product revenues are derived from sales of Communicators and
other equipment, such as gateway earth stations and gateway
control centers, to customers. The Company derives service
revenues from its resellers (i.e., its value added
resellers (VARs), international value added
resellers (IVARs), international licensees and
country representatives) and direct customers from utilization
of Communicators on the ORBCOMM System. These service revenues
consist of a one-time activation fee for each Communicator
activated for use and monthly usage
F-8
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
fees. Usage fees charged to customers are based upon the number,
size and frequency of data transmitted by a customer and the
overall number of Communicators activated by each customer.
Usage fees charged to the Companys VARs, IVARs,
international licensees and country representatives are charged
primarily based on the overall number of Communicators activated
by the VAR, IVAR, international licensee or country
representative and the total amount of data transmitted by their
customers. For one licensee customer, the Company charges usage
fees as a percentage of the licensees revenues. The
Company also earns revenues from providing engineering,
technical and management support services to customers, and from
license fees and royalties relating to the manufacture of
Communicators by third parties under certain manufacturing
agreements.
Revenues generated from the sale of Communicators and other
products are either recognized when the products are shipped or
when customers accept the products, depending on the specific
contractual terms. Sales of Communicators and other products are
not subject to return and title and risk of loss pass to the
customer at the time of shipment. Sales of Communicators are
primarily to VARs and IVARs are not bundled with services
arrangements. Revenues from sales of gateway earth stations and
related products are recognized upon customer acceptance.
Revenues from the activation of Communicators are initially
recorded as deferred revenues and are, thereafter, recognized
ratably over the term of the agreement with the customer,
generally three years. Revenues generated from monthly usage and
administrative fees and engineering services are recognized when
the services are rendered. Upfront payments for manufacturing
license fees are initially recorded as deferred revenues and are
recognized ratably over the term of the agreements, generally
ten years. Revenues generated from royalties relating to the
manufacture of Communicators by third parties are recognized
when the third party notifies the Company of the units it has
manufactured and a unique serial number is assigned to each unit
by the Company.
Amounts received prior to the performance of services under
customer contracts are recognized as deferred revenues and
revenue recognition is deferred until such time that all revenue
recognition criteria have been met.
For arrangements with multiple obligations (e.g.,
deliverable and undeliverable products, and other post-contract
support), the Company allocates revenues to each component of
the contract based on objective evidence of its fair value. The
Company recognizes revenues allocated to undelivered products
when the criteria for product revenues set forth above are met.
If objective and reliable evidence of the fair value of the
undelivered obligations is not available, the arrangement
consideration allocable to a delivered item is combined with the
amount allocable to the undelivered item(s) within the
arrangement. Revenues are recognized as the remaining
obligations are fulfilled.
Out-of-pocket
expenses incurred during the performance of professional service
contracts are included in costs of services and any amounts
re-billed to clients are included in revenues during the period
in which they are incurred. Shipping costs billed to customers
are included in product sales revenues and the related costs are
included as costs of product sales.
The Company, on occasion, issues options to purchase its equity
securities or the equity securities of its subsidiaries, or
issues shares of its common stock as an incentive in soliciting
sales commitments from its customers. The grant date fair value
of such equity instruments is recorded as a reduction of
revenues on a pro-rata basis as products or services are
delivered under the sales arrangement.
Costs
of revenues
Costs of product sales includes the purchase price of products
sold, shipping charges, costs of warranty obligations, payroll
and payroll related costs for employees who are directly
associated with fulfilling product sales and depreciation and
amortization of assets used to deliver products. Costs of
services is comprised of payroll and related costs, including
stock-based compensation, materials and supplies, depreciation
and amortization of assets used to provide services.
F-9
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
Foreign
currency translation
The Company has foreign operations where the functional currency
has been determined to be the local currency. For operations
where the local currency is the functional currency, assets and
liabilities are translated using
end-of-period
exchange rates; revenues, expenses and cash flows are translated
using average rates of exchange. For these operations, currency
translation adjustments are accumulated in a separate component
of stockholders deficit. Transaction gains and losses are
recognized in the determination of net income or loss.
Fair
value of financial instruments
The carrying value of the Companys short-term financial
instruments, including cash, accounts receivable, accounts
payable and accrued expenses approximated their fair value due
to the short-term nature of these items. There is no market
value information available for the Companys long-term
receivables and a reasonable estimate could not be made without
incurring excessive costs.
Cash
and cash equivalents
The Company considers all liquid investments with maturities of
three months or less, at the time of purchase, to be cash
equivalents.
Marketable
securities
Marketable securities consist of floating rate redeemable
municipal debt securities which have stated maturities ranging
from twenty to forty years. The Company classifies these
securities as
available-for-sale.
Management determines the appropriate classification of its
investments at the time of purchase and at each balance sheet
date.
Available-for-sale
securities are carried at fair value with unrealized gains and
losses, if any, reported in accumulated other comprehensive
income. Interest received on these securities is included in
interest income. Realized gains or losses upon disposition of
available-for-sale
securities are included in other income. As of December 31,
2006, the fair value of these securities approximates cost.
Concentration
of risk
The Companys customers are primarily commercial
organizations headquartered in the United States. Accounts
receivable are generally unsecured.
Accounts receivable are due in accordance with payment terms
included in contracts negotiated with customers. Amounts due
from customers are stated net of an allowance for doubtful
accounts. Accounts that are outstanding longer than the
contractual payment terms are considered past due. The Company
determines its allowance for doubtful accounts by considering a
number of factors, including the length of time accounts are
past due, the customers current ability to pay its
obligations to the Company, and the condition of the general
economy and the industry as a whole. The Company writes-off
accounts receivable when they are deemed uncollectible.
Long-term receivables represent amounts due from the sale of
products and services to related parties that are collateralized
by assets whose estimated fair market value exceeds the carrying
value of the receivables (see Note 15).
During the years ended December 31, 2006, 2005 and 2004,
one customer comprised 49.5%, 31.4% and 37.2% of revenues,
respectively. During 2005, a second customer comprised 13.5% of
revenues, resulting from the sale of a gateway earth station to
that customer. At December 31, 2006 and 2005, one customer
accounted for 60.3% and 41.9% of accounts receivable,
respectively.
A significant portion of the Companys Communicators are
manufactured under a contract by Delphi Automotive Systems LLC,
a subsidiary of Delphi Corporation, which is under bankruptcy
protection. The Communicators are manufactured by a Delphi
affiliate in Mexico, which the Company does not believe will
F-10
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
be impacted by the Delphi bankruptcy. As of December 31,
2006, there has been no interruption to the supply of
Communicators from Delphi.
The Company does not currently maintain in-orbit insurance
coverage for its satellites to address the risk of potential
systemic anomalies, failures or catastrophic events affecting
the existing satellite constellation. If the Company experiences
significant uninsured losses, such events could have a material
adverse impact on the Companys business.
Inventories
Inventories are stated at the lower of cost or market,
determined on a
first-in,
first-out basis. Inventory represents finished goods available
for sale to customers. The Company regularly reviews inventory
quantities on hand and adjusts the carrying value of excess and
obsolete inventory based on historical demand, as well as an
estimated forecast of product demand. Impairment charges for
excess and obsolete inventory are recorded in costs of product
sales in the accompanying consolidated statements of operations
and amounted to approximately $361, $115 and $56 for the years
ended December 31, 2006, 2005 and 2004, respectively.
Satellite
network and other equipment
Satellite network and other equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are recognized once an asset is placed in service
using the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized over the
shorter of their useful life or their respective lease term.
Satellite network includes costs of the constellation of
satellites, and the ground and control segments, consisting of
gateway earth stations, gateway control centers and the network
control center (the Ground Segment).
Assets under construction primarily consists of costs relating
to the design, development and launch of the Coast Guard
demonstration satellite, payload, bus and launch procurement
agreements for the quick-launch satellites and other related
costs, and upgrades to the Companys infrastructure and the
Ground Segment. Once these assets are placed in service they
will be transferred to satellite network and then depreciation
will be recognized using the straight-line method over the
estimated lives of the assets. No depreciation has been charged
on these assets as of December 31, 2006.
The cost of repairs and maintenance is charged to operations as
incurred; significant renewals and betterments are capitalized.
Capitalized
development costs
The Company capitalizes the costs of acquiring, developing and
testing software to meet the Companys internal needs.
Capitalization of costs associated with software obtained or
developed for internal use commences when both the preliminary
project stage is completed and management has authorized further
funding for the project, based on a determination that it is
probable that the project will be completed and used to perform
the function intended. Capitalized costs include only
(1) external direct cost of materials and services consumed
in developing or obtaining internal-use software, and
(2) payroll and payroll-related costs for employees who are
directly associated with and devote time to the internal-use
software project. Capitalization of such costs ceases no later
than the point at which the project is substantially complete
and ready for its intended use. Internal use software costs are
amortized once the software is placed in service using the
straight-line method over periods ranging from three to five
years. Prior to 2005, the Company did not capitalize any payroll
and payroll-related costs because in the opinion of management
these costs were not deemed capitalizable. Capitalized internal
use software costs are amortized using the straight-line method
over the estimated lives of the assets.
F-11
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
Intangible
assets
Intangible assets consist primarily of licenses acquired from
affiliates to market and resell the Companys services in
certain foreign geographic areas and related regulatory
approvals to allow the Company to provide its services in
various countries and territories. The Companys intangible
assets also include acquired intellectual property related to
the manufacture of Communicators. Intangible assets are stated
at their acquisition cost. The Company does not have any
indefinite lived intangible assets at December 31, 2006 and
2005.
Amortization of intangible assets is recognized using the
straight-line method over the estimated useful lives of the
assets.
Impairment
of long-lived assets
The Companys reviews its long-lived assets and amortizable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. In connection with this review, the Company
also reevaluates the periods of depreciation and amortization
for these assets. The Company recognizes an impairment loss when
the sum of the future undiscounted net cash flows expected to be
realized from the asset is less than its carrying amount. If an
asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset, which
is determined using the present value of net future operating
cash flows to be generated by the asset.
Debt
issuance costs and debt discount
Loan fees and other costs incurred in connection with the
issuance of notes payable are deferred and amortized over the
term of the related loan using the effective interest method.
Such amortization is reported as a component of interest expense.
The Company accounts for the intrinsic value of beneficial
conversion rights arising from the issuance of convertible debt
instruments with conversion rights that are
in-the-money
at the commitment date pursuant to Emerging Issues Task Force
(EITF) Issue
No. 98-5
and EITF Issue
No. 00-27.
Such value is measured based on the relative fair value of the
detachable convertible instrument and the associated debt and is
allocated to additional
paid-in-capital
(or members deficiency prior to the Reorganization) and
recorded as a reduction in the carrying value of the related
debt. The intrinsic value of beneficial conversion rights is
amortized to interest expense from the issuance date through the
earliest date the underlying debt instrument can be converted,
using the effective interest method.
Warrants, or any other detachable instruments issued in
connection with debt financing agreements are valued using the
relative fair value method and allocated to additional paid-in
capital (or members deficiency prior to the
Reorganization) and recorded as a reduction in the carrying
value of the related debt. This discount is amortized to
interest expense from the issuance date through the maturity
date of the debt using the effective interest method.
If debt is repaid, or converted into preferred or common stock,
prior to the full amortization of the related issuance costs,
beneficial conversion rights or debt discount, the remaining
balance of such items is recorded as loss on extinguishment of
debt in the Companys consolidated statements of
operations. Prepaid interest associated with notes payable is
recognized based on the terms of the related notes, generally in
the first interest periods of the notes.
Convertible
redeemable preferred stock
At the time of issuance, preferred stock is recorded at its
gross proceeds less issuance costs. The carrying value is
increased to the redemption value using the effective interest
method over the period from the date of issuance to the earliest
date of redemption. The carrying value of preferred stock is
also increased by cumulative unpaid dividends. At
December 31, 2006, the Company did not have any issued and
outstanding convertible redeemable preferred stock.
F-12
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
Income
taxes
Prior to February 17, 2004, the consolidated financial
statements did not include a provision for federal and state
income taxes because ORBCOMM LLC was treated as a partnership
for federal and state income tax purposes. As such, ORBCOMM LLC
was not subject to any income taxes, as any income or loss
through February 17, 2004 was included in the tax returns
of the individual members.
ORBCOMM LLC became a wholly owned subsidiary of the Company as
of February 17, 2004. The Company is a C
corporation and for income tax purposes has adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 109 Accounting for Income Taxes
(SFAS 109).
Under SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. Valuation allowances are established when realization of
deferred tax assets is not considered more likely than not.
Loss
contingencies
The Company accrues for costs relating to litigation, claims and
other contingent matters when such liabilities become probable
and reasonably estimable. Such estimates may be based on advice
from third parties or on managements judgment, as
appropriate. Actual amounts paid may differ from amounts
estimated, and such differences will be charged to operations in
the period in which the final determination of the liability is
made.
Stock-based
compensation
On January 1, 2006, the Company adopted
SFAS No. 123 (Revised 2004), Share-Based Payment
(SFAS 123(R)), which requires the
measurement and recognition of stock-based compensation expense
for all share-based payment awards made to employees and
directors based on estimated fair values.
The Company adopted SFAS 123(R) using the modified
prospective transition method. Under that transition method,
stock-based compensation expense recognized during the year
ended December 31, 2006 includes stock-based compensation
expense for all share-based payments granted prior to, but not
vested as of January 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123) and
stock-based compensation expense for all share-based payments
granted on or after January 1, 2006, based on the
grant-date fair value, estimated in accordance with provisions
of SFAS 123(R).
SFAS 123(R) requires companies the measurement and
recognition of compensation expense for all shared-based payment
awards made to employees and directors based on estimated fair
values. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite
service period. For awards with performance conditions, an
evaluation at the grant date and future periods as to the
likelihood of the performance criteria being met. Compensation
expense is adjusted in future periods for subsequent changes in
the expected outcome of the performance conditions until the
vesting date. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. In the Companys pro forma information required
under SFAS No. 123 for the periods prior to
January 1, 2006, the Company accounted for forfeitures as
they occurred. In accordance with the modified prospective
transition method, prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R).
Prior to January 1, 2006, the Company accounted for
stock-based compensation arrangements with employees in
accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, using the intrinsic
value method of accounting which requires charges
F-13
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
to stock-based compensation expense for the excess, if any, of
the fair value of the underlying stock at the date an employee
stock option is granted (or at an appropriate subsequent
measurement date) over the amount the employee must pay to
acquire the stock. For the years ended December 31, 2005
and 2004, the Company recorded the intrinsic value per share as
stock-based compensation over the applicable vesting period,
using the straight-line method. The Company provided the
required disclosures of SFAS No. 123, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure.
Stock-based awards to nonemployees prior to January 1,
2006 were accounted for under the provisions of
SFAS No. 123 and EITF Issue
No. 96-18,
Accounting for Equity Instruments Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods
or Services.
Recent
accounting pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) an interpretation of FASB
Statement No. 109, Accounting for Income Taxes.
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in
accordance with SFAS 109 and prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 will be effective for the Company beginning
January 1, 2007. The Company does not believe that the
adoption of FIN 48 will have a material impact on its
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157), to
define fair value, establish a framework for measuring fair
value in accordance with generally accepted accounting
principles (GAAP) and expand disclosures about fair value
measurements. SFAS 157 requires quantitative disclosures
using a tabular format in all periods (interim and annual) and
qualitative disclosures about the valuation techniques used to
measure fair value in all annual periods. SFAS 157 will be
effective for the Company beginning January 1, 2008. The
Company is currently evaluating the impact of adopting
SFAS 157.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements When Quantifying Misstatements in Current
Year Financial Statements (SAB 108).
SAB 108 requires analysis of misstatements using both an
income statement (rollover) approach and a balance sheet (iron
curtain) approach in assessing materiality and provides for a
one-time cumulative effect transition adjustment. SAB 108
is effective for fiscal years ending on or after
November 15, 2006. The adoption of this standard did not
have a material impact on the Companys Consolidated
Financial Statements.
In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 expands
opportunities to use fair value measurements in financial
reporting and permits entities to choose to measure many
financial instruments and certain other items at fair value.
SFAS 159 will be effective for the Company on
January 1, 2008. The Company is currently evaluating the
impact of adopting SFAS 159 on its consolidated financial
statements.
|
|
Note 4.
|
Stock-based
Compensation
|
In September 2006, the Companys stockholders approved the
2006 Long-Term Incentives Plan (the 2006 LTIP),
under which awards for an aggregate amount of
4,658,207 shares of common stock are available for grants
to directors and employees. The 4,658,207 shares available
for grant under the 2006 LTIP includes 202,247 shares of
common stock remaining available for grant under the
Companys 2004 stock option plan as of December 31,
2006 and will be increased by the number of shares underlying
awards under the 2004 stock option plan that have been cancelled
or forfeited since that date. The 2006 LTIP replaces in its
entirety the Companys 2006 stock option plan adopted in
December 2005. As of December 31, 2006, there were
3,690,413 remaining shares available for grant under the 2006
LTIP.
F-14
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
The 2006 LTIP provides for the grants of stock options (which
may be incentive stock options as defined in Section 422 of
the Internal Revenue Code of 1986, as amended, or non-qualified
stock options). The stock options granted may have a maximum
term of up to 10 years. The 2006 LTIP also provides for
awards of stock appreciation rights, common stock, restricted
stock, restricted stock units, performance units and performance
shares. The 2006 LTIP is administrated by the Compensation
Committee of the Companys Board of Directors, which
selects persons eligible to receive awards under the 2006 LTIP
and determines the number, terms, conditions, performance
measures and other provisions of the awards.
In 2004, the Company established the 2004 Stock Option Plan
which provides for the issuance of options to purchase up to
1,666,667 shares of common stock to officers, directors,
employees and consultants. At December 31, 2006, options to
purchase 202,247 shares were available for issuance under the
2004 stock option plan that are included in the 2006 LTIP as
discussed above. Options granted under the 2004 Stock Option
Plan have a maximum term of 10 years and vest over a period
determined by the Companys Board of Directors (generally
four years) at an exercise price per share determined by the
Board of Directors at the time of the grant. The 2004 stock
option plan expires 10 years from the effective date, or when
all options have been granted, whichever is sooner.
The Company recognized $3,945 of stock-based compensation
expense for the year ended December 31, 2006. The Company
has not recognized, and does not expect to recognize in the
foreseeable future, any tax benefit related to employee
stock-based compensation expense as a result of the full
valuation allowance on its net deferred tax assets and its net
operating loss carryforwards.
The components of the Companys stock-based compensation
expense are presented below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Stock options
|
|
$
|
651
|
|
|
$
|
201
|
|
|
$
|
1,516
|
|
Restricted stock units
|
|
|
2,904
|
|
|
|
|
|
|
|
|
|
Stock appreciation rights
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,945
|
|
|
$
|
201
|
|
|
$
|
1,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-
based compensation stock options granted under the
2004 Stock Option Plan
The fair value of stock options is estimated on the date of
grant using the Black-Scholes option pricing model with the
assumptions described below for the periods indicated. Expected
volatility was based on the stock volatility for comparable
publicly traded companies. The Company uses historical activity
to estimate the expected life of stock options, giving
consideration to the contractual terms and vesting schedules.
Estimated forfeitures were based on voluntary and involuntary
termination behavior as well as analysis of actual option
forfeitures. The risk-free interest rate was based on the
U.S. Treasury yield curve at the time of the grant over the
expected term of the stock option grants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005(1)
|
|
|
2004
|
|
|
Risk-free interest rate
|
|
|
4.64
|
%
|
|
|
|
|
|
|
2.33
|
%
|
Expected life (years)
|
|
|
4.00
|
|
|
|
|
|
|
|
3.00 to 4.00
|
|
Expected volatility factor
|
|
|
44.50
|
%
|
|
|
|
|
|
|
61.50
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
|
|
|
|
None
|
|
|
|
|
(1) |
|
There were no options granted in 2005. |
In February 2006, the Company granted an option to an employee
to purchase 50,000 shares of common stock. The Company
determined the fair value of its common stock underlying these
stock options to be $15.00 per share.
F-15
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
The Company made such determination by considering a number of
factors including the conversion price of its Series B
preferred stock issued in December 2005 and January 2006, recent
business developments, a discounted cash flow analysis of its
projected financial results, and preliminary estimated price
ranges related to the commencement of its process for an IPO.
In 2004, the Company granted options to employees to purchase a
total of 1,528,331 shares of common stock, at exercise
prices ranging from $2.33 to $4.26 per share. The Company
determined the fair market value of its common stock in 2004 to
be $4.26 per share based upon the sales prices of its
Series A preferred stock issued in arms-length
transactions with unaffiliated parties. The aggregate intrinsic
value of such options, in the amount of $1,764, was being
recognized as stock-based compensation expense over the vesting
period of the stock options. The Company recognized $201 and
$1,516 of stock-based compensation expense related to such
options in the years ended December 31, 2005 and 2004,
respectively.
Prior to adopting the provisions of SFAS 123(R), the
Company recorded stock-based compensation expense for employee
stock options pursuant to APB No. 25, and provided the
required pro forma disclosures of SFAS 123. The following
table illustrates the pro forma effect on net loss and basic and
diluted net loss per share for fiscal years 2005 and 2004 had
the Company accounted for employee stock-based compensation in
accordance with SFAS No. 123:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net loss applicable to common
shares, as reported
|
|
$
|
(14,248
|
)
|
|
$
|
(14,535
|
)
|
Add: Stock-based employee
compensation determined under APB No. 25 and
included in reported net loss
|
|
|
201
|
|
|
|
1,516
|
|
Deduct: Employee stock-based
compensation determined under the fair value method for all
awards, net of related tax effects
|
|
|
(530
|
)
|
|
|
(2,387
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss applicable to
common shares
|
|
$
|
(14,577
|
)
|
|
$
|
(15,406
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic
and diluted:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(2.51
|
)
|
|
$
|
(2.57
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
(2.57
|
)
|
|
$
|
(2.72
|
)
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys 2004 stock option
plan as of December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Contractual
|
|
|
Intrinsic Value
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (years)
|
|
|
(in thousands)
|
|
|
Outstanding at January 1, 2006
|
|
|
1,461,753
|
|
|
$
|
3.06
|
|
|
|
|
|
|
|
|
|
Granted (February 2006)
|
|
|
50,000
|
|
|
|
4.88
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(47,333
|
)
|
|
|
3.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
1,464,420
|
|
|
$
|
3.09
|
|
|
|
6.87
|
|
|
$
|
8,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
1,371,615
|
|
|
$
|
3.00
|
|
|
|
6.82
|
|
|
$
|
7,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
December 31, 2006
|
|
|
1,449,861
|
|
|
$
|
3.08
|
|
|
|
6.87
|
|
|
$
|
8,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
The weighted-average grant date fair value of stock options
granted during 2006 and 2004 was $11.16 and $2.34, respectively.
A summary of the Companys non-vested stock options under
the 2004 stock option plan is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
Balance at January 1, 2006
|
|
|
252,566
|
|
|
$
|
2.10
|
|
Granted
|
|
|
50,000
|
|
|
|
11.16
|
|
Vested
|
|
|
(176,926
|
)
|
|
|
3.79
|
|
Forfeited
|
|
|
(32,835
|
)
|
|
|
2.09
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
92,805
|
|
|
$
|
4.03
|
|
|
|
|
|
|
|
|
|
|
The Company applied a forfeiture rate of 6% calculating the
number of options expected to vest as of December 31, 2006.
As of December 31, 2006, $363 of total unrecognized
compensation cost related to stock options issued to employees
under the 2004 stock option plan is expected to be recognized
over a weighted-average term of 1.83 years.
2006
LTIP
In October 2006, the Compensation Committee of the
Companys Board of Directors approved the issuance of
1,059,280 restricted stock units (RSUs) to employees
of the Company. The holders of the RSUs are entitled to receive
an equivalent number of common shares upon vesting of the RSUs.
An aggregate of 532,880 RSUs are time-based awards that vest in
three equal installments, subject to continued employment on
January 1, 2007, 2008 and 2009. An aggregate of 526,400
RSUs are performance-based awards that will vest upon attainment
of various operational and financial performance targets
established for each of fiscal 2006, 2007 and 2008 by the
Compensation Committee or the Board of Directors and continued
employment by the employee through dates the Compensation
Committee has determined that the performance targets have been
achieved.
In October 2006, the Compensation Committee established
performance targets for fiscal 2006 and, for the grants to
certain individuals, the performance targets for fiscal 2007
with respect to an aggregate of 258,044 performance based RSUs.
Accordingly, these grants are considered granted for accounting
purposes upon issuance.
As of December 31, 2006, the Company estimates that the
performance targets will be achieved at a rate of 71%, resulting
in 183,834 performance-based RSUs vesting in 2007 and 2008.
As of December 31, 2006, the remaining 264,123
performance-based RSUs, net of cancellations totaling 4,233, are
not considered granted for accounting purposes as the
Compensation Committee has not yet established performance
targets for fiscal 2007 and 2008.
A summary of the activity relating to the Companys
time-based and performance-based RSUs for the year ended
December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Time-Based
|
|
|
Performance-Based
|
|
|
|
RSUs
|
|
|
RSUs
|
|
|
Outstanding at January 1, 2006
|
|
|
|
|
|
|
|
|
Granted
|
|
|
532,880
|
|
|
|
258,044
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
(4,793
|
)
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
|
528,087
|
|
|
|
257,484
|
|
|
|
|
|
|
|
|
|
|
F-17
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
The grant date fair value of the time and performance-based RSUs
was determined to be $11.00 per common share, the price of the
Companys common stock sold in its IPO.
All of the time-based RSUs that were subject to continued
employment on January 1, 2007 vested. For the year ended
December 31, 2006, the Company recorded stock-based
compensation expense of $1,925 relating to these RSUs and
stock-based compensation expense of $979 relating to the
performance-based RSUs based on expected achievement of the
performance targets.
As of December 31, 2006, $3,882 of total unrecognized
compensation cost related to the time-based RSUs granted to
employees is expected to be recognized ratably through
January 1, 2009. As of December 31, 2006, $1,041 of
total unrecognized compensation cost related to the
performance-based RSUs granted to employees of which $875 is
expected to be recognized in the first quarter of 2007 and the
remaining balance of $166 is expected be recognized from March
2007 through January 2008.
In October 2006, the Compensation Committee of the
Companys Board of Directors approved the issuance of
413,334 stock appreciation rights (SARs) to certain
executive officers of the Company. The SARs expire 10 years
from the date of grant. The SARs are payable in cash, shares of
common stock or a combination of both upon exercise, as
determined by the Compensation Committee. An aggregate of 66,667
are time-based SARs that vest in three equal installments
subject to continued employed on January 1, 2007, 2008 and
2009. The grant date fair value of these SARs was $5.41.
An aggregate of 346,667 SARs are performance-based awards that
will vest upon attainment of various operational and financial
performance targets established for each of fiscal 2006, 2007
and 2008 by the Compensation Committee or the Board of Directors
and continued employment by the executive officers through dates
the Compensation Committee has determined that the performance
targets have been achieved.
In October 2006, the Compensation Committee has established
performance targets for fiscal 2006 with respect to an aggregate
of 115,556 performance-based SARs. Accordingly, these SARs are
considered granted for accounting purposes upon issuance and
compensation cost associated with these SARs is expected to be
recognized ratably over the vesting periods. As of
December 31, 2006, the Company estimates performance
targets will be achieved at a rate of 88%, resulting in 101,731
performance-based SARs vesting in March 2007. The grant date
fair value of these SARs was $5.18. As of December 31,
2006, the remaining 231,111 performance-based SARs are not
considered granted for accounting purposes as the Compensation
Committee has not yet established performance targets for fiscal
2007 and 2008.
As of December 31, 2006, none of these SARs has vested or
have been cancelled. As of December 31, 2006, the weighted
average remaining contractual terms for the time and
performance-based SARs was 9.75 years.
All of the time-based SARs that were subject to continued
employment on January 1, 2007 vested. For the year ended
December 31, 2006, the Company recorded stock-based
compensation expense of $119 relating to these SARs and $271 of
stock-based compensation expense relating to the
performance-based SARs based on the expected achievement of the
performance targets.
As of December 31, 2006, $242 of total unrecognized
compensation cost related to the time-based SARs issued to
executive officers is expected to be recognized ratably through
January 1, 2009. As of December 31, 2006, $256 of
total unrecognized compensation cost related to the 2006
performance-based SARs granted to executive officers is expected
to be recognized in the first quarter of 2007.
As of December 31, 2006, the Company had $5,784 of total
unrecognized compensation cost for all share-based payment
arrangements.
The fair value of the time- and 2006 performance-based SARs
granted in 2006 was estimated on the date of grant using the
Black-Scholes option pricing model using the following
assumptions: expected volatility of 43.85% based on the stock
volatility for comparable public traded companies; expected life
of 5.50 and 6.00 years utilizing the simplified
method based on the average of the vesting term and the
contractual term; risk-free interest rate of
F-18
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
4.66% based on the U.S. Treasury yield curve at the time of
the grant over the expected term; and a zero dividend yield.
The average exercise price of the SARs granted in 2006 was
$11.00 which was equal to the price of the Companys common
stock sold in its IPO. At December 31, 2006, the aggregate
intrinsic value for SARs outstanding and expected to vest was $0.
In December 2006, the Companys Board of Directors gave
employees and executive officers of the Company an option to
defer vesting for the RSUs and SARs awards. Certain employees of
the Company accepted the option to defer vesting, subject to
continued employment to May 21, 2007, 2008 and 2009,
relating to their RSU awards, which created a modification in
accordance with SFAS 123(R). A total of 269,926 time-based
RSU awards and performance-based awards were modified. However,
no additional stock-based compensation expense was recognized at
the date of the modification as these awards were expected to
vest under the original vesting terms and the fair market value
of Companys common stock on the date of modification was
lower then the fair market value at the grant date.
|
|
Note 5.
|
Net Loss
per Common Share
|
Basic net loss per common share is calculated by dividing net
loss applicable to common stockholders (net loss adjusted for
dividends required on preferred stock and accretion in preferred
stock carrying value) by the weighted-average number of common
shares outstanding for the year. Diluted net loss per common
share is the same as basic net loss per common share, since
potentially dilutive securities such as RSUs, SARs, stock
options, stock warrants convertible preferred stock and
convertible notes would have an antidilutive effect as the
Company incurred a net loss for the years ended
December 31, 2006, 2005 and 2004. The potentially dilutive
securities excluded from the determination of basic and diluted
loss per share, as their effect is antidilutive, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
|
1,617,296
|
|
|
|
1,917,998
|
|
|
|
1,917,998
|
|
Stock options
|
|
|
1,464,420
|
|
|
|
1,461,707
|
|
|
|
1,476,457
|
|
RSUs
|
|
|
785,571
|
|
|
|
|
|
|
|
|
|
SARs
|
|
|
182,223
|
|
|
|
|
|
|
|
|
|
Series A convertible
preferred stock
|
|
|
|
|
|
|
9,369,074
|
|
|
|
8,955,741
|
|
Series B convertible
preferred stock
|
|
|
|
|
|
|
11,753,333
|
|
|
|
|
|
Series A preferred stock
warrants
|
|
|
|
|
|
|
318,928
|
|
|
|
318,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,049,510
|
|
|
|
24,821,040
|
|
|
|
12,669,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the Companys IPO, all outstanding
shares of Series A and Series B convertible preferred
stock automatically converted into shares of common stock and
all outstanding warrants to purchase Series A preferred
stock were converted into warrants to purchase shares of common
stock. The net loss applicable to common shares of the Company
for the year ended December 31, 2004 is based on the
Companys net loss for the period from the date of the
Reorganization (February 17, 2004) through
December 31, 2004. Net loss attributable to the period from
January 1, 2004 to February 16, 2004, prior to the
Company becoming a corporation and issuing its common shares,
has been excluded from the net loss applicable to common shares.
As a result, net loss per common share for 2004 is not
comparable to the net loss per common share for 2006 and 2005.
F-19
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
For the years ended December 31, 2006, 2005 and 2004, the
reconciliation between net loss and net loss applicable to
common shares is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net loss
|
|
$
|
(11,215
|
)
|
|
$
|
(9,098
|
)
|
|
$
|
(12,389
|
)
|
Less: Net loss attributable to
period prior to the Reorganization
|
|
|
|
|
|
|
|
|
|
|
1,492
|
|
Add: Preferred stock dividends and
accretion of preferred stock carrying value
|
|
|
(8,320
|
)
|
|
|
(5,150
|
)
|
|
|
(3,638
|
)
|
Add: Consent payment to holders of
Series B preferred stock for the automatic conversion of
the Series B preferred stock into common stock. (See
Note 12)
|
|
|
(10,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common
shares
|
|
$
|
(29,646
|
)
|
|
$
|
(14,248
|
)
|
|
$
|
(14,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Sistron International LLC.
On February 17, 2004, as a condition to the Reorganization,
two officers of the Company contributed all of their interests
in Sistron International LLC (Sistron) (representing
100% of Sistron) to the Company in exchange for
127,414 shares of Series A redeemable convertible
preferred stock of the Company. Sistron is a value added
reseller of the Companys services.
Sistron and the Company were entities under common control and
as a result, the acquisition of Sistron was accounted for in a
manner similar to a pooling of interests and Sistrons
assets and liabilities were recorded at their historical
carrying amounts. The excess of the carrying amount of
Sistrons liabilities over its assets of $103 was recorded
as an increase in accumulated deficit. The Company also recorded
a reduction to additional paid-in capital of $362 which equaled
the carrying value of preferred stock issued for the interests
in Sistron. Sistrons results of operations from
January 1, 2004 through February 17, 2004 were
immaterial and were not included in the Companys
consolidated statements of operations prior to the acquisition.
Acquisition
of interest in Satcom International Group plc.
On October 7, 2005 the Company acquired, from two officers
of the Company, a 51% interest in Satcom International Group
plc. (Satcom) in exchange for
(i) 620,000 shares of Series A redeemable
convertible preferred stock and the assumption of certain
liabilities and (ii) a contingent payment in the event of a
sale of or IPO of the Company. The contingent payment would
equal $2,000, $3,000 or $6,000 in the event of proceeds from
such a sale or the valuation in an IPO exceeding $250,000,
$300,000 or $500,000, respectively, subject to proration for
amounts that fall in between these thresholds. Satcom is an
international licensee of the Companys services. The
transaction was completed in order to eliminate any potential
conflict of interest between the Company and the officers (see
Note 15).
Upon review of the activities of Satcom, the Company determined
that the operations of Satcom did not qualify as a business as
it had no employees, no sales force, insignificant revenues, and
its only assets of value were its granted licenses. Satcom had
been inactive for several years at the time of acquisition.
Accordingly, the acquisition was accounted for as an asset
purchase. The assets acquired were recorded at their estimated
fair value at the date of acquisition of $4,655. As
consideration, the Company issued 620,000 shares of
Series A preferred stock valued with an aggregate value of
$1,761 (determined at the date the agreement to purchase Satcom
was executed). The Company incurred transactions costs of $508.
The net asset value attributed to the 49% owners is
F-20
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
recorded at its historical cost basis which was $0 at the date
of acquisition. The Company allocated the purchase price as
follows:
|
|
|
|
|
Acquired licenses
|
|
$
|
4,484
|
|
Other assets
|
|
|
171
|
|
Liabilities (including note
payable to related party of $586)
|
|
|
(2,386
|
)
|
|
|
|
|
|
Acquisition cost
|
|
$
|
2,269
|
|
|
|
|
|
|
The accompanying consolidated statements of operations and cash
flows include Satcoms revenues, operating expenses and
cash flows from October 7, 2005.
On November 8, 2006, the Company closed its IPO and
accordingly, made a contingent payment of $3,631 based on the
valuation of the Company established by the IPO, which has been
recorded as an increase in the carrying value of the acquired
licenses (see Note 8).
|
|
Note 7.
|
Satellite
Network and Other Equipment
|
Satellite network and other equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
|
|
|
|
$
|
379
|
|
|
$
|
|
|
Satellite network
|
|
|
5-7
|
|
|
|
7,373
|
|
|
|
7,421
|
|
Capitalized software
|
|
|
3-5
|
|
|
|
516
|
|
|
|
268
|
|
Computer hardware
|
|
|
5
|
|
|
|
867
|
|
|
|
318
|
|
Other
|
|
|
5-7
|
|
|
|
411
|
|
|
|
345
|
|
Assets under construction
|
|
|
|
|
|
|
26,905
|
|
|
|
5,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,451
|
|
|
|
13,683
|
|
Less accumulated depreciation and
amortization
|
|
|
|
|
|
|
(7,320
|
)
|
|
|
(5,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,131
|
|
|
$
|
7,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2006 and 2005, the
Company capitalized costs attributable to the design and
development of internal-use software in the amount of $386 and
$367, respectively.
Depreciation and amortization expense for the years ended
December 31, 2006, 2005 and 2004 was $1,424, $1,556, and
$1,241, respectively. This includes amortization of internal-use
software of $104, $42 and $11 for the years ended
December 31, 2006, 2005 and 2004, respectively.
Assets under construction primarily consist of costs relating to
the design, development and launch of a single demonstration
satellite pursuant to a contract with the United States Coast
Guard (USCG) (see Notes 10 and 16) and
milestone payments and other costs pursuant to the
Companys satellite payload and launch procurement
agreements with Orbital Sciences Corporation and OHB-System AG
for its quick-launch satellites (see Note 16) and
upgrades to its infrastructure and Ground Segment.
F-21
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
|
|
Note 8.
|
Intangibles
Assets
|
The Companys intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Useful Life
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
(Years)
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Acquired licenses
|
|
|
6
|
|
|
$
|
8,115
|
|
|
$
|
(1,057
|
)
|
|
$
|
7,058
|
|
|
$
|
4,484
|
|
|
$
|
(187
|
)
|
|
$
|
4,297
|
|
Intellectual property
|
|
|
3
|
|
|
|
715
|
|
|
|
(715
|
)
|
|
|
|
|
|
|
715
|
|
|
|
(637
|
)
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,830
|
|
|
$
|
(1,772
|
)
|
|
$
|
7,058
|
|
|
$
|
5,199
|
|
|
$
|
(824
|
)
|
|
$
|
4,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 8, 2006, the Company made a contingent purchase
price payment of $3,631 to certain former shareholders of Satcom
(see Note 6). The entire amount was attributed to acquired
licenses and will be amortized over the remaining life of the
licenses. Amortization of intangible assets for the years ended
December 31, 2006, 2005 and 2004 was $948, $426 and $239,
respectively.
Estimated amortization expense for intangible assets is as
follows:
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
2007
|
|
$
|
1,486
|
|
2008
|
|
|
1,486
|
|
2009
|
|
|
1,486
|
|
2010
|
|
|
1,486
|
|
2011
|
|
|
1,114
|
|
|
|
|
|
|
|
|
$
|
7,058
|
|
|
|
|
|
|
|
|
Note 9.
|
Accrued
Liabilities
|
The Companys accrued liabilities consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Accrued Series B preferred
stock issuance costs
|
|
$
|
|
|
|
$
|
2,911
|
|
Gateway settlement obligation (see
Note 16)
|
|
|
945
|
|
|
|
1,645
|
|
Accrued compensation and benefits
|
|
|
2,094
|
|
|
|
960
|
|
Payroll taxes and withholdings,
interest and penalties
|
|
|
|
|
|
|
117
|
|
Accrued warranty obligations
|
|
|
45
|
|
|
|
236
|
|
Accrued interest
|
|
|
622
|
|
|
|
560
|
|
Accrued professional services
|
|
|
361
|
|
|
|
596
|
|
Other accrued expenses
|
|
|
848
|
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,915
|
|
|
$
|
8,198
|
|
|
|
|
|
|
|
|
|
|
F-22
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
The Company accrues an estimate of its exposure to warranty
claims based on current product sales data and actual customer
claims. The majority of the Companys products carry a
one-year warranty. The Company assesses the adequacy of its
recorded accrued warranty costs periodically and adjusts the
amount as necessary. The Companys current contract
manufacturer is responsible for warranty obligations related to
the Companys newer Communicator models which were
introduced in the third quarter of 2005. During the year ended
December 31, 2006, substantially all of the Communicators
sold by the Company were these newer models. As of
December 31, 2006 and 2005, accrued warranty obligations
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Balance at January 1
|
|
$
|
236
|
|
|
$
|
493
|
|
Payments
|
|
|
(210
|
)
|
|
|
(584
|
)
|
Accruals for obligations
|
|
|
19
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
45
|
|
|
$
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10.
|
Deferred
Revenue
|
Deferred revenues consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
Professional services
|
|
$
|
7,236
|
|
|
$
|
6,674
|
|
Service activation fees
|
|
|
1,326
|
|
|
|
1,040
|
|
Manufacturing license fees
|
|
|
89
|
|
|
|
105
|
|
Prepaid services
|
|
|
1,498
|
|
|
|
808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,149
|
|
|
|
8,627
|
|
Less current portion
|
|
|
(2,083
|
)
|
|
|
(575
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
8,066
|
|
|
$
|
8,052
|
|
|
|
|
|
|
|
|
|
|
During 2004, the Company entered into a contract with the USCG
to design, develop, launch and operate a single satellite
equipped with the capability to receive, process and forward
Automatic Identification System (AIS) data (the
Concept Validation Project). Under the terms of the
agreement, title to the Concept Validation Project demonstration
satellite remains with the Company, however the USCG will be
granted a non-exclusive, royalty free license to use the
designs, processes and procedures developed under the contract
in connection with any future Company satellites that are AIS
enabled. The Company is permitted to use the Concept Validation
Project satellite to provide services to other customers,
subject to receipt of a modification of the Companys
current license or special temporary authority from the Federal
Communication Commission. The agreement also provides for
post-launch maintenance and AIS data transmission services to be
provided by the Company to the USCG for an initial term of
14 months. At its option, the USCG may elect under the
agreement to receive maintenance and AIS data transmission
services for up to an additional 18 months subsequent to
the initial term. The deliverables under the arrangement do not
qualify as separate units of accounting and, as a result,
revenues from the contract will be recognized ratably commencing
upon the launch of the Concept Validation Project demonstration
satellite (expected during 2007) over the expected life of
the customer relationship.
Deferred professional services revenues at December 31,
2006 and 2005 represent amounts received from the USCG under the
contract.
F-23
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
OHB
Technology A.G.
In connection with the acquisition of a majority interest in
Satcom (see Note 6), the Company has recorded an indebtedness to
OHB Technology A.G. (formerly known as OHB Teledata A.G.)
(OHB), a principal stockholder of the Company. At
December 31, 2006, the principal balance of the note
payable was 1,138 ($1,502) and it had a carrying value of
$879. At December 31, 2005, the principal balance of the
note payable was 1,138 ($1,348) and it had a carrying
value of $594. The carrying value was based on the notes
estimated fair value at the time of acquisition. The difference
between the carrying value and principal balance is being
amortized to interest expense over the estimated life of the
note of six years. Interest expense related to the note was $131
and $33 for the years ended December 31, 2006 and 2005,
respectively. This note does not bear interest and has no fixed
repayment term. Repayment will be made from the distribution
profits (as defined in the note agreement) of ORBCOMM Europe
LLC. The note has been classified as long-term and the Company
does not expect any repayments to be required prior to
December 31, 2007.
2005
bridge notes
In November and December 2005, the Company issued 10% bridge
notes for net proceeds of $25,019 (2005 Bridge
Notes). The 2005 Bridge Notes had a maturity date of
February 16, 2010. The 2005 Bridge Notes were automatically
convertible into shares of the Companys Series B
convertible redeemable preferred stock (Series B
preferred stock) in the event the Company issued in excess
of $25,000 of 2005 Bridge Notes and in certain other
circumstances. In connection with the issuance of the 2005
Bridge Notes, the Company agreed to issue warrants to purchase
common stock of the Company at the lower of $4.03 per share
or the price of the next Company issuance of preferred stock.
The warrants were subject to cancellation if the 2005 Bridge
Notes were automatically converted into Series B preferred
stock. On December 30, 2005, all 2005 Bridge Notes were
converted into shares of Series B preferred stock at a
conversion price of $4.03 per share and the Companys
obligation to issue warrants to purchase common stock
terminated. The Company recognized a loss on extinguishment of
debt of $1,016 for unamortized debt issuance costs upon
conversion of the 2005 Bridge Notes.
10% convertible
bridge notes
In January and February 2004, ORBCOMM LLC issued 10%
Series C convertible bridge notes (Series C
Notes) in the aggregate principal amount of $1,316.
ORBCOMM LLC received proceeds of $1,250, net of prepaid interest
of $66 from the sale of the Series C Notes. These notes
were scheduled to mature on various dates from January through
February 2005.
In connection with the issuance of the Series C Notes,
ORBCOMM LLC issued warrants to purchase 131,578 membership
interest units of ORBCOMM LLC at an exercise price of
$2.84 per unit. These warrants were scheduled to expire on
various dates from January through February 2009. The fair value
of the warrants of $177 was recorded as debt discount. The
Company used the Black-Scholes pricing model to determine the
estimate fair value of its warrants. Additionally, these notes
had a beneficial conversion feature which was valued at $177 and
recorded as debt discount. The fair value of the warrants and
the beneficial conversion feature were amortized to interest
expense over the term of the notes using the effective interest
method.
18% convertible
bridge notes issued to investors and related
parties
During 2002 and 2003, ORBCOMM LLC issued 18% convertible
bridge notes (the 18% Notes) to investors and
related parties that were scheduled to mature on various dates
in 2004 and 2003. In connection with the issuance of the 18%
Notes, ORBCOMM LLC issued warrants to purchase an aggregate
of 1,864,680 membership units of ORBCOMM LLC, of which 468,500
were issued to related parties. The warrants had an exercise
price of $1.55 per unit. These warrants were scheduled to
expire on various dates from November 2007 through November
2008. The fair value of the warrants of $1,511 was recorded as a
debt discount. Additionally, these notes had a beneficial
F-24
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
conversion feature which was valued $1,511 and recorded as a
debt discount. The fair value of the warrants and the beneficial
conversion feature were amortized to interest expense over the
terms of the notes using the effective interest method. In
addition, certain holders of these 18% Notes had agreed to
extend the maturity dates of the notes to 2004. In consideration
for agreeing to extend the maturity dates, ORBCOMM LLC issued
warrants to purchase 340,737 membership interest units of
ORBCOMM LLC at an exercise price of $1.55 per unit, which
expire in November 2008. The fair value of the warrants was $321
and recorded as debt discount. The fair value of these warrants
was amortized over the term of the 18% Notes using the
effective interest method.
12% convertible
bridge note
During 2003, ORBCOMM LLC issued a 12% convertible
promissory note (12% Note) in the amount of $2,500.
The 12% Note was scheduled to mature on May 5, 2004.
The 12% Note provided for the issuance of warrants. The
number of warrants issued was based on the length of time the
debt was outstanding. The 12% Note was automatically
convertible into Series A preferred stock of the Company in
the event of a qualified financing, as defined in the
12% Note.
In February 2004, following the Reorganization and pursuant to
the terms of the 12% Note, the Company issued the
noteholder warrants to purchase 132,041 shares of the
Companys Series A preferred stock at an exercise
price of $2.84 per share. The fair value of the warrants of $213
and beneficial conversion feature of $213 were recorded as a
loss on extinguishment of debt.
Conversion
of notes
In February 2004, in connection with the Reorganization (see
Note 1), certain holders of the Series C Notes, the
18% Notes and the 12% Note exchanged notes having an aggregate
principal balance and accrued interest of approximately $10,967
for 3,861,703 shares of the Companys Series A
preferred stock. Noteholders who did not convert their notes
were repaid approximately $3,263 in 2004 in satisfaction of all
amounts due thereunder. The unamortized balances of debt
discount and deferred charges in the amounts of $1,279 and $478,
respectively, were recorded as a loss on extinguishment of debt
on the date of conversion.
Interest
expense and amortization
Interest expense and amortization of debt issuance costs and
debt discount are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
Amortization of Debt
|
|
|
Amortization of Debt
|
|
|
|
for the Years
|
|
|
Issuance Costs for the
|
|
|
Discount for the Years
|
|
|
|
Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Series C Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15
|
|
18% Notes
|
|
|
|
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
459
|
|
12% Notes
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eurovest loan
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Bridge Notes
|
|
|
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll taxes
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OHB Technology A.G
|
|
|
131
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
106
|
|
|
|
57
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
237
|
|
|
$
|
277
|
|
|
$
|
596
|
|
|
$
|
|
|
|
$
|
31
|
|
|
$
|
248
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
|
|
Note 12.
|
Stockholders
Equity and Convertible Redeemable Preferred Stock
|
Reverse
stock split
On October 6, 2006, in connection with its IPO, the Company
effected a
2-for-3
reverse stock split applicable to all issued and outstanding
shares of the Companys common stock. All share and per
share amounts for common stock, options, stock appreciation
rights and warrants to purchase the Companys common stock
and restricted stock units included in these financial
statements and notes to the financial statements have been
adjusted to reflect the reverse stock split. The conversion
ratios of the Companys Series A and Series B
preferred stock have also been adjusted to reflect the reverse
stock split. On October 30, 2006, the Companys
Certificate of Incorporation was amended to increase the number
of authorized shares of common stock to 250 million and
preferred stock to 50 million. The rights and preferences
of preferred stock may be designated by the Board of Directors
without further action by the Companys stockholders.
Initial
Public Offering
On November 8, 2006, the Company completed its IPO of
9,230,800 shares of common stock at a price of
$11.00 per share. The Company received net proceeds of
approximately $89,500 from the IPO after deducting
underwriters discounts and commissions and offering costs
in the aggregate amount of $11,447. From the net proceeds, the
Company paid accumulated and unpaid dividends totaling $7,467 to
the holders of Series B preferred stock, contingent
purchase price consideration of $3,631 relating to the Satcom
acquisition (see Note 8) and a consent fee of $10,111 to
the holders of Series B preferred stock (see below). All
outstanding shares of Series A and B preferred stock
automatically converted into an aggregate of
21,383,318 shares of common stock upon completion of the
IPO.
On October 12, 2006, as a condition to the conversion of
all outstanding shares of Series A and B preferred stock
into common stock, the Company obtained written consents of
holders who collectively held in excess of two-thirds of the
Series B preferred stock. The holders consented to the
automatic conversion of the Series B preferred stock into
shares of common stock upon the closing of the Companys
IPO at an initial public offering price per share of not less
than $11.00 required for the automatic conversion of the
Series B preferred stock into common stock. In
consideration for providing their consents, the Company agreed
to make a contingent payment to all of the holders of the
Series B preferred stock if the price per share of the IPO
was between $11.00 and $12.49 per share, determined as
follows: (i) 12,014,227 (the number of shares of the
Companys common stock into which all of the shares of the
Series B preferred stock converted at the current
conversion price) multiplied by (ii) the difference between
(a) $6.045 and (b) the quotient of (I) the
initial public offering price divided by (II) 2.114. The
maximum amount payable was $10,111. Upon closing of the IPO, the
Company made a payment of $10,111 to the holders of the
Series B preferred stock from the net proceeds of the IPO.
The $10,111 payment was accounted for similar to a dividend.
Convertible
Redeemable Preferred Stock
On December 30, 2005, the Company issued
17,629,999 shares of Series B convertible preferred
stock and received net proceeds of $66,721, after deducting
issuance costs of $4,328, which included the conversion of the
convertible notes issued in November and December 2005 (see
Note 11). In January 2006, the Company issued an additional
260,895 shares of Series B preferred stock and
received net proceeds of $1,465, after deducting issuance costs
of $113.
F-26
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
A summary of the Companys preferred stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Redemption value
|
|
$
|
|
|
|
$
|
39,912
|
|
|
$
|
|
|
|
$
|
71,049
|
|
Accrued dividends
|
|
|
|
|
|
|
8,027
|
|
|
|
|
|
|
|
|
|
Issuance costs, net of accretion
|
|
|
|
|
|
|
(2,439
|
)
|
|
|
|
|
|
|
(4,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
$
|
|
|
|
$
|
45,500
|
|
|
$
|
|
|
|
$
|
66,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2004, warrants to purchase shares of Series A preferred
stock were issued in exchange for services. The fair value of
preferred stock warrants issued in exchange for services totaled
$606 for the year ended December 31, 2004 and has been
included in selling, general and administrative expenses. At
December 31, 2005 and 2004, there were outstanding warrants
to purchase 318,923 shares of Series A preferred stock
at an exercise price of $4.26 per share. On
November 8, 2006, upon closing of the IPO, all outstanding
Series A warrants were converted into warrants to purchase
shares of common stock on the basis of two shares of common
stock for every three shares of Series A preferred stock.
The terms of the Series A and Series B preferred stock
were as follows:
Dividends
The Series A preferred stock holders were entitled to
receive a cumulative 12% annual dividend. The Series A
preferred stock dividend was eliminated upon the issuance of the
Series B preferred stock in December 2005. In January 2006,
the Company paid all accumulated dividends on its Series A
preferred stock totaling $8,027. Holders of the Series B
preferred stock were entitled to receive a cumulative 12%
dividend annually payable in cash in arrears. On
November 8, 2006, upon the closing of its IPO, the Company
paid all accumulated dividends on its Series B preferred
stock totaling $7,467.
Conversion
Shares of preferred stock were convertible into two shares of
common stock for every three shares of preferred stock, subject
to adjustment in the event of certain dilutive issuances. Each
share of preferred stock was convertible into common stock at
any time by the holder or automatically at any time upon the
earlier of one of the following events: (i) the closing of
a Qualified Public Offering of the Companys common stock;
or (ii) the closing of a Qualified Sale; or (iii) upon
the vote of the holders of not less than two-thirds of the
Series B preferred shares.
For purposes of an automatic conversion of preferred stock:
(1) A Qualified Public Offering was defined as a public
offering with gross cash proceeds of not less than
$75 million at a per share price of not less than
(i) $12.78 per share if the public offering occured on
or before February 28, 2007, (ii) $15.00 per
share if the public offering occured after February 28,
2007 and on or before December 31, 2007, or
(iii) $18.00 per share if the public offering occured
on or after January 1, 2008.
(2) A Qualified Sale was defined to mean a sale or merger
of the Company in which the holders of the Series B
preferred stock received not less than (i) $12.78 per
share if the Qualified Sale occured on or before
February 28, 2007, (ii) $15.00 per share if the
Qualified Sale occured after February 28, 2007 and on or
before December 31, 2007, or (iii) $18.00 per
share if the Qualified Sale occured on or after January 1,
2008.
F-27
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
Voting
rights
Each share of Series A and Series B preferred stock
was entitled to one vote for each share of common stock into
which the preferred stock is convertible. The holders of
preferred stock, voting as a single class, were entitled to
elect six members of the Companys board of directors (out
of a ten member board).
Liquidation
preference
In the event of any liquidation, sale or merger of the Company,
the holders of Series B preferred stock were entitled to
receive, prior to and in preference to the holders of the
Series A preferred stock and common stock of the Company,
an amount equal to $4.03 per share plus all unpaid
dividends. After the payment of the full preference to all of
the holders of Series B preferred shares as a result of
such an event, any remaining assets of the Company legally
available for distribution would be then distributed ratably to
all of the holders of Series A and B preferred stock, on an
as-converted basis, and common stock. Subsequent to the payment
of accumulated dividends on Series A preferred stock in
January 2006 there was no liquidation preference on
Series A preferred stock.
Redemption
The Series B preferred stock was subject to redemption by
the Company at a price equal to the issuance price per share
($4.03) plus all declared
and/or
accrued but unpaid dividends commencing 60 days after
receipt of notice by the Company at any time on or after
October 31, 2011 from the holders of at least two-thirds of
the outstanding shares of the Series B preferred stock. The
Series A preferred stock was subject to redemption by the
Company at a price equal to the issuance price per share ($2.84)
commencing 60 days after receipt of notice by the Company
from the holders of at least two-thirds of the outstanding
shares of the Series A preferred stock. Such notice could
only be presented on or after February 16, 2012, if one of
the two following conditions are met: (1) there are no
outstanding shares of Series B preferred stock, or
(2) the Series B redemption price has been paid in
full (or funds necessary for such payment having been set side
by the Company in a trust for the account of such Series B
preferred stockholders).
Series B
Commitment
Certain purchasers of the Companys Series B preferred
stock were obligated to purchase an additional
10,297,767 shares of Series B preferred stock in March
2007 at $4.03 per share, unless a Qualified Sale or a
Qualified Initial Public Offering occurred prior to that time.
These rights were terminated upon the closing of the IPO.
Common
Stock
The terms of the Common stock are as follows:
Voting
rights
The holders of common stock are entitled to one vote per share.
Dividends
Subject to preferences that may be applicable to any outstanding
shares of preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors. No common stock dividends
have been declared to date.
Warrants
Warrants to purchase shares of common stock have been issued in
connection with convertible bridge notes (see
Note 10) and in exchange for services. The fair value
of common stock warrants issued in exchange for services
F-28
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
totaled $304 for the year ended December 31, 2004, and were
included in selling, general and administrative expenses. The
Company issued no warrants to purchase common stock in 2006 and
2005.
Warrants to purchase common stock outstanding at
December 31, 2006 were as follows:
|
|
|
|
|
|
|
Shares Subject
|
|
Exercise Price
|
|
to Warrants
|
|
|
$2.33
|
|
|
1,040,452
|
|
$2.78
|
|
|
23,332
|
|
$3.38
|
|
|
143,607
|
|
$4.26
|
|
|
409,905
|
|
|
|
|
|
|
|
|
|
1,617,296
|
|
|
|
|
|
|
During the year ended December 31, 2006, the Company issued
619,580 shares of common stock upon the exercise of
warrants at per share exercise prices of ranging from $2.33 to
$4.26. The Company received gross proceeds of $1,558 from the
exercise of these warrants.
At December 31, 2006, the Company has reserved the
following shares of common stock for future issuance:
|
|
|
|
|
|
|
Shares
|
|
|
Employee stock compensation plans
|
|
|
6,122,627
|
|
Warrants to purchase common stock
|
|
|
1,617,296
|
|
|
|
|
|
|
|
|
|
7,739,923
|
|
|
|
|
|
|
In 2005, the Company issued GE TIP 32,083 shares of common
stock upon GE TIPs issuance of a non cancellable order for
the purchase of Company products. The common stock was
determined to have a fair value of $136 which was recorded as a
reduction of product sales revenues over the delivery of the
underlying equipment.
|
|
Note 13.
|
Geographical
Information
|
The Company operates in one reportable segment, satellite data
communications. Long-lived assets outside of the United States
are not significant. The following table summarizes revenues on
a percentage basis by geographic region, based on the country in
which the customer is located:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
United States
|
|
|
90
|
%
|
|
|
74
|
%
|
|
|
75
|
%
|
Central Asia(1)
|
|
|
|
|
|
|
14
|
%
|
|
|
|
|
Other(2)
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents a gateway earth station sale. |
|
(2) |
|
No other geographic areas are more than 10% for the years ended
December 31, 2006, 2005 and 2004. |
F-29
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
The following is a summary of the tax provision of the Company
for the years ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(4,635
|
)
|
|
$
|
(2,512
|
)
|
|
$
|
(2,012
|
)
|
State
|
|
|
(604
|
)
|
|
|
(160
|
)
|
|
|
(377
|
)
|
International
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(5,290
|
)
|
|
|
(2,672
|
)
|
|
|
(2,389
|
)
|
Valuation allowance
|
|
|
5,290
|
|
|
|
2,672
|
|
|
|
2,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
$
|
3,706
|
|
|
$
|
3,271
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
216
|
|
|
|
332
|
|
|
|
|
|
Inventory reserves
|
|
|
155
|
|
|
|
61
|
|
|
|
|
|
Deferred compensation
|
|
|
1,546
|
|
|
|
216
|
|
|
|
|
|
Bonus accruals
|
|
|
274
|
|
|
|
|
|
|
|
|
|
Warranty
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Vacation accrual
|
|
|
210
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
6,124
|
|
|
|
4,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(6,124
|
)
|
|
|
(4,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite network and other
property
|
|
$
|
241
|
|
|
|
127
|
|
|
|
|
|
Tax loss carryforwards
|
|
|
7,859
|
|
|
|
4,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
8,100
|
|
|
|
4,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(8,100
|
)
|
|
|
(4,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
The benefit for income taxes differs from the amount computed by
applying the statutory U.S. Federal income tax rate because
of the effect of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income tax benefit at
U.S. statutory rate of 34%
|
|
$
|
(3,813
|
)
|
|
$
|
(3,093
|
)
|
|
$
|
(4,212
|
)
|
State income taxes, net of federal
benefit
|
|
|
(392
|
)
|
|
|
(279
|
)
|
|
|
(256
|
)
|
Effect of foreign subsidiaries
|
|
|
(1,251
|
)
|
|
|
669
|
|
|
|
443
|
|
Pre-reorganization LLC loss
|
|
|
|
|
|
|
|
|
|
|
1,591
|
|
Other permanent items
|
|
|
166
|
|
|
|
31
|
|
|
|
45
|
|
Change in valuation allowance
|
|
|
5,290
|
|
|
|
2,672
|
|
|
|
2,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has determined that it is more likely than not that
the Company will not recognize the benefits of federal and state
deferred tax assets and, as a result, a full valuation allowance
was established. The net change in the total valuation allowance
for the years ended December 31, 2006, 2005 and 2004 was an
increase of $5,290, $4,083 and 2,389, respectively. The $4,083
increase in 2005 includes $1,411 attributable to net operating
loss carryforwards of Satcom, which was acquired in 2005.
On February 17, 2004, the members of ORBCOMM, LLC
contributed all of their outstanding membership interests in
exchange for shares of the Companys common stock. This
transaction resulted in the conversion of the Company from a
partnership to a corporation for tax purposes. At the date of
the conversion, the Company established deferred tax assets in
the amount of $2,312, which were subject to a full valuation
allowance.
At December 31, 2006 and December 31, 2005, the
Company had potentially utilizable federal net operating loss
tax carryforwards of $14,412 and $6,418, respectively. The net
operating loss carryforwards expire at various times through
2026. At December 31, 2006 and December 31, 2005, the
Company had potentially utilizable foreign net operating loss
carryforwards of $8,159 and $7,396, respectively. The foreign
net operating loss carryforwards begin to expire in 2008.
The utilization of the Companys net operating losses may
be subject to a substantial limitation due to the change
of ownership provisions under Section 382 of the
Internal Revenue Code and similar state provisions. Such
limitation may result in the expiration of the net operating
loss carryforwards before their utilization.
|
|
Note 15.
|
Related
Party Transactions
|
Revenues and receivables from related parties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for the Years
|
|
|
Receivables at
|
|
|
|
Ended December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
ORBCOMM Europe LLC(1)
|
|
$
|
|
|
|
$
|
191
|
|
|
$
|
270
|
|
|
$
|
|
|
|
$
|
|
|
ORBCOMM Asia Limited(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
ORBCOMM Japan Limited
|
|
|
327
|
|
|
|
299
|
|
|
|
259
|
|
|
|
343
|
|
|
|
385
|
|
Korea ORBCOMM Limited
|
|
|
109
|
|
|
|
134
|
|
|
|
109
|
|
|
|
116
|
|
|
|
149
|
|
Satcom International Group plc.(1)
|
|
|
|
|
|
|
8
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
436
|
|
|
$
|
632
|
|
|
$
|
640
|
|
|
$
|
459
|
|
|
$
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2006, no revenue was generated from Satcom because the
Company acquired Satcom on October 7, 2005. (see
Satcom Reorganization and Acquisition below). |
F-31
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
|
|
|
(2) |
|
Receivables from ORBCOMM Asia Limited relate to reimbursements
of storage costs for gateway earth stations owned by ORBCOMM
Asia Limited that are warehoused by the Company. |
ORBCOMM
Europe
The Company has entered into a service license agreement
covering 43 jurisdictions in Europe and a gateway services
agreement with ORBCOMM Europe LLC, a Delaware limited liability
company (ORBCOMM Europe). ORBCOMM Europe is owned
50% by Satcom and 50% by OHB. Satcom is 51% owned by the Company
at December 31, 2006 and 2005. ORBCOMM Europe is a
consolidated affiliate at December 31, 2006 and 2005. The
Chief Executive Officer and certain other stockholders of the
Company were previously substantial stockholders of Satcom who
entered into an agreement in February 2004 to sell substantially
all of their interest in Satcom to the Company. See Satcom
International Group plc. Satcom Transaction
below. In addition, Satcom has been appointed by ORBCOMM Europe
as a country representative for the United Kingdom, Ireland and
Switzerland. In addition, ORBCOMM Europe and Satcom have entered
into an agreement obligating ORBCOMM Europe to enter into a
country representative agreement for Turkey with Satcom, if the
current representative agreement for Turkey expires or is
terminated for any reason. ORBCOMM Deutschland and Technikom
Polska, affiliates of OHB, have been appointed by ORBCOMM Europe
as country representatives for Germany and Poland, respectively.
OHB is also a 34% stockholder of Elta S.A. the country
representative for France.
Upon the acquisition of Satcom on October 7, 2005, the
Company became the primary beneficiary of ORBCOMM Europe, and as
such, the Company consolidates the entity. The beneficial
interest holders and creditors of this variable interest entity
do not have a legal recourse to the general credit of the
Company.
In connection with the organization of ORBCOMM Europe and the
reorganization of the ORBCOMM business in Europe, ORBCOMM agreed
to grant ORBCOMM Europe approximately $3,736 in airtime credits.
The amount of the grant was equal to the amount owed by the
Predecessor Company to the European Company for Mobile
Communications Services N.V. (MCS), the former
licensee for Europe of the Predecessor Company. ORBCOMM Europe,
in turn, agreed to issue credits in the aggregate amount of the
credits received from the Company to MCS and its country
representatives who were stockholders of MCS. Satcom, as a
country representative for the United Kingdom, Ireland and
Switzerland, received airtime credits in the amount of
approximately $580. ORBCOMM Deutschland, as country
representative for Germany, received airtime credits of
approximately $450. Because approximately $2,706 of the airtime
credits were granted to stockholders of MCS who are not related
to the Company and who continue to be country representatives in
Europe, the Company believes that granting of the airtime
credits was essential to permit ORBCOMM Europe to reorganize the
ORBCOMM business in Europe. The Company did not record the
airtime credits as a liability at the date of the acquisition of
the assets of the Predecessor Company for the following reasons:
(i) the Company has no obligation to pay the unused airtime
credits back to ORBCOMM Europe if ORBCOMM Europe does not use
them; and (ii) the airtime credits are earned by ORBCOMM
Europe only when the Company generates revenues from ORBCOMM
Europe. The airtime credits have no expiration date.
Accordingly, the Company is recording the airtime credits as
services are rendered and these airtime credits are recorded net
of revenues generated from ORBCOMM Europe. For the years ended
December 31, 2006, 2005 and 2004, airtime credits used
totaled approximately $201, $176 and $219, respectively. As of
December 31, 2006 and 2005, the unused credits granted by
the Company to ORBCOMM Europe were approximately $2,669 and
$2,870, respectively.
ORBCOMM
Asia Limited
On May 8, 2001, ORBCOMM LLC signed a Memorandum of
Understanding (the MOU) with ORBCOMM Asia Limited
(ORBCOMM Asia) outlining the parties intention
to enter into a definitive service license agreement on terms
satisfactory to the Company, covering 23 countries in Asia,
including China, India, Australia and Indonesia. Although the
parties commenced negotiations toward such an agreement, a
definitive agreement was never concluded and the MOU terminated
by its terms. The Company believes ORBCOMM Asia is approximately
90% owned by a stockholder in the Company. It is the
Companys intention to consider operating
F-32
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
service licenses
and/or
country representative agreements for these territories on a
country by country basis as prospective parties demonstrate the
ability, from a financial, technical and operations point of
view, to execute a viable business plan. During 2005 and 2004,
ORBCOMM Asia owed the Company amounts for costs related to the
storage of certain assets owned by ORBCOMM Asia. On
September 14, 2003, ORBCOMM Asia pledged certain assets to
the Company to ensure such amounts would be paid. On
August 29, 2005, the Company foreclosed on a
warehousemans lien on three gateway earth stations it was
storing on behalf of ORBCOMM Asia in satisfaction of outstanding
and unpaid storage fees in the amount of $172. The gateway earth
stations are included in inventory at December 31, 2006 and
2005 at a carrying value of $172. The Company continues to store
certain assets owned by ORBCOMM Asia and as of December 31,
2006 and 2005, ORBCOMM Asia owed the Company $0 and $9,
respectively.
ORBCOMM
Japan Limited
To ensure that regulatory authorizations held by ORBCOMM Japan
Limited (ORBCOMM Japan) in Japan were not
jeopardized at the time the Company purchased the assets from
the Predecessor Company, and with the understanding that a new
service license agreement would be entered into between the
parties, ORBCOMM assumed the service license agreement entered
into between the Predecessor Company and ORBCOMM Japan. The
Company and ORBCOMM Japan undertook extensive negotiations for a
new service license agreement from early 2002 until 2004 but
were unable to reach agreement on important terms. The Company
believes a stockholder of the Company is the beneficial owner of
approximately 38% of ORBCOMM Japan. On September 14, 2003,
ORBCOMM Asia pledged certain assets to the Company to ensure
certain amounts owed by ORBCOMM Japan to the Company under the
existing service license agreement would be paid. On
January 4, 2005, the Company sent a notice of default to
ORBCOMM Japan for its failure to remain current with payments
under the service license agreement and subsequently terminated
the agreement when the default was not cured. On March 31,
2005, ORBCOMM Japan made a partial payment of the amounts due of
$350. In 2005, the Company agreed to a standstill under the
pledge agreement (including as to ORBCOMM Asia and Korea ORBCOMM
Limited (ORBCOMM Korea)) and reinstatement of the
prior service license agreement, subject to ORBCOMM receiving
payment in full of all debts owed by ORBCOMM Japan, ORBCOMM
Korea and ORBCOMM Asia to the Company by December 15, 2005
and certain operational changes designed to give the Company
more control over the Japanese and Korean gateway earth
stations. The outstanding amounts owed by ORBCOMM Japan to the
Company were not repaid as of December 15, 2005. As of
December 31, 2006 and 2005, ORBCOMM Japan owed the Company
$343 and $385, respectively in unpaid service fees. On
February 22, 2006, the Company sent a notice of default to
ORBCOMM Japan for its failure to satisfy its obligations under
the standstill agreement, including its failure to make the
required payments under the service license agreement and if the
defaults are not cured in the near future, the Company intends
to terminate the agreement as a result of such default.
Korea
ORBCOMM Limited
To ensure that regulatory authorizations held by ORBCOMM Korea
in South Korea were not jeopardized at the time ORBCOMM LLC
purchased the assets from the Predecessor Company, and with the
understanding that a new service license agreement would be
entered into between the parties, ORBCOMM assumed the service
license agreement entered into between the Predecessor Company
and ORBCOMM Korea. The Company and ORBCOMM Korea undertook
extensive negotiations for a new service license agreement from
early 2002 until 2004 but were unable to reach agreement on
important terms. The Company believes a stockholder of the
Company is the beneficial owner of approximately 33% of ORBCOMM
Korea. On September 14, 2003, ORBCOMM Asia pledged certain
assets to the Company to ensure that certain amounts owed to the
Company by ORBCOMM Korea under the existing service license
agreement would be paid. On January 4, 2005, the Company
sent a notice of default to ORBCOMM Korea for its failure to
remain current with the payments under the service licensing
agreement and subsequently terminated the agreement when the
default was not cured. In 2005, the Company agreed to a
standstill with respect to the default by ORBCOMM Korea as part
of the standstill agreement with ORBCOMM Japan and a
reinstatement of the prior service license agreement. The
outstanding amounts owed by ORBCOMM Korea to the
F-33
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
Company were not repaid as of December 15, 2005. As of
December 31, 2006 and 2005, ORBCOMM Korea owed the Company
$116 and $149, respectively in unpaid service fees. On
April 5, 2006, the Company sent a notice of default to
ORBCOMM Korea for its failure to comply with the standstill
agreement and if the defaults are not cured in the near future,
the Company intends to terminate the service license agreement
as a result of such defaults.
Satcom
International Group plc.
General. Satcom (i) owns 50% of ORBCOMM
Europe; (ii) has entered into country representative
agreements with ORBCOMM Europe covering the United Kingdom,
Ireland and Switzerland; and (iii) has entered into a
service license agreement with the Company covering
substantially all of the countries of the Middle East and a
significant number of countries of Central Asia, and gateway
services agreement with the Company. See
ORBCOMM Europe described above.
As of December 31, 2004 the Chief Executive Officer of the
Company, Jerome B. Eisenberg, and a former officer, Don Franco
(Messrs. Franco and Eisenberg), both of whom
were directors of the Company at the time, owned directly or
indirectly a majority of the outstanding voting shares of Satcom
and held a substantial portion of the outstanding debt of
Satcom. Certain other investors in the Company were also
investors in Satcom. Satcom was formerly a principal stockholder
of MCS and made significant investments in other territories
related to the Predecessor Company.
Satcom Transaction. As a condition of the
Reorganization, Messrs. Franco and Eisenberg were required
to enter into a definitive agreement, in order to eliminate any
potential conflict of interest between the Company and the
officers, to transfer to the Company all of their interests in
Satcom in exchange for (i) 620,000 shares of
Series A preferred stock and (ii) a contingent payment
in the event of a sale or initial public offering of the
Company. The closing of the Satcom transaction was subject to a
completion of a reorganization of Satcom resulting in the
conversion to equity of not less than 95% of the outstanding
debt of Satcom by July 1, 2005 unless the parties elected
to extend the date or agree otherwise. If the reorganization was
not completed by July 1, 2005, or such later date, the
Company could elect to take less than all of the interests of
the officers; provided however, the Company must still issue the
620,000 shares of Series A preferred stock and make
the contingent payment regardless of what portion of such
interests the Company chooses to purchase. The contingent
payment would be equal to $2,000, $3,000 or $6,000 in the event
of proceeds from such a sale or the valuation in an initial
public offering exceeding $250,000, $300,000 or $500,000,
respectively, subject to proration for amounts that fall in
between these thresholds. On November 8, 2006, upon
completion of its IPO, the Company made a contingent payment of
$3,631, based on the valuation of the Company established by the
IPO.
Satcom Reorganization and Acquisition. On
October 7, 2005, Satcom and certain of its stockholders and
noteholders consummated a reorganization transaction (the
Satcom Reorganization) whereby 95% of the
outstanding principal of demand notes, convertible notes and
certain contract debt was converted into equity, and accrued and
unpaid interest on such demand and convertible notes was
acknowledged to have been previously released. This
reorganization included the conversion to equity of the demand
notes and convertible notes owed by Satcom to
Messrs. Franco and Eisenberg and the release of any other
debts of Satcom owed to them. Concurrently, the Company acquired
the Satcom interests of Messrs. Franco and Eisenberg and
issued them 620,000 shares of Series A preferred stock
(see Note 6).
The Company entered into a $1,000 line of credit for working
capital purposes with Satcom pursuant to a revolving note dated
December 30, 2005. The revolving loan bears interest at
8% per annum, and was originally scheduled to mature on
December 31, 2006, and is secured by all of Satcoms
assets, including its membership interest in ORBCOMM Europe. On
December 22, 2006, the Company extended the maturity date
to December 31, 2007. As of December 31, 2006 and
2005, Satcom had $465 and $0 amounts outstanding under this line
of credit, respectively.
F-34
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
OHB
Technology A.G.
On May 21, 2002, the Company entered into an international
value added reseller agreement with OHB whereby OHB has been
granted non-exclusive rights to resell ORBCOMM services for
applications developed by OHB for the monitoring and tracking of
mobile tanks and containers. The Company has not generated any
revenues under this agreement but the Company has a note payable
of $879 and $594 to OHB as of December 31, 2006 and 2005,
respectively (see Note 11). In addition, the Company also
has a purchase commitment with an OHB subsidiary (see
Note 16).
SES.
On February 17, 2004, the Company entered into an
international value added reseller agreement with SES (formerly
named SES Global S.A.), an affiliate of SES Global
Participation, S.A., a substantial investor in the Company,
whereby SES has been granted exclusive rights during the initial
term of the agreement to resell the Companys services for
return channel applications developed by SES for the
Direct-to-Home
TV market. The Company has not generated any revenues under this
agreement and there are no balances due from SES.
|
|
Note 16.
|
Commitments
and Contingencies
|
Procurement
agreements in connection with U.S. Coast Guard
contract
In May 2004, the Company entered into an agreement to construct
and deploy a satellite for use by the USCG (see Note 9). In
connection with this agreement, the Company entered into the
procurement agreements discussed below. All expenditures
relating to this project are being capitalized as assets under
construction. The satellite is scheduled for launch during 2007.
As of December 31, 2006, the Company has incurred $6,622 of
costs related to this project.
In November 2004, the Company entered into an ORBCOMM Concept
Demonstration Payload Procurement Agreement with Orbital
Sciences Corporation (Orbital Sciences), under which
the Company will purchase a Concept Demonstration Communication
Payload at a total cost of $3,305. At December 31, 2006,
the Companys remaining obligation under this agreement was
$150.
In March 2005, the Company entered into an ORBCOMM Concept
Demonstration Satellite Bus, Integration Test and Launch
Services Procurement Agreement with OHB-System AG, an affiliate
of OHB, under which the Company will purchase, among other
things, overall Concept Demonstration Satellite, design, bus
module and payload module structure manufacture, payload module
and bus module integration, assembled satellite environmental
tests, launch services and in-orbit testing of bus module at a
total cost not to exceed $2,416. At December 31, 2006, the
Companys remaining obligation under this agreement was
$362.
Gateway
settlement obligation
In 1996, the Predecessor Company entered into a contract to
purchase gateway earth stations (GESs) from ViaSAT
Inc. (the GESs Contract). As of September 15,
2000, the date the Predecessor Company filed for bankruptcy,
approximately $11,000 had been paid to ViaSAT, leaving
approximately $3,700 owing under the GESs Contract for 8.5 GESs
manufactured and stored by ViaSAT. In December 2004, the Company
and ViaSAT entered into a settlement agreement whereby the
Company was granted title to 4 completed GESs in return for a
commitment to pay an aggregate of $1,000 by December 2007.
ViaSAT maintains a security interest and lien in the 4 GESs and
has the right to possession of each GESs until the lien
associated with the GESs has been satisfied. The Company has
options, expiring in December 2007, to purchase any or all of
the remaining 4.5 GESs for aggregate consideration of $2,700.
However, the Company must purchase one of the remaining 4.5 GESs
for $1,000 prior to the sale or disposition of the last of the 4
GESs for which title has been transferred. The Company recorded
the 4 GESs in inventory at an aggregate value of $1,644
upon execution of the settlement agreement. At December 31,
2006 and, 2005, the accrued liability for the settlement
agreement was $944 and $1,644, respectively.
F-35
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
Procurement
agreements in connection with quick-launch
satellites
On April 21, 2006, the Company entered into an agreement
with Orbital Sciences whereby Orbital Sciences will design,
manufacture, test and deliver to the Company, one payload
engineering development unit and six AIS-equipped satellite
payloads for the Company. The cost of the payloads is $17,000,
subject to adjustment under certain circumstances. Payments
under the agreement are due upon the achievement of specified
milestones by Orbital Sciences. As of December 31, 2006,
the Company has made milestone payments of $10,500 under this
agreement. The Company anticipates making the remaining payments
under the agreement of $5,800 and $700 in 2007 and 2008,
respectively.
On June 5, 2006, the Company entered into an agreement with
OHB-System AG, an affiliate of OHB, to design, develop and
manufacture six satellite buses, integrate such buses with the
payloads to be provided by Orbital Sciences, and launch the six
integrated satellites. The price for the six satellite buses and
launch services is $20,000 and payments under the agreement are
due upon specific milestones achieved by OHB-System AG. In
addition, if OHB-System AG meets specific on-time delivery
milestones, the Company would be obligated to pay up to an
additional $1,000. The Company anticipates making the remaining
payments under the agreement of $13,600 and $1,400 in 2007 and
2008, respectively, for the initial order of six satellite buses
and the related integration and launch services, inclusive of
the on-time delivery payments. As of December 31, 2006, the
Company has made milestone payments of $6,000 under this
agreement. In addition, OHB-System AG will provide services
relating to the development, demonstration and launch of the
Companys next-generation satellites at a total cost of
$1,350. The Company has the option on or before June 5,
2007, to require OHB-System AG to design, develop and
manufacture up to two additional satellite buses and integrate
two satellite payloads at a cost of $2,100 per satellite.
Operating
leases
The Company leases office, storage and other facilities under
agreements classified as operating leases which expire through
2009. Future minimum lease payments, by year and in the
aggregate, under non-cancelable operating leases with initial or
remaining terms of one year or more as of December 31, 2006
are as follows:
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
2007
|
|
$
|
995
|
|
2008
|
|
|
730
|
|
2009
|
|
|
128
|
|
|
|
|
|
|
|
|
$
|
1,853
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2006, 2005
and 2004 was approximately $973, $956 and $920, respectively.
Litigation
Quake. On February 24, 2005, Quake
Global, Inc. (Quake) filed a four count action for
damages and injunctive relief against the Company, the
Companys wholly owned subsidiary, Stellar Satellite
Communications, Ltd. (New Stellar) and Delphi
Corporation, in the U.S. District Court for the Central
District of California, Western Division (the
Complaint). The Complaint alleges antitrust
violations, breach of contract, tortious interference and
improper exclusive dealing arrangements. Quake claims damages in
excess of $15,000 and seeks treble damages, costs and reasonable
attorneys fees, unspecified compensatory damages, punitive
damages, injunctive relief and that the Company be required to
divest itself of the assets it acquired from Stellar Satellite
Communications, Ltd. (Old Stellar) and reconstitute
a new and effective competitor. On April 21, 2005, the
Company filed a motion to dismiss or to compel arbitration and
dismiss or stay the proceedings, which the District Court
denied. On July 19, 2005, the Company and New Stellar took
an interlocutory appeal as of right to the Court
F-36
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
of Appeals for the Ninth Circuit from the denial of the
Companys motion to dismiss. The appeal has been fully
briefed and the parties are awaiting and oral argument to be
scheduled by the Ninth Circuit.
On December 6, 2005, the Company filed its answer and
counterclaims to Quakes complaint. The parties are
currently engaged in discovery; the discovery cut-off date is
June 8, 2007. A pre-trial conference is scheduled for
November 19, 2007, at which time a trial date will be set.
On December 21, 2006, The Company served a Notice of
Default on Quake for its failure to pay past-due royalty fees.
Under the Subscriber Communicator Manufacturing Agreement, Quake
had 30 days to cure that default, but failed to do so. In
addition, the Company has demanded in this Notice of Default
that Quake post security as required by the Subscriber
Communicator Manufacturing Agreement, which Quake also failed to
do. Accordingly, on January 30, 2007, the Company
terminated its Subscriber Communicator Manufacturing Agreement
with Quake. On February 12, 2007, Quake sought leave to
file and serve a proposed supplemental complaint in the
U.S. District Court for the Central District of California,
alleging that the recent termination was a monopolizing and
tortious act by the Company. On March 9, 2007, the Company
filed an opposition to Quakes motion to file a
supplemental complaint, asserting that any dispute over the
legality of the January 30 termination is subject to
arbitration. In March 2007, the Company entered into an interim
agreement with Quake for a term of two months for Quake to
continue to supply Subscriber Communicators to the
Companys customers.
Separately, ORBCOMM served notices of default upon Quake in July
and September 2005 and in June, August and December 2006 under
the parties Subscriber Communicators Manufacturing
Agreement. On September 23, 2005, the Company commenced an
arbitration with the American Arbitration Association seeking:
(1) a declaration that the Company has the right to
terminate the Subscriber Communicator Manufacturing Agreement;
(2) an injunction against Quakes improperly using the
fruits of contractually-prohibited non-segregated modem design
and development efforts in products intended for use with the
systems of the Companys competitors; and (3) damages.
Quake has filed an answer with counterclaims to the
Companys claims in the arbitration. As part of
Quakes counter claims, it claims damages of at least
$50,000 and seeks attorney fees and expenses incurred in
connection with the arbitration. On August 28, 2006, the
Company amended its statement of claims in the arbitration to
add the claims identified in the June and August 2006 notices of
default. On December 15, 2006 the Company amended its
statement of claims in the arbitration to add the claims
identified in the December 14, 2006 notice of default. On
February 7, 2007, the Company sought leave to amend its
statement of claims in the arbitration seeking a declaration
that its exercise of its contractual termination right under the
Subscriber Communicator Manufacturing Agreement was lawful and
proper in all respects, including but not limited to under the
terms of the Subscriber Communicator Manufacturing Agreement and
the laws of the United States. On February 23, 2007, Quake
filed its reply papers opposing such amended statement of
claims. On March 10, 2007, the arbitration panel determined
to allow the Company to amend its statement of claims in the
arbitration seeking a declaration that its exercise of its
contractual termination right under the Subscriber Communicator
Manufacturing Agreement was proper as a contractual matter but
declined jurisdiction as to antitrust issues related to such
termination. The arbitration hearing is currently rescheduled
for July 2007.
No provision for losses, if any, that might result from this
matter have been recorded in the Companys consolidated
financial statements as this action is in its preliminary stages
and the Company is unable to predict the outcome and therefore
it is not probable that a liability has been incurred and the
amount of loss if any, is not reasonably estimable.
Separately, in connection with a pending legal action between
Quake and Mobile Applitech, Inc, or MobiApps, relating to an RF
application specific integrated circuit, or ASIC, developed
pursuant to a Joint Development Agreement between Quake and
MobiApps, Quake sent the Company a letter dated July 19,
2006 notifying the Company that it should not permit or
facilitate MobiApps to market or sell Communicators for use on
the ORBCOMM system or allow MobiApps Communicators to be
activated on ORBCOMMs system and that failure to cease and
desist from the foregoing actions may subject the Company to
legal liability and allow Quake to seek equitable and monetary
relief.
F-37
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
On August 4, 2006, ORBCOMM LLC filed a motion to intervene
in the pending action between Quake and MobiApps in the
U.S. District Court for the District of Maryland (Greenbelt
Division) seeking a declaration as to (1) whether MobiApps
has the right to use the ASIC product in Communicators it
manufactures for use on the ORBCOMM system, and (2) whether
the Company can permit or facilitate MobiApps to market or sell
Communicators using the ASIC product for ORBCOMMs system
and/or allow
such Communicators to be activated on ORBCOMMs system. On
August 7, 2006, the Maryland District Court transferred
that action to the U.S. District Court for the Southern
District of California. On October 20, 2006, ORBCOMM moved
to intervene in the Southern District of California action and
filed a
Complaint-In-Intervention
therein, seeking the relief it had requested in the Maryland
District Court. ORBCOMMs Motion to Intervene was granted
on January 4, 2007. Under the terms of the agreement with
MobiApps, the Company will be indemnified for its expenses
incurred in connection with this action related to the alleged
violations of Quakes proprietary rights. On
February 15, 2007, Quake filed its answer to the
Complaint-In-Intervention
and counterclaims against intervenor ORBCOMM, alleging that
ORBCOMM interfered with Quakes contractual relations and
conspired with MobiApps to misappropriate Quakes
proprietary information. ORBCOMM LLC has sent notice to
Quakes counsel that ORBCOMM LLC believes the assertion of
these counterclaims violates Rule 11 of the Federal Rules
of Civil Procedure. No provision for losses, if any, that might
result from this matter have been recorded in the Companys
consolidated financial statements as this action is in its
preliminary stages and the Company is unable to predict the
outcome and therefore it is not probable that a liability has
been incurred and the amount of loss if any, is not reasonably
estimable.
ORBCOMM Asia. On September 30, 2005,
ORBCOMM Asia delivered to the Company, ORBCOMM Holdings LLC,
ORBCOMM LLC, and two officers of the Company a written notice of
its intention to arbitrate certain claims of breach of contract
and constructive fraud related to the MOU and seeking an award
of $3,170 in actual and compensatory damages for breach of
contract and $5,000 in punitive damages, and an award of damages
for lost profits in an amount to be established. The Company
believes that ORBCOMM Asia is approximately 90% owned by Gene
Hyung-Jin Song, who is also a stockholder of the Company. On
October 13, 2005, the Company, ORBCOMM Holdings, ORBCOMM
LLC, and two officers of the Company received notification from
the International Centre for Dispute Resolution, a division of
the American Arbitration Association, that it had received the
demand for arbitration from ORBCOMM Asia. On October 19,
2005, ORBCOMM Inc., ORBCOMM Holdings LLC, ORBCOMM LLC, Jerome
Eisenberg and Don Franco filed a petition, by order to show
cause, in New York Supreme Court seeking a stay of the
arbitration as to all parties other than ORBCOMM Asia and
ORBCOMM LLC on the ground that those parties were not
signatories to the MOU which contains the arbitration provision
upon which the arbitration was based. By order dated
January 31, 2006, the Supreme Court of the State of New
York permanently stayed the arbitration as to all parties other
than ORBCOMM LLC and ORBCOMM Asia. The arbitration hearing on
the claims between ORBCOMM Asia and ORBCOMM LLC was held on
June 8, 2006.
On June 30, 2006, the arbitration panel entered an award
denying ORBCOMM Asias claims in their entirety and
awarding ORBCOMM LLC attorneys fees and costs of
approximately $250. On August 9, 2006, the Company received
$120 from ORBCOMM Asia and recorded the amount as a reduction to
selling, general and administrative expenses. On
December 4, 2006, the Company received the remaining
balance from ORBCOMM Asia and recorded the amount as a reduction
to selling, general and administrative expenses.
The Company is subject to various other claims and assessments
in the normal course of its business. While it is not possible
at this time to predict the outcome of the litigation discussed
above with certainty and some lawsuits, claims or proceedings
may be disposed of unfavorably to the Company, based on its
evaluation of matters which are pending or asserted the
Companys management believes the disposition of such
matters will not have a material adverse effect on the
Companys business or financial statements.
|
|
Note 17.
|
Employee
Incentive Plans
|
The Company maintains a 401(k) plan. All employees who have been
employed for three months or longer are eligible to participate
in the plan. Employees may contribute up to 15% of eligible
compensation to the plan, subject to certain limitations. The
Company has the option of matching up to 100% of the amount
contributed by each employee up to 4% of employees
compensation. In addition, the plan contains a discretionary
contribution component pursuant to which the Company may make an
additional annual contribution. Contributions vest over a
F-38
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
five-year period from the employees date of employment.
The Company did not make any contributions for the years ended
December 31, 2006, 2005 and 2004.
|
|
Note 18.
|
Supplemental
Disclosure of Cash Flow Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series A
preferred stock in connection with the acquisition of Sistron
|
|
$
|
|
|
|
$
|
|
|
|
$
|
465
|
|
Gateway received in consideration
for payment for accounts receivable
|
|
|
|
|
|
|
157
|
|
|
|
730
|
|
Gateway acquired and recorded in
inventory in 2005 and used for construction under satellite and
property and equipment in 2006
|
|
|
411
|
|
|
|
|
|
|
|
|
|
Issuance of Series A
preferred stock in connection with the acquisition of Satcom
|
|
|
|
|
|
|
1,761
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of notes payable and
accrued interest for Series A preferred stock
|
|
|
|
|
|
|
|
|
|
|
10,967
|
|
Conversion of notes payable for
Series B preferred stock
|
|
|
|
|
|
|
25,019
|
|
|
|
|
|
Debt discount attributable to
issued warrants and beneficial conversion rights in connection
with 12% convertible bridge notes
|
|
|
|
|
|
|
|
|
|
|
426
|
|
Debt discount attributable to
issued warrants and beneficial conversion rights in connection
with 10% convertible bridge notes
|
|
|
|
|
|
|
|
|
|
|
354
|
|
Deferred financing costs
attributable to issued warrants and beneficial conversion rights
in connection with 10% convertible bridge notes
|
|
|
|
|
|
|
|
|
|
|
56
|
|
Warrants issued in connection with
Series A preferred stock issuance
|
|
|
|
|
|
|
|
|
|
|
606
|
|
Warrants issued in exchange for
services rendered
|
|
|
|
|
|
|
|
|
|
|
248
|
|
Preferred stock dividends accrued
|
|
|
|
|
|
|
4,709
|
|
|
|
3,318
|
|
Conversion of Series A
preferred stock into common stock
|
|
|
37,882
|
|
|
|
|
|
|
|
|
|
Conversion of Series B
preferred stock into common stock
|
|
|
68,629
|
|
|
|
|
|
|
|
|
|
F-39
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
|
|
Note 19.
|
Quarterly
Financial Data (Unaudited)
|
The quarterly results of operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,380
|
|
|
$
|
6,261
|
|
|
$
|
5,554
|
|
|
$
|
6,325
|
|
Loss from operations
|
|
|
(3,579
|
)
|
|
|
(2,866
|
)
|
|
|
(2,458
|
)
|
|
|
(4,928
|
)
|
Net loss
|
|
|
(3,141
|
)
|
|
|
(2,250
|
)
|
|
|
(1,867
|
)
|
|
|
(3,957
|
)
|
Net loss applicable to common
shares
|
|
|
(5,448
|
)
|
|
|
(4,806
|
)
|
|
|
(4,305
|
)
|
|
|
(15,087
|
)
|
Net loss per common share, Basic
and diluted
|
|
|
(0.96
|
)
|
|
|
(0.84
|
)
|
|
|
(0.71
|
)
|
|
|
(0.61
|
)
|
Weighted average common shares
outstanding
|
|
|
5,690,017
|
|
|
|
5,690,017
|
|
|
|
6,085,376
|
|
|
|
24,779,007
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,751
|
|
|
$
|
3,657
|
|
|
$
|
3,665
|
|
|
$
|
5,454
|
|
Loss from operations
|
|
|
(1,642
|
)
|
|
|
(2,126
|
)
|
|
|
(2,104
|
)
|
|
|
(1,968
|
)
|
Net loss
|
|
|
(1,633
|
)
|
|
|
(2,111
|
)
|
|
|
(2,099
|
)
|
|
|
(3,255
|
)
|
Net loss applicable to common
shares
|
|
|
(2,895
|
)
|
|
|
(3,418
|
)
|
|
|
(3,361
|
)
|
|
|
(4,574
|
)
|
Net loss per common share, Basic
and diluted
|
|
|
(0.51
|
)
|
|
|
(0.60
|
)
|
|
|
(0.59
|
)
|
|
|
(0.81
|
)
|
Weighted average common shares
outstanding
|
|
|
5,658,655
|
|
|
|
5,690,017
|
|
|
|
5,690,017
|
|
|
|
5,690,017
|
|
F-40
Schedule II
Valuation and Qualifying Accounts
ORBCOMM Inc.
December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Col. A
|
|
Col. B
|
|
|
Col. C
|
|
|
Col. D
|
|
|
Col. E
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
End of the
|
|
Description
|
|
the Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(Amounts in thousands)
|
|
|
Year ended December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful receivables
|
|
$
|
671
|
|
|
|
30
|
|
|
|
(404
|
)
|
|
|
|
|
|
$
|
297
|
|
Deferred tax asset valuation
allowance
|
|
$
|
8,784
|
|
|
|
5,290
|
|
|
|
150
|
|
|
|
|
|
|
$
|
14,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful receivables
|
|
$
|
564
|
|
|
|
291
|
|
|
|
(184
|
)
|
|
|
|
|
|
$
|
671
|
|
Deferred tax asset valuation
allowance
|
|
$
|
4,701
|
|
|
|
4,083
|
|
|
|
|
|
|
|
|
|
|
$
|
8,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful receivables
|
|
$
|
137
|
|
|
|
1,280
|
|
|
|
(853
|
)
|
|
|
|
|
|
$
|
564
|
|
Deferred tax asset valuation
allowance
|
|
$
|
|
|
|
|
4,701
|
|
|
|
|
|
|
|
|
|
|
$
|
4,701
|
|
F-41
Exhibit Index
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
Description
|
|
Page No.
|
|
|
3
|
.1
|
|
Restated Certificate of
Incorporation of the Company.
|
|
|
|
3
|
.2
|
|
Amended Bylaws of the Company.
|
|
|
|
10
|
.1
|
|
Validation Services Agreement,
dated May 20, 2004, between the Company and the United
States Coast Guard, filed as Exhibit 10.1 to the
Companys Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.2.1
|
|
Cooperation Agreement, dated
May 18, 2004, among the Company, Stellar Satellite
Communications Ltd. and Delphi Corporation, filed as
Exhibit 10.2.1 to the Companys Registration Statement
on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.2.2
|
|
Amendment Number One to
Cooperation Agreement, dated December 27, 2005, among the
Company, Stellar Satellite Communications Ltd. and Delphi
Corporation, filed as Exhibit 10.2.2 to the Companys
Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.2.3
|
|
Pricing Letter Agreement, dated
May 6, 2004, between the Company and Delphi Corporation,
filed as Exhibit 10.2.3 to the Companys Registration
Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.3.1
|
|
ORBCOMM Concept Demonstration
Satellite Bus, Integration Test and Launch Services Procurement
Agreement, dated March 10, 2005, between the Company and
OHB-System AG, filed as Exhibit 10.3.1 to the
Companys Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.3.2
|
|
Amendment to the Procurement
Agreement, dated June 5, 2006, between the Company and
OHB-System AG, filed as Exhibit 10.3.2 to the
Companys Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.4
|
|
ORBCOMM Concept Demonstration
Communication Payload Procurement Agreement, dated
November 3, 2004, between the Company and Orbital Sciences
Corporation, filed as Exhibit 10.4 to the Companys
Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.5
|
|
Amendment to the Procurement
Agreement, dated April 21, 2006, between the Company and
Orbital Sciences Corporation, filed as Exhibit 10.5 to the
Companys Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.6
|
|
Second Amended and Restated
Registration Rights Agreement, dated as of December 30,
2005, by and among the Company and certain preferred
stockholders of the Company, filed as Exhibit 10.6 to the
Companys Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.7.1
|
|
International Value Added Reseller
Agreement, dated March 14, 2003, between the Company and
Transport International Pool, filed as Exhibit 10.9.1 to
the Companys Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.7.2
|
|
Amendment to International Value
Added Reseller Agreement, dated January 26, 2006, between
the Company and Transport International Pool, filed as
Exhibit 10.9.2 to the Companys Registration Statement
on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.7.3
|
|
Assignment and Assumption
Agreement, dated February 28, 2006, between ORBCOMM LLC,
Transport International Pool and GE Asset Intelligence, LLC,
filed as Exhibit 10.9.3 to the Companys Registration
Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.7.4
|
|
Amendment to International Value
Added Reseller Agreement dated July 11, 2006 between
ORBCOMM LLC and GE Asset Intelligence, filed as
Exhibit 10.9.4 to the Companys Registration Statement
on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
Description
|
|
Page No.
|
|
|
10
|
.7.5
|
|
Amendment to International Value
Added Resellers Agreement, dated August 3, 2006, between
ORBCOMM LLC and GE Asset Intelligence, LLC, filed as
Exhibit 10.9.5 to the Companys Registration Statement
on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.8
|
|
Form of Common Stock Warrants,
filed as Exhibit 10.10 to the Companys Registration
Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.9
|
|
Form of Series A Preferred
Stock Warrants, filed as Exhibit 10.11 to the
Companys Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.10
|
|
Form of Ridgewood Preferred Stock
Warrants, filed as Exhibit 10.12 to the Companys
Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.11
|
|
Form of Indemnification Agreement
between the Company and the executive officers and directors of
the Company, filed as Exhibit 10.13 to the Companys
Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.12
|
|
Schedule identifying agreements
substantially identical to the Form of Indemnification Agreement
constituting Exhibit 10.11 hereto, filed as
Exhibit 10.14 to the Companys Registration Statement
on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.13
|
|
2004 Stock Option Plan, filed as
Exhibit 10.15 to the Companys Registration Statement
on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.14
|
|
2006 Long-Term Incentives Plan,
filed as Exhibit 10.16 to the Companys Registration
Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.15
|
|
Form of Incentive Stock Option
Agreement under the 2004 Stock Option Plan, filed as
Exhibit 10.17 to the Companys Registration Statement
on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference, filed as Exhibit 10.17
to the Companys Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.16
|
|
Form of Non Statutory Stock Option
Agreement under the 2004 Stock Option Plan, filed as
Exhibit 10.18 to the Companys Registration Statement
on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.17
|
|
Employment Agreement, effective as
of June 1, 2006, between Jerome B. Eisenberg and the
Company, filed as Exhibit 10.19 to the Companys
Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.18
|
|
Employment Agreement, effective as
of June 1, 2006, between Marc Eisenberg and the Company,
filed as Exhibit 10.20 to the Companys Registration
Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.19.1
|
|
Employment Agreement, dated as of
May 5, 2006, between John P. Brady and the Company, filed
as Exhibit 10.21.1 to the Companys Registration
Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.19.2
|
|
Amendment to Stock Option
Agreement, dated as of May 5, 2006, between John P. Brady
and the Company, filed as Exhibit 10.21.2 to the
Companys Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.19.3
|
|
Retention and Separation
Agreement, effective as of October 11, 2006, between John
P. Brady and the Company, filed as Exhibit 10.21.3 to the
Companys Registration. Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.20
|
|
Employment Agreement, effective as
of June 1, 2006, between John J. Stolte, Jr. and the
Company, filed as Exhibit 10.22 to the Companys
Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.21
|
|
Employment Agreement, effective as
of August 2, 2004, between Emmett Hume and the Company,
filed as Exhibit 10.23 to the Companys Registration
Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
Description
|
|
Page No.
|
|
|
*10
|
.22
|
|
Form of Restricted Stock Unit
Award Agreement under the 2006 Long-Term Incentives Plan, filed
as Exhibit 10.24 to the Companys Registration
Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.23
|
|
Form of Stock Appreciation Rights
Award Agreement under the 2006 Long-Term Incentives Plan, filed
as Exhibit 10.25 to the Companys Registration
Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
*10
|
.24
|
|
Employment Agreement, effective as
of October 1, 2006, between Robert G. Costantini and the
Company, filed as Exhibit 10.26 to the Companys
Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.25
|
|
Letter agreement, dated
October 10, 2006, between Stellar Satellite Communications
Ltd. and GE Asset Intelligence, LLC, filed as Exhibit 10.27
to the Companys Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
16
|
|
|
Letter of J.H. Cohn LLP regarding
change in certifying accountant.
|
|
|
|
21
|
|
|
Subsidiaries of the Company.
|
|
|
|
23
|
.1
|
|
Consent of Deloitte &
Touche LLP, an independent registered public accounting firm.
|
|
|
|
24
|
|
|
Power of Attorney authorizing
certain persons to sign this Annual Report on behalf of certain
directors and executive officers of the Company.
|
|
|
|
31
|
.1
|
|
Certification of the Chairman of
the Board and Chief Executive Officer.
|
|
|
|
31
|
.2
|
|
Certification of the Executive
Vice President and Chief Financial Officer.
|
|
|
|
32
|
.1
|
|
Certification of the Chairman of
the Board and Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act.
|
|
|
|
32
|
.2
|
|
Certification of the Executive
Vice President and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
|
|
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. The omitted portions have been
separately filed with the Securities and Exchange Commission. |