424b4
Filed Pursuant to
Rule 424(b)(4)
Registration
No. 333-142427
PROSPECTUS
7,000,000 Shares
Common
Stock
We are selling 2,985,000 shares of common stock and the
selling stockholders are selling 4,015,000 shares of common
stock. We will not receive any proceeds from the shares of
common stock sold by the selling stockholders.
Our common stock is listed on The Nasdaq Global Market under the
symbol ORBC. On May 24, 2007, the closing sale
price of our common stock was $11.62 per share.
Investing in our common stock involves a high degree of risk.
Before buying any shares, you should read carefully the
discussion of material risks of investing in our common stock in
Risk factors beginning on page 10 of this
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per
Share
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Total
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Public
offering price
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$
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11.50
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$
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80,500,000
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Underwriting
discounts and commissions
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$
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0.6325
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$
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4,427,500
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Proceeds,
before expenses, to us
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$
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10.8675
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$
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32,439,487
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Proceeds,
before expenses, to selling stockholders
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$
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10.8675
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$
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43,633,013
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The underwriters may also purchase from the selling stockholders
up to an additional 1,050,000 shares of our common stock at
the public offering price, less the underwriting discounts and
commissions payable by the selling stockholders, to cover
over-allotments, if any, within 30 days from the date of
this prospectus. If the underwriters exercise this option in
full, the total underwriting discounts and commissions will be
$5,091,625, and the selling stockholders total proceeds,
before expenses, will be $55,043,888.
The underwriters are offering our common stock as set forth
under Underwriting. Delivery of the shares will be
made on or about May 31, 2007.
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UBS
Investment Bank |
Cowen
and Company |
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Piper
Jaffray |
CIBC
World Markets |
Raymond
James |
The date of this prospectus is May 24, 2007.
ORBCOMM
Satellite Communication for Machines Around the World
Lowest cost M2M solution for global two-way connectivity
Our core Machine to Machine (M2M) Markets;
Marine / Homeland Security
Equipment
Designed and built for M2M communications
29 mobile Low Earth orbit satellites offering contiguous global coverage
Authorized to operate in more than 80 countries and territories
Single global technology standard
14 gateways globally Licensed for up to 48 satellites |
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with additional information or
information different from that contained in this prospectus. We
and the selling stockholders are not, and the underwriters are
not, making an offer to sell or seeking offers to buy, shares of
our common stock in any jurisdiction where such offer or sale is
not permitted. You should assume that the information contained
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or of any sale of shares of our common stock.
TABLE OF
CONTENTS
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F-1
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We use market data and industry forecasts and projections
throughout this prospectus, which we have obtained from market
research, publicly available information and industry
publications and surveys conducted by third parties, including
regularly published research prepared by Harbor Research, Inc.,
or Harbor. We also engaged Harbor to prepare a report for our
use internally and in this prospectus that reorganizes
machine-to-machine
and telematics industry information and data regularly gathered
by Harbor into categories that correspond to our view of our
potential addressable markets. Our sources generally state that
the information they provide has been obtained from sources
believed to be reliable, but that the accuracy and completeness
of the information are not guaranteed. The forecasts and
projections are based on industry surveys and the
preparers experience in the industry and there is no
assurance that any of the projected amounts will be achieved.
Similarly, we believe that the surveys and market research
others have performed are reliable, but we have not
independently verified this information. No person may use the
market and industry information contained in this prospectus
attributed to Harbor or any other third party without their
consent.
ORBCOMM is a registered trademark of ORBCOMM Inc. This
prospectus refers to brand names, trademarks, service marks and
trade names of other companies and organizations, and these
brand names, trademarks, service marks and trade names are the
property of their respective holders.
i
Prospectus summary
This summary highlights selected information contained
elsewhere in this prospectus. This summary may not contain all
of the information that you should consider before investing in
our common stock. We urge you to read this entire prospectus
carefully, including the more detailed information about us and
about the shares of our common stock being sold in this offering
and our consolidated financial statements and related notes
appearing elsewhere in this prospectus, and the section entitled
Risk factors before making an investment decision.
Unless the context requires otherwise, the words
ORBCOMM, we, company,
us, and our refer to ORBCOMM Inc. and
its subsidiaries.
OUR
COMPANY
We operate the only global commercial wireless messaging system
optimized for narrowband communications. Our system consists of
a global network of 29 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 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, or GE Equipment Services, value-added
resellers, or VARs, such as Fleet Management Solutions, XATA
Corporation and American Innovations, Ltd., 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 80 countries
and territories in North America, Europe, South America, Asia,
Africa and Australia. As of March 31, 2007, we had
approximately 250,000 billable subscriber communicators
(subscriber communicators activated and currently billing or
expected to be billing within 30 to 90 days) on our system,
an increase of approximately 81.6% over the approximately
138,000 billable subscriber communicators as of March 31,
2006. During the three months ended March 31, 2007, our
billable subscriber communicator net additions totaled over
25,000 units. For a further discussion of billable
subscriber communicators, see Managements discussion
and analysis of financial condition and results of
operationsOverview.
We believe that our target markets are significant and growing.
Harbor Research, Inc., an independent strategic research firm
that we engaged to reorganize their existing data for our use
internally and in this prospectus, estimates that the number of
vehicles, devices and units worldwide in the commercial
transportation, heavy equipment, fixed asset monitoring, marine
vessel, consumer transportation, and government and homeland
security markets which are connected to M2M data communications
systems using satellite or cellular networks will grow from
approximately 17.4 million in 2006 to approximately
131.0 million by 2012, representing a compound annual
growth rate of 40.0%. During this time, they expect penetration
of M2M data communications devices for these target markets to
increase from approximately 1.4% of a total of 1.3 billion
vehicles, devices and units in 2006 to approximately 8.9% of a
total of 1.5 billion vehicles, devices and units in 2012.
1
Our unique M2M data communications system is comprised of three
elements: (i) a constellation of 29 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, four 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.
In April 2001, we acquired substantially all of the non-cash
assets of ORBCOMM Global L.P. and its subsidiaries, which had
originally designed, developed, constructed and put into service
almost all of our current communications system. The transaction
also involved the acquisition of the Federal Communications
Commission, or FCC, licenses necessary to operate the system.
Following the acquisition, we implemented a turn-around plan to
stabilize our operations and to preserve and substantially
enhance the value of the acquired business, while substantially
reducing costs and redefining our strategy, including:
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Lowering the prices, improving features and performance, and
introducing new models of our subscriber communicators;
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Implementing a revised, low cost, multi-channel marketing and
distribution model;
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Implementing changes intended to extend the operational lives of
existing satellites; and
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Enhancing network capabilities.
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As a result of our turn-around strategy, our revenues increased
from $3.3 million in 2002 to $24.5 million in 2006,
representing a compounded annual growth rate of 65.1% and the
number of billable subscriber communicators on our system
increased from approximately 31,000 at the end of 2002 to
approximately 250,000 as of March 31, 2007. As of
March 31, 2007, our cash, cash equivalents and marketable
securities were $98.1 million. We believe that our existing
cash and cash equivalents, expected proceeds from the
liquidation of our marketable securities, along with anticipated
cash flows from operations, are sufficient to fully fund our
base business plan. In addition, our net proceeds from this
offering will allow us to take advantage of current
opportunities to procure advanced communication systems for our
next-generation satellites that significantly increase capacity
beyond that provided in our base capital expenditure plan. We
have had annual net losses since our inception, including net
losses of $11.2 million for fiscal year 2006 and
$2.9 million for the three months ended March 31,
2007, and an accumulated deficit of $62.8 million as of
March 31, 2007. For more information about our net losses,
see Risk factorsRisks Relating to Our
BusinessWe are incurring substantial operating losses and
net losses. We anticipate additional future losses. We must
significantly increase our revenues to become profitable.
Our principal products and services are satellite communications
services and subscriber communicators. We provide global 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 wholly owned subsidiary, Stellar Satellite Communications
Ltd., or Stellar, markets and sells subscriber communicators
manufactured by Delphi Automotive Systems LLC, a subsidiary of
Delphi Corporation, directly to customers. We also earn a
one-time royalty from third parties for the use of our
proprietary communications protocol, which enables subscriber
communicators to connect to our M2M data communications system.
Increasingly, businesses and governments face the need to track,
control, 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 or measurements
and respond to external commands. As these intelligent devices
proliferate, we believe that the need to establish two-way
communications with these devices is greater than ever.
Increasingly, owners and users of these
2
intelligent devices are seeking low cost and efficient
communications systems that will enable them to communicate with
these devices.
Our products and services are typically combined with industry-
or customer-specific applications developed by our resellers
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
approximately 150 resellers (i.e., VARs, international
value-added resellers, or IVARs, international licensees and
country representatives). These resellers, which are our direct
customers, market to end-users in the following markets:
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Commercial transportationCommercial transportation
companies, including trucking and trailer leasing companies,
rail transport service providers and companies that handle
hazardous materials, 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 transport fleets more
safely and efficiently. Commercial transportation fleet owners
and operators, as well as OEMs, are increasingly integrating M2M
data communications systems into their commercial vehicles in
order to achieve these objectives;
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Heavy equipmentHeavy 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;
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Fixed asset monitoringCompanies 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, including for example, the remote
operation of valves, electrical switches and other devices. 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;
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Marine vesselsMaritime vessels have a need for
satellite-based communications due to the absence of reliable
terrestrial-based coverage more than a few miles offshore.
Luxury recreational marine vessels and commercial marine vessels
may use M2M data communications systems that offer features and
functions such as onboard diagnostics and other marine
telematics, alarms, requests for assistance, security, location
reporting/tracking,
e-mail and
two-way messaging, catch data and weather reports;
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Government and homeland securityGovernments 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, such as the tracking and
monitoring of military vehicles and in supply chain management,
logistics and support, which could incorporate our products and
services. M2M data communications systems could be used in
applications to monitor marine vessels or containers, detect
infiltration across land borders or monitor the status of
container door seals to address these homeland security needs.
In addition, we may also be able to leverage our work with the
Automatic Identification System, or AIS, to resell, subject in
certain circumstances to U.S. Coast Guard approval, AIS
data collected on our network to other coast guard services and
governmental agencies; and
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Consumer transportationAutomotive 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. An example of such a safety system is the
detection and reporting of airbag deployment. 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
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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 currently contemplated expanded capital plan in order
to expand our satellite constellation and further 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 system into the automotive OEM product
development cycle.
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OUR BUSINESS
STRENGTHS AND COMPETITIVE ADVANTAGE
We believe our business strengths and competitive advantages
include:
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Established global network and proven technologyWe 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;
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Low cost structureWe 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 communications system
assets from ORBCOMM Global L.P. 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, our current constellation is, and our
quick-launch and
next-generation
satellites will be, 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;
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Key distribution and OEM customer relationshipsOur
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 Inc., Komatsu Ltd., Hitachi Construction Machinery
Co., Ltd. and the Volvo Group;
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Significant market lead over satellite-based competitorsWe
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;
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Sole commercial satellite operator licensed in the VHF
spectrumWe are the sole commercial satellite operator
licensed to operate in the VHF spectrum by the FCC or, to our
knowledge, any other national spectrum or
radio-telecommunications regulatory agency in the world. The VHF
spectrum that we use was allocated globally by the International
Telecommunication Union, or the
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ITU, for use by satellite fleets such as ours to provide mobile
data communications service. We are currently authorized, either
directly or indirectly, to provide our data communications
services in over 80 countries and territories in North America,
Europe, South America, Asia, Africa and Australia. 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; and
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Reliable, low cost subscriber communicatorsWe have
manufacturing arrangements that provide us with industrial-scale
manufacturing capability for the supply of low cost, reliable,
ISO-9001 certified, automotive grade subscriber communicators
and the ability to scale up such manufacturing rapidly to meet
additional demand, as well as 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, 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.
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As part of your evaluation of an investment in our common stock,
you should take into account the risks to which we are subject.
Among other things, 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. For more information about these and other risks,
see Risk factorsRisks Related to Our
Technology. You should consider carefully these risks
before making an investment in our common stock.
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 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. We are pursuing the
following business strategies:
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Expand our low cost, multi-channel marketing and distribution
network of resellers;
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Expand our international markets;
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Further reduce subscriber communicator costs;
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Reduce network latency;
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Introduce new features and services; and
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Provide comprehensive technical support, customer service and
quality control.
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RECENT
DEVELOPMENTS
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In May 2007, we entered into a reseller agreement with T-Mobile
USA, Inc., or T-Mobile, a leading international provider of
wireless telecommunications, pursuant to which we will resell
T-Mobiles terrestrial wireless data services in
combination with our satellite-based data communications
services in the United States to target end-users who have
higher bandwidth requirements using dual-mode subscriber
communicators, which combine our subscriber communicators with
GSM communications
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devices. We anticipate offering these combined services to our
end-users beginning in the third quarter of 2007.
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During the three months ended March 31, 2007, our billable
subscriber communicator net additions were over 25,000 and as of
March 31, 2007, there were approximately 250,000 billable
subscriber communicators activated on our communications system,
an increase of approximately 81.6% over the approximately
138,000 billable subscriber communicators as of March 31,
2006.
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In February 2007, we completed the construction of a new gateway
earth station in Rutherglen Vic, Australia, allowing 2,500
existing subscriber communicators in Australia to utilize our
communications system in near-real-time mode, and enabling us to
provide improved service throughout Australia, New Zealand and
other parts of Asia, which are currently under-served by
terrestrial networks.
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In January 2007, our Mexican country representative, MITE Global
Communications Systems S.A. de C.V., or MITE GCS, obtained
regulatory authorization to provide ORBCOMM satellite services
in Mexico. MITE GCS has already contracted with five Mexican
VARs, including both private and government-owned partners,
which have developed innovative applications for trailer
tracking and fixed-site monitoring. The regulatory authorization
also opens the Mexican market to ORBCOMMs existing IVARs,
such as General Electric, Komatsu, Caterpillar, American
Innovations, and Fleet Management Solutions.
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For 2006, we achieved a nearly 100% increase in the total number
of billable subscriber communicators, or approximately
112,000 net units added, to approximately 225,000 billable
subscriber communicators as of December 31, 2006 from
approximately 113,000 billable subscriber communicators as of
December 31, 2005.
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In October 2006, the Trailer Fleet Services division of General
Electric and the U.S. Postal Service announced a six-year
contract under which Trailer Fleet Services will supply
GEs
VeriWisetm
Asset Intelligence trailer tracking technology to the
U.S. Postal Service for its approximately 4,800
over-the-road
semi-trailers, using our M2M data communications system.
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OUR CORPORATE
INFORMATION
Our principal executive office is located at 2115 Linwood
Avenue, Suite 100, Fort Lee, New Jersey 07024. Our
telephone number at that office is
(201) 363-4900.
Our website is located at www.orbcomm.com. Information contained
on our website is not part of, and is not incorporated into,
this prospectus.
6
The offering
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Issuer |
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ORBCOMM Inc. |
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Common stock offered by us |
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2,985,000 shares |
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Common stock offered by the selling stockholders |
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4,015,000 shares |
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Underwriters option to purchase additional shares from the
selling stockholders |
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1,050,000 shares |
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Common stock outstanding immediately after this offering |
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40,172,134 shares |
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Use of proceeds |
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We estimate that the net proceeds to us from this offering will
be approximately $31.2 million. We intend to use the net
proceeds to us from this offering as follows: |
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Ø Approximately
$30.0 million to expand our capital expenditure plan to
increase significantly the capacity and efficiency of our
next-generation satellites; and
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Ø The
remainder to provide additional working capital and for other
general corporate purposes.
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We will not receive any of the proceeds from the sales of common
stock by selling stockholders in the offering. |
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Nasdaq Global Market symbol |
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ORBC |
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Dividend Policy |
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We have never declared or paid cash dividends on shares of our
common stock. We intend to retain all available funds and any
future earnings after this offering for use in the operation of
our business and do not anticipate paying any further cash
dividends in the foreseeable future. Our board of directors may,
from time to time, examine our dividend policy and may, in their
absolute discretion, change such policy. |
Throughout this prospectus, the number of shares of our common
stock outstanding immediately after the closing of this offering
is based on shares of common stock outstanding on March 31,
2007 and:
|
|
Ø
|
excludes 1,464,420 shares of common stock subject to
outstanding stock options with a weighted average exercise price
of $3.09 per share;
|
|
Ø
|
excludes 1,443,985 shares of common stock subject to
outstanding warrants with a weighted average exercise price of
$2.93 per share;
|
|
Ø
|
excludes 899,296 and 413,334 shares of common stock
deliverable upon vesting of outstanding restricted stock units,
or RSUs, and exercise of outstanding stock appreciation rights,
or SARs, with a weighted average issuance price per share of
$11.00, respectively; and
|
|
Ø
|
excludes 3,600,539 shares of common stock available for
future issuance under our 2006 long-term incentives plan, or
2006 LTIP.
|
7
Summary consolidated
financial data
The following table presents summary consolidated financial data
as of and for the years ended December 31, 2002, 2003,
2004, 2005 and 2006 from our audited consolidated financial
statements and as of and for the three months ended
March 31, 2006 and 2007 from our unaudited condensed
consolidated financial statements. You should read this
information in conjunction with the information set forth in
Capitalization, Selected consolidated
financial data, Managements discussion and
analysis of financial condition and results of operations
and our consolidated financial statements for the years ended
December 31, 2004, 2005 and 2006 and our condensed
consolidated financial statements for the three months ended
March 31, 2006 and 2007 which are included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
Years ended
December 31,
|
|
|
March 31,
|
|
Consolidated
statement of operations data:
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(1)
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
(in thousands,
except per share data)
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
3,083
|
|
|
$
|
5,143
|
|
|
$
|
6,479
|
|
|
$
|
7,804
|
|
|
$
|
11,561
|
|
|
$
|
2,321
|
|
|
$
|
3,950
|
|
Product sales
|
|
|
185
|
|
|
|
1,938
|
|
|
|
4,387
|
|
|
|
7,723
|
|
|
|
12,959
|
|
|
|
4,059
|
|
|
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,268
|
|
|
|
7,081
|
|
|
|
10,866
|
|
|
|
15,527
|
|
|
|
24,520
|
|
|
|
6,380
|
|
|
|
5,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of services
|
|
|
6,812
|
|
|
|
6,102
|
|
|
|
5,884
|
|
|
|
6,223
|
|
|
|
8,714
|
|
|
|
2,057
|
|
|
|
2,353
|
|
Costs of product sales
|
|
|
96
|
|
|
|
1,833
|
|
|
|
4,921
|
|
|
|
6,459
|
|
|
|
12,092
|
|
|
|
4,076
|
|
|
|
2,106
|
|
Selling, general and administrative
|
|
|
5,792
|
|
|
|
6,577
|
|
|
|
8,646
|
|
|
|
9,344
|
|
|
|
15,731
|
|
|
|
3,328
|
|
|
|
5,311
|
|
Product development
|
|
|
439
|
|
|
|
546
|
|
|
|
778
|
|
|
|
1,341
|
|
|
|
1,814
|
|
|
|
498
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
13,139
|
|
|
|
15,058
|
|
|
|
20,229
|
|
|
|
23,367
|
|
|
|
38,351
|
|
|
|
9,959
|
|
|
|
10,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,871
|
)
|
|
|
(7,977
|
)
|
|
|
(9,363
|
)
|
|
|
(7,840
|
)
|
|
|
(13,831
|
)
|
|
|
(3,579
|
)
|
|
|
(4,169
|
)
|
Other income (expense), net
|
|
|
(913
|
)
|
|
|
(5,340
|
)
|
|
|
(3,026
|
)
|
|
|
(1,258
|
)
|
|
|
2,616
|
|
|
|
438
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary gain
|
|
|
(10,784
|
)
|
|
|
(13,317
|
)
|
|
|
(12,389
|
)
|
|
|
(9,098
|
)
|
|
|
(11,215
|
)
|
|
|
(3,141
|
)
|
|
|
(2,939
|
)
|
Extraordinary gain on
extinguishment of debt
|
|
|
5,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,857
|
)
|
|
$
|
(13,317
|
)
|
|
$
|
(12,389
|
)
|
|
$
|
(9,098
|
)
|
|
$
|
(11,215
|
)
|
|
$
|
(3,141
|
)
|
|
$
|
(2,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common
shares(2)
|
|
|
|
|
|
|
|
|
|
$
|
(14,535
|
)
|
|
$
|
(14,248
|
)
|
|
$
|
(29,646
|
)
|
|
$
|
(5,448
|
)
|
|
$
|
(2,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
$
|
(2.57
|
)
|
|
$
|
(2.51
|
)
|
|
$
|
(2.80
|
)
|
|
$
|
(0.96
|
)
|
|
$
|
(0.08
|
)
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
5,658
|
|
|
|
5,683
|
|
|
|
10,601
|
|
|
|
5,690
|
|
|
|
37,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
As of
March 31,
|
|
Consolidated
balance sheet data:
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(1)
|
|
|
2007
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
166
|
|
|
$
|
78
|
|
|
$
|
3,316
|
|
|
$
|
68,663
|
|
|
$
|
62,139
|
|
|
$
|
47,012
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,850
|
|
|
|
51,100
|
|
Working capital (deficit)
|
|
|
(5,461
|
)
|
|
|
(19,389
|
)
|
|
|
8,416
|
|
|
|
65,285
|
|
|
|
100,887
|
|
|
|
91,584
|
|
Satellite network and other
equipment, net
|
|
|
4,354
|
|
|
|
3,263
|
|
|
|
5,243
|
|
|
|
7,787
|
|
|
|
29,131
|
|
|
|
37,598
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
317
|
|
|
|
4,375
|
|
|
|
7,058
|
|
|
|
6,686
|
|
Total assets
|
|
|
6,701
|
|
|
|
7,198
|
|
|
|
20,888
|
|
|
|
89,316
|
|
|
|
148,093
|
|
|
|
152,258
|
|
Notes payable
|
|
|
3,699
|
|
|
|
12,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payablerelated party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
594
|
|
|
|
879
|
|
|
|
930
|
|
Convertible redeemable preferred
stock
|
|
|
|
|
|
|
|
|
|
|
38,588
|
|
|
|
112,221
|
|
|
|
|
|
|
|
|
|
Stockholders (members)
equity (deficit)
|
|
|
(4,730
|
)
|
|
|
(15,547
|
)
|
|
|
(28,833
|
)
|
|
|
(42,654
|
)
|
|
|
128,712
|
|
|
|
127,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
Three months
ended March 31,
|
|
Consolidated
statements of cash flows data:
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
(in
thousands)
|
|
Net cash (used in) provided by
operating activities
|
|
$
|
(5,246
|
)
|
|
$
|
(4,968
|
)
|
|
$
|
(16,051
|
)
|
|
$
|
3,641
|
|
|
$
|
(8,866
|
)
|
|
$
|
(6,669
|
)
|
|
$
|
735
|
|
Net cash used in investing
activities
|
|
|
(14
|
)
|
|
|
(1,747
|
)
|
|
|
(2,489
|
)
|
|
|
(4,033
|
)
|
|
|
(64,838
|
)
|
|
|
(754
|
)
|
|
|
(15,257
|
)
|
Net cash provided by (used in)
financing activities
|
|
|
5,060
|
|
|
|
6,627
|
|
|
|
21,778
|
|
|
|
65,674
|
|
|
|
67,510
|
|
|
|
(6,562
|
)
|
|
|
(599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
Three months
ended March 31,
|
|
Other
data:
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
EBITDA(3) (in thousands)
|
|
$
|
(2,796
|
)
|
|
$
|
(6,666
|
)
|
|
$
|
(9,640
|
)
|
|
$
|
(6,874
|
)
|
|
$
|
(11,187
|
)
|
|
$
|
(2,923
|
)
|
|
$
|
(3,624
|
)
|
Billable subscriber communicators
(at end of period) (number of units)
|
|
|
30,788
|
|
|
|
47,937
|
|
|
|
75,186
|
|
|
|
112,984
|
|
|
|
224,935
|
|
|
|
137,968
|
|
|
|
250,295
|
|
(footnotes on following
page)
8
|
|
|
(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 in connection with our
initial public offering. |
|
(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 our
becoming a corporation and issuing our 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 2005 and 2006. |
|
(3) |
|
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.
The following table reconciles our net loss to EBITDA for the
periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
Years ended
December 31,
|
|
|
ended March
31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
(in
thousands)
|
|
|
Net loss
|
|
$
|
(4,857
|
)
|
|
$
|
(13,317
|
)
|
|
$
|
(12,389
|
)
|
|
$
|
(9,098
|
)
|
|
$
|
(11,215
|
)
|
|
$
|
(3,141
|
)
|
|
$
|
(2,939
|
)
|
Interest income
|
|
|
(3
|
)
|
|
|
|
|
|
|
(49
|
)
|
|
|
(66
|
)
|
|
|
(2,582
|
)
|
|
|
(455
|
)
|
|
|
(1,279
|
)
|
Interest
expense(a)
|
|
|
916
|
|
|
|
5,340
|
|
|
|
1,318
|
|
|
|
308
|
|
|
|
237
|
|
|
|
17
|
|
|
|
52
|
|
Depreciation and amortization
|
|
|
1,148
|
|
|
|
1,311
|
|
|
|
1,480
|
|
|
|
1,982
|
|
|
|
2,373
|
|
|
|
656
|
|
|
|
542
|
|
|
|
|
|
|
|
|
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EBITDA
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$
|
(2,796
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)
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$
|
(6,666
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)
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$
|
(9,640
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)
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$
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(6,874
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)
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$
|
(11,187
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)
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$
|
(2,923
|
)
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|
$
|
(3,624
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)
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(a)
|
Includes amortization of deferred debt issuance costs and
debt discount of approximately $170, $3,527, $722, $31 and $0
for the years 2002, 2003, 2004, 2005 and 2006, respectively, and
$0 for each of the first three months of 2006 and 2007.
|
9
Risk factors
An investment in our common stock involves a high degree of
risk. You should carefully consider the following risks and
other information in this prospectus before you decide whether
to invest in shares of our common stock. Our business,
prospects, financial condition, operating results or cash flows
may be materially and adversely affected by the following risks,
or other risks and uncertainties that we have not yet identified
or currently consider to be immaterial. In that event, the
trading price of our common stock could decline, and you could
lose all or part of your investment.
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 net
losses of $11.2 million for fiscal year 2006 and
$2.9 million for the three months ended March 31,
2007, and at March 31, 2007, we had an accumulated deficit
of $62.8 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 for the remainder of 2007 and
may incur additional 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, the proceeds of this offering 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 the next-generation satellites,
as well as additional expenditures related to the Coast Guard
demonstration and quick-launch satellites. We cannot assure you
that we will have access to additional sources of capital on
favorable terms or at all.
10
Risk
factors
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, board 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.
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, 2007, 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, and FCC regulations prohibit voice
traffic in our VHF spectrum. 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.
11
Risk
factors
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.
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 base 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:
|
|
Ø
|
successfully construct, launch, place in commercial service,
operate and maintain our quick-launch and next-generation
satellites in a timely and cost-effective manner;
|
|
Ø
|
develop licensing and distribution arrangements in key markets
within and outside the United States sufficient to capture and
retain an adequate customer base;
|
|
Ø
|
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;
and
|
|
Ø
|
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.
|
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,
procurement, construction and launch of a satellite system.
12
Risk
factors
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 collectively 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.
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 who also owns
approximately 5.5% of our common stock, represented 49.5% of our
revenues for fiscal 2006 and 39.7% of our revenues for the three
months ended March 31, 2007, 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
13
Risk
factors
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
ORBCOMM Global L.P. 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 financial
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 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.
14
Risk
factors
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., or Quake, Mobile
Applitech, Inc. and our Stellar subsidiary. If our agreements
with third party manufacturers, including our new subscriber
communicator manufacturing agreement with Quake entered into as
part of our global settlement with Quake, are terminated or
expire, our search for additional or alternate manufacturers
could result in significant delays in customers activating
subscriber communicators on our communications system, added
expense for our 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.
15
Risk
factors
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
described in BusinessLegal 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), higher power
geostationary 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
16
Risk
factors
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 licensesa license for the satellite constellation,
separate licenses for the four U.S. gateway earth stations
and a blanket license for the subscriber communicatorsare
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 were required, slightly more than three years prior to
the expiration of the FCC satellite constellation license, to
apply for a license renewal with the FCC. The renewal
application was timely filed with the FCC on March 2, 2007,
and appeared on public notice on March 16, 2007. The
U.S. gateway earth station and subscriber communicator
licenses will 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.
Although the FCC has indicated that it is positively disposed
towards granting license renewals to a below 1 GHz band, or
little LEO, licensee that complies with the applicable FCC
licensing policies, 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
special temporary authority, or 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
17
Risk
factors
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 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.
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, delays and cost overruns, the
occurrence of which can materially and adversely affect our
operations.
Satellites are subject to certain risks related to failed or
delayed 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. Launch delays can be caused by a number of
factors, including delays in manufacturing satellites, preparing
satellites for launch, securing appropriate launch vehicles or
obtaining regulatory approvals. 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 our Coast Guard
demonstration satellite is important to us to test and
ultimately to leverage our work with AIS to resell, subject in
certain circumstances to U.S. Coast Guard approval, AIS
data collected by our satellites as well as to augment our
satellite constellation. 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
18
Risk
factors
subscriber growth. A failure or delay or cost overrun of either
our Coast Guard demonstration satellite or our quick-launch
mission could materially adversely affect our business,
financial condition and results of operations, including our
obligations under our contract with the U.S. Coast Guard. Any
launch failures of our next-generation satellites could 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 after giving effect to certain operational
changes and software updates. 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, the proceeds of this
offering and funds generated from operations to expand our
capital expenditure plan to increase significantly the capacity
and efficiency of our next-generation 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 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 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.
19
Risk
factors
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:
|
|
Ø |
Mechanical failures due to manufacturing error or defect,
including:
|
|
|
|
|
-
|
Mechanical failures that degrade the functionality of a
satellite, such as the failure of solar array panel deployment
mechanisms;
|
|
|
-
|
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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Ø |
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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Ø |
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.
|
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. See The ORBCOMM communications
systemSystem StatusNetwork capacity. 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.
A total of 35 satellites were launched by ORBCOMM Global L.P.
and of these, a total of 29 remain operational. Our Plane F
polar satellite, one of the original prototype first generation
satellites launched in 1995, was retired in April 2007 due to
intermittent service. The other five satellites that are not
operational experienced failures early in their lifetime and the
previous mission ending satellite failure affecting our system
occurred in October 2000, prior to our acquisition of the
satellite constellation. The absence of these six satellites
slightly increases system latency and slightly decreases overall
20
Risk
factors
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. Other operating risks, such as collisions
with space debris, could materially affect system performance
and our business. While certain software deficiencies may be
corrected remotely, most, if not all, of the satellite anomalies
or debris collision damage cannot be corrected once the
satellites are placed in orbit. See The ORBCOMM
communications systemSpace Segment for a description
of the operational status and anomalies that affect our
satellites. 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.
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
prospectus 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.
21
Risk
factors
RISKS RELATING TO
THIS OFFERING
The price of our
common stock has been, and may continue to be, volatile and your
investment may decline in value.
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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Ø
|
liquidity of the market in, and demand for, our common stock;
|
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Ø
|
changes in expectations as to our future financial performance
or changes in financial estimates, if any, of market analysts;
|
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Ø
|
actual or anticipated fluctuations in our results of operations,
including quarterly results;
|
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Ø
|
our financial performance failing to meet the expectations of
market analysts or investors;
|
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Ø
|
our ability to raise additional funds to meet our capital needs;
|
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Ø
|
the outcome of any litigation by or against us, including any
judgments favorable or adverse to us;
|
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Ø
|
conditions and trends in the end markets we serve and changes in
the estimation of the size and growth rate of these markets;
|
|
Ø
|
announcements relating to our business or the business of our
competitors;
|
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Ø
|
investor perception of our prospects, our industry and the
markets in which we operate;
|
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Ø
|
changes in our pricing policies or the pricing policies of our
competitors;
|
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Ø
|
loss of one or more of our significant customers;
|
|
Ø
|
changes in governmental regulation;
|
|
Ø
|
changes in market valuation or earnings of our competitors; and
|
|
Ø
|
general economic conditions.
|
In addition, the stock market in general, and The Nasdaq Global
Market and the market for communications 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 these
analysts do not continue to provide 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
22
Risk
factors
us regularly, demand for our stock could decrease, which could
cause our stock price and trading volume to decline.
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 March 31, 2007 we had 37,187,134 shares of
common stock outstanding. The 9,230,800 shares sold in our
initial public offering are, and the 7,000,000 shares sold
by the selling stockholders and us in this offering will be,
freely tradable without restriction or further registration
under federal securities laws unless purchased by our
affiliates. Approximately 31,000,000 outstanding 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 us that expire on
June 1, 2007, subject to extension under certain
circumstances. We and UBS Securities LLC have jointly waived the
lock-up
provisions to permit us and the selling stockholders in this
offering to participate in this offering. In connection with
this offering, the stockholders party to the Second Amended and
Restated Registration Rights Agreement, dated as of
December 30, 2005, including the majority of the selling
stockholders, have agreed to be bound by
lock-up
arrangements with UBS Securities LLC and us. The shares of
common stock subject to the
lock-up
arrangement will be available for sale in the public market
beginning 90 days after the date of this prospectus,
subject to extension under certain circumstances, assuming the
holders of such shares 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 this offering or 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.
Additionally, certain stockholders currently holding our common
stock may require us to file a shelf registration statement to
register the resale of all the shares of our common stock, from
time to time and at any time beginning 90 days after this
offering. We are also obligated to file a shelf registration
statement beginning in November 2007. See Certain
relationships and transactions with related
personsRegistration Rights Agreement.
Sales of substantial amounts of our common stock in the public
market following this offering, or the perception that these
sales may occur, could cause the market price of our common
stock to decline.
You will
experience immediate and substantial dilution in the as adjusted
net tangible book value of the shares you purchase in this
offering and will experience further dilution from the exercise
of stock options and warrants.
If you purchase shares of our common stock in this offering, you
will pay more for your shares than the net tangible book value
per share of our common stock. As a result, based on a public
offering price of $11.50 per share, the as adjusted net
tangible book value dilution to investors purchasing common
stock in this offering will be $7.71 per share. This
dilution is due in large part to earlier investors in our
company having paid substantially less than the public offering
price when they purchased their shares. The exercise of
outstanding options and warrants for common stock may result in
further dilution to you. See Dilution for a more
complete description of how the value of your investment in our
common stock will be diluted upon completion of this offering.
23
Risk
factors
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.
We will not
receive the majority of the proceeds of this offering and of the
proceeds we will receive, our management may invest or spend the
proceeds in ways with which you may not agree or in ways that
may not yield a positive return.
We will not receive any proceeds from the shares of common stock
sold by the selling stockholders, which will represent the
majority of the proceeds of this offering. We currently
anticipate using the net proceeds to us from this offering to
expand our capital expenditure plan to increase significantly
the capacity and efficiency of our next-generation satellites.
We cannot specify with certainty how we will use the net
proceeds of this offering. Accordingly, our management will have
considerable discretion in the application of these proceeds and
you will not have the opportunity to assess whether these
proceeds are being used appropriately. These proceeds may be
used for corporate purposes that do not increase our operating
results or market value. Until the net proceeds are used, they
may be placed in investments that do not produce income or that
lose value.
24
Special note
regarding forward-looking statements
This prospectus contains forward-looking statements. These
statements related to our growth strategy and our future
financial performance, including our operations, economic
performance, financial condition and prospects, and other future
events. We generally identify forward-looking statements by
using such words as anticipate, believe,
can, continue, could,
estimate, expect, intend,
may, plan, potential,
seek, should and similar expressions,
and the negative of such words and expressions, although not all
forward-looking statements contain such words or expressions.
The forward-looking statements in this prospectus are primarily
located in the material set forth under the headings
Prospectus summary, Risk factors,
Capitalization, Managements discussion
and analysis of financial condition and results of
operations and Business, but are found in
other locations as well.
These forward-looking statements generally relate to our plans,
objectives and expectations for future operations and are based
upon managements current estimates and projections of
future results or trends. Although we believe that our plans and
objectives reflected in or suggested by these forward-looking
statements are reasonable, we may not achieve these plans or
objectives. Our actual results may differ materially from those
projected as a result of certain risks and uncertainties. These
risks and uncertainties include, but are not limited to:
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Ø
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the substantial losses we have incurred and expect to continue
to incur;
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Ø
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demand for and market acceptance of our products and services
and the applications developed by our resellers;
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Ø
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technological changes, pricing pressures and other competitive
factors;
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Ø
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the inability of our international resellers to develop markets
outside the United States;
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Ø
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satellite launch failures, satellite launch and construction
delays and in-orbit satellite failures or reduced performance;
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Ø
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the failure of our system or reductions in levels of service due
to technological malfunctions or deficiencies or other events;
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Ø
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our inability to renew or expand our satellite constellation;
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Ø
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financial market conditions and the results of financing efforts;
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Ø
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political, legal, regulatory, governmental, administrative and
economic conditions and developments in the United States and
other countries and territories in which we operate;
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Ø
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changes in our business strategy; and
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Ø
|
the other risks described in this prospectus under Risk
factors.
|
This prospectus also contains forward-looking statements
attributed to third parties relating to their estimates of the
growth of our markets. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance
or achievements. Forward-looking statements contained in this
prospectus speak only as of the date of this prospectus. Unless
required by law, we undertake no obligation to update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise. You should, however,
review the risks and uncertainties we describe in the reports we
will file from time to time with the SEC after the date of this
prospectus. See Where you can find more information.
25
Use of proceeds
We will not receive any of the proceeds from the sale of the
4,015,000 shares of common stock offered by the selling
stockholders. With the exception of any underwriting discounts
and commissions related to the sale of shares of common stock by
the selling stockholders, we are responsible for the fees, costs
and expenses of this offering which are estimated to be
$1.2 million, inclusive of our legal and accounting fees,
printing costs and filing and other miscellaneous fees and
expenses.
We estimate that the net proceeds to us from the sale of the
2,985,000 shares of common stock we are offering will be
approximately $31.2 million, after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us.
We intend to use the net proceeds to us from this offering as
follows:
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Ø
|
Approximately $30.0 million to expand our capital
expenditure plan to take advantage of current opportunities to
procure advanced communication systems for our next-generation
satellites that significantly increase capacity beyond that
provided in our base capital expenditure plan; and
|
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Ø
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The remainder to provide additional working capital and for
other general corporate purposes.
|
The allocation of the net proceeds of this offering described
above represents our best current estimate of our projected
capital expenditure plan. The amount and timing of how we
actually spend the net proceeds to us from this offering may
vary significantly and will depend on a number of factors,
including our future revenues and cash generated by operations
and other factors we describe in Risk factors.
Accordingly, we will have broad discretion in the way we use the
net proceeds to us from this offering and we reserve the right
to change the use of these proceeds in response to certain
contingencies such as more attractive business opportunities,
changes in technology, competitive developments and other
factors. Pending their ultimate use, we intend to invest the net
proceeds to us from this offering in short- to medium-term,
interest-bearing, investment-grade securities.
26
Price range of our
common stock
Our common stock has traded on The Nasdaq Global Market under
the symbol ORBC since November 3, 2006. Prior
to that time, there was no public market for our common stock.
The following sets forth the high and low trading prices of our
common stock, as reported on The Nasdaq Global Market for the
periods shown:
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High
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Low
|
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2006:
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|
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Fourth Quarter (beginning on
November 3, 2006)
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$
|
11.10
|
|
|
$
|
7.03
|
|
2007:
|
|
|
|
|
|
|
|
|
First Quarter
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|
$
|
14.23
|
|
|
$
|
8.76
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|
Second Quarter (through
May 24, 2007)
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|
$
|
13.97
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|
|
$
|
11.45
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|
On May 24, 2007 the last reported sale price for our common
stock on The Nasdaq Global Market was $11.62 per share. As
of March 31, 2007 there were 122 holders of record of our
common stock.
Dividend policy
We have never declared or paid cash dividends on shares of our
common stock.
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.
27
Capitalization
Capitalization
The following table summarizes our cash, cash equivalents and
marketable securities and our capitalization as of
March 31, 2007:
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Ø
|
on a historical basis; and
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Ø
|
on an as adjusted basis to reflect the capitalization as
adjusted to give effect to the sale by us of shares of common
stock offered hereby at the public offering price of $11.50 per
share, after deducting estimated underwriting discounts and
commissions and the estimated offering expenses payable by us
and the application of the net proceeds from the offering.
|
The following table excludes:
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Ø
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an aggregate of 1,464,420 shares of common stock subject to
outstanding options at a weighted average exercise price of
$3.09 per share as of March 31, 2007;
|
|
Ø
|
an aggregate of 1,443,985 shares of common stock subject to
outstanding warrants at a weighted average exercise price of
$2.93 per share as of March 31, 2007;
|
|
Ø
|
899,296 and 413,334 shares of common stock deliverable upon
vesting of outstanding RSUs and exercise of outstanding SARs
with a weighted average issuance price per share of
$11.00, respectively; and
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Ø
|
3,600,539 shares of common stock available for future
issuance at March 31, 2007 under our 2006 LTIP. See
ManagementStock Option and Other Compensation
Plans and Note 4 of Notes to condensed consolidated
financial statements.
|
You should read the following table in conjunction with
Managements discussion and analysis of financial
condition and results of operations, Description of
capital stock and our consolidated financial statements
and related notes appearing elsewhere in this prospectus.
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As of
March 31, 2007
|
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Actual
|
|
|
As
adjusted
|
|
|
|
|
|
(in thousands,
except par values)
|
|
|
Cash and cash equivalents
|
|
$
|
47,012
|
|
|
$
|
78,251
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
51,100
|
|
|
$
|
51,100
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par
value; 50,000 shares authorized, no shares issued and
outstanding, actual and as adjusted
|
|
$
|
|
|
|
$
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par
value; 250,000 shares authorized, 37,187 shares issued
and outstanding, actual, and 40,172 shares issued and
outstanding as adjusted
|
|
|
37
|
|
|
|
40
|
|
Additional paid-in capital
|
|
|
190,845
|
|
|
|
222,081
|
|
Accumulated other comprehensive
loss
|
|
|
(419
|
)
|
|
|
(419
|
)
|
Accumulated deficit
|
|
|
(62,786
|
)
|
|
|
(62,786
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
127,677
|
|
|
|
158,916
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
127,677
|
|
|
$
|
158,916
|
|
|
|
|
|
|
|
|
|
|
28
Dilution
If you invest in our common stock, your interest will be diluted
immediately to the extent of the difference between the public
offering price per share of our common stock and the as adjusted
net tangible book value per share of our common stock after this
offering. As of March 31, 2007, our net tangible book value
was approximately $121.0 million, or approximately
$3.25 per share of our common stock. Net tangible book
value per share is equal to our total net tangible assets, or
total net assets less intangible assets, divided by the number
of shares of our outstanding common stock. After giving effect
to our sale of 2,985,000 shares of our common stock in this
offering at the public offering price of $11.50 per share,
and the application of the proceeds therefrom, and after
deducting estimated underwriting discounts and commissions paid
by us and the estimated offering expenses of this offering, our
as adjusted net tangible book value as of March 31, 2007
attributable to common stockholders would have been
approximately $152.2 million, or approximately $3.79 per
share of our common stock. This represents an immediate increase
in net tangible book value of $0.54 per share to our existing
stockholders, and an immediate dilution of $7.71 per share to
new investors purchasing shares in this offering. The following
table illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
Public offering price per share
|
|
|
|
|
|
$
|
11.50
|
|
Net tangible book value per share
before the offering
|
|
$
|
3.25
|
|
|
|
|
|
Increase in net tangible book
value per share attributable to new investors
|
|
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted net tangible book
value per share after the offering
|
|
|
|
|
|
|
3.79
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
7.71
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes on an as adjusted basis, as of
March 31, 2007, after giving effect to this offering, the
total number of shares of our common stock purchased from us and
the total consideration and the average price per share paid by
existing stockholders and by new investors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shares
|
|
|
Total
consideration
|
|
|
Average price
|
|
|
|
Number
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
per
share
|
|
|
|
|
Existing stockholders
|
|
|
37,187,134
|
|
|
|
92.6
|
|
|
$
|
190,882,000
|
|
|
|
84.8
|
|
|
$
|
5.13
|
|
New investors
|
|
|
2,985,000
|
|
|
|
7.4
|
|
|
|
34,327,500
|
|
|
|
15.2
|
|
|
|
11.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
40,172,134
|
|
|
|
100.0
|
%
|
|
$
|
225,209,500
|
|
|
$
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If the underwriters exercise their over-allotment option in
full, the following will occur:
|
|
Ø
|
the as adjusted percentage of shares of our common stock held by
existing stockholders will decrease to approximately 80.0% of
the total number of as adjusted shares of our common stock
outstanding after this offering; and
|
|
Ø
|
the number of shares of our common stock held by new investors
will increase to 8,050,000, or approximately 20.0% of the total
number of shares of our common stock outstanding after this
offering.
|
The discussion and tables above exclude the following:
|
|
Ø
|
an aggregate of 1,464,420 shares of common stock subject to
outstanding options at a weighted average exercise price of
$3.09 per share as of March 31, 2007;
|
|
Ø
|
an aggregate of 1,443,985 shares of common stock subject to
outstanding warrants at a weighted average exercise price of
$2.93 per share as of March 31, 2007;
|
|
Ø
|
899,296 and 413,334 shares of common stock deliverable upon
vesting of outstanding RSUs and exercise of outstanding SARs
with a weighted average issuance price per share of $11.00,
respectively; and
|
29
Dilution
|
|
Ø |
3,600,539 shares of common stock available for future
issuance at March 31, 2007 under our 2006 LTIP. See
ManagementStock Option and Other Compensation
Plans and Note 4 of Notes to condensed consolidated
financial statements.
|
If all outstanding options and warrants are exercised
immediately after this offering, the following will occur:
|
|
Ø
|
the as adjusted percentage of shares of our common stock held by
existing shareholders will increase to approximately 93.1% of
the total number of as adjusted shares of our common stock
outstanding after this offering;
|
|
Ø
|
the number of shares of our common stock held by new investors
will decrease to approximately 6.9% of the total number of
shares of our common stock outstanding after this offering; and
|
|
Ø
|
the dilution per share to new investors will be $7.76.
|
30
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
prospectus. We have derived the consolidated statement of
operations data for the years ended December 31, 2004, 2005
and 2006 and the consolidated balance sheet data as of
December 31, 2005 and 2006 from our audited consolidated
financial statements and for the three months ended
March 31, 2006 and 2007 from our unaudited condensed
consolidated financial statements, which are included elsewhere
in this prospectus. We have derived the consolidated statement
of operations data for the years ended December 31, 2002
and 2003 and the consolidated balance sheet data as of
December 31, 2002, 2003 and 2004 from our audited
consolidated financial statements, which are not included in
this prospectus. Our historical results are not necessarily
indicative of future results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Years ended
December 31,
|
|
|
ended March
31,
|
|
Consolidated
statement of operations data:
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(1)
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
(in thousands,
except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
3,083
|
|
|
$
|
5,143
|
|
|
$
|
6,479
|
|
|
$
|
7,804
|
|
|
$
|
11,561
|
|
|
$
|
2,321
|
|
|
$
|
3,950
|
|
Product sales
|
|
|
185
|
|
|
|
1,938
|
|
|
|
4,387
|
|
|
|
7,723
|
|
|
|
12,959
|
|
|
|
4,059
|
|
|
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,268
|
|
|
|
7,081
|
|
|
|
10,866
|
|
|
|
15,527
|
|
|
|
24,520
|
|
|
|
6,380
|
|
|
|
5,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of services
|
|
|
6,812
|
|
|
|
6,102
|
|
|
|
5,884
|
|
|
|
6,223
|
|
|
|
8,714
|
|
|
|
2,057
|
|
|
|
2,353
|
|
Costs of product sales
|
|
|
96
|
|
|
|
1,833
|
|
|
|
4,921
|
|
|
|
6,459
|
|
|
|
12,092
|
|
|
|
4,076
|
|
|
|
2,106
|
|
Selling, general and administrative
|
|
|
5,792
|
|
|
|
6,577
|
|
|
|
8,646
|
|
|
|
9,344
|
|
|
|
15,731
|
|
|
|
3,328
|
|
|
|
5,311
|
|
Product development
|
|
|
439
|
|
|
|
546
|
|
|
|
778
|
|
|
|
1,341
|
|
|
|
1,814
|
|
|
|
498
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
13,139
|
|
|
|
15,058
|
|
|
|
20,229
|
|
|
|
23,367
|
|
|
|
38,351
|
|
|
|
9,959
|
|
|
|
10,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,871
|
)
|
|
|
(7,977
|
)
|
|
|
(9,363
|
)
|
|
|
(7,840
|
)
|
|
|
(13,831
|
)
|
|
|
(3,579
|
)
|
|
|
(4,169
|
)
|
Other income (expense), net
|
|
|
(913
|
)
|
|
|
(5,340
|
)
|
|
|
(3,026
|
)
|
|
|
(1,258
|
)
|
|
|
2,616
|
|
|
|
438
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary gain
|
|
|
(10,784
|
)
|
|
|
(13,317
|
)
|
|
|
(12,389
|
)
|
|
|
(9,098
|
)
|
|
|
(11,215
|
)
|
|
|
(3,141
|
)
|
|
|
(2,939
|
)
|
Extraordinary gain on
extinguishment of debt
|
|
|
5,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,857
|
)
|
|
$
|
(13,317
|
)
|
|
$
|
(12,389
|
)
|
|
$
|
(9,098
|
)
|
|
$
|
(11,215
|
)
|
|
$
|
(3,141
|
)
|
|
$
|
(2,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common
shares(2)
|
|
|
|
|
|
|
|
|
|
$
|
(14,535
|
)
|
|
$
|
(14,248
|
)
|
|
$
|
(29,646
|
)
|
|
$
|
(5,448
|
)
|
|
$
|
(2,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
$
|
(2.57
|
)
|
|
$
|
(2.51
|
)
|
|
$
|
(2.80
|
)
|
|
$
|
(0.96
|
)
|
|
$
|
(0.08
|
)
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
5,658
|
|
|
|
5,683
|
|
|
|
10,601
|
|
|
|
5,690
|
|
|
|
37,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of
December 31,
|
|
|
March 31,
|
|
Consolidated
balance sheet data:
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006(1)
|
|
|
2007
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
166
|
|
|
$
|
78
|
|
|
$
|
3,316
|
|
|
$
|
68,663
|
|
|
$
|
62,139
|
|
|
$
|
47,012
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,850
|
|
|
|
51,100
|
|
Working capital (deficit)
|
|
|
(5,461
|
)
|
|
|
(19,389
|
)
|
|
|
8,416
|
|
|
|
65,285
|
|
|
|
100,887
|
|
|
|
91,584
|
|
Satellite network and other
equipment, net
|
|
|
4,354
|
|
|
|
3,263
|
|
|
|
5,243
|
|
|
|
7,787
|
|
|
|
29,131
|
|
|
|
37,598
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
317
|
|
|
|
4,375
|
|
|
|
7,058
|
|
|
|
6,686
|
|
Total assets
|
|
|
6,701
|
|
|
|
7,198
|
|
|
|
20,888
|
|
|
|
89,316
|
|
|
|
148,093
|
|
|
|
152,258
|
|
Notes payable
|
|
|
3,699
|
|
|
|
12,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payablerelated party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
594
|
|
|
|
879
|
|
|
|
930
|
|
Convertible redeemable preferred
stock
|
|
|
|
|
|
|
|
|
|
|
38,588
|
|
|
|
112,221
|
|
|
|
|
|
|
|
|
|
Stockholders (members)
equity (deficit)
|
|
|
(4,730
|
)
|
|
|
(15,547
|
)
|
|
|
(28,833
|
)
|
|
|
(42,654
|
)
|
|
|
128,712
|
|
|
|
127,677
|
|
(footnotes on following
page)
31
Selected
consolidated financial data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
Years ended
December 31,
|
|
|
ended
March 31,
|
|
Consolidated
statements of cash flows data:
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
(in
thousands)
|
|
|
Net cash (used in) provided by
operating activities
|
|
$
|
(5,246
|
)
|
|
$
|
(4,968
|
)
|
|
$
|
(16,051
|
)
|
|
$
|
3,641
|
|
|
$
|
(8,866
|
)
|
|
$
|
(6,669
|
)
|
|
$
|
735
|
|
Net cash used in investing
activities
|
|
|
(14
|
)
|
|
|
(1,747
|
)
|
|
|
(2,489
|
)
|
|
|
(4,033
|
)
|
|
|
(64,838
|
)
|
|
|
(754
|
)
|
|
|
(15,257
|
)
|
Net cash provided by (used in)
financing activities
|
|
|
5,060
|
|
|
|
6,627
|
|
|
|
21,778
|
|
|
|
65,674
|
|
|
|
67,510
|
|
|
|
(6,562
|
)
|
|
|
(599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
Years ended
December 31,
|
|
|
ended
March 31,
|
|
Other
data:
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
EBITDA(3)
(in thousands)
|
|
$
|
(2,796
|
)
|
|
$
|
(6,666
|
)
|
|
$
|
(9,640
|
)
|
|
$
|
(6,874
|
)
|
|
$
|
(11,187
|
)
|
|
$
|
(2,923
|
)
|
|
$
|
(3,624
|
)
|
Billable subscriber communicators
(at end of period) (number of units)
|
|
|
30,788
|
|
|
|
47,937
|
|
|
|
75,186
|
|
|
|
112,984
|
|
|
|
224,935
|
|
|
|
137,968
|
|
|
|
250,295
|
|
|
|
|
(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 in connection with our
initial public offering. |
|
(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 our
becoming a corporation and issuing our 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 2005 and 2006. |
|
(3) |
|
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
32
Selected
consolidated financial data
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.
The following table reconciles our net loss to EBITDA for the
periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
Years ended
December 31,
|
|
|
ended March
31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
(in
thousands)
|
|
|
Net loss
|
|
$
|
(4,857
|
)
|
|
$
|
(13,317
|
)
|
|
$
|
(12,389
|
)
|
|
$
|
(9,098
|
)
|
|
$
|
(11,215
|
)
|
|
$
|
(3,141
|
)
|
|
$
|
(2,939
|
)
|
Interest income
|
|
|
(3
|
)
|
|
|
|
|
|
|
(49
|
)
|
|
|
(66
|
)
|
|
|
(2,582
|
)
|
|
|
(455
|
)
|
|
|
(1,279
|
)
|
Interest
expense(a)
|
|
|
916
|
|
|
|
5,340
|
|
|
|
1,318
|
|
|
|
308
|
|
|
|
237
|
|
|
|
17
|
|
|
|
52
|
|
Depreciation and amortization
|
|
|
1,148
|
|
|
|
1,311
|
|
|
|
1,480
|
|
|
|
1,982
|
|
|
|
2,373
|
|
|
|
656
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(2,796
|
)
|
|
$
|
(6,666
|
)
|
|
$
|
(9,640
|
)
|
|
$
|
(6,874
|
)
|
|
$
|
(11,187
|
)
|
|
$
|
(2,923
|
)
|
|
$
|
(3,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes amortization of deferred debt issuance costs and
debt discount of approximately $170, $3,527, $722, $31 and $0
for the years 2002, 2003, 2004, 2005 and 2006, respectively, and
$0 for each of the first three months of 2006 and 2007.
|
33
Managements
discussion and analysis of financial condition and results of
operations
The following discussion and analysis of our results of
operations, financial condition and liquidity should be read in
conjunction with our consolidated financial statements and the
related notes which appear elsewhere in this prospectus. Some of
the information contained in this discussion and analysis or set
forth elsewhere in this prospectus, including information with
respect to our plans and strategies for our business, includes
forward-looking statements. You should review the Risk
factors section of this prospectus for a discussion of
important factors that could cause our actual results to differ
materially from the results described in or implied by these
forward-looking statements. Please refer to Special note
regarding forward-looking statements included elsewhere in
this prospectus for more information.
OVERVIEW
We operate the only global commercial wireless messaging system
optimized for narrowband communications. Our system consists of
a global network of 29 low-Earth orbit, or LEO, satellites and
accompanying ground infrastructure. In April 2007, our
Plane F polar satellite, one of the original prototype
first generation satellites launched in 1995, was voluntarily
retired due to intermittent service, without material impact on
our service, reducing our constellation from 30 to
29 satellites. 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 GE Equipment
Services, 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%.
During the three months ended March 31, 2007, our billable
subscriber communicator net additions totaled over 25,000 units.
As of March 31, 2007, we had approximately 250,000 billable
subscriber communicators on our communications system as
compared to approximately 138,000 as of March 31, 2006, an
increase of approximately 81.6%.
34
Managements
discussion and analysis of financial condition and results of
operations
The following sets forth certain developments in our business
during 2006:
|
|
Ø
|
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;
|
|
Ø
|
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;
|
|
Ø
|
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 went on sale
beginning in the first quarter of 2007;
|
|
Ø
|
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;
|
|
Ø
|
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;
|
|
Ø
|
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;
|
|
Ø
|
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
|
|
Ø
|
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, or PCG, which
funded $30 million. New investors, in addition to PCG,
included investment firms MH Equity Investors and Torch 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, in connection with the Series B stock financing 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
|
35
Managements
discussion and analysis of financial condition and results of
operations
|
|
|
outstanding preferred stock was converted to common stock upon
completion of our initial public offering.
|
The following are some of the factors that we believe will drive
an increase of billable subscriber communicators on our system
and cause future revenue growth rates to exceed our historical
revenue growth rates:
|
|
Ø
|
We believe that our target markets are significant and growing.
Harbor Research, Inc., an independent strategic research firm
that we engaged to reorganize their existing data for our use
internally and in this prospectus, estimates that the number of
vehicles, devices and units worldwide in the commercial
transportation, heavy equipment, fixed asset monitoring, marine
vessel, consumer transportation and homeland security markets
which are connected to M2M data communications systems using
satellite or cellular networks will grow from approximately
17.4 million in 2006 to approximately 131.0 million by
2012, representing a compound annual growth rate of 40.0%.
During this time, Harbor expects penetration of M2M data
communications devices in these target markets to increase from
approximately 1.4% of a total of 1.3 billion vehicles,
devices and units in 2006 to approximately 8.9% of a total of
1.5 billion vehicles, devices and units in 2012.
|
|
Ø
|
The growing demand for wireless connectivity for M2M
applications arises from the need for businesses and governments
to track, control, monitor and communicate with their fixed and
mobile assets that are located throughout the world. In recent
years, these assets increasingly incorporate microprocessors,
sensors and other devices that can provide a variety of
information about the assets location, condition,
operation or environment and respond to external commands. Our
M2M data communications system enables these businesses and
governments to communicate with these devices in a low cost and
efficient manner.
|
|
Ø
|
Our Stellar DS 300 and DS 100 subscriber communicators perform
better, cost substantially less, and are significantly more
reliable than the subscriber communicators Stellar offered prior
to the second half of 2005. As a result of being able to supply
low cost subscriber communicators, we are positioned to address
the needs of large-volume market segments, such as mobile asset
tracking, including truck and trailer tracking, and many
fixed-asset monitoring applications, including pipeline
monitoring, utility meter reading and tank level monitoring,
where subscriber communicator costs are a critical competitive
factor.
|
|
Ø
|
A number of our key customers have begun to roll out
applications which had been under development prior to 2005.
These include GE Equipment Services, which spent a significant
amount of time integrating the DS 300 subscriber communicator
into its
VeriWisetm
trailer tracking solution. This application is now being rolled
out to some of its major customers, including Wal-Mart Stores,
Inc. Other examples include American Innovations, Ltd., which
has developed a pipeline monitoring solution using the DS 100
subscriber communicator and Hitachi Construction Machinery Co.,
Ltd., which has developed a heavy equipment tracking solution
using subscriber communicators from Quake Global, Inc., another
manufacturer of our subscriber communicators.
|
|
Ø
|
The expected launches of our quick-launch and next-generation
satellites, together with the installation of additional gateway
earth stations around the world, is expected to reduce the time
lags in delivering messages, improving quality and coverage of
our system.
|
|
Ø
|
We expect to open new markets and to expand our existing
international activities. 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 those regions, in
particular, where the market opportunity for our OEM customers
and resellers is greatest. We are currently authorized, either
directly or indirectly, to provide our communications services
in over 80 countries and territories through our seven
international licensees and 12 country
|
36
Managements
discussion and analysis of financial condition and results of
operations
|
|
|
representatives. We are currently working with approximately 60
IVARs, who, generally, subject to certain regulatory
restrictions, have the right to market and sell their
applications anywhere our communications services are offered.
|
The following are some of the factors that we believe will
impact our expenses in the future:
|
|
Ø
|
Increased network equipment costs, including our planned
acquisition of additional gateway earth stations and gateway
control centers, will cause our depreciation expense, a
component of cost of service, to increase. Other than this
increased depreciation, the marginal cost to operate our
communications system is relatively low. Consequently, as our
service revenues associated with additional subscriber
communicators on our system increase, they will offset
non-network
related expenses and positively impact our results of operations.
|
|
Ø
|
From the beginning of 2007 through 2012, we anticipate spending
approximately $205 million on our expanded capital plan,
which contemplates the launch of at least 25 additional
satellites at a cost of approximately $175 million,
including a demonstration satellite for the U.S. Coast
Guard to prove the capability of an ORBCOMM satellite to
receive, process and forward Automatic Identification System, or
AIS, data (the Concept Validation Project), and the
remaining approximately $30 million for non-satellite
capital expenditures. If market demands increase or lower
latencies are required, we may exercise any options we may have
to acquire additional satellites to supplement or expand our
constellation, which will require additional capital
expenditures. As of March 31, 2007, we had made payments
totaling $10.5 million pursuant to our procurement
agreement with Orbital Sciences Corporation. Our procurement
agreement with OHB-System AG includes options for two additional
satellite buses and related integration services, exercisable on
or before June 5, 2007, at a price for each optional bus
and related integration services of $2.1 million, subject
to price adjustments for late penalties and on-time or early
delivery incentives. As of March 31, 2007, we had made
payments of $8.0 million pursuant to this agreement. We
intend to require our satellite manufacturers for our
next-generation satellites to include options for additional
satellites that can be launched on an accelerated schedule if
necessary.
|
|
Ø
|
Our largest recurring expenses are costs associated with our
employees, and we expect these expenses to increase, as we plan
to increase headcount from 95 employees as of March 31,
2007 to approximately 145 employees by 2010.
|
Consolidated revenues decreased 6.6% to $6.0 million for
the three months ended March 31, 2007 from
$6.4 million for the three months ended March 31,
2006. Sales to GE represented 39.7% and 62.7% of our revenues
for the three months ended March 31, 2007 and 2006,
respectively. Consolidated revenues increased 57.9% from
$15.5 million in 2005 to $24.5 million in 2006. Sales
to GE Equipment Services, which represented 49.5% of our
revenues for 2006, accounted for 80.5% of this growth.
Consolidated revenues increased 43.0% from $10.9 million in
2004 to $15.5 million in 2005. We have reported net losses
since inception and, as of March 31, 2007, we had an
accumulated deficit of $62.8 million. For the three months
ended March 31, 2007 and the years ended December 31,
2004, 2005 and 2006, we reported net losses of
$2.9 million, $12.4 million, $9.1 million and
$11.2 million, respectively. Our long-term viability is
dependent upon our ability to achieve positive cash flows from
operations or to raise additional financing.
Organization
ORBCOMM LLC was organized as a Delaware limited liability
company on April 4, 2001 and on April 23, 2001, it
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
37
Managements
discussion and analysis of financial condition and results of
operations
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, 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, ORBCOMM Inc. did not have any operating
activities.
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.
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
38
Managements
discussion and analysis of financial condition and results of
operations
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. An increase of subscriber communicator sales over our
historical growth rate occurred in the latter part of 2005
following the introduction of our new DS 300 and DS 100
subscriber communicators. We expect the growth rate of
subscriber communicator sales to continue substantially above
our historical growth rate due to the DS 300 and DS 100
subscriber communicators improved performance and
substantially lower prices and a number of key customers
beginning to roll out applications in larger volumes. We expect,
however, to maintain our current gross margin (defined as
selling price less manufacturing costs) per subscriber
communicator on future sales by offsetting the price decreases
with reductions in the manufacturing cost of our communicators.
We also expect service revenue will grow as more billable
subscriber communicators are added to the network. Service
revenue depends on the usage patterns of individual customers
and end-users. We are expecting the average revenue per
subscriber communicator to decrease moderately as we add
additional low-usage subscriber communicators in the trailer
industry, as well as expand internationally into new markets
with lower pricing.
Operating
expenses
We own and operate a 29-satellite constellation, six of the 14
gateway earth stations and two of the four 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 satellite system 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 extended 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 95
employees as of March 31, 2007 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, after giving effect to
certain operational changes
39
Managements
discussion and analysis of financial condition and results of
operations
and software updates. 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 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. For the three months
ended March 31, 2007, we spent $3.0 million on capital
expenditures, consisting of $2.2 million for the
quick-launch and next-generation satellites and
$0.8 million for improvements to our internal
infrastructure and the ground and control segments, which
consists of gateway earth stations, gateway control centers and
the network control center (the Ground Segment). For
the three months ended March 31, 2006, we spent
$0.8 million on capital expenditures, consisting of
$0.5 million for the Coast Guard Concept Validation Project
and $0.3 million for improvements to our internal
infrastructure and Ground Segment.
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 proceed
to final negotiations leading to an anticipated contract award
in mid-2007.
From the beginning of 2007 through 2012, we anticipate spending
approximately $205 million on our expanded capital plan,
which contemplates the launch of at least 25 additional
satellites at a cost of approximately $175 million,
including next-generation satellites with significantly
increased capacity and efficiency, and the remaining
approximately $30 million for non-satellite capital
expenditures.
As a result, through a series of up to five launches, we intend
to replenish the existing constellation of satellites. Depending
on the capabilities of the replacement satellites, this 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 extended 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 2007 and extend 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 expanded capital plan, as described above.
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
40
Managements
discussion and analysis of financial condition and results of
operations
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 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.
There are material limitations to using a measure such as
EBITDA, including the difficulty associated with comparing
results among more than one company and the inability to analyze
certain significant items, including depreciation and interest
income (expense), that directly affect our net loss. We
compensate for these limitations by considering the economic
effect of the excluded expense items independently as well as in
connection with our analysis of net loss.
The following table reconciles our net loss to EBITDA and for
the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
Three months
ended March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,389
|
)
|
|
$
|
(9,098
|
)
|
|
$
|
(11,215
|
)
|
|
$
|
(3,141
|
)
|
|
$
|
(2,939
|
)
|
Interest income
|
|
|
(49
|
)
|
|
|
(66
|
)
|
|
|
(2,582
|
)
|
|
|
(455
|
)
|
|
|
(1,279
|
)
|
Interest
expense(a)
|
|
|
1,318
|
|
|
|
308
|
|
|
|
237
|
|
|
|
17
|
|
|
|
52
|
|
Depreciation and amortization
|
|
|
1,480
|
|
|
|
1,982
|
|
|
|
2,373
|
|
|
|
656
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(9,640
|
)
|
|
$
|
(6,874
|
)
|
|
$
|
(11,187
|
)
|
|
$
|
(2,923
|
)
|
|
$
|
(3,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes amortization of deferred debt issuance costs and
debt discount of approximately $722, $31 and $0, for the years
2004, 2005 and 2006, respectively, and $0 for each of the three
months of 2006 and 2007. |
EBITDA during the three months ended March 31, 2007
decreased by $0.7 million over 2006. This decrease was due
to an increase in operating expenses of $2.1 million to
support the growth of the business, which was partially offset
by higher net service revenues of $1.7 million. Operating
expenses increased in the first quarter of 2007 mostly due to
increases in stock-based compensation of $1.3 million,
staffing costs, litigation and the costs of being a public
company. For the remainder of 2007, staffing costs excluding
stock-based compensation are expected to moderate as our
staffing increased subsequent to the first quarter of 2006. We
expect negative EBITDA to continue in 2007.
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 our 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
(RSUs) and stock appreciation rights
(SARs) on October 2006, litigation
41
Managements
discussion and analysis of financial condition and results of
operations
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.
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
GAAP. 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 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.
42
Managements
discussion and analysis of financial condition and results of
operations
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 OverviewRevenues, 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.
43
Managements
discussion and analysis of financial condition and results of
operations
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 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 had been charged on these
assets as of December 31, 2006 and March 31, 2007.
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 our management 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.
44
Managements
discussion and analysis of financial condition and results of
operations
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 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 the Financial Accounting Standards
Board (FASB) Statement of Financial Accounting
Standards (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.
Effective January 1, 2007, we began to measure and record
uncertain tax positions in accordance with FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48), an Interpretation of FASB Statement
No. 109.
45
Managements
discussion and analysis of financial condition and results of
operations
FIN 48 prescribes a threshold for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. Only tax positions meeting the
more-likely-than-not recognition threshold at the effective date
may be recognized or continue to be recognized upon adoption of
this Interpretation. FIN 48 also provides guidance on
accounting for derecognition, interest and penalties, and
classification and disclosure of matters related to uncertainty
in income taxes. Accounting for uncertainties in income tax
positions under FIN 48 involves significant judgments by
management.
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, SARs,
common stock, restricted stock, RSUs, performance units and
performance shares to our employees and non-employee directors.
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 our 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.
46
Managements
discussion and analysis of financial condition and results of
operations
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 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
47
Managements
discussion and analysis of financial condition and results of
operations
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 was expected to be recognized over a
weighted average term of 1.83 years. The 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 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
48
Managements
discussion and analysis of financial condition and results of
operations
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 were not considered granted for
accounting purposes because our Compensation Committee had not
established performance targets as of December 31, 2006.
The performance targets for fiscal 2007 were established in
February 2007.
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 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 were not considered granted for accounting purposes because
our Compensation Committee had not established performance
targets for fiscal 2007 and 2008 as of December 31, 2006.
The performance targets for fiscal 2007 were established in
February 2007.
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
49
Managements
discussion and analysis of financial condition and results of
operations
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.
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 $0.
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 of their RSUs, subject to continued employment, to
May 21, 2007, 2008 and 2009, which created a modification
in accordance with SFAS 123(R). A total of 269,926
time-based RSU awards and performance-based RSU 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 the price
of 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.
Share-based award
activity for the three months ended March 31,
2007
During the three months ended March 31, 2007, 128,949
performance-based RSUs were granted when our Compensation
Committee established performance targets for fiscal 2007. These
RSUs will vest through May 2008 and we estimate that 100% of
these performance targets will be achieved. We expect that
142,015 performance-based RSUs will vest in the second quarter
of 2007.
In February 2007, we granted 11,000 time-based RSUs to certain
executive officers. These RSUs will vest on January 1, 2008.
During the three months ended March 31, 2007, 115,556
performance-based SARs were granted when our Compensation
Committee established performance targets for fiscal 2007. These
SARs will vest through March 2008 and we estimate that 100% of
these performance targets will be achieved. We expect that
101,731 performance-based SARs will vest in the second quarter
of 2007.
We recognized $1.9 million of stock-based compensation
expense for all share-based payment arrangements during the
three months ended March 31, 2007.
As of March 31, 2007, we had an aggregate of
$6.4 million of unrecognized compensation costs for
share-based payment arrangements.
50
Managements
discussion and analysis of financial condition and results of
operations
RESULTS OF
OPERATIONS
Three months
ended March 31, 2007 compared with three months ended
March 31, 2006.
Revenues
The table below presents our revenues (in thousands) for the
three months ended March 31, 2007 and 2006, together with
the percentage of total revenue represented by each revenue
category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
|
Total
|
|
|
|
|
Total
|
|
|
Service revenues
|
|
$
|
3,950
|
|
|
66.3
|
%
|
|
$
|
2,321
|
|
|
36.4
|
%
|
Product sales
|
|
|
2,011
|
|
|
33.7
|
%
|
|
|
4,059
|
|
|
63.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,961
|
|
|
100.0
|
%
|
|
$
|
6,380
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the three months ended March 31, 2007
decreased by $0.4 million, or 6.6%, to $6.0 million
from $6.4 million for the three months ended March 31,
2006. This decrease related to a decrease in product sales of
$2.1 million offset by an increase in service revenues of
$1.7 million.
Service
revenues
Service revenues increased by $1.7 million for the three
months ended March 31, 2007, or 70.2%, to
$4.0 million, or approximately 66.3% of total revenues,
from $2.3 million, or approximately 36.4% of total revenues
for the three months ended March 31, 2006. This increase
was primarily due to an increase in the number of billable
subscriber communicators activated on our communications system.
At March 31, 2007, there were approximately 250,000
billable subscriber communicators as compared to approximately
138,000 billable subscriber communicators at March 31,
2006, an increase of 81.6%.
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. 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. For the
remainder of 2007, we expect service revenues to increase over
the corresponding periods in 2006, as service revenues increase
from our growing base of subscriber communicators.
Product
sales
Revenue from product sales decreased by $2.1 million for
the three months ended March 31, 2007, or 50.5%, to
$2.0 million, or approximately 33.7% of total revenues,
from $4.1 million, or approximately 63.6% of total revenues
for the three months ended March 31, 2006. This decrease
was primarily due to lower sales to GE in the first quarter of
2007 resulting from a large order from GE in the prior year
quarter, and also a sales return and a decrease in our average
selling price of subscriber communicators based on expected
volume price reductions we will receive from our contract
manufacturer Delphi on 2007 inventory purchases. For the
remainder of 2007, 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 over the corresponding periods in 2006.
51
Managements
discussion and analysis of financial condition and results of
operations
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.
Costs of services increased by $0.3 million, or 14.4%, to
$2.4 million for the three months ended March 31, 2007
from $2.1 million during the three months ended
March 31, 2006. The increase was due to an increase of
$0.2 million in stock-based compensation, which was not
significant in 2006, and higher equipment maintenance costs of
$0.2 million as we made improvements to the existing system
infrastructure, offset by a decrease of $0.1 million in the
depreciation associated with our communications system primarily
related to our satellites becoming fully depreciated during the
fourth quarter of 2006. As a percentage of service revenues,
cost of services were 59.6% of service revenues for the three
months ended March 31, 2007 compared to 88.6% for the three
months ended March 31, 2006. For the remainder of 2007, we
expect costs of services as a percentage of service revenues to
decrease over the corresponding periods in 2006.
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.
Costs of product sales decreased for the three months ended
March 31, 2007 by $2.0 million, or 48.3%, to
$2.1 million from $4.1 million for the three months
ended March 31, 2006. Product cost represented 83.3% of the
cost of product sales for the three months ended March 31,
2007, which decreased by $2.0 million, or 53.4%, to
$1.8 million for the three months ended March 31, 2007
from $3.8 million for the three months ended March 31,
2006. We had a gross loss from product sales (revenues from
product sales minus costs of product sales including costs for
Stellar) of $0.1 million, for the three months ended
March 31, 2007, including stock-based compensation of less
than $0.1 million as compared to a gross loss from product
sales of less than $0.1 million for the three months ended
March 31, 2006. Stock-based compensation was nil for the
three months ended March 31, 2006. The gross loss from
product sales for the three months ended March 31, 2007 was
related to lower revenues from subscriber communicator sales and
lower average selling prices per unit as described above under
Product sales during the three months ended
March 31, 2007, which was not enough to cover costs
associated with distribution, fulfillment and customer service
costs associated with completing customer orders. The gross loss
from product sales for the three months ended March 31,
2006 was attributable primarily to an inventory impairment of
$0.3 million due to lower than anticipated demand for our
older ST2500 model subscriber communicators because of the rapid
acceptance of our newer DS 300 and DS 100 models manufactured by
Delphi. For the remainder of 2007, we expect gross profit to
increase over 2006.
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, litigation
expenses and regulatory matters.
Selling, general and administrative expenses increased by
$2.0 million, or 60.0%, to $5.3 million for the three
months ended March 31, 2007 from $3.3 million for the
three months ended March 31, 2006. This increase is
primarily due to an increase in stock-based compensation of
$1.3 million for the three months ended March 31 2007,
resulting from the granting of restricted stock units and stock
52
Managements
discussion and analysis of financial condition and results of
operations
appreciation rights in February 2007 and October 2006, a
$0.4 million increase in payroll costs related to increased
staffing after the first quarter of 2006 and a $0.3 million
increase in professional service fees relating to litigation and
regulatory filings.
For the remainder of 2007, we expect the growth rate of selling,
general and administrative expenses, excluding stock-based
compensation, to moderate over the corresponding 2006 periods.
Except for the fourth quarter of 2007, we expect stock-based
compensation to increase over the corresponding 2006 periods due
to the timing of granting time-based and performance-based
restricted stock units and stock appreciation rights.
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.
Product development expenses for the three months ended
March 31, 2007 and 2006 was $0.4 million and
$0.5 million, respectively, decreasing 27.2% in the current
year period over the same period in the prior year.
Other income
(expense)
Other income 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.
Other income was $1.3 million for the three months ended
March 31, 2007 compared to $0.5 million for the three
months ended March 31, 2006. This increase was due to
increased investment balances resulting from 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.
Net loss and net
loss applicable to common shares
As a result of the items described above, our net loss narrowed
to $2.9 million for the three months ended March 31,
2007, compared to a net loss of $3.1 million for the three
months ended March 31, 2006, decreasing by
$0.2 million, an improvement of 6.4%. For the three months
ended March 31, 2006, our net loss applicable to common
shares (net loss adjusted for dividends required to be paid on
shares of preferred stock and accretion in preferred stock
carrying value) was $5.4 million.
53
Managements
discussion and analysis of financial condition and results of
operations
Year ended
December 31, 2006 compared with year ended
December 31, 2005, and year ended December 31, 2005
compared with year ended December 31, 2004.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
Service revenues
|
|
$
|
11,561
|
|
|
|
47.2
|
%
|
|
$
|
7,804
|
|
|
|
50.3
|
%
|
|
$
|
6,479
|
|
|
|
59.6
|
%
|
Product sales
|
|
|
12,959
|
|
|
|
52.8
|
%
|
|
|
7,723
|
|
|
|
49.7
|
%
|
|
|
4,387
|
|
|
|
40.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,520
|
|
|
|
100.0
|
%
|
|
$
|
15,527
|
|
|
|
100.0
|
%
|
|
$
|
10,866
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 sales
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 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
54
Managements
discussion and analysis of financial condition and results of
operations
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 and 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
41.6%. 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.
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
55
Managements
discussion and analysis of financial condition and results of
operations
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 $0 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
56
Managements
discussion and analysis of financial condition and results of
operations
fees related to preparing for compliance with Section 404
of the Sarbanes-Oxley Act, recruiting fees, litigation expenses
and regulatory matters.
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 RSUs and SARs 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 and the
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.
57
Managements
discussion and analysis of financial condition and results of
operations
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 $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.
58
Managements
discussion and analysis of financial condition and results of
operations
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 net losses of
$11.2 million in 2006 and $2.9 million for the three
months ended March 31, 2007, and as of March 31, 2007
we have an accumulated deficit of $62.8 million. As of
March 31, 2007, our primary source of liquidity consisted
of cash, cash equivalents and marketable securities, consisting
of floating rate redeemable municipal debt securities, totaling
$98.1 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 our interest in 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 initial public
offering. As a result, all outstanding shares of Series A
and B preferred stock converted into 21,383,318 shares of
common stock.
Operating
activities
Cash generated in our operating activities for the three months
ended March 31, 2007 was $0.7 million resulting from a
net loss of $2.9 million offset by adjustments for non-cash
items of $2.5 million, and $1.1 million of cash
generated from working capital. Adjustments for non-cash items
primarily consisted of $0.5 million for depreciation and
amortization and $1.9 million for stock-based compensation.
Working capital activities primarily consisted of a net source
of cash of $1.4 million for a decrease to inventories
primarily related to better inventory management, offset by a
use of cash of $0.5 million for an increase in prepaid
expense and other current assets primarily related to deferred
costs incurred in connection with a proposed secondary public
offering of our common stock.
Cash used in our operating activities for the three months ended
March 31, 2006 was $6.7 million resulting from a net
loss of $3.1 million, offset by adjustments for non-cash
items of $1.1 million, and $4.7 million used for
working capital. Adjustments for non-cash items primarily
consisted of $0.7 million for depreciation and
amortization, $0.3 million for inventory impairments and
$0.3 million for stock-based compensation, offset by a
decrease of $0.3 million in the allowance for doubtful
accounts. Working capital activities primarily consisted of a
net use of cash of $3.0 million for an increase to accounts
receivable primarily related to the increase in our revenues,
and the timing of collections, a use of cash of
$0.5 million to inventories primarily related to the
increase in our revenues and a use of cash of $1.9 million
for a decrease in accounts payable and accrued liabilities
primarily related to payments for issuance costs related to our
Series B preferred stock. The uses described above were
offset by a source of cash of $0.7 million from an increase
in deferred revenue primarily related to billings we rendered in
connection with our Coast Guard demonstration satellite
scheduled for launch during 2007.
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.
59
Managements
discussion and analysis of financial condition and results of
operations
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 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 preferred 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 for the three months ended
March 31, 2007 was $15.3 million resulting from
capital expenditures of $3.0 million and purchases of
marketable securities consisting of floating rate redeemable
municipal debt securities totaling $19.0 million offset by
sales of marketable securities of $6.8 million. Capital
expenditures included $2.2 million for the quick-launch and
next-generation satellites and $0.8 million of improvements
to our internal infrastructure and Ground Segment.
Cash used in our investing activities for the three months ended
March 31, 2006 was $0.8 million, resulting from
capital expenditures of $0.5 million for the Concept
Validation Project and $0.3 million of improvements to our
internal infrastructure and Ground Segment.
60
Managements
discussion and analysis of financial condition and results of
operations
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 our
interest in 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.
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 March 31, 2007, we have
incurred $31.5 million of such costs with $6.7 million
of costs related to the construction of the Coast Guard
demonstration satellite and $24.3 million related to the
quick-launch satellites and $0.5 million for the next-generation
satellites.
Financing
activities
Cash used in our financing activities for the three months ended
March 31, 2007 was $0.6 million, resulting from
payments of invoices in 2007 related to offering costs incurred
in connection with our initial public offering in November 2006.
Cash used in our financing activities for the three months ended
March 31, 2006 was $6.6 million, resulting from
dividend payments to our Series A preferred stock holders
totaling $8.0 million, offset by net proceeds received of
$1.4 million for the issuance of an additional
391,342 shares of Series B preferred stock after
deducting issuance costs.
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 initial public offering. 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 stockholders
totaling $8.0 million in January 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.
61
Managements
discussion and analysis of financial condition and results of
operations
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 marketable securities will be sufficient to
provide working capital and fund capital expenditures, which
primarily includes the deployment of seven additional
satellites through the next 12 months. For the remainder of
2007, we expect to incur approximately $65 million of
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
|
|
$
|
|
|
|
There were no significant charges to our contractual obligations
during the three months ended March 31, 2007.
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
March 31, 2007, 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
March 31, 2007, we had made payments totaling
$8.0 million pursuant to this agreement.
62
Managements
discussion and analysis of financial condition and results of
operations
Related
parties
For a discussion of related party transactions, see
Certain relationships and transactions with related
persons.
OFF-BALANCE SHEET
ARRANGEMENTS
We have not entered into any off-balance sheet arrangements.
RECENT ACCOUNTING
PRONOUNCEMENTS
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 GAAP, 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 adopting
SFAS 157 will have 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 be effective for us on January 1, 2008.
We are currently evaluating the impact adopting SFAS 159
will have on our consolidated financial statements.
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 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, sales
to GE, a holder of approximately 5.5% of our common stock,
accounted for 49.5%, 31.4% and 37.2% of our
63
Managements
discussion and analysis of financial condition and results of
operations
consolidated revenues, respectively. For the three months ended
March 31, 2007 and 2006, sales to GE accounted for 39.7% and
62.7% 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 March 31, 2007, we held investments in marketable
securities consisting of floating rate redeemable municipal debt
securities totaling $51.1 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 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.
64
Business
OVERVIEW
We operate the only global commercial wireless messaging system
optimized for narrowband communications. Our system consists of
a global network of 29 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 OEMs, such as Caterpillar Inc.,
Komatsu Ltd., Hitachi Construction Machinery Co., Ltd. and the
Volvo Group, service providers, such as GE Equipment Services,
VARs, such as Fleet Management Solutions, XATA Corporation and
American Innovations, Ltd., 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 80 countries
and territories in North America, Europe, 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 communications system as compared to
approximately 113,000 as of December 31, 2005, an increase
of approximately 99.1%. During the three months ended
March 31, 2007, we added over 25,000 net billable
subscriber communicators on our communications system for a
total of approximately 250,000 billable subscriber communicators
as of March 31, 2007, an increase of approximately 81.6%
over the approximately 138,000 billable subscriber communicators
as of March 31, 2006. 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.
Harbor Research, Inc., an independent strategic research firm we
engaged to reorganize their existing data for our use internally
and in this prospectus, estimates that the number of vehicles,
devices and units worldwide in these markets which are connected
to M2M data communications systems using satellite or cellular
networks will grow to approximately 131.0 million 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% of a total
1.3 billion vehicles, devices and units in 2006 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 29 LEO satellites in
multiple orbital planes between 435 and 550 miles above the
Earth operating in the VHF radio frequency spectrum;
(ii) related ground infrastructure, including 14 gateway
earth stations,
65
Business
four 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.
Acquisition and
turn-around
In April 2001, we acquired substantially all of the non-cash
assets of ORBCOMM Global L.P. and its subsidiaries, which had
originally designed, developed, constructed and put into service
almost all of our current communications system, for a fraction
of their original cost, in a bankruptcy court-approved sale. The
assets acquired included 30 operational satellites, four
installed U.S. gateway earth stations, the network control
center, intellectual property, other equipment and inventory
(including uninstalled gateway earth stations, gateway control
centers and subscriber communicators), certain service license
agreements and contract rights and other assets. The transaction
also involved the acquisition of the FCC licenses necessary to
operate the system.
Following the acquisition, we implemented a turn-around plan to
stabilize our operations and to preserve and substantially
enhance the value of the acquired business, while substantially
reducing costs and redefining our strategy, including:
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Lowering prices, improving features and performance, and
introducing new models of our subscriber
communicators. In the past, potential new
customers were inhibited by the high prices of our subscriber
communicators. To address this challenge, in close collaboration
with our subscriber communicator suppliers, including our wholly
owned subsidiary, Stellar, we lowered the average price of our
subscriber communicators significantly, while also upgrading
their features and reliability. As a result of being able to
supply low cost subscriber communicators, we are well positioned
to address the needs of large-volume market segments, such as
mobile asset tracking, including truck and trailer tracking, and
many fixed-asset monitoring applications, including pipeline
monitoring, utility meter reading and tank level monitoring,
where subscriber communicator costs are a critical competitive
factor.
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Implementing a revised low cost, multi-channel marketing
and distribution model. Under our revised
marketing and distribution model, we have established
relationships with several large-scale VARs, international
licensees and country representatives, who develop applications
and market our products and services to end-users. This revised
structure not only reduces our internal marketing and research
and development costs, but also enables us to scale up our
distribution network easily and rapidly as our business grows,
while avoiding direct competition between us and our resellers.
In addition, we introduced the concept of IVARs, which generally
allows selected resellers to enter into a single agreement with
us and pay 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 each individual international licensee
and/or
country representative. As of March 31, 2007, we had
established relationships with approximately 150 VARs, IVARs,
international licensees and country representatives. See also
Sales, Marketing and Distribution.
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Implementing changes intended to extend the operational
lives of existing satellites. We implemented
improved power management and other techniques to extend battery
life, which we believe extended the operational lives of our
existing first-generation satellites by an average of
approximately 1.5 to 2.5 years. We expect this will
increase our flexibility with respect to future deployments of
replacement satellites and provide us with more control over the
development and timing of future capital investments in our
satellites.
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66
Business
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Enhancing network capabilities. We
implemented a plan to centralize worldwide network operations at
our network control center in Dulles, Virginia in order to
reduce operational costs, monitor usage and control our
satellites more effectively, including taking ownership and
control of certain international gateway earth stations and
gateway control centers. This has contributed to our ability to
lower the cost and improve the quality of our data
communications service to end-users.
|
As a result of our turn-around strategy, our revenues increased
from $3.3 million in 2002 to $24.5 million in 2006,
representing a compounded annual growth rate of 65.1% and the
number of billable subscriber communicators on our system
increased from approximately 31,000 at the end of 2002 to
approximately 250,000 as of March 31, 2007. We have had
annual net losses since our inception, including a net loss of
$9.1 million for fiscal year 2005, a net loss of
$11.2 million for fiscal year 2006 and a net loss of
$2.9 million for the three months ended March 31,
2007, and an accumulated deficit of $62.8 million as of
March 31, 2007. For more information about our net losses,
see Risk factorsRisks Relating to Our
BusinessWe are incurring substantial operating losses and
net losses. We anticipate additional future losses. We must
significantly increase our revenues to become profitable.
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. 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, our current constellation is, and
our quick-launch and
next-generation
satellites will be, 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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Ø
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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
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67
Business
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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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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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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 indirectly, to provide our data communications
service in over 80 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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Reliable, low cost subscriber
communicators. There are multiple
manufacturers that build subscriber communicators for our
network. Through our Stellar subsidiary, we have an arrangement
with Delphi 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
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68
Business
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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 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
80 countries and territories in North America, Europe,
South America, Asia, Africa and Australia, directly or
indirectly through seven international licensees and
12 country representatives. We are currently working with
approximately 60 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 ORBCOMM Global L.P. 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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Business
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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. We
intend to use the net proceeds to us from this offering to
increase significantly the capacity and efficiency of our
next-generation satellites. This technology is expected to
increase spectrum efficiency to support higher usage
applications, accelerate the reduction in network latency to
address potential new markets and enhance our ability to manage
increased expected future demands for our communications
services.
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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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Business
INDUSTRY
OVERVIEW
Increasingly, businesses and governments face the need to track,
control, 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 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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|
Ø
|
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.
|
|
Ø
|
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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Business
MARKET
OPPORTUNITY
Our estimates of the current addressable markets, as set forth
in this prospectus, are based upon our analysis of secondary
market data, including a report that we engaged Harbor Research,
Inc. to prepare for our use internally and in this prospectus
that reorganizes M2M and telematics industry information and
data regularly gathered by Harbor into categories that
correspond to our potential addressable markets.
Commercial
transportation
Commercial transportation companies, such as trucking and
trailer leasing companies, rail transport service providers and
companies that handle hazardous materials, 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 transport fleets more safely and efficiently and to
improve utilization.
Commercial transportation fleet owners and operators, as well as
OEMs, are increasingly integrating M2M data communications
systems into their commercial vehicles. In the near future, as
older analog cellular wireless networks currently used in
commercial vehicles 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 and railcar markets
also require 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 and railcar 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.
According to Harbor Research, Inc., the number of commercial
transportation vehicles worldwide, including tractors, trailers,
fleet cars and railcars, was estimated to be approximately
76.4 million in 2006. Harbor estimates that the number of
commercial transportation vehicles connected to M2M data
communications systems will grow to approximately
14.6 million by 2012 from approximately 2.1 million in
2006, representing a compound annual growth rate of 38.4%.
During this time, they expect penetration of M2M data
communications devices in the total addressable market to
increase from approximately 2.7% in 2006 to approximately 16.8%
of a total of 87.0 million commercial transportation
vehicles by 2012.
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
72
Business
M2M data communications systems into their equipment at the
factory or offering them as add-on options through certified
after-market dealers.
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.
According to Harbor Research, Inc., the number of pieces of
heavy equipment worldwide, including bulldozers, forklifts,
cranes and other construction vehicles, was estimated to be
approximately 7.1 million in 2006. Harbor estimates that
the number of pieces of heavy equipment connected to M2M data
communications systems will grow to approximately
4.1 million by 2012 from approximately 0.9 million in
2006, representing a compound annual growth rate of 28.9%.
During this time, they expect penetration of M2M data
communications devices in the total addressable market to
increase from 12.5% in 2006 to 49.8% of a total of
8.2 million pieces of heavy equipment by 2012.
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.
According to Harbor Research, Inc., the number of fixed assets
worldwide, including pipelines, environmental equipment and
storage tanks, was estimated to be approximately
364.4 million in 2006. Harbor estimates that the number of
fixed assets connected to M2M data communications systems will
grow to approximately 22.8 million by 2012 from
approximately 2.0 million in 2006, representing a compound
annual growth rate of 49.6%. During this time, they expect
penetration of M2M data communications devices in the total
addressable market to increase from 0.6% in 2006 to 5.4% of a
total of 420.7 million fixed assets by 2012.
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 marine 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 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.
According to Harbor Research, Inc., the number of marine vessels
worldwide, including shipping, fishing and recreational vessels,
was estimated to be approximately 49.6 million in 2006.
Harbor estimates that the number of marine vessels connected to
M2M data communications will grow to approximately
4.9 million by 2012 from approximately 1.6 million in
2006, representing a compound annual growth rate of 20.9%.
During this time, they expect penetration of M2M data
communications devices in the total addressable market to
increase from 3.2% in 2006 to 8.7% of a total of
56.4 million marine vessels by 2012.
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Business
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,
such as for the tracking and monitoring of military vehicles,
and 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.
According to Harbor Research, Inc., the number of assets
worldwide with the potential to be monitored for government and
homeland security purposes, including shipping containers,
vehicles, equipment and other devices, was estimated to be
approximately 159.1 million in 2006. Harbor estimates that
the number of such shipping containers, vehicles, equipment and
other devices connected to M2M data communications will grow to
approximately 25.5 million by 2012 from approximately
2.9 million in 2006, representing a compound annual growth
rate of 43.8%. During this time, they expect penetration of M2M
data communications devices in the total addressable market to
increase from 1.8% in 2006 to 14.1% of a total of
181.1 million assets being monitored for purposes of
government and homeland security by 2012.
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 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
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Business
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 currently contemplated expanded capital plan in order
to expand our satellite constellation and further 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.
According to Harbor Research, Inc., the number of consumer
transportation vehicles worldwide, primarily automobiles, was
estimated to be approximately 627.8 million in 2006. Harbor
estimates that the number of consumer transportation vehicles
connected to M2M data communications will grow to approximately
59.1 million by 2012 from approximately 8.0 million in
2006, representing a compound annual growth rate of 39.6%.
During this time, they expect penetration of M2M data
communications devices in the total addressable market to
increase from 1.3% in 2006 to 8.3% of a total of
714.4 million consumer transportation vehicles by 2012.
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.
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Business
The following table sets forth selected customers,
representative applications and the benefits of such
applications for each of our addressed markets:
|
|
|
|
|
|
|
Market
|
|
Select
Customers/End-Users
|
|
Representative
Applications
|
|
Key
Benefits
|
|
Commercial
transportation
|
|
GE
Volvo Group
XATA Corporation
Fleet Management Solutions
DriverTech
Air IQ
Crossbridge Solutions
Salco Products, Inc.
|
|
Position reporting
Units diagnostic monitoring
Compliance / tax reporting
Cargo monitoring
Systems control
|
|
Improve fleet productivity and profitability
Enable efficient, centralized fleet management
Ensure safe delivery of shipping cargo
Allow real-time tracking of unit maintenance
|
|
|
|
|
|
|
|
Heavy equipment
|
|
Caterpillar, Inc.
Komatsu Ltd.
Hitachi Construction Machinery Co., Ltd
Volvo Group
Sumitomo
|
|
Position reporting
Unit diagnostic monitoring
Usage tracking
Emergency notification
|
|
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
|
|
American Innovations, Ltd.
Automata, Inc.
GE
Electronic Sensors, Inc.
Implicit Monitoring Systems, L.P.
|
|
Unit diagnostic monitoring
Usage tracking
Systems control
Automated meter reading
|
|
Provide method for managing, controlling, and collecting data from remote sites
Improve maintenance services productivity and profitability
|
Marine vessels
|
|
Metocean Data Systems Ltd.
Recreational boaters*
Sasco Inc.
Skymate, Inc.
SeaKey/Volvo Penta
|
|
Position reporting
Two-way messaging
Unit diagnostic monitoring
Weather reporting
|
|
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
|
|
National Oceanic and Atmospheric Administration*
U.S. Coast Guard
U.S. Customs and Border Protection*
U.S. Marine Corps*
U.S. Postal Service*
|
|
Container tracking
Environmental monitoring
Automatic Identification System development
Border monitoring
Vehicle tracking
|
|
Provide efficient monitoring of changing environmental conditions
Address increasing need to monitor vessels in U.S. waters
Minimize security threats and secure border
|
|
|
* |
Represents an end-user from which we directly dervive revenue
through VARs or other resellers.
|
76
Business
Subscriber
communicators
Our wholly owned subsidiary, Stellar, markets and sells
subscriber communicators manufactured by Delphi directly to our
customers. We also earn a one-time royalty from third parties
for the use of our proprietary communications protocol, which
enables subscriber communicators 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,
expected to be released beginning in 2008. See Key
RelationshipsDelphi Automotive Systems LLC.
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% and
39.7% of our revenues for fiscal 2006 and the three months ended
March 31, 2007, respectively, no other customer accounted
for more than 10% of our total sales in fiscal 2006 or the three
months ended March 31, 2007.
KEY
RELATIONSHIPS
Delphi Automotive
Systems LLC
In May 2004, we entered into a Cooperation Agreement with
Stellar and Delphi Corporationa 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 during 2005 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
77
Business
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 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,
VeriWisetm,
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
RailWisetm
application for railcars. GE Equipment Services European
division offers
RailWisetm
and we expect GE Equipment Services to begin marketing both
VeriWisetm
and
RailWisetm
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.
In addition, in March 2007, GE became a significant stockholder
of ours. See Certain relationships and transactions with
related personsSES.
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
78
Business
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 March 31, 2007, 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.
Due to the fact that the launch of our original shared vehicle
did not take place principally as a result of the cancellation
of the primary launch vehicle payload, our launch services
provider, with our participation, has been seeking an
alternative launch vehicle for the Coast Guard demonstration
satellite. As a result of these delays, in February 2007, the
U.S. Coast Guard issued a unilateral modification to our
contract setting a definitive launch date of July 2, 2007
with respect to the Coast Guard demonstration satellite, which
we received in March 2007. Although we have not agreed to this
modification, we and our launch services contractor have advised
the U.S. Coast Guard that we intend to work with the U.S.
Coast Guard to establish within the next several months a new
definitive launch date. By letter dated April 20, 2007, the
U.S. Coast Guard has advised us that they intend to seek
consideration, or other contractual or statutory remedies, for
any launch delay beyond July 2, 2007. We have certain
indemnity rights against our launch services provider in the
event of a default under our launch services contract. We
continue to be in discussions with the U.S. Coast Guard and
our launch services providers to secure an acceptable launch
date and a successful resolution of this matter.
SALES, MARKETING
AND DISTRIBUTION
Satellite
services
We generally market our satellite communications services
through VARs and internationally through IVARs, international
licensees and country representatives. The following chart shows
the structure of our low cost, multi-channel distribution
network:
VARs and IVARs. We are currently
working with approximately 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,
targeted vertical markets. VARs and IVARs are responsible for
establishing retail pricing, collecting airtime revenue from
end-users and for providing
79
Business
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 approximately 60 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
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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 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 ORBCOMM Global L.P. and new groups
consisting of affiliates of former licensees of ORBCOMM Global
L.P. 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 ORBCOMM Global L.P., 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 a one-time royalty from third parties for the use of
our proprietary communications protocol, which enables 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
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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.
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, require
higher-powered
transceivers 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
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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 March 31, 2007 was 413,053 units, or
approximately $58.2 million, as compared with a backlog of
66,556 units, or approximately $11.5 million as of
March 31, 2006. We believe that approximately
$11.3 million of the backlog as of March 31, 2007 will
be filled during fiscal 2008. 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 25,339 units as of March 31, 2007, as
compared with a pre-bill backlog of 15,497 units as of
March 31, 2006. 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.
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 markORBCOMMwhich 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 March 31, 2007, we had 95 full-time employees,
25 of whom are at our Fort Lee, New Jersey headquarters and
70 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.
PROPERTIES
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. We also lease approximately 25,000 square feet of
additional space in Virginia for storage. In addition, we
currently own and
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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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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.
GEOGRAPHIC
INFORMATION
Our revenues from the United States were $8.2 million,
$11.4 million and $22.2 million, respectively, for the
years ended December 31, 2004, 2005 and 2006. Our revenues
from all other countries were $2.7 million,
$4.1 million and $2.3 million, respectively, for the
years ended December 31, 2004, 2005 and 2006. Our revenues
from the United States were $5.9 million and
$5.3 million for the three months ended March 31, 2006
and 2007, respectively. Our revenues from all other countries
were $0.5 million and $0.7 million for the three
months ended March 31, 2006 and 2007, respectively. Other
than satellites in orbit, our long-lived assets outside of the
United States are not significant.
LEGAL
PROCEEDINGS
Quake Global,
Inc.
On May 11, 2007, our ORBCOMM LLC subsidiary, our Stellar
subsidiary and Quake entered into a global settlement agreement
dismissing or discontinuing our legal proceedings with Quake
discussed below.
On February 24, 2005, Quake 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, tortious
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. On December 6, 2005, we filed our answer and
counterclaims to Quakes Complaint.
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 us. 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. By order dated April 23, 2007, the
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court granted Quakes motion to amend the complaint, but
deferred ruling on whether Quakes new claims must be
arbitrated. The court held that the issue of arbitrability may
be raised by ORBCOMM LLC in a subsequent motion. 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 counterclaims, 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 our
exercise of our 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.
Separately, in connection with a pending legal action between
Quake and Mobile Applitech, Inc., or MobiApps, relating to a
radio frequency 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 LLC 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. ORBCOMM LLCs 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 LLC, alleging that
ORBCOMM LLC interfered with Quakes contractual relations
and conspired with MobiApps to misappropriate Quakes
proprietary information. ORBCOMM LLC sent notice to Quakes
counsel that ORBCOMM LLC believed the assertion of these
counterclaims violated Rule 11 of the Federal Rules of
Civil Procedure.
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Business
On May 11, 2007, our ORBCOMM LLC subsidiary, our Stellar
subsidiary and Quake entered into a global settlement agreement,
pursuant to which the parties have agreed to (1) dismiss
with prejudice and without cost the Complaint and any
counterclaims; (2) discontinue in its entirety the
arbitration relating to the Subscriber Communicator
Manufacturing Agreement with prejudice and without cost; and
(3) dismiss with prejudice and without cost Quakes
counterclaims against ORBCOMM LLC in the pending action between
Quake and MobiApps. Each party will bear its own legal expenses
with respect to each of these legal proceedings. Under the terms
of the settlement, ORBCOMM LLC and Stellar agreed to separate
and segregate our officers and employees from those of Stellar
within 60 days and to maintain separate office, testing and
laboratory facilities for Stellar by February 2008. In addition,
as part of the settlement, we and Quake have entered into a new
subscriber communicator manufacturing agreement for a ten-year
term with respect to the manufacture of subscriber communicators
for use on our communications system.
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. See Certain relationships and
transactions with related personsORBCOMM Asia
Limited. 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, we, 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 such other 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 our 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.
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The 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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Ø
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The space segment, which consists of a constellation of
29 operational satellites in multiple orbital planes
between 435 and 550 miles above the Earth (four primary
planes of six to eight satellites each and one polar plane
satellite) operating in the VHF band;
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Ø
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The ground and control segment, which consists of 14 operational
gateway earth stations that send signals to and receive signals
from the satellites, four 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 four 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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Ø
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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.
SPACE
SEGMENT
At present, we have 29 operational satellites in five orbital
planes providing worldwide coverage. We have authority under our
FCC licenses to operate up to a total of forty-eight satellites.
Additional
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The ORBCOMM
communications system
satellites we launch will further reduce our network latency and
enhance service levels for our customers.
Planes A, B, C and D, our primary planes, contain six to eight
satellites each, constitute the main part of the constellation
and provide the coverage to regions between approximately 60
degrees north and south latitudes. The orbits are designed to
provide optimum coverage between 20 and 55 degrees latitude in
both the Northern and Southern hemispheres, which include the
principal economic centers of the world. Plane G contains one
satellite and provides polar coverage.
Unlike geostationary satellites, our satellites are relatively
small in size, weighing less than one hundred pounds and
measuring only forty-two inches in diameter and six inches in
height before deployment. The relatively small size of our
satellites is made possible by the fact that our
first-generation satellites do not require a propulsion system
(although a small propulsion system is installed) to maintain
the satellites in the appropriate orbit and have significantly
lower power requirements as compared to geostationary satellites.
Our satellites are equipped with a VHF and Ultra High Frequency,
or UHF, communication payload capable of operation in the
137.0-150.05 MHz and the 400.075-400.125 MHz bands.
The use of the system uplink
(Earth-to-space)
spectrum is managed by an on-board computer that employs the
ORBCOMM-pioneered Dynamic Channel Activity Assignment System, or
DCAAS. DCAAS continuously scans the authorized spectrum,
identifies frequencies in use by other users of the frequency
band and assigns subscriber communication uplink channels to
minimize interference. DCAAS changes the uplink frequency at
least every 15 seconds, which allows our system to coexist with
the current terrestrial users of the VHF frequency band, and
limits interference to acceptable levels.
The gateway earth stations and the subscriber communicators
communicate with the satellites in the same VHF band, thus
eliminating the design complexity, as well as the associated
bulk, power and cost of supporting multiple communication
equipment on a single satellite. Our satellites also contain
packet-routing communications capability, including a limited
store-and-forward
capability.
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, after giving effect to certain operational changes and
software updates. 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 94.0% for
the quarter ended March 31, 2007. Twenty-three of the 29
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). Our Plane F polar
satellite, one of the original prototype first generation
satellites launched in 1995, was retired in April 2007, due to
intermittent service, without any material impact on our
service. Prior to such retirement, a 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 a distributed satellite system architecture like
ours.
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The ORBCOMM
communications system
The following chart provides an overview of our satellite
constellation, including the U.S. availability of the
individual satellites, the intended date of launch for new
satellites and other information regarding the operational
status of our space segment. The expected launch dates set forth
below are based on the current plans for the Coast Guard
demonstration satellite, six quick-launch satellites and 18
next-generation satellites. Once the next generation satellite
procurement contract has been finalized, these launch dates may
be adjusted to optimize the constellation health.
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U.S.
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Expected
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availability
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new
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for first
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satellite
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3 months
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Launch
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launch
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Sat ID
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of 2007
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date
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date(1)
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Satellite
operational status
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A1
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99.3%
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|
Dec-97
|
|
4Q 07
|
|
Antenna anomaly reduces
communications capabilities
|
A2
|
|
|
91.2%
|
|
|
Dec-97
|
|
4Q 07
|
|
Antenna anomaly reduces
communications capabilities
|
A3
|
|
|
98.5%
|
|
|
Dec-97
|
|
4Q 07
|
|
Antenna anomaly and subscriber
transmitter burn-out reduces communications capability
|
A4
|
|
|
99.7%
|
|
|
Dec-97
|
|
*
|
|
Antenna anomaly reduces
communications capabilities
|
A5
|
|
|
98.7%
|
|
|
Dec-97
|
|
*
|
|
Antenna anomaly reduces
communications capabilities
|
A6
|
|
|
98.4%
|
|
|
Dec-97
|
|
4Q 07
|
|
Antenna anomaly reduces
communications capabilities
|
A7
|
|
|
98.3%
|
|
|
Dec-97
|
|
4Q 07
|
|
Antenna anomaly and subscriber
transmitter burn-out reduces communications capability
|
A8
|
|
|
99.4%
|
|
|
Dec-97
|
|
4Q 07
|
|
Antenna anomaly and subscriber
transmitter burn-out reduces communications capability
|
B1
|
|
|
99.4%
|
|
|
Aug-98
|
|
3Q 10
|
|
Antenna anomaly reduces
communications capabilities
|
B2
|
|
|
99.6%
|
|
|
Aug-98
|
|
3Q 10
|
|
Normal operation
|
B3
|
|
|
99.8%
|
|
|
Aug-98
|
|
3Q 10
|
|
Normal operation
|
B4
|
|
|
99.8%
|
|
|
Aug-98
|
|
*
|
|
Normal operation
|
B5
|
|
|
99.8%
|
|
|
Aug-98
|
|
3Q 10
|
|
Antenna anomaly reduces
communications capabilities
|
B6
|
|
|
99.7%
|
|
|
Aug-98
|
|
*
|
|
Normal operation
|
B7
|
|
|
99.7%
|
|
|
Aug-98
|
|
3Q 10
|
|
Normal operation
|
B8
|
|
|
98.9%
|
|
|
Aug-98
|
|
3Q 10
|
|
Normal operation
|
C1
|
|
|
85.1%
|
|
|
Sep-98
|
|
1Q 10
|
|
Piece part failure limits
nighttime operation
|
C2
|
|
|
99.3%
|
|
|
Sep-98
|
|
1Q 10
|
|
Normal operation
|
C3
|
|
|
99.3%
|
|
|
Sep-98
|
|
1Q 10
|
|
Normal operation
|
C4
|
|
|
99.6%
|
|
|
Sep-98
|
|
1Q 10
|
|
Normal operation
|
C5
|
|
|
99.3%
|
|
|
Sep-98
|
|
1Q 10
|
|
Normal operation
|
C7
|
|
|
99.5%
|
|
|
Sep-98
|
|
1Q 10
|
|
Normal operation
|
D2
|
|
|
99.7%
|
|
|
Dec-99
|
|
3Q 09
|
|
Battery anomaly limits
nighttime operation
|
D3
|
|
|
99.6%
|
|
|
Dec-99
|
|
3Q 09
|
|
Normal operation
|
D4
|
|
|
59.6%
|
|
|
Dec-99
|
|
3Q 09
|
|
Battery anomaly prevents
nighttime operation
|
D6
|
|
|
99.7%
|
|
|
Dec-99
|
|
3Q 09
|
|
Normal operation
|
D7
|
|
|
99.6%
|
|
|
Dec-99
|
|
3Q 09
|
|
Normal operation
|
D8
|
|
|
99.8%
|
|
|
Dec-99
|
|
3Q 09
|
|
Antenna anomaly reduces
communications capabilities
|
G2
|
|
|
98.5%
|
|
|
Feb-98
|
|
3Q 07
|
|
Antenna anomaly reduces
communications capabilities
|
|
|
|
(1) |
|
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 and consistent with our FCC authorized 48
satellite limit. |
|
* |
|
Our next-generation replenishment plan requires only six
satellites per orbital plane. Replacement launch dates noted
with an asterisk are not currently planned. If market demands
increase or lower latencies are required, we may acquire
additional satellites (including through the exercise of any
options we may have) to supplement or expand our
constellation. |
Recent Upgrades. Beginning in 2002, we
implemented several operational changes and software updates
that we believe have enhanced the expected life of the
satellites. The majority of these changes focused on extending
the life of the primary life-limiting componentthe nickel
hydrogen batteries
89
The ORBCOMM
communications system
which power the satellites. Battery lifetime is a function of
the number of discharge cycles (when power stored in the
batteries is used) and the amount of power used during each such
discharge cycle or depth of discharge, or DOD. Satellites
experience a discharge cycle on nearly every orbit because they
enter an eclipse period when the Earth is between the satellite
and the sun, or an Eclipse Period. Since the
constellation configuration is constant, the number of discharge
cycles cannot be altered. The battery lifetime improvements are
focused primarily on reducing DOD. This was accomplished by
reducing the power consumption during an Eclipse Period.
The subscriber transmitter and the battery heaters are the
highest power consumption devices on the satellite and the
primary devices affecting DOD. The subscriber transmitter
provides the system downlink communication from the satellite to
a subscriber communicator. During an Eclipse Period the radio
frequency energy needed to establish a connection with a
subscriber communicator is greatly reduced because radio
frequency interference generated by terrestrial users within our
VHF band is very low. We took advantage of this condition to
implement a power saving mode which reduces the subscriber
transmitter output power during an Eclipse Period, thus reducing
DOD.
In order to maintain operations within the batteries
fairly narrow temperature-operating band, heaters installed on
the batteries were designed to automatically turn on when the
battery temperature dropped below a specified level. We were
able to reprogram the satellites to turn on the heater to
pre-heat the batteries prior to an Eclipse Period when the
satellite is operating under solar power and then turn off the
heaters during an Eclipse Period. This allows the batteries to
maintain a temperature within the operating band through the
Eclipse Period without the need to use the batteries to power
the heaters. The combination of reduced transmitter and heater
power has significantly reduced the DOD. We believe these
changes have increased our estimated satellite lifetime to nine
to twelve years.
Replacement Satellites. Although these
lifetime-enhancing upgrades and constellation changes have
delayed the need for additional satellites, we recognize that a
new generation of satellites will be necessary for us to
continue to provide our services in the future. We believe our
next-generation of satellites should adhere to the following
requirements: (1) backwards compatibility so that current
subscriber communicators do not have to be replaced;
(2) increased satellite communications capacity; and
(3) increased propulsion for multiple plane replenishment
on a single launch and to meet new FCC de-orbit guidelines which
call for us to remove our satellites from orbit within
25 years of such satellites end of life. 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 to
receive AIS signals from marine vessels over 300 tons using a
single satellite that also satisfies full functionality with our
communications system. The satellite, which also includes our
standard communications payload, is in the final integration and
test phase with a launch expected to occur in 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 communications capability compared to our
current first generation satellites. Finally, we intend to
launch next-generation satellites with increased communications
capabilities in 2009 and 2010.
We intend to use the net proceeds to us from this offering to
expand our capital expenditure plan to take advantage of current
opportunities to procure advanced communication systems for our
next-generation satellites that significantly increase capacity
beyond that provided in our base capital expenditure plan. This
technology is expected to increase spectrum efficiency to
support higher usage applications, accelerate the reduction in
network latency to address potential new markets and enhance our
ability to manage increased expected future demands for our
communications services.
As a result, through a series of up to five launches, we intend
to replenish the existing constellation with a total of 25
satellites. Depending on the capabilities of the replacement
satellites, we may require fewer satellites than we currently
have. Flexibility in the number of satellites per launch, the
number of
90
The ORBCOMM
communications system
satellites inserted into each plane and target plane will allow
us to modify our plans within just a couple of 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.
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 six payloads
is $17 million, subject to price adjustments for late
penalties and on-time or early delivery incentives. As of
March 31, 2007, we made payments totaling
$10.5 million pursuant to this agreement. Orbital Sciences
Corporation built our current fleet of 29 satellites and will be
reusing much of the existing technology that was developed for
those satellites. These new payloads will be augmented with an
AIS receiver for supporting global maritime navigation
objectives as well as an additional set of receivers to increase
the messaging capacity of each new satellite.
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 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. 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. As of March 31, 2007, we made
payments totaling $8.0 million pursuant to this agreement.
We are using a competitive bid process in selecting satellite
and launch services providers for our next-generation
satellites; this competitive bid process improves our ability to
negotiate the best price and terms for these satellites. We have
received proposals from three satellite manufacturers and are
currently evaluating each bid. We started the procurement
activities for the next-generation satellites and are planning
to proceed to final negotiations leading to an anticipated
contract award in mid-2007.
GROUND/CONTROL
SEGMENT
The ground segment consists of gateways strategically located
throughout the world. The role of each gateway is to provide
access to the space segment and to interface with public and
private data networks including the Internet. The major elements
of the ground and control segment include:
|
|
Ø
|
a gateway earth station, which consists of two radomes, with
enclosed VHF tracking antennas, one of which is largely
redundant, and associated pedestals, controllers and radio
equipment, an uninterruptible power source and a
back-up
power generator;
|
|
Ø
|
an associated gateway control center, which processes the data
and provides the interconnection to the terrestrial
communications networks; and
|
|
Ø
|
a network control center which manages the gateway elements and
monitors and controls the satellites.
|
The gateway earth
station-to-satellite
links have been designed to make use of single uplink and
downlink channels for all of the satellites using a Time
Division Multiple Access, or TDMA, protocol which permits
gateway earth stations to communicate with satellites and
providing a simple handover of a satellite from gateway earth
station to gateway earth station under the centralized control
of the gateway control center.
91
The ORBCOMM
communications system
Providing services using our system in a particular region
requires an appropriately located gateway earth station, unless
GlobalGram operation is used by the operator of the subscriber
communicator. Gateway earth stations connect to satellites above
a maximum of five degrees elevation and cover a large,
approximately circular footprint with a radius of approximately
3,300 miles. Command, control and monitoring of gateway
earth stations is provided by the associated gateway control
center. The North American gateway control center is located in
Dulles, Virginia, and currently services five gateway earth
stations located in New York, Arizona, Georgia, Washington and
Curaçao serving the United States, Canada, Mexico, the
Caribbean, Greenland and South America. The European gateway
control center is also located in Dulles, Virginia, and
currently services four gateway earth stations located in Italy,
Kazakhstan, Malaysia and Morocco. Additionally, we have
operational gateway control centers located in Japan and South
Korea, as well as their associated gateway earth stations
located in those same countries. We recently installed a new
gateway earth station in Australia that is connected to the
European gateway control center. We plan to install additional
gateway earth stations in South Africa, Italy,
Sub-Saharan
Africa, the Middle East, Turkey, India, China, Indonesia, Russia
and Taiwan, subject to our obtaining, or our international
licensees or country representatives obtaining, the necessary
regulatory approval and financing.
The core control segment of our system is housed at the network
control center in Dulles, Virginia. The control segment
currently houses the gateway control centers for North America
and Europe, and includes a network management system, which
monitors the status of all network elements, and a space vehicle
management system. The existing network control center is
equipped with fault-tolerant hardware. Standard building power
is supplemented with both an uninterruptible power supply system
and an automatic emergency generator. Through the network
control center, operations staff has the ability to command,
control and monitor all satellite assets and certain gateway
earth stations through the gateway control centers we control.
We are planning to upgrade our architecture by connecting other
gateway earth stations to gateway control centers located at the
network control center in Dulles, Virginia. The connection of
gateway earth stations in Curaçao, Morocco and Italy was
completed in
2003-2004
and in Argentina and Brazil was completed in 2006. Provisioning
of subscriber communicators on the North American and European
gateway control centers is currently being performed in Dulles,
Virginia. In 2005, we centralized all other operations related
to those gateway control centers. In addition, all future
gateway earth stations are expected to be connected through and
operated by gateway control centers located at the network
control center in Dulles, Virginia, unless local regulations
require a local gateway control center. Connecting such gateway
earth stations to gateway control centers located at the network
control center improves the network for the following reasons:
|
|
Ø
|
Improved roaming capability for
end-users. Centralized provisioning provides
simplified access for end-users to all of North America, South
America, North Africa and Europe.
|
|
Ø
|
Centralized view of worldwide satellite
coverage. The network control center will have a
centralized view of worldwide satellite coverage in areas
serviced by gateway earth stations around the globe. This will
provide us with improved control of satellites and the ability
to respond quickly to space anomalies.
|
Today, the
day-to-day
operation of a gateway control center requires multiple
personnel to be present 24 hours a day, 365 days a
year. International gateway control center staff requirements
will be reduced with the realization of this centralized design
plan, and consequently, our international licensees expect their
operating expenditures to decrease as their staffing
requirements are reduced.
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
92
The ORBCOMM
communications system
well. Several infrastructure upgrades have been completed over
the past few years including software upgrades, new antenna
tracking control hardware, improved power conditioning and
remote monitoring.
In general, our international gateway control centers are
stable. Our gateway control centers located in 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 were 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.
SUBSCRIBER
SEGMENT
The subscriber segment consists of various models of subscriber
communicators, some of which are intended for general use and
some of which are designed to support specific applications. The
subscriber communicator models include:
|
|
Ø
|
vehicle-powered subscriber communicators that accept wide input
voltage ranges;
|
|
Ø
|
subscriber communicators that have built-in application
processors which allow customers to write specific applications;
|
|
Ø
|
a simple modem that has only power and serial data inputs, which
are used for fixed site applications where global positioning
system, or GPS, is not needed, or in applications where they are
replacing an existing communications device such as cellular
communications device; and
|
|
Ø
|
full-featured devices that include application processor,
multiple inputs, battery charger, GPS and weather-tight
enclosure.
|
The subscriber communicators targeted for M2M industrial
applications are designed to interface with sensors or control
devices through a variety of industry-standard interfaces. In
addition to supporting our own serial interface, subscriber
communicators with application processors have been programmed
to interface with external devices in that devices native
serial data structure, eliminating the need for an external
translation device. They are usually enclosed in specialized,
heavy-duty packaging enabling the units to operate even in
extreme environmental conditions.
For many mobile applications, the addition of GPS functionality
allows not only the tracking of assets, but the capability to
add geo-fencing features into the subscriber communicator.
Utilizing GPS and application programming, users can receive
alerts when their remote assets are moving or when their assets
have entered or exited a defined area. The subscriber
communicators targeted for the messaging market incorporate
interfaces such as integrated keyboards or touch-sensitive
screens. Subscriber communicators used for asset tracking are
usually equipped with GPS receivers, permitting the user or
application to determine the subscriber communicators
location anywhere in the world.
Our subscriber communicators have also been integrated with
other communication devices to provide dual-mode solutions that
are compatible with multiple cellular networks. These dual-mode
solutions allow us to augment the primary communications path
and ensure that remote data is transmitted on our network when
the subscriber communicator is located outside the cellular
networks coverage area.
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 subscriber
communicator manufacturers. There are currently three subscriber
communicator manufacturers, including Mobile Applitech, Inc.,
Quake Global, Inc. and our Stellar subsidiary. Stellars
newest model of subscriber communicators are being designed and
manufactured by Delphi, a subsidiary of Delphi Corporation, a
tier one automotive supplier. As part of our global
93
The ORBCOMM
communications system
settlement dismissing or discontinuing our legal proceedings
with Quake, we and Quake have entered into a new Subscriber
Communicator Manufacturing Agreement with a
ten-year
term. Quake is currently operating under an interim
manufacturing agreement which expires in May 2007.
In many cases, the manufacturers are working on their third or
fourth generation designs and have incorporated application
specific integrated circuits, or ASICs, into their subscriber
communicators. The inclusion of ASICs has reduced the cost while
increasing the performance of subscriber communicators.
SYSTEM
STATUS
Our satellites are distributed in multiple planes and at various
inclinations to maximize geographic coverage and concentrate the
service over regions with the most demanding data delivery and
latency requirements. In these regions, we believe that in the
majority of cases, messages will be transmitted from the
subscriber communicator to a gateway earth station in less than
one minute for six byte messages. Satellite coverage is provided
to the entire globe, but because of the constant movement of our
satellites, coverage over a given point varies depending on the
position of the subscriber communicator relative to the
satellites. We believe these performance results are well within
acceptable parameters for the commercial use of our system by
our current customers. Moreover, we expect that performance will
improve as we deploy our next-generation satellites and further
reduce the latency on our network.
Sending messages in near-real-time also requires that a
satellite be connected to a gateway earth station at the time
the message is received by the satellite from the subscriber
communicator. There are currently 14 gateway earth stations
deployed around the world. Territories outside those covered by
these gateway earth stations are currently served exclusively by
GlobalGram service (messages are stored in the satellite until
it reaches the targeted gateway earth station, where they are
downloaded and, distributed as required by the user).
Network
capacity
Although the capacity of a messaging system can be measured in a
number of different ways, we believe the maximum sustainable
rate of message processing, or throughput, is the most relevant
measure for our business. For our system, this rate is highly
dependent on the type and size of messages, as well as the
geographic distribution of our customers subscriber
communicator units and the temporal distribution of their
messages. Our current system is able to support our existing
global customer base and we believe that our system will be able
to support any increases currently anticipated through the
expected launch dates of our quick-launch and next-generation
satellites. Each major component of our system is scalable, and
our system upgrade and capital expenditure plan are designed to
ensure that system capacity stays well ahead of anticipated
customer demand.
The communication link between the subscriber communicator and
the satellite is the portion of our system that most directly
limits the capacity of our network. The communications protocol
employs three different subscriber communicator to satellite
links, one downlink and two uplinks. One uplink is used
primarily for message initiation, short messages and
acknowledgements, while the second is reserved for transmitting
the content of longer messages. Each satellite has six
subscriber receiver channels, each of which can be configured to
service either uplink type. This capability provides us with the
flexibility to tune the satellites to the message volume,
thereby maximizing throughput.
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
94
The ORBCOMM
communications system
raise this performance ratio to slightly 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.
In addition to making system modifications and optimizing
configuration settings, we can also increase network capacity by
deploying additional satellites with enhanced subscriber uplink
capacity to address any latency issues of our system. Our
current FCC license permits us to operate 19 additional
satellites in addition to our existing 29-satellite
constellation. During 2007, we intend to launch the first of our
planned satellite replenishment and enhancement program,
including six quick-launch satellites by the end of 2007 and our
next-generation satellites in 2009 and 2010. We have entered
into procurement contracts with Orbital Sciences Corporation and
OHB-System AG to supply and launch our six quick-launch
satellites. Each of the next-generation satellites will have
substantially more subscriber receiver capacity, which is
expected to improve overall throughput on our network.
Finally, while the availability of frequency spectrum can be a
concern for some systems, we believe that we currently have
sufficient spectrum authorized to accommodate our
next-generation satellite system. Moreover, additional little
LEO spectrum in the VHF and UHF bands has been reclaimed by the
FCC or voluntarily relinquished by other licensees who did not
deploy their planned satellite systems, and may be made
available for our use under the FCCs new satellite
licensing procedures. Under these new first in time
processing rules, if we are the first to file for this spectrum
and are otherwise qualified to be a licensee, then we should be
authorized by the FCC to use a portion of this available little
LEO spectrum. 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
TECHNOLOGY
Non-interference
generally
Our system operates both in the United States and in other
countries using radio frequency spectrum in the range of
137-150 MHz,
along with use of a timing channel downlink at 400.1 MHz.
Specific frequency band portions used within this range are
allocated on a co-primary basis by the ITU in the International
Table of Frequency Allocations or the International Table, for
use by Below 1 GHz Band Low-Earth Orbit Mobile Satellite
Service systems (also known as little LEO systems). Under
International Table provisions, the uplink operations of little
LEO systems may not interfere with or constrain the growth of
certain other co-primary-allocated services operating in the
same frequency bands and little LEO systems may not claim
interference protection from those other co-primary services,
including military
push-to-talk
terrestrial radios in the uplink band and meteorological
satellites in the downlink bands. We have been able to avoid
interference in the downlink bands through frequency
coordination with the meteorological satellite systems operating
in this spectrum. We believe that our Dynamic Channel Activity
Assignment System, or DCAAS, which is specifically designed to
avoid uplink interference to and from terrestrial, land mobile
or other services allocated by the ITU on a co-primary basis,
allows the system to operate in compliance with all of these
non-interference restrictions, while fully meeting our service
objectives. DCAAS avoids uplink interference by scanning the
systems uplink band approximately every five seconds
searching for actively used channels and then assigning
subscriber traffic to specific frequencies for the next
five-second period based on its assessment of the least used
frequencies at the time of the previous scan. Experience to date
with more than ten years of operations has validated the
effectiveness of DCAAS in avoiding instances
95
The ORBCOMM
communications system
of interference resulting from our subscriber uplink
transmissions, although there is no guarantee that harmful
interference will not become an issue in the future.
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 ORBCOMM Global L.P. in 1994 (which we refer to as the
Space Segment License). The Space Segment License authorized
construction, launch and operation of a constellation of 36
initial and twelve additional little LEO satellites and we have
additional licenses 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.
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
(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 May
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, and the renewal application appeared on public notice as
accepted for filing on March 16, 2007. The current FCC
licenses for the United States gateway earth stations and
subscriber communicators expire on May 17, 2020 and
June 12, 2020, respectively, and the renewal applications
must be filed between 30 and 90 days prior to expiration.
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.
96
The ORBCOMM
communications system
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. As a result of revocations or
voluntary relinquishments, 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 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
97
The ORBCOMM
communications system
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 80 countries and territories in North America,
Europe, South America, Asia, Africa 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.
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
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The ORBCOMM
communications system
to comply with operating standards that may include
specifications relating to required maximum 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
Radiocommunication 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
Radiocommunication 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.
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.
99
Management
EXECUTIVE
OFFICERS AND DIRECTORS
The following table sets forth certain information concerning
each of our executive officers and directors:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
|
|
Jerome B. Eisenberg
|
|
|
67
|
|
|
Chairman of the Board and Chief
Executive Officer
|
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
|
Didier Delepine
|
|
|
59
|
|
|
Director
|
Marco Fuchs
|
|
|
44
|
|
|
Director
|
Hans E.W. Hoffmann
|
|
|
73
|
|
|
Director
|
Timothy Kelleher
|
|
|
44
|
|
|
Director
|
John Major
|
|
|
61
|
|
|
Director
|
Gary H. Ritondaro
|
|
|
60
|
|
|
Director
|
Executive
Officers
Jerome B. Eisenberg has been our Chairman of the Board
since January 2006, and our Chief Executive Officer since
December 2004. Between December 2004 and August 2006, he also
served as our President. 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.
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-PresidentFinance 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 effective as of 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
100
Management
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.
Directors
Jerome B. Eisenberg has been a member of our board of
directors since February 2004. See Executive
Officers above.
Didier Delepine has been a member of our board of
directors since May 2007 upon his election by our stockholders
at our 2007 annual meeting of stockholders. Mr. Delepine
served as President and Chief Executive Officer of Equant (now
Orange Business Services) (global data networking and managed
communications) from 1998 to 2003. From 1995 to 1998,
Mr. Delepine served as President and Chief Executive
Officer of Equants network services division and as
Chairman and President of Equants Integration Services
division, Americas. From 1983 to 1995, Mr. Delepine held a
range of senior management positions at SITA, the global
telecommunications and technology organization supporting the
worlds airlines. Mr. Delepine was a director of
Intelsat, Ltd., a global provider of communications services,
from 2003 to 2005 and Eircom Group plc, an Irish communications
company, from 2003 to 2006.
Marco Fuchs has been a member of our board of directors
since February 2004. He has also been a member of the board of
directors of ORBCOMM LLC since 2001 and of ORBCOMM Holdings LLC
from 2001 to February 2004. Mr. Fuchs is currently the
Chief Executive Officer and Chairman of the Managing Board of
OHB Technology A.G. (technology and space), positions he has
held since 2000. From 1995 to 2000, Mr. Fuchs worked at OHB
Orbitale Hochtechnologie Bremen-System A.G., first as a
Prokurist (authorized signatory) and then as Managing Director.
Prior to that, he worked as a lawyer from 1992 to 1994 for
Jones, Day, Reavis & Pogue in New York, and from 1994
to 1995 in Frankfurt am Main.
Hans E. W. Hoffmann has been a member of our board of
directors since November 2006. Mr. Hoffmann currently
serves as President of the Bremen United States Center
(international relations) and Vice President of Bund der
Steuerzahler Niedersachsen und Bremen e.v. (tax policy),
positions he
101
Management
has held since 2001. Mr. Hoffmann was the President and
Chief Executive Officer of ORBCOMM LLC from 2001 to 2003. Prior
to joining ORBCOMM LLC, Mr. Hoffmann served as the
President of STN Atlas Elektronik GmbH, a 5,200 person
Germany-based corporation that manufacturers products for the
aerospace, navy equipment and military markets, from 1994 to
1997.
Timothy Kelleher has been a member of our board of
directors since December 2005. Mr. Kelleher joined Pacific
Corporate Group LLC (investment management firm) as a Managing
Director in 2002. Prior to joining Pacific Corporate Group,
Mr. Kelleher was a Partner and Senior Vice President at
Desai Capital Management Incorporated from 1992 to 2002 and held
positions at Entrecanales, Inc., L.F. Rothschild & Co.
Incorporated and Arthur Young & Co. Mr. Kelleher
is currently a director of Pacific Corporate Group and Backyard
Broadcasting Holdings LLC.
John Major has been a member of our board of directors
since April 2007. Mr. Major is President of MTSG (strategic
consulting and investment), which he founded in January 2003.
From April 2004 to October 2006, Mr. Major also served as
Chief Executive Officer of Apacheta Corporation, a
privately-held mobile, wireless software company. From August
2000 until January 2003, Mr. Major was Chairman and Chief
Executive Officer of Novatel Wireless, Inc., a wireless data
access solutions company. Prior to August 2000, he was the
founder and Chief Executive Officer of the Wireless Internet
Solutions Group, a strategic consulting firm. From November 1998
to November 1999, Mr. Major was Chairman and Chief
Executive Officer of Wireless Knowledge, a joint venture of
Qualcomm Incorporated and Microsoft Corporation. From 1997 until
1998, he served as President of the Wireless Infrastructure
Division of Qualcomm. Prior to that, for approximately
18 years, he held various positions at Motorola, Inc., the
most recent of which was Senior Vice President and Chief
Technology Officer. Mr. Major is a director of Broadcom
Corporation, Lennox International, Inc. and Littelfuse Inc.
Gary H. Ritondaro has been a member of our board of
directors since November 2006. Mr. Ritondaro is the Senior
Vice President and Chief Financial Officer of LodgeNet
Entertainment Corporation (entertainment, marketing and
information services for the lodging and healthcare markets), a
position he has held since 2001 and has also served as Senior
Vice President, Finance, Information Systems and Administration
of LodgeNet since July 2002. Prior to joining LodgeNet,
Mr. Ritondaro served as Senior Vice President and Chief
Financial Officer for Mail-Well, Inc., an NYSE-listed
manufacturer of envelopes, commercial printing and labels, from
1999 to 2001. From 1996 to 1999, Mr. Ritondaro was Vice
President and Chief Financial Officer for Ferro Corporation, an
NYSE-listed international manufacturer of specialty plastics,
chemicals, colors, industrial coatings and ceramics.
BOARD OF
DIRECTORS
Our board of directors is currently composed of seven members,
five of whom are independent directors. Our board of directors
is classified into three classes of directors serving staggered,
three-year terms and directors may be removed only for cause.
The terms of the Class I, Class II and Class III
directors will expire at the 2007, 2008 and 2009 annual meeting
of stockholders, respectively. The following sets forth our
board classes:
|
|
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Class I
|
|
Class II
|
|
Class III
|
Didier Delepine
|
|
Timothy Kelleher
|
|
Jerome B. Eisenberg
|
Hans E.W. Hoffmann
|
|
John Major
|
|
Marco Fuchs
|
Gary H. Ritondaro
|
|
|
|
|
COMMITTEES OF THE
BOARD OF DIRECTORS
Our board of directors has the authority to appoint committees
to perform certain management and administration functions. We
currently have an audit committee and a compensation committee,
102
Management
composed of three members each, and a nominating and corporate
governance committee, composed of two members.
Audit Committee. The audit committee,
among other things:
|
|
Ø
|
reviews and oversees the integrity of our financial statements
and internal controls;
|
|
Ø
|
reviews the qualifications of and, selects and recommends to the
board of directors the selection of, our independent registered
public accounting firm, subject to the approval of our
stockholders, and reviews and approves their fees;
|
|
Ø
|
reviews and oversees the adequacy of our accounting and
financial reporting processes, including our system of internal
controls and disclosure controls, and recommendations of the
independent accountants with respect to our systems; and
|
|
Ø
|
reviews and oversees our compliance with legal and regulatory
requirements.
|
Gary H. Ritondaro, Didier Delepine and Hans Hoffmann currently
serve as members of our audit committee. Each member of our
audit committee meets the independence and financial literacy
requirements of the Nasdaq, the SEC and applicable law. All
members of our audit committee are able to read and understand
fundamental financial statements. The board of directors has
determined that Mr. Ritondaro is an audit committee
financial expert as defined by the SEC rules.
Mr. Ritondaro serves as chair of our audit committee.
Compensation Committee. The
compensation committee, among other things:
|
|
Ø
|
reviews and approves corporate goals and objectives relevant to
the compensation of the Chief Executive Officer, evaluates the
performance of the Chief Executive Officer in light of these
goals and objectives and determines and approves the level of
the Chief Executive Officers compensation based on this
evaluation;
|
|
Ø
|
determines the base and incentive compensation of senior
executives other than the Chief Executive Officer and determines
the terms of the employment of senior executives, including the
Chief Executive Officer;
|
|
Ø
|
reviews, administers, monitors and recommends to the board of
directors all executive compensation plans and programs,
including incentive compensation and equity-based plans; and
|
|
Ø
|
evaluates and makes recommendations regarding the compensation
of non-employee directors and administration of non-employee
director compensation plans or programs.
|
Timothy Kelleher, John Major and Hans Hoffmann currently serve
as members of our compensation committee. Each member of our
compensation committee meets the independence requirement of
Nasdaq and applicable law. Mr. Kelleher serves as chair of
our compensation committee.
Nominating and Corporate Governance
Committee. The nominating and corporate
governance committee, among other things:
|
|
Ø
|
reviews and recommends to the board of directors the size and
composition of the board, the qualification and independence of
the directors and the recruitment and selection of individuals
to serve as directors;
|
|
Ø
|
reviews and recommends to the board of directors the
organization and operation of the board of directors, including
the nature, size and composition of committees of the board, the
designation of committee chairs, the designation of a Chairman
of the Board or similar position, and the distribution of
information to the board and its committees;
|
|
Ø
|
coordinates an annual self-assessment by the board of its
operations and performance and the operations and performance of
the committees and prepares an assessment of the boards
performance for discussion with the board;
|
103
Management
|
|
Ø
|
in coordination with the compensation committee, evaluates the
performance of the chief executive officer in light of corporate
goals and objectives; and
|
|
Ø
|
oversees our corporate governance policies, practices and
programs.
|
Timothy Kelleher and John Major currently serve as members of
our nominating and corporate governance committee and there is a
vacancy created by the expiration of Ronald Gerwigs term
as a director, which we expect to fill with an appropriate
director in the near future. Each current and expected future
member of our nominating and corporate governance committee
meets or will meet the independence requirement of Nasdaq and
applicable law. Mr. Kelleher serves as chair of our
nominating and corporate governance committee.
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers currently serves as a director or
member of the compensation committee of another entity with an
executive officer who serves on our board of directors or our
Compensation Committee.
DIRECTOR
COMPENSATION
During 2006, none of our directors received any compensation for
their board or committee service. As of March 31, 2007,
none of our directors held any stock awards or option awards
granted under our 2004 Stock Option Plan or the 2006 LTIP in
connection with their service as a director or committee member.
For 2007, Didier Delepine, Hans Hoffmann, John Major and Gary
Ritondaro will each receive an annual retainer of $35,000. In
addition to the annual retainer, each of these directors will
receive $3,000 annually for each committee on which they serve,
$10,000 annually for service as the chair of the Audit Committee
or $5,000 for service as the chair of any other board committee.
Each of these directors will receive an attendance fee of $1,000
for each committee meeting. All directors are reimbursed for
reasonable expenses incurred to attend meetings of the board of
directors. It is expected that we will grant an award of 1,850
time-based RSUs vesting on December 31, 2007 to each of
Messrs. Delepine, Hoffmann, Major and Ritondaro on the date
of the Annual Meeting.
Under the terms of our directors deferred compensation
arrangements, a non-employee director may elect to defer all or
part of the cash payment of director retainer fees until such
time as shall be specified, with interest on deferred amounts
accruing quarterly at 120% of the Federal long-term rate set
each month by the U.S. Treasury Department. Each member of
the Audit Committee also has the alternative each year to
determine whether to defer all or any portion of his or her cash
retainer fees for Audit Committee service by electing to receive
shares or restricted shares of our common stock valued at the
closing price of our common stock on Nasdaq on the date each
retainer payment would otherwise be made in cash.
EMPLOYMENT
AGREEMENTS
Jerome B. Eisenberg. In August 2006, we
entered into an employment agreement with Jerome B. Eisenberg to
serve as our Chairman of the Board and Chief Executive Officer,
effective as of June 1, 2006. The employment agreement
expires on December 31, 2008, unless terminated earlier
pursuant to the terms of the agreement. The employment agreement
may be extended by mutual agreement of the parties. Upon the
expiration of the agreements term, and any extension
thereof, Mr. Eisenberg will continue to be employed on an
at will basis.
Mr. Eisenbergs employment agreement provides for an
annual base salary of $355,000. If we hire an employee with a
base salary greater than Mr. Eisenbergs base salary,
then Mr. Eisenbergs base salary will be increased to
105% of the other employees base salary. In addition to
his salary, Mr. Eisenberg is
104
Management
entitled to certain employee benefits, including medical and
disability insurance, term life insurance, paid holiday and
vacation time and other employee benefits paid by us.
Mr. Eisenberg is eligible to receive a bonus, payable in
cash or cash equivalents, based on a percentage of his base
salary (ranging from 18% to 140% for fiscal 2006 and fiscal
2007) dependent upon achieving 90% to 133% of certain
performance targets established each year by the board of
directors. No bonus will be paid unless 90% of the applicable
performance targets for that fiscal year are met or exceeded or,
for operational milestone targets, unless the operational
milestone target is achieved by the specified time. See
Compensation of executive officersSummary
Compensation Table and Grants of Plan-Based
Awards for a discussion of Mr. Eisenbergs 2006
bonus award. For 2007, the performance targets will be based 30%
on achievement of a target adjusted EBITDA for fiscal 2007, 30%
on achievement of a target net subscriber communicator additions
during 2007 and 40% on achievement of certain operational
milestone targets in 2007; however, if a certain operational
milestone target is not achieved by the specified time,
Mr. Eisenberg will only be entitled to 80% of the bonus
that would have otherwise been earned by him. Mr. Eisenberg
is entitled to participate in any profit sharing
and/or
pension plan generally provided for our executives, and in any
equity option plan or restricted equity plan established by us
in which our senior executives are generally permitted to
participate.
In addition, under his employment agreement, we issued
Mr. Eisenberg awards consisting of 298,667 RSUs and 150,000
SARs. The RSUs will be payable only in shares of our common
stock. Upon the exercise of a SAR, we will deliver cash, shares
of our common stock valued at fair market value on the date of
exercise or a combination of cash and shares our common stock,
as the Compensation Committee may determine. The SARs will have
a base price equal to the fair market value on the date of grant
(the initial public offering price of our common stock for the
2006 grant). One half of the RSUs will vest in three equal
installments on January 1, 2007, January 1, 2008 and
December 31, 2008. The remaining RSUs and all the SARs will
vest in three equal installments in 2007, 2008 and 2009 on the
achievement of certain performance targets, for each of fiscal
2006, 2007 and 2008, established each year by the board of
directors or the Compensation Committee. See Compensation
of executive officersSummary Compensation Table and
Grants of Plan-Based Awards for a discussion
of Mr. Eisenbergs performance-based RSU and SAR
awards. For fiscal 2007, the performance targets for
Mr. Eisenbergs performance-based RSU and SAR awards
are the same as for Mr. Eisenbergs annual bonus
described above; however, if a certain operational milestone
target is not achieved by the specified time, Mr. Eisenberg
will only be entitled to 80% of the RSU and SAR awards that
would have otherwise been earned by him.
If Mr. Eisenbergs employment as Chairman and Chief
Executive Officer is terminated by us without cause
(as defined in his agreement) or by Mr. Eisenberg with
good reason (as defined in his agreement), he is
entitled (1) to receive a pro rata share of his target
bonus for the fiscal year in which the termination occurs and
(2) to continue to receive, as a severance payment, his
base salary and continued health insurance coverage for one year
immediately following such termination.
If Mr. Eisenberg terminates his employment as Chief
Executive Officer, but continues to serve as non-executive
Chairman of the Board, he will not be entitled to the severance
payment described above. If Mr. Eisenbergs employment
as Chief Executive Officer is terminated by us without
cause or by Mr. Eisenberg with good
reason, but he continues to serve as non-executive
Chairman of the Board, Mr. Eisenberg will be entitled to
receive severance payments equal to the difference between his
then-current base salary and his annual compensation from us for
service as non-executive Chairman of the Board payable in
regular installments for one year immediately following such
termination. If Mr. Eisenbergs appointment as our
Chairman of the Board is terminated by us without
cause, then in lieu of any other severance payments
under the agreement, Mr. Eisenberg will be entitled to
continue to receive his base salary for the greater of
(1) one year immediately following such termination or
(2) the remainder of the term of the agreement; provided
that if Mr. Eisenberg has previously received
105
Management
severance payments under the agreement, we are entitled to
offset, on a
dollar-for-dollar
basis, any severance payments described in this sentence.
Mr. Eisenbergs post-termination payments described
above are conditioned on his executing a release in favor of us.
In addition, his employment agreement contains standard
covenants relating to confidentiality and assignment of
intellectual property rights, a two-year post-employment
non-solicitation covenant and a one-year post-employment
non-competition covenant. Upon a change of control,
Mr. Eisenberg will be entitled to the same post-employment
payments as if his employment as Chief Executive Officer were
terminated by us without cause, unless the successor
or transferee company continues his employment on substantially
equivalent terms as under his agreement; provided that if the
change of control transaction occurs having a value
greater than $6.045 per share (as adjusted for any stock
dividends, combinations or splits), Mr. Eisenberg will be
entitled to have all his equity related and stock-based
compensation awards as of the date of such change of
control become fully exercisable (without regard to the
satisfaction of any time-based or performance criteria).
If Mr. Eisenberg is no longer our Chief Executive Officer,
but continues as Chairman of the Board, then (1) his base
salary will be reduced by $155,000, (2) subject to
satisfying any eligibility requirements, he will continue to be
entitled to receive the employee benefits he received as Chief
Executive Officer and (3) his RSU and SAR awards will
continue to vest in accordance with their terms.
Robert G. Costantini. In September 2006, we
entered into an employment agreement with Robert G. Costantini
to serve as our Executive Vice President and Chief Financial
Officer, effective as of October 2, 2006. The employment
agreement expires on September 30, 2009, unless terminated
earlier pursuant to the terms of the agreement. The employment
agreement may be extended by mutual agreement of the parties.
Upon the expiration of the agreements term, and any
extension thereof, Mr. Costantini will continue to be
employed on an at will basis.
Mr. Costantinis employment agreement provides for an
annual base salary of $270,000. In addition to his salary,
Mr. Costantini is entitled to certain employee benefits,
including medical and disability insurance, term life insurance,
paid holiday and vacation time and other employee benefits paid
by us. Mr. Costantini is eligible to receive a bonus,
beginning with a pro rata bonus for the 2006 fiscal year,
payable in cash or cash equivalents, based on a percentage of
his base salary (ranging from 18% to 100%) dependent upon
achieving 90% to 125% of certain performance targets established
each year by the board of directors. No bonus will be paid
unless 90% of the applicable performance targets for that fiscal
year are met or exceeded. See Compensation of executive
officersSummary Compensation Table and
Grants of Plan-Based Awards for a discussion
of Mr. Costantinis 2006 bonus award. For fiscal 2007,
the performance targets will be based 65% on achievement of a
target adjusted EBITDA for fiscal 2007 and 35% on achievement of
a target net of subscriber communicator additions during 2007.
Mr. Costantini is entitled to participate in any profit
sharing
and/or
pension plan generally provided for our executives, and in any
equity option plan or restricted equity plan established by us
in which our senior executives are generally permitted to
participate.
In addition, under his employment agreement, we issued
Mr. Costantini awards consisting of 23,333 RSUs and 133,333
SARs. The RSUs will be payable only in shares of our common
stock. Upon the exercise of a SAR, we will deliver cash, shares
of our common stock valued at fair market value on the date of
exercise or a combination of cash and shares our common stock,
as the Compensation Committee may determine. The SARs will have
a base price equal to the fair market value on the date of grant
(the initial public offering price of our common stock for all
the time-based SARs and the performance-based SARs granted in
2006). One half of the RSUs and one half of the SARs will vest
in three equal installments on January 1, 2007,
January 1, 2008 and January 1, 2009. The remaining
RSUs and SARs will vest in three equal installments in 2007,
2008 and 2009 on the achievement of
106
Management
certain performance targets, for each of fiscal 2006, 2007 and
2008, established each year by the board of directors or the
Compensation Committee. See Compensation of executive
officersSummary Compensation Table and
Grants of Plan-Based Awards for a discussion
of Mr. Costantinis performance-based RSU and SAR
awards. For fiscal 2007, the performance targets will be the
same as for Mr. Costantinis annual bonus described
above.
If Mr. Costantinis employment is terminated by us
without cause (as defined in his agreement) during
the term of the agreement, or any extension thereof, he is
entitled to continue to receive his base salary and continued
health insurance coverage for one year immediately following
such termination. Mr. Costantinis post-termination
payments are conditioned on his executing a release in favor of
us. In addition, his employment agreement contains standard
covenants relating to confidentiality and assignment of
intellectual property rights, a two-year post-employment
nonsolicitation covenant and a one-year post-employment
non-competition covenant. Upon a change of control
(as defined in his agreement), Mr. Costantini will be
entitled to the same post-employment payments as if his
employment were terminated by us without cause (as
described above), unless the successor or transferee company
continues his employment on substantially equivalent terms as
under his agreement.
Marc Eisenberg. In July 2006, we entered into
an employment agreement with Marc Eisenberg to serve as our
Chief Marketing Officer, effective as of June 1, 2006. The
employment agreement expires on December 31, 2008, unless
terminated earlier pursuant to the terms of the agreement. The
employment agreement may be extended by mutual agreement of the
parties. Upon the expiration of the agreements term, and
any extension thereof, Mr. Eisenberg will continue to be
employed on an at will basis.
Mr. Eisenbergs employment agreement provides for an
annual base salary of $315,000. In addition to his salary,
Mr. Eisenberg is entitled to certain employee benefits,
including medical and disability insurance, term life insurance,
paid holiday and vacation time and other employee benefits paid
by us. Mr. Eisenberg is eligible to receive a bonus,
payable in cash or cash equivalents, based on a percentage of
his base salary (ranging from 18% to 140%) dependent upon
achieving 90% to 133% of certain performance targets established
each year by the board of directors. No bonus will be paid
unless 90% of the applicable performance targets for that fiscal
year are met or exceeded. See Compensation of executive
officersSummary Compensation Table and
Grants of Plan-Based Awards for a discussion
of Mr. Eisenbergs 2006 bonus award. For fiscal 2007,
the performance targets will be based 35% on achievement of a
target EBITDA for fiscal 2006 and 65% on achievement of a target
net subscriber communicator additions during 2007.
Mr. Eisenberg will be entitled to participate in any profit
sharing
and/or
pension plan generally provided for our executives, and in any
equity option plan or restricted equity plan established by us
in which our senior executives are generally permitted to
participate.
In addition, under his employment agreement, we issued
Mr. Eisenberg awards consisting of 224,000 RSUs and 130,000
SARs. The RSUs will be payable only in shares of our common
stock. Upon the exercise of a SAR, we will deliver cash, shares
of our common stock valued at fair market value on the date of
exercise or a combination of cash and shares our common stock,
as the Compensation Committee may determine. The SARs will have
a base price equal to the fair market value on the date of grant
(the initial public offering price of our common stock for the
2006 grant). One half of the RSUs will vest in three equal
installments on January 1, 2007, January 1, 2008 and
December 31, 2008. The remaining RSUs and all the SARs will
vest in three equal installments in 2007, 2008 and 2009 on the
achievement of certain performance targets, for each of fiscal
2006, 2007 and 2008, established each year by the board of
directors or the Compensation Committee. See Compensation
of executive officersSummary Compensation Table and
Grants of Plan-Based Awards for a discussion
of Mr. Eisenbergs performance-based RSU and SAR
awards. For fiscal 2007, the performance targets will be the
same as for Mr. Eisenbergs annual bonus described
above.
107
Management
If Mr. Eisenbergs employment is terminated by us
without cause (as defined in his agreement) or by
Mr. Eisenberg due to a material change in his status,
title, position or scope of authority or responsibility during
the term of the agreement, or any extension thereof, he is
entitled to continue to receive his base salary and continued
health insurance coverage for one year immediately following
such termination. Mr. Eisenbergs post-termination
payments are conditioned on his executing a release in favor of
us. In addition, his employment agreement contains standard
covenants relating to confidentiality and assignment of
intellectual property rights, a two-year post-employment
non-solicitation covenant and a one-year post-employment
non-competition covenant. Upon a change of control
(as defined in his agreement), Mr. Eisenberg will be
entitled to the same post-employment payments as if his
employment were terminated by us without cause (as
described above), unless the successor or transferee company
continues his employment on substantially equivalent terms as
under his agreement; provided that if the change of
control transaction occurs having a value greater than
$6.045 per share (as adjusted for any stock dividends,
combinations or splits), Mr. Eisenberg will be entitled to
have all his RSU and SAR awards as of the date of such
change of control become fully vested and
exercisable (without regard to the satisfaction of any
time-based or performance criteria).
Emmett Hume. We have entered into an
employment agreement with Emmett Hume to serve as our Executive
Vice President, International, effective as of August 2,
2004. The initial term of the employment agreement is for three
years, expiring on August 1, 2007, unless terminated
earlier pursuant to the terms of the agreement. The employment
agreement may be extended by mutual agreement of the parties.
Upon the expiration of the employment agreements term, or
any extension thereof, Mr. Humes employment will
continue on an at will basis.
Mr. Humes employment agreement provides for an annual
base salary of $220,000 and eligibility for annual discretionary
bonuses and to participate in our employee benefit and
equity-based compensation plans. In addition, under his
agreement, we granted Mr. Hume options to purchase
83,333 shares of our common stock. If Mr. Hume is
terminated without cause or resigns for good
reason (each as defined in his agreement), he is entitled
to receive a severance payment equal to his base salary for the
greater of (1) the remainder of the agreements term
or (2) six months after the termination date, plus a
prorated bonus for the year in which the termination occurs.
Mr. Humes severance payments are conditioned on his
executing a release in favor of us. In addition, his agreement
contains standard covenants relating to confidentiality and
assignment of intellectual property rights, and one year
post-employment non-solicitation and non-competition covenants.
John J. Stolte, Jr. In August 2006, we
entered into an employment agreement with John J.
Stolte, Jr. to serve as our Executive Vice
PresidentTechnology and Operations, effective as of
June 1, 2006. The employment agreement expires on
December 31, 2008, unless terminated earlier pursuant to
the terms of the agreement. The employment agreement may be
extended by mutual agreement of the parties. Upon the expiration
of the agreements term, and any extension thereof,
Mr. Stolte will continue to be employed on an at
will basis.
Mr. Stoltes employment agreement provides for an
annual base salary of $225,000. In addition to his salary,
Mr. Stolte is entitled to certain employee benefits,
including medical and disability insurance, term life insurance,
paid holiday and vacation time and other employee benefits paid
by us. Mr. Stolte is eligible to receive a bonus, payable
in cash or cash equivalent, based on a percentage of his base
salary (ranging from 15% to 75%) dependent upon achieving 90% to
100% of certain performance targets established each year by the
board of directors or the Compensation Committee. No bonus will
be paid unless 90% of the applicable performance targets for
that fiscal year are met or exceeded. See Compensation of
executive officersSummary Compensation Table and
Grants of Plan-Based Awards for a discussion
of Mr. Stoltes 2006 bonus award. For fiscal 2007, the
performance targets will be based 12.5% on achievement of a
target adjusted EBITDA for fiscal 2007, 12.5% on
108
Management
achievement of a target net number of billable subscriber
communicators added to our communications system during 2007 and
75% on achievement of certain operational milestone targets in
2007; however, if a certain operational milestone target is not
achieved by the specified time, Mr. Stolte will only be
entitled to 80% of the bonus that would have otherwise been
earned by him. Mr. Stolte is entitled to participate in any
profit sharing
and/or
pension plan generally provided for our executives, and in any
equity option plan or restricted equity plan established by us
in which our senior executives are generally permitted to
participate.
In addition, under his employment agreement, we issued
Mr. Stolte 121,333 RSUs. The RSUs will be payable only in
shares of our common stock. One half of the RSUs will vest in
three equal installments on May 21, 2007, 2008 and 2009.
The remaining RSUs will vest as follows: 45,500 on May 21,
2007 and 15,167 on January 15, 2008, in each case subject
to the achievement of certain performance targets. For fiscal
2006, the performance targets were based on achieving certain
operational targets by specified dates. See Compensation
of executive officersSummary Compensation Table and
Grants of Plan-Based Awards for a discussion
of Mr. Stoltes performance-based RSU awards. The RSUs
will be subject to forfeiture if Mr. Stolte breaches the
one-year post-employment non-competition and non-solicitation
covenants under the RSU award agreement. If
Mr. Stoltes employment is terminated by reason of his
death or disability, or by us without cause (as
defined in his agreement) during the term of the agreement, or
any extension thereof, he or his estate is entitled to continue
to receive his then current base salary for one year immediately
following such termination. Mr. Stoltes
post-termination payments are conditioned on his executing a
release in favor of us. In addition, his agreement contains
standard covenants relating to confidentiality and assignment of
intellectual property rights, a two-year post-employment
non-solicitation covenant and a one-year post-employment
non-competition covenant. Upon a change of control
(as defined in his agreement), Mr. Stolte will be entitled
to the same post-employment payments as if his employment were
terminated by us without cause (as described above),
unless the successor or transferee company continues his
employment on substantially equivalent terms as under his
agreement; provided that if the change of control
transaction occurs having a value greater than $6.045 per
share (as adjusted for any stock dividends, combinations or
splits), Mr. Stolte will be entitled to have all his RSU
and SAR awards as of the date of such change of
control become fully vested and exercisable (without
regard to the satisfaction of any time-based or performance
criteria).
John P. Brady. We entered into an employment
agreement with John P. Brady, our former Executive Vice
PresidentFinance, dated as of May 5, 2006, and a
retention and separation agreement with Mr. Brady,
effective as of October 11, 2006, which amended and
superseded certain portions of the employment agreement. Under
the terms of the retention and separation agreement,
Mr. Brady continued his employment with us as Executive
Vice PresidentFinance and provided continued services for
our finance functions until December 31, 2006.
Under the terms of the retention and separation agreement,
Mr. Brady continued to receive his annual base salary of
$225,000 until December 31, 2006 and received the following
retention payments: continued payment of his base salary for six
months after his termination of employment (an aggregate of
$120,000, including payroll withholding tax) and eligibility to
receive a discretionary bonus for the 2006 fiscal year, as
determined in the sole discretion of the Compensation Committee,
payable at the same time as annual bonuses for the 2006 fiscal
year are paid to our other executive officers.
Mr. Bradys retention payments are conditioned on his
executing a release in favor of us. In addition, his agreements
contain standard covenants relating to confidentiality,
non-disparagement, cooperation and assignment of intellectual
property rights, a two year post-employment non-solicitation
covenant and a one year post-employment non-competition covenant.
109
Management
In addition, we issued Mr. Brady an award of 9,333 RSUs.
The RSUs will be payable only in shares of our common stock.
1,555 time-based RSUs vest on May 21, 2007 and 1,555
performance-based RSUs are expected to vest on May 21, 2007
on the achievement of certain performance targets, for fiscal
2006. For fiscal 2006, the performance targets were based 50% on
achievement of a target adjusted EBITDA for fiscal 2006 and 50%
on achievement of a target net subscriber communicator additions
during 2006. Upon Mr. Bradys termination of
employment on December 31, 2006, the remaining 6,222 RSUs
were cancelled.
Effective May 5, 2006, we amended Mr. Bradys
stock option agreement as follows: (i) options originally
granted as incentive stock options will be treated as
non-statutory stock options, (ii) all options that are not
already exercisable will vest immediately upon the occurrence
of: (1) his termination by us without cause, (2) his
death or disability, or (3) the natural expiration of the
Term, as defined in the employment agreement, and (iii) the
period of time in which Mr. Brady must exercise his vested
options following a termination of employment is extended until
the later of (1) December 31st of the calendar year in
which Mr. Bradys right to exercise the options would
have expired but for this extension and (2) the
15th day of the third month following the month in which
Mr. Bradys right to exercise the options would have
expired but for this extension.
Pursuant to the terms of Mr. Bradys agreement, he
received $120,000 (including payroll withholding tax) as a
post-employment payment and his options to purchase
83,334 shares of common stock became fully vested on
December 31, 2006 and may be exercised until
December 31, 2007.
INDEMNITY
AGREEMENTS
Each of our directors and executive officers has entered into an
indemnity agreement with us. See Certain relationships and
transactions with related personsIndemnity
Agreements.
STOCK OPTION AND
OTHER COMPENSATION PLANS
Securities
authorized for issuance under equity compensation
plans
The following table provides information, as of
December 31, 2006, about shares of our common stock that
may be issued upon the exercise or vesting of options, RSUs and
SARs granted to employees, consultants or directors under all of
our existing equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
Number of
|
|
|
|
|
|
Number of
securities
|
|
|
|
securities to
be
|
|
|
|
|
|
remaining
available for
|
|
|
|
issued upon
|
|
|
|
|
|
future issuance
under
|
|
|
|
exercise or
vesting
|
|
|
Weighted-average
|
|
|
equity
compensation
|
|
|
|
of outstanding
|
|
|
exercise price
|
|
|
plans
(excluding
|
|
|
|
options, RSUs
|
|
|
of outstanding
|
|
|
securities
reflected
|
|
Plan
Category
|
|
and
SARs
|
|
|
options and
SARs
|
|
|
in column
(a))
|
|
|
|
|
Equity compensation plans
approved by
stockholders(1)
|
|
|
2,432,214
|
(2)
|
|
$
|
3.97
|
(3)
|
|
|
3,690,413
|
(4)
|
Equity compensation plans not
approved by stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,432,214
|
(2)
|
|
$
|
3.97
|
(3)
|
|
|
3,690,413
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of the following equity compensation plans: the 2004
Stock Option Plan and the 2006 LTIP. |
|
(2) |
|
Consists of 1,464,420 shares subject to outstanding
stock options under the 2004 Stock Option Plan and
182,223 shares underlying outstanding time- and
performance-based SARs and 785,571 shares underlying
outstanding time- and performance-based RSUs granted under the
2006 LTIP. |
(footnotes continued on
following page)
110
Management
|
|
|
(3) |
|
Excludes 785,571 shares underlying outstanding time- and
performance-based RSUs which do not have an exercise price. |
|
(4) |
|
Consists of shares available for issuance under the 2006
LTIP, which includes the remaining 202,247 shares of common
stock available for issuance under the 2004 Stock Option Plan.
Also includes an aggregate of 231,111 shares underlying
performance-based SARs and 268,356 shares underlying
performance-based RSUs awarded in 2006 under the 2006 LTIP which
are subject to operational and performance targets for fiscal
2007 and 2008, which are not considered granted for accounting
purposes because the performance targets for fiscal 2007 and
2008 had not yet been established as of December 31,
2006. |
2004 Stock option
plan
The ORBCOMM Inc. 2004 stock option plan was adopted by our board
of directors and approved by our stockholders on
February 17, 2004. The plan permits grants to be made from
time to time as incentive stock options and non-statutory stock
options.
Share Reserve. A total of
1,666,667 shares of our common stock has been reserved for
issuance under the 2004 stock option plan. Following a qualified
initial public offering, options to purchase no more than
333,333 shares may be issued to any individual participant
in any calendar year. The shares issuable under the plan consist
of shares of authorized but unissued or reacquired common stock,
including shares repurchased by us in the open market.
Appropriate adjustments will be made to the number or kind of
shares or securities subject to the 2004 stock option plan and
available for or covered by the grants and share prices related
to outstanding grants in the event of an acquisition, spin-off
or reclassification, recapitalization or merger, combination or
exchange of shares or other corporate exchange, change of
control or similar event, or as required under any option
agreement.
Administration. The 2004 stock option plan is
administered by our compensation committee, or the board of
directors, if there is no compensation committee. Our committee
has the power and authority to administer, construe and
interpret the plan, to make rules for carrying it out and to
make changes to such rules. In order to meet the requirements of
Section 162(m) of the Internal Revenue Code of 1986 as
amended, or the Code, and the rules under Section 16 of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act, all grants under the 2004 stock option plan will be made by
a committee made up of members who are both outside
directors as defined for purposes of Section 162(m)
and regulations thereunder and nonemployee directors
as defined for purposes of Section 16 of the Exchange Act.
Grant of Awards. The option plan permits the
grant of incentive stock options to employees of ours or any
subsidiary of ours and non-statutory stock options to directors,
employees, independent contractors, and other persons having a
unique relationship with us or any of our affiliates. The
committee determines the option exercise price, the option price
and such other conditions and restrictions on the grant or
exercise of the option as the committee deems appropriate. The
terms, conditions and limitations of each grant under the plan
are set forth in an option agreement in a form which is approved
by the committee.
Stock Options. The board of directors or
compensation committee shall set the per share exercise price,
subject to the following rules:
|
|
Ø
|
an incentive stock option may not have an exercise price of less
than 100% of the fair market value of a share on the date the
option is granted;
|
|
Ø
|
if the aggregate fair market value of a share subject to
incentive stock option which is exercisable for the first time
during any calendar year exceeds $100,000, then the portion of
the incentive stock option in excess of the $100,000 limitation
will be treated as a non-statutory stock option; and
|
111
Management
|
|
Ø |
for any person owning more than 10% of the total combined voting
power of all classes of our stock or any subsidiary corporation
of ours then the: (i) exercise price of the option may not
be less than 110% of the fair market value of the common stock
on the date the option is granted, and (ii) such option may
not be exercisable after the expiration of five years from the
date the option is granted.
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Limitations and Conditions. An option granted
under the plan may not be exercised more than 10 years
after the date it is granted. Payment of the option exercise
price must be in cash, or in shares of our common stock that
have been held for at least six months or any combination of
cash and shares of our common stock in accordance with the terms
of the plan, the option agreement and any applicable guidelines
of the compensation committee. Participants do not have any of
the rights or privileges of, equityholders of ours in respect of
any shares of common stock which may be purchased upon exercise
of any grant unless and until certificates representing any such
shares have been issued by us to such participants. Each
participant entered into a stockholder agreement with us, in a
form provided by us, upon the exercise of any option under the
plan.
Amendment, Suspension or Termination. The
committee may amend, suspend or terminate the 2004 stock option
plan and may amend any terms and conditions applicable to
outstanding grants as are consistent with the Plan. However, no
such action shall be allowed which would increase the aggregate
number of shares available for grants under the plan, change the
eligible class of individuals, decrease the price of outstanding
options, change the requirements relating to the board of
directors or compensation committee or extend the term of the
plan if stockholder approval is required under the law, or
modify a grant in a manner adverse to the participant without
the participants consent except as such modification is
provided for or contemplated in the terms of the grant.
Change of Control. The committee may, in its
absolute discretion and on such terms and conditions as it deems
appropriate, provide, either by the terms of such option or by a
resolution adopted prior to the occurrence of the change of
control, that such option will be exercisable as to all or any
portion of the shares subject thereto.
Repurchase Rights. Under the terms of the
current forms of the option agreements, we have the right to
repurchase the shares acquired upon the exercise of options for
a period of three months after the participant ceases to be
director, an employee or an independent contractor or other
person with a unique relationship to us or any of our
affiliates, whichever applies, or three months after the shares
for which the option is exercise are acquired, whichever is
later. The purchase price per share payable is as follows:
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if the participant is terminated by us for cause, the amount
equal to the lesser of: (A) the fair market value of the
shares at the time of the termination of employment; and
(B) the exercise price;
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if the participant voluntarily terminates employment and such
termination occurs prior to the expiration of the holding period
for the shares acquired through the exercise of the option, the
amount equal to the lesser of: (A) the fair market value of
the shares at the time of the termination of employment; and
(B) the exercise price;
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if the participant voluntarily terminates employment and such
termination occurs after the expiration of the holding period
for the shares acquired through the exercise of the option, the
amount equal to the greater of: (A) the fair market value
of the shares at the time of the termination of employment; and
(B) the exercise price; and
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if the participants employment ceases for any other reason
(i.e., death, termination without cause or because the
participant is disabled) the amount equal to the greater of:
(A) the fair market value of the shares at the time of the
termination of employment; and (B) the exercise price.
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112
Management
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Transferability. Under the terms of the
current forms of the option agreements, awards under the 2004
stock option plan generally may not be assigned or transferred
other than by will or the laws of descent and distribution and
only the participant may exercise an award during his or her
lifetime.
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2006 Long-term
incentives plan
Our board of directors has adopted, and our stockholders
approved, our 2006 long-term incentives plan, or the 2006 LTIP.
The 2006 LTIP authorizes the delivery of a maximum of
4,658,207 shares of our common stock (subject to adjustment
and the other restrictions described below under
Shares Available). The 2006 LTIP permits
our Compensation Committee to grant awards from time to time as
stock options (which may be incentive stock options eligible for
special tax treatment or non-qualified stock options), stock
appreciation rights (which may be in conjunction with or
separate and apart from a grant of stock options), stock,
restricted stock, restricted stock units, performance units and
performance shares. Any of these types of awards (except stock
options or stock appreciation rights, which are deemed to be
performance based) may be granted as performance compensation
awards intended to qualify as performance based compensation for
purposes of Section 162(m) of the Code.
Purpose; Eligibility. The purpose of the 2006
LTIP is to promote the interests of our company and our
stockholders by providing incentive compensation opportunities
to assist in:
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attracting, motivating and retaining employees and non-employee
directors; and
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aligning the interests of our employees and non-employee
directors who participate in the 2006 LTIP with the interests of
our stockholders.
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The 2006 LTIP will remain in effect until all awards under the
2006 LTIP have been exercised or terminated under the terms of
the 2006 LTIP and applicable award agreements, provided that
awards under the 2006 LTIP may be granted only within ten years
from the 2006 LTIPs effective date.
Stock Options. A stock option is an option to
purchase a specific number of shares of our common stock
exercisable at such time or times, and subject to such terms and
conditions, as the Compensation Committee may determine
consistent with the terms of the 2006 LTIP, including the
following:
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The exercise price of an option will not be less than the fair
market value of our common stock on the date the option is
granted;
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No option may be exercisable more than ten years after the date
the option is granted;
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The exercise price of an option will be paid in cash or, at the
discretion of the Compensation Committee, in shares of our
common stock or in a combination of cash and our common stock;
and
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No fractional shares of our common stock will be issued or
accepted.
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Incentive stock options, which are options that comply with the
requirements of Section 422 of the Code, are subject to the
following additional provisions:
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The aggregate fair market value (determined at the time of
grant) of the shares of our common stock subject to incentive
stock options that are exercisable by one person for the first
time during a particular calendar year may not exceed the
maximum amount permitted under the Code (currently $100,000);
provided, however, that if the limitation is exceeded, the
incentive stock options in excess of such limitation will be
treated as non-qualified stock options;
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No incentive stock option may be granted under the 2006 LTIP
more than ten years after the effective date of the 2006 LTIP;
and
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No incentive stock option may be granted to any employee who on
the date of grant is not our employee or an employee of one of
our subsidiaries within the meaning of Code Section 424(f).
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Stock Appreciation Rights. A stock
appreciation right, or SAR, is the right to receive a payment
measured by the increase in the fair market value of a specified
number of shares of our common stock
113
Management
from the date of grant of the SAR to the date on which the
participant exercises the SAR. Under the 2006 LTIP, SARs may be
(1) freestanding SARs or (2) tandem SARs granted in
conjunction with an option, either at the time of grant of the
option or at a later date, and exercisable at the
participants election instead of all or any part of the
related option. The payment to which a participant is entitled
on exercise of a SAR may be in cash, shares of our common stock
valued at fair market value on the date of exercise or a
combination of cash and shares our common stock, as the
Compensation Committee may determine. SARs granted to certain of
our employees, including our executive officers, are subject to
forfeiture in the event such employees breach the
non-competition
and/or
non-solicitation covenants set forth in their award agreements.
Stock. Shares of common stock may be issued to
participants without any restrictions on transfer or other
vesting requirements.
Restricted Stock. Shares of restricted stock
are shares of our common stock that are issued to a participant
subject to restrictions on transfer and such other restrictions
on incidents of ownership as the Compensation Committee may
determine, which restrictions will lapse at such time or times,
or upon the occurrence of such event or events, including but
not limited to the achievement of one or more specific goals
with respect to our performance, the performance of a business
unit (which may but need not be a subsidiary) or the performance
of the participant over a specified period of time as the
Compensation Committee may determine. Subject to the specified
restrictions, the participant as owner of the shares of
restricted stock will have the rights of the holder thereof,
except that the Compensation Committee may provide at the time
of the award that any dividends or other distributions paid with
respect to the shares of restricted stock while subject to the
restrictions will be accumulated, with or without interest, or
reinvested in our common stock and held subject to the same
restrictions as the restricted stock and such other terms and
conditions as the Compensation Committee shall determine.
Restricted Stock Units. A restricted stock
unit, or RSU, is an award of a contractual right to receive at a
specified future date an amount based on the fair market value
of one share of our common stock, subject to such terms and
conditions as the Compensation Committee may establish. RSUs
that become payable in accordance with their terms and
conditions will be settled in cash, shares of our common stock,
or a combination of cash and our common stock, as determined by
the Compensation Committee. The Compensation Committee may
provide for the accumulation of dividend equivalents in cash,
with or without interest, or the reinvestment of dividend
equivalents in our common stock held subject to the same
conditions as the RSU and such terms and conditions as the
Compensation Committee may determine. No participant who holds
restricted stock units will have any ownership interest in the
shares of common stock to which such RSUs relate until and
unless payment with respect to such RSUs is actually made in
shares of common stock. RSUs awarded to certain of our
employees, including our executive officers, will be subject to
forfeiture in the event such employees breach their
non-competition
and/or
non-solicitation covenants set forth in their award agreements.
Performance Units. A performance unit is an
award denominated in cash, the amount of which may be based on
the achievement, over a specified period of time, of one or more
specific goals with respect to our performance, the performance
of a business unit (which may but need not be a subsidiary) or
the performance of a participant to whom the performance units
are granted. The annual amount that may be paid to any one
participant with respect to performance units will not exceed
$15 million per year. The payout of performance units may
be in cash, shares of our common stock valued at fair market
value on the payout date (or at the sole discretion of the
Compensation Committee, the day immediately preceding that
date), or a combination of cash and shares of our common stock,
as the Compensation Committee may determine.
Performance Shares. A performance share is an
award denominated in shares of our common stock, the amount of
which may be based on the achievement, over a specified period
of time, of one or more
114
Management
specific goals with respect to our performance, the performance
of a business unit (which may but need not be a subsidiary) or
the performance of a participant to whom the performance shares
are granted. The payout of performance shares may be in cash
based on the fair market value of our common stock on the payout
date (or at the sole discretion of the Compensation Committee,
the day immediately preceding that date), shares of our common
stock, or a combination of cash and shares of our common stock,
as the Compensation Committee may determine.
Performance Compensation Awards. The
Compensation Committee may designate any award (other than an
option or SAR) at the time of its grant as a performance
compensation award so that the award will constitute qualified
performance-based compensation under Code Section 162(m),
provided that no performance compensation award may be granted
to our leased employees or leased employees of our subsidiaries.
With respect to each performance compensation award, the
Compensation Committee will establish, in writing, a performance
period, performance measure(s), performance goal(s) and
performance formula(s) within 90 days after the beginning
of the performance period or such other period as may be
required by Code Section 162(m). Once established for a
performance period or such other period as may be required by
Code Section 162(m), such items may not be amended or
otherwise modified if and to the extent such amendment or
modification would cause the compensation payable pursuant to
the award to fail to constitute qualified performance-based
compensation under Code Section 162(m).
Awards to Non-Employee Directors. Each of our
non-employee directors may be granted from time to time an award
with terms and conditions, including restrictions, as determined
by our board of directors or by the Compensation Committee.
At such times as it may determine, our board of directors may
change (1) the form of any award to our non-employee
directors provided for in the 2006 LTIP to any other type of
award set forth in the 2006 LTIP and (2) the size and the
vesting period of any such award.
Deferrals. The Compensation Committee may
require or permit 2006 LTIP participants to defer the issuance
or vesting of shares of our common stock or the settlement of
awards under rules and procedures it may establish under the
2006 LTIP. The Compensation Committee may also provide that
deferred settlements include the payment of, or crediting of
interest on, the deferral amounts, or the payment or crediting
of dividend equivalents on deferred settlements in shares of our
common stock. No deferral will be permitted if it will result in
the 2006 LTIP becoming subject to the Employee Retirement Income
Security Act of 1974, as amended, or ERISA. Any deferral will
either be exempt under Code Section 409A or comply with
Code Section 409A.
Other Code Section 409A Provisions. The
award agreement for each award will set forth such terms and
conditions as are necessary to (a) satisfy the requirements
for exemption under Code Section 409A or (b) satisfy
the requirements of Code Section 409A.
Administration. The 2006 LTIP and all awards
under the 2006 LTIP will be administered by the Compensation
Committee, which will have full and complete authority, in its
sole and absolute discretion:
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to exercise all of the powers granted to it under the 2006 LTIP;
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to construe, interpret and implement the 2006 LTIP and any
related document;
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to prescribe, amend and rescind rules relating to the 2006 LTIP;
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to make all determinations necessary or advisable in
administering the 2006 LTIP; and
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to correct any defect, supply any omission and reconcile any
inconsistency in the 2006 LTIP.
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Any member of the Compensation Committee who, at the time of any
proposed grant of one or more awards, is not both an
outside director as defined for purposes of Code
Section 162(m) and a non-
115
Management
employee director as defined in
Rule 16b-3(b)(3)(i)
under the Exchange Act will abstain from and take no part in the
Compensation Committees action on the proposed grant.
It is our intent that the 2006 LTIP and awards under the 2006
LTIP satisfy, and be interpreted in a manner that satisfy,
(1) in the case of participants who are or may be our
executive officers or non-employee directors, the applicable
requirements of
Rule 16b-3
under the Exchange Act, so that such persons will be entitled to
the benefits of
Rule 16b-3,
or other exemptive rules under Section 16 of the Exchange
Act, and will not be subjected to avoidable liability under
Section 16(b) of the Exchange Act; (2) in the case of
performance compensation awards to covered employees, as defined
in the Code, the applicable requirements of Code
Section 162(m); and (3) either the requirements for
exemption under Code Section 409A or the requirements for
compliance with Code Section 409A.
The Compensation Committee may delegate, and revoke the
delegation of, all or any portion of its authority and powers
under the 2006 LTIP to our Chief Executive Officer, except that
the Compensation Committee may not delegate any discretionary
authority with respect to awards granted to our Chief Executive
Officer or non-employee directors or substantive decisions or
functions regarding the 2006 LTIP or awards to the extent they
are inconsistent with the intent expressed in the previous
paragraph or to the extent prohibited by applicable law.
Shares Available. Subject to adjustment
in the event of any change in or affecting shares of our common
stock, including but not limited to stock dividends, stock
splits and reorganizations, and the adjustment provisions
described under Adjustment Provisions, the
number of shares of our common stock which may be delivered upon
exercise of options or upon grant or in payment of other awards
under the 2006 LTIP will not exceed 4,658,207, which number
includes 185,459 shares of our common stock remaining
available for grants of awards under our 2004 stock option plan
as of March 31, 2006, plus 16,833 shares previously
subject to award under the 2004 stock option plan that were
forfeited during the nine months ended December 31, 2006.
Subject to the adjustment provisions discussed below under
Adjustment Provisions, no single 2006 LTIP
participant will receive annual awards of more than one million
stock options (measured by the number of shares of common stock
underlying such stock options), SARS (measured by the number of
shares of common stock underlying such SARS), shares of
restricted stock, RSUs, performance shares or any combination
thereof under the 2006 LTIP.
Award Agreements. Each award under the 2006
LTIP will be evidenced by an award agreement between us and the
participant setting forth the terms and conditions applicable to
the award, including but not limited to:
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provisions for the time at which the award becomes exercisable
or otherwise vests;
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provisions for the treatment of the award in the event of the
termination of a participants status as an employee;
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any special provisions applicable in the event of an occurrence
of a change of control of our company, as determined by the
Compensation Committee consistent with the provisions of the
2006 LTIP; and
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such additional provisions as are required to make the award
exempt under or comply with the Code.
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Rights as an Employee or Non-Employee
Director. Nothing contained in the 2006 LTIP or
in any award agreement confers upon any employee, non-employee
director or participant any right to continue in the employ or
other service of our company or any of our subsidiaries or
constitutes any contract or limits in any way our right or the
rights of our subsidiaries to change such persons
compensation or other benefits or to terminate the employment or
other service of such person with or without cause. If Code
Section 409A applies to an award, Code
Section 409As definition of separation
116
Management
of service will apply to determine when a participant
becomes entitled to payment upon termination of employment.
Rights as a Stockholder. A 2006 LTIP
participant will have no rights as a stockholder with respect to
any shares of common stock covered by an award until the date
the participant becomes a holder of record of such shares.
Except as described below under Adjustment
Provisions, no adjustment will be made for dividends or
other rights, unless the award agreement specifically requires
such adjustment.
Adjustment Provisions. In the event of any
change in or affecting the outstanding shares of our common
stock by reason of a stock dividend or split, merger or
consolidation (whether or not we are the surviving corporation),
recapitalization, reorganization, combination or exchange of
shares or other similar corporate changes or an extraordinary
dividend in cash, securities or other property, our board of
directors will make such amendments to the 2006 LTIP and
outstanding awards and award agreements and make such
adjustments and take actions thereunder as it deems appropriate,
in its sole discretion, under the circumstances. These
amendments, adjustments and actions may include, but are not
limited to, changes in the number of shares of our common stock
then remaining subject to the 2006 LTIP, and the maximum number
of shares that may be granted or delivered to any single
participant pursuant to the 2006 LTIP, including those that are
then covered by outstanding awards, or accelerating the vesting
of outstanding awards. In addition, to the extent that any
outstanding awards under our 2004 stock option plan as of
March 31, 2006 are cancelled, forfeited or otherwise lapse
unexercised pursuant to the terms of that plan, the shares
underlying those awards shall be available for awards under the
2006 LTIP.
Amendment and Termination. Our board of
directors may at any time amend, suspend or terminate the 2006
LTIP, in whole or in part, except that, without the approval of
our stockholders, no such action will (1) increase the
number of shares of our common stock available for awards
(except as described above under Adjustment
Provisions) or (2) materially increase the benefits
accruing to participants under the 2006 LTIP or otherwise make
any material revision to the 2006 LTIP, or otherwise be
effective to the extent that such approval is necessary to
comply with any tax or regulatory requirement applicable to the
2006 LTIP, including applicable requirements of Nasdaq, and,
except as described above under Adjustment
Provisions, no such action may impair the rights of any
holder of an award without the holders consent.
The Compensation Committee may at any time alter or amend any or
all award agreements to the extent permitted by the 2006 LTIP
and applicable law, provided that except as described above
under Adjustment Provisions, no such
alteration or amendment may impair the rights of any holder of
an award without the holders consent.
Neither our board of directors nor the Compensation Committee
may, except as described above under Adjustment
Provisions, amend the 2006 LTIP or any award agreement to
reprice any option or SAR whose exercise price is above the then
fair market value of our common stock subject to the award,
whether by decreasing the exercise price, canceling the award
and granting a substitute award, or otherwise.
Change of Control. The Compensation Committee
may determine at the time an award is granted that upon a change
of control of our company, any or all of the following may
occur: outstanding stock options and SARs may become vested and
exercisable; restrictions on restricted stock and RSUs may
lapse; performance goals may be deemed met and other terms and
conditions may be deemed met; performance shares may be
delivered; performance units and RSUs may be paid out as
promptly as practicable; and other awards may be delivered or
paid. The current forms of RSU and SAR award agreements provide
that if a change of control transaction occurs having a value
greater than $6.045 per share (as adjusted for any stock
dividends, combinations or splits), the holder of the award will
be entitled to have all his or her RSU or SAR awards, as the
case may be, as of the date of such change of control become
fully vested and exercisable (without regard to the satisfaction
of any time-based or performance criteria).
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Management
Retirement
plan
We maintain a 401(k) retirement plan intended to qualify under
Sections 401(a) and 401(k) of the Code. The 401(k) Plan is
a defined contribution plan that covers all our employees who
have been employed for three months or longer, beginning on the
date of employment. Employees may contribute up to 15% of their
eligible compensation (subject to certain limits) as pretax,
salary deferral contributions. We have the option of matching up
to 15% of 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 we may make an additional annual contribution.
Contributions made by us vest over a five-year period from the
employees date of employment. We have not made any
contributions since the inception of the plan.
118
Compensation
discussion and analysis
The following Compensation Discussion and Analysis describes
the material elements of compensation for our executive officers
identified in the Summary Compensation Table (our Named
Executive Officers).
COMPENSATION
COMMITTEE
Our Compensation Committee assists our board of directors in
fulfilling its responsibilities with respect to oversight and
determination of executive compensation and human resources
matters, including the compensation of the Named Executive
Officers. A description of the Compensation Committees
composition, functions, duties and responsibilities is set forth
in this prospectus under ManagementCommittees of the
Board of DirectorsCompensation Committee.
PHILOSOPHY AND
OBJECTIVES OF COMPENSATION PROGRAMS
Our executive compensation philosophy is to create a system that
rewards executives for performance and focuses our management
team on our critical short-term and long-term objectives. The
primary objectives of our executive compensation programs are to
attract, motivate and retain talented and dedicated executives,
to link annual and long-term cash and stock incentives to
achievement of specified performance objectives, and to align
executives incentives with stockholder value creation. To
achieve these objectives, the Compensation Committee has
implemented compensation programs that make a substantial
portion of the executives overall compensation contingent
upon achieving key short-term business and long-term strategic
goals established by our board of directors, such as the
expansion of our communications system, the establishment and
maintenance of key strategic relationships, and the growth of
our subscriber base as well as our financial and operational
performance, as measured by metrics such as adjusted EBITDA
(defined as EBITDA less stock-based compensation) and net number
of billable subscriber communicators added to our communications
system (net subscriber communicator additions). The Compensation
Committees goal is to set executive compensation at levels
the committee believes are competitive against compensation
offered by other rapidly growing companies of similar size and
stage of development against whom we compete for executive
talent in the communications industry, while taking into account
our performance and our own strategic goals.
We seek to provide executive compensation that is competitive in
order to attract, motivate and retain key talent, while also
rewarding executives for achieving goals designed to generate
returns for our stockholders, but not for poor performance, by
linking compensation to overall business performance and the
achievement of performance goals. As a result, we believe that
compensation packages provided to our executives, including our
Named Executive Officers, should include both cash and
stock-based compensation that reward performance as measured
against performance goals.
We have not retained a compensation consultant to review our
policies and procedures with respect to executive compensation,
and do not seek to set our executive compensation to any
specific benchmarks or peer group. Instead, we use general
competitive market data available to us relating to compensation
levels, mix of elements and compensation strategies being used
by companies of comparable size and stage of development
operating in the communications industry, and review such data
against the aggregate level of our executive compensation, as
well as the mix of elements used to compensate our executive
officers. In addition, we collected relevant market data with
respect to base salary, incentive bonus and equity award levels
from search firms that we engaged in connection with our search
for a new chief financial officer in 2006.
ELEMENTS OF
COMPENSATION
Base Salary. Base salaries are determined on
an individual basis, are based on job responsibilities and
individual contribution and are intended to provide our
executives with current income. Base salaries for our Named
Executive Officers are reviewed annually and may be adjusted to
reflect any changes in
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Compensation
discussion and analysis
job responsibilities and individual contribution, as well as
competitive conditions in the market for executive talent. Our
senior management proposes new base salary amounts to the
Compensation Committee for approval based on: an evaluation of
individual performance and expected future contributions; a goal
to ensure competitive compensation against the external market;
and comparison of the base salaries of the executive officers
who report directly to our Chief Executive Officer to ensure
internal equity.
For 2006, the base salaries of Messrs. J. Eisenberg,
Costantini, M. Eisenberg, Stolte, Hume and Brady were
established pursuant to employment agreements entered into by
the individual Named Executive Officer and us.
Annual Cash Bonus. The Compensation Committee
has the authority to grant discretionary annual cash bonuses to
employees. Annual cash bonuses are designed to align
employees goals with our financial and operational
objectives for the current year and to reward individual
performance. These objectives vary depending on the individual
employee, but relate generally to strategic factors such as
communications system expansion and operational improvements,
service implementation in new geographic areas and net
subscriber communicator additions, and to financial factors,
such as improving our results of operations, as measured by
adjusted EBITDA. These performance measures are primarily
objective criteria that can be readily measured and do not
require subjective determinations.
Messrs. Hume and Brady were the only Named Executive
Officers eligible to participate in our discretionary annual
cash bonus program, pursuant to which the board of directors or
the Compensation Committee annually designates a specified bonus
pool based on our performance for the fiscal year to be
available for cash bonuses to eligible employees in the
discretion of the Compensation Committee based on
recommendations of management and evaluations of individual
performance.
Pursuant to their employment agreements, each Named Executive
Officer (other than Messrs. Hume and Brady) is generally
eligible to receive annual bonuses, payable in cash or cash
equivalents, based on a percentage of base salary (which may, in
some cases, exceed 100%) and dependent upon achieving or
exceeding certain performance targets for that fiscal year.
Generally, bonuses are not earned unless 90% of the applicable
performance target is met for a given fiscal year and these
amounts increase more rapidly as actual performance exceeds
target levels. Certain 2006 annual bonuses were based on
achieving certain operational milestones by specified dates. For
2006, the annual bonus payable for each Named Executive Officer
was allocated with respect to specified performance targets as
set forth in the following table:
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Target
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Net subscriber
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Other
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adjusted
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communicator
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operational
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Name
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EBITDA
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additions
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milestones
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Jerome Eisenberg
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50%
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50%
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N/A
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Robert Costantini
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50%
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50%
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N/A
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Marc Eisenberg
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35%
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65%
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N/A
|
|
John Stolte
|
|
|
17%
|
|
|
|
17%
|
|
|
|
66%
|
|
We believe that our performance targets are established at
levels that are achievable if we meet our business plan. By
providing for significant incentives for exceeding those
targets, we motivate our Named Executive Officers to achieve
strategic business objectives that result in the creation of
value to us and our stockholders over the long-term.
Long-Term Equity-Based Incentives. In addition
to the short-term cash compensation payable to our Named
Executive Officers, our Compensation Committee believes that the
interests of our stockholders are best served when a substantial
portion of our Named Executive Officers compensation is
comprised of equity-based and other long-term incentives that
appreciate in value contingent upon increases in the
120
Compensation
discussion and analysis
share price of our common stock and other indicators that
reflect improvements in business fundamentals. Therefore, it is
our Compensation Committees intention to make grants of
equity-based awards to our Named Executive Officers and other
key employees at such times and in such amounts as may be
required to accomplish the objectives of our compensation
programs. See Compensation of executive
officersGrants of Plan-Based Awards, for more
information regarding the grants of equity-based awards to our
Named Executive Officers in fiscal 2006. We have not timed
grants of equity-based awards in coordination with the release
of non-public information nor have we timed the release of
non-public information for the purpose of affecting the value of
executive compensation.
Under the 2006 LTIP, the Compensation Committee has the ability
to provide a number of equity-based awards, including restricted
stock units (RSUs), stock appreciation rights
(SARs), stock options, stock, restricted stock,
performance units and performance shares to promote our
long-term growth and profitability. Following adoption of the
2006 LTIP, we ceased to grant additional stock options under the
2004 Stock Option Plan. The 2004 Stock Option Plan will continue
to govern all stock option awards granted under the 2004 Stock
Option Plan prior to the adoption of the 2006 LTIP. Since
adopting the 2006 LTIP, we have changed the mix of our
equity-based incentives from stock options to a mix of RSUs and
SARs. This combination of equity-based incentives is intended to
benefit stockholders by enabling us to better attract and retain
top talent in a marketplace where such incentives are prevalent.
We believe that awards of RSUs and SARs provide an effective
vehicle for promoting a long-term share ownership perspective
for our senior management and employees and closely align the
interests of senior management and employees with our
achievement of longer-term financial objectives that enhance
stockholder value, while at the same time limiting the dilutive
effects of such equity-based awards relative to our prior
practice of granting stock options. We have not adopted stock
ownership guidelines, and, other than with respect to Jerome
Eisenberg, our stock compensation plans have provided the
principal method for our executive officers to acquire equity or
equity-based interests in us.
RSUs. A restricted stock unit, or RSU,
is a contractual right to receive at a specified future vesting
date an amount in respect of each RSU based on the fair market
value on such date of one share of our common stock, subject to
such terms and conditions as the Compensation Committee may
establish. RSUs that become payable in accordance with their
terms and conditions will be settled in cash, shares of our
common stock, or a combination of cash and our common stock, as
determined by the Compensation Committee. The Compensation
Committee has determined that all currently outstanding RSUs
will be settled in shares of common stock. The Compensation
Committee may provide for the accumulation of dividend
equivalents in cash, with or without interest, or the
reinvestment of dividend equivalents in our common stock held
subject to the same conditions as the RSU and such terms and
conditions as the Compensation Committee may determine. No
participant who holds RSUs will have any ownership interest in
the shares of common stock to which such RSUs relate until and
unless payment with respect to such RSUs is actually made in
shares of common stock. Vested and unvested RSUs awarded to
certain of our employees, including our Named Executive
Officers, will be subject to forfeiture in the event such
employees breach their non-competition
and/or
non-solicitation covenants set forth in their award agreements
and unvested RSUs are subject to cancellation if, prior to
vesting, such employees ceased to be employed by us for any
reason.
Time-based RSUs typically vest in three equal installments based
on continued employment over a three-year period.
Performance-based RSUs typically vest in three equal
installments over a three-year period based upon the achievement
of specific corporate and individual performance targets that we
believe are important to our long-term success, including
adjusted EBITDA targets, net subscriber communicator additions
on our network, government approvals with respect to our
communications network, and strategic factors such as
communications system expansion and operational improvements.
The Compensation Committee, on the recommendation of management,
linked target
121
Compensation
discussion and analysis
performance levels to these measures, as we believe that each of
them is an important factor in our revenue growth and for
sustaining our business model. The performance-based RSU awards
are generally structured to have a three-year vesting period
beginning in 2006, and to be subject to a percentage reduction
in the event that the performance targets are not attained.
Certain performance-based RSUs cliff vest upon achieving certain
operational milestones by specified dates. We believe that the
vesting periods in connection with these time-based and
performance-based awards are appropriate for the following
reasons:
|
|
Ø
|
they are intended to help retain employees, including
executives, by rewarding them for extended, continuous service
with us;
|
|
Ø
|
they are time periods that incentivize and focus executives on
the long-term performance of our business over reasonable
timeframes, while minimizing the potential that longer vesting
periods might dilute the motivation of the executives; and
|
|
Ø
|
they allow the Compensation Committee to formulate performance
targets annually that are aligned with our dynamic business
plans and external industry factors.
|
In 2006, Messrs. J. Eisenberg, Costantini, M. Eisenberg,
Hume, Stolte and Brady were granted time-based RSUs and
performance-based RSUs under the 2006 LTIP in the amounts set
forth in Compensation of executive officersGrants of
Plan-Based Awards. In general, RSUs granted to each of our
Named Executive Officers were divided evenly: 50% as time-based
RSUs and 50% as performance-based RSUs. We believe that this
allocation strikes the proper balance between the retention and
incentive objectives of these long-term equity awards. Each of
the performance targets with respect to awards of RSUs to J.
Eisenberg, Costantini, M. Eisenberg and Stolte were the same as
those for their annual cash bonuses. Mr. Humes
performance target with respect to his awards of RSUs was based
on achievement of a certain operational target by a specified
date. Mr. Bradys performance targets with respect to
his awards of RSUs were based 50% on achievement of a target
adjusted EBITDA for fiscal 2006 and 50% on achievement of a
target net additions of billable subscriber communicators during
2006.
SARs. A stock appreciation right, or
SAR, is the right to receive a payment measured by the increase
in the fair market value of a specified number of shares of our
common stock from the date of grant of the SAR to the date on
which the participant exercises the SAR. Under the 2006 LTIP,
SARs may be (1) freestanding SARs or (2) tandem SARs
granted in conjunction with an option, either at the time of
grant of the option or at a later date, and exercisable at the
participants election instead of all or any part of the
related option. Upon the exercise of a SAR, we will deliver
cash, shares of our common stock valued at fair market value on
the date of exercise or a combination of cash and shares our
common stock, as the Compensation Committee may determine.
Vested and unvested SARs granted to certain of our employees,
including our Named Executive Officers, are subject to
forfeiture in the event such employees breach the
non-competition
and/or
non-solicitation covenants set forth in their award agreements
and unvested SARs are subject to cancellation if, prior to
vesting, such employees ceased to be employed by us for any
reason.
Time-based SARs and performance-based SARs typically vest in the
same manner as time-based RSUs and performance-based RSUs. In
2006, Mr. Costantini was granted time-based SARs and
Messrs. J. Eisenberg, Costantini and M. Eisenberg were
granted performance-based SARs under the 2006 LTIP in the
amounts set forth in Compensation of executive
officersGrants of Plan-Based Awards. The performance
targets with respect to awards of performance-based SARs to
Messrs. J. Eisenberg, Costantini and M. Eisenberg were the
same as those for their performance-based RSU awards and annual
cash bonuses.
Stock Options. We may grant stock
options exercisable at such time or times, and subject to such
terms and conditions, as the Compensation Committee may
determine consistent with the terms of the
122
Compensation
discussion and analysis
2006 LTIP. The exercise price of such stock options will be
equal to or higher than the fair market value of our common
stock on the date of grant.
Our 2004 Stock Option Plan authorized us to grant options to
purchase common stock to our employees, directors and
consultants. Stock option grants were made at the commencement
of employment or to meet other special retention or performance
objectives. The Compensation Committee reviewed and approved
stock option awards to executive officers, including Named
Executive Officers, based upon its assessment of individual
performance, a review of each executives existing
long-term incentives, and retention considerations. Periodic
stock option grants were made at the discretion of the
Compensation Committee to eligible employee and, in appropriate
circumstances, the Compensation Committee considered the
recommendations of members of management, such as our Chief
Executive Officer. In 2004, certain Named Executive Officers
were awarded stock options reflected in the Compensation
of executive officersOutstanding Equity Awards at Fiscal
Year-End in connection with a merit-based grant to a large
number of employees intended to encourage an ownership culture
among our employees. Stock options granted by us typically vest
25% per annum based upon continued employment over a
four-year period, and generally expire ten years after the date
of grant. Incentive stock options also include certain other
terms necessary to assure compliance with the Code.
We may also grant RSUs or SARs to executives under special
circumstances outside of the annual process. Grants under the
2006 LTIP are made from time to time to selected executives in
connection with talent management objectives, giving particular
attention to employees leadership potential and potential
future contributions in achieving critical business goals and
objectives. For example, on February 27, 2007, our
Compensation Committee approved grants of 3,000 and 8,000
time-based RSUs which vest on January 1, 2008 to each of
Messrs. J. Eisenberg and M. Eisenberg, respectively, in
recognition of their contributions towards achievement of our
operating and financial goals in 2006.
We may also grant RSUs and SARs, as deemed appropriate by the
Compensation Committee, in new-hire situations. As part of his
employment agreement, Mr. Costantini was granted RSUs and
SARs as set forth in Compensation of executive
officersGrants of Plan-Based Awards.
PERSONAL
BENEFITS
Our Named Executive Officers participate in a variety of
retirement, health and welfare, and vacation benefits designed
to enable us to attract and retain our workforce in a
competitive marketplace. Health and welfare and vacation
benefits help ensure that we have a productive and focused
workforce through reliable and competitive health and other
benefits.
PERQUISITES
Our Named Executive Officers are provided a limited number of
perquisites whose primary purpose is to minimize distractions
from the executives attention to our business. An item is
not a perquisite if it is integrally and directly related to the
performance of the executives duties. An item is a
perquisite if it confers a direct or indirect benefit that has a
personal aspect, without regard to whether it may be provided
for some business reason or for our convenience, unless it is
generally available on a non-discriminatory basis to all
employees.
The principal perquisites offered to our Named Executive
Officers are car allowances and life insurance premiums. Please
see Compensation of executive officersSummary
Compensation Table for more information on perquisites and
other personal benefits we provide to our Named Executive
Officers.
123
Compensation
discussion and analysis
401(k)
PLAN
We maintain a 401(k) retirement plan intended to qualify under
Sections 401(a) and 401(k) of the Code. The 401(k) Plan is
a defined contribution plan that covers all our employees who
have been employed for three months or longer, beginning on the
date of employment. Employees may contribute up to 15% of their
eligible compensation (subject to certain limits) as pretax,
salary deferral contributions. We have the option of matching up
to 15% of 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 we may make an additional annual contribution.
Contributions made by us vest over a five-year period from the
employees date of employment. We have not made any
contributions since the inception of the plan.
SEVERANCE AND
CHANGE IN CONTROL BENEFITS
Severance and change in control benefits are designed to
facilitate our ability to attract and retain executives as we
compete for talented employees in a marketplace where such
protections are commonly offered. The severance and change in
control benefits found in the Named Executive Officers
employment agreements are designed to encourage employees to
remain focused on our business in the event of rumored or actual
fundamental corporate changes. These benefits include continued
base salary payments and health insurance coverage (typically
for a one-year period), acceleration of the vesting of
outstanding equity-based awards, such as options, RSUs and SARs
(without regard to the satisfaction of any time-based
requirements or performance criteria), and extension of
post-termination exercise periods for options and SARs
(typically for 30 to 90 days).
Termination Provisions. Our employment
agreements with the Named Executive Officers provide severance
payments and other benefits in an amount we believe is
appropriate, taking into account the time it is expected to take
a separated employee to find another job. The payments and other
benefits are provided because we consider a separation to be a
Company-initiated termination of employment that under different
circumstances would not have occurred and which is beyond the
control of a separated employee. Separation benefits are
intended to ease the consequences to an employee of an
unexpected termination of employment. We benefit by requiring a
general release from separated employees. In addition, we have
included post-termination non-compete and non-solicitation
covenants in certain individual employment agreements.
We consider it likely that it will take more time for
higher-level employees to find new employment, and therefore
senior management generally is paid severance for a longer
period. Additional payments may be permitted in some
circumstances as a result of individual negotiations with
executives, especially where we desire particular
nondisparagement, cooperation with litigation, noncompetition
and nonsolicitation terms. See the descriptions of the
individual employment agreements with the Named Executive
Officers under ManagementEmployment Agreements
for additional information.
Change of control provisions. Under the
2004 Stock Option Plan and the 2006 LTIP and the award
agreements under those plans, our stock options, RSUs and SARs
generally vest upon a change of control, whether or not time
vesting requirements or performance targets have been achieved.
Under the employment agreements with our Named Executive
Officers, other change of control benefits generally require a
change of control, followed by a termination of or change in an
executives employment. In adopting the so-called
single trigger treatment for equity-based awards, we
were guided by a number principles: being consistent with
current market practice among communications company peers; and
keeping employees relatively whole for a reasonable period but
avoid creating a windfall. Single trigger vesting
ensures that ongoing employees are treated the same as
terminated employees with respect to outstanding equity-based
grants. Single trigger vesting provides employees with the same
opportunities as stockholders, who are free to sell their equity
at the time of the change in control event
124
Compensation
discussion and analysis
and thereby realize the value created at the time of the change
of control transaction. The company that made the original
equity grant will no longer exist after a change of control and
employees should not be required to have the fate of their
outstanding equity tied to the new companys future
success. Single trigger vesting on performance-contingent
equity, in particular, is appropriate given the difficulty of
replicating the underlying performance goals.
TAX AND
ACCOUNTING IMPLICATIONS
Deductibility of
Executive Compensation
Section 162(m) of the Code limits our tax deductions
relating to the compensation paid to Named Executive Officers,
unless the compensation is performance-based and the material
terms of the applicable performance goals are disclosed to and
approved by our stockholders. All of our equity-based
compensation plans have received stockholder approval and, to
the extent applicable, were prepared with the intention that our
incentive compensation would qualify as performance-based
compensation under Section 162(m). While we intend to
continue to rely on performance-based compensation programs, we
recognize the need for flexibility in making executive
compensation decisions, based on the relevant facts and
circumstances, so that we achieve our best interests and the
best interests of our stockholders. To the extent consistent
with this goal and to help us manage our compensation costs, we
attempt to satisfy the requirements of Section 162(m) with
respect to those elements of our compensation programs that are
performance-based.
Accounting for
Stock-Based Compensation
Beginning January 1, 2006, we adopted Statement of
Financial Accounting Standards (SFAS) No. 123 (Revised
2004), Share-Based Payments
(SFAS 123(R)), and began measuring and
recording stock-based compensation expense in our financial
statements based on the estimated fair value of share-based
awards.
Certain Awards
Deferring or Accelerating the Receipt of Compensation
Section 409A of the Code, enacted as part of the American
Jobs Creation Act of 2004, imposes certain new requirements
applicable to nonqualified deferred compensation
plans. If a nonqualified deferred compensation plan
subject to Section 409A fails to meet, or is not operated
in accordance with, these new requirements, then all
compensation deferred under the plan may become immediately
taxable. We intend that awards granted under the 2006 LTIP will
comply with the requirements of Section 409A and intends to
administer and interpret the 2006 LTIP in such a manner.
ROLE OF
EXECUTIVES AND OTHERS IN ESTABLISHING COMPENSATION
Our Chairman and Chief Executive Officer, Jerome Eisenberg,
annually reviews the performance of the Named Executive Officers
(other than his own and that of Marc Eisenberg, which are
reviewed by the Compensation Committee), and meets on a
case-by-case
basis with each of the other Named Executive Officers to reach
agreements with respect to salary adjustments and annual award
amounts, which are then presented to the Compensation Committee
for approval. The Compensation Committee can exercise discretion
in modifying any recommended adjustments or awards to
executives. Messrs. J. Eisenberg and M. Eisenberg
each attended meetings of the Compensation Committee in 2006.
The
day-to-day
design and administration of benefits, including health and
vacation plans and policies applicable to salaried employees in
general are handled by our Finance and Legal Departments. Our
Compensation Committee (or board of directors) remains
responsible for certain fundamental changes outside the
day-to-day
requirements necessary to maintain these plans and policies.
125
Compensation
discussion and analysis
CONCLUSION
We believe the current design of our executive compensation
programs, utilizing a mix of base salary, annual cash bonus and
long-term equity-based incentives properly motivates our
management team to perform and produce strong returns for us and
our stockholders. Further, although the current compensation
programs have been in place for less than a year, in the view of
the board of directors and the Compensation Committee, the
overall compensation amounts earned by the Named Executive
Officers under our compensation programs for fiscal 2006 reflect
our performance during the period and appropriately reward the
Named Executive Officers for their efforts and achievements
relative to the performance targets, consistent with our
compensation philosophy and objectives.
126
Compensation of
executive officers
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
incentive plan
|
|
|
All other
|
|
|
|
|
Name and
|
|
|
|
|
Salary
|
|
|
Bonus(1)
|
|
|
awards(2)
|
|
|
awards(3)
|
|
|
compensation(4)
|
|
|
compensation(5)
|
|
|
Total
|
|
principal
position(s)
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
|
|
Jerome B. Eisenberg
|
|
|
2006
|
|
|
$
|
335,771
|
|
|
$
|
|
|
|
$
|
786,560
|
|
|
$
|
133,456
|
|
|
$
|
263,233
|
|
|
$
|
20,362
|
|
|
$
|
1,539,382
|
|
Chairman of the
Board and Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert G. Costantini
|
|
|
2006
|
|
|
|
67,500
|
|
|
|
|
|
|
|
64,315
|
|
|
|
178,115
|
|
|
|
59,479
|
|
|
|
2,506
|
|
|
|
371,915
|
|
Executive Vice
President and Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marc Eisenberg
|
|
|
2006
|
|
|
|
294,167
|
|
|
|
|
|
|
|
581,676
|
|
|
|
113,480
|
|
|
|
214,527
|
|
|
|
19,304
|
|
|
|
1,223,154
|
|
Chief Operating
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emmett Hume
|
|
|
2006
|
|
|
|
220,000
|
|
|
|
10,000
|
|
|
|
13,529
|
|
|
|
23,667
|
|
|
|
|
|
|
|
9,628
|
|
|
|
276,824
|
|
Executive Vice
President, International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John J.
Stolte, Jr.
|
|
|
2006
|
|
|
|
212,500
|
|
|
|
|
|
|
|
344,196
|
|
|
|
6,983
|
|
|
|
107,782
|
|
|
|
639
|
|
|
|
672,100
|
|
Executive Vice
PresidentTechnology
and Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John P. Brady
|
|
|
2006
|
|
|
|
225,000
|
|
|
|
|
|
|
|
24,576
|
|
|
|
59,166
|
|
|
|
|
|
|
|
121,832
|
|
|
|
430,574
|
|
Former Executive
Vice President,
Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts set forth in the Bonus column
represent discretionary annual cash bonus payments.
Messrs. Hume and Brady were the only Named Executive
Officer eligible to participate in the annual discretionary cash
bonus pool with respect to fiscal 2006. |
|
(2) |
|
The amounts set forth in the Stock Awards column
represent the compensation costs for financial statement
purposes recognized in 2006 relating to time-based and
performance-based RSU awards that were granted in 2006 in
accordance with Statement of Financial Accounting Standards No.
123 (Revised 2004), Share-Based Payment,
(SFAS 123(R)). For a discussion of the
assumptions used to calculate the value of the amounts in the
Stock Awards column see Note 4 to consolidated
financial statements for the year ended December 31, 2006
included in this prospectus. See the Grants of Plan-Based Awards
Table and Compensation discussion and
analysisElements of CompensationLong-Term
Equity-Based Incentives for a further discussion regarding
RSU awards in 2006 and the Outstanding Equity Awards at Fiscal
Year-End Table for a further discussion regarding outstanding
RSU awards. |
|
(3) |
|
The amounts set forth in the Options Awards
column represent the compensation costs for financial statement
purposes recognized in 2006 in accordance with SFAS 123(R)
relating to option awards granted in 2004 and time- and
performance-based SAR awards granted in 2006. The assumptions
used to calculate the value of the amounts in the Options
Awards column are described in Note 4 to consolidated
financial statements for the year ended December 31, 2006
included in this prospectus. See the Grants of Plan-Based Awards
Table and Compensation discussion and
analysisElements of CompensationLong-Term
Equity-Based Incentives for a further discussion regarding
SAR awards in 2006 and the Outstanding Equity Awards at Fiscal
Year-End Table for a further discussion regarding outstanding
SAR awards. |
(footnotes continued on
following page)
127
Compensation of
executive officers
|
|
|
(4) |
|
The amounts set forth in the Non-Equity Incentive Plan
Compensation column represent the annual incentive bonus
paid to Messrs. J. Eisenberg, Costantini, M. Eisenberg and
Stolte under the terms of their respective employment
agreements. See the Grants of Plan-Based Awards Table for a
further discussion regarding the annual incentive payments. |
|
(5) |
|
The amounts set forth in the All Other
Compensation column are comprised of the following for
each Named Executive Officer: |
Perquisites and Personal Benefits: $13,200 for
automobile allowance and $7,162 for payment of life insurance
premiums.
Perquisites and Personal Benefits: $2,400 for
automobile allowance and $106 for payment of life insurance
premiums.
Perquisites and Personal Benefits: $9,350 for
automobile allowance, $9,060 for reimbursement for legal
services and $894 for payment of life insurance premiums.
Perquisites and Personal Benefits: $639 for
payment of life insurance premiums.
Perquisites and Personal Benefits: $1,832 for
payment of life insurance premiums.
Post-Termination Payments: $120,000 for a
post-employment payment (including payroll withholding taxes)
paid pursuant to the terms of Mr. Bradys employment
agreement with us in connection with his termination of
employment with us effective December 31, 2006.
128
Compensation of
executive officers
Grants of
Plan-Based Awards
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All other
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All other
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stock
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option
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awards:
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awards:
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Grant date
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Estimated future
payouts under
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number of
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number of
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Exercise or
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fair value
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Estimated
possible payouts under
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equity incentive
plan
awards(2)(3)
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shares of
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securities
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base price
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of stock
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non-equity
incentive plan
awards(1)
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Target/
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stock
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underlying
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of option
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and option
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Threshold
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Target
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Maximum
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Threshold
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Maximum
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or units
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options
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awards
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awards(4)
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Name
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Grant
date
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Award
type
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($)
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($)
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($)
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(#)
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(#)
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(#)
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(#)
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($/Sh)
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($)
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Jerome B. Eisenberg
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10/5/2006
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Annual incentive
(Adjusted EBITDA)
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$
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31,950
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$
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142,000
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$
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248,500
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$
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$
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|
|
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10/5/2006
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Annual incentive
(Net subscriber additions)
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31,950
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142,000
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248,500
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10/5/2006
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Time-based RSUs
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149,334
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(6)
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1,642,674
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10/5/2006
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Performance-based RSUs (Adjusted
EBITDA)
|
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8,711
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24,889
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273,779
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10/5/2006
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Performance-based RSUs
(Net subscriber additions)
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|
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8,711
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24,889
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273,779
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11/3/2006*
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Performance-based SARs (Adjusted
EBITDA)
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8,750
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25,000
|
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11.00
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129,500
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11/3/2006*
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Performance-based SARs
(Net subscriber additions)
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8,750
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25,000
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11.00
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129,500
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Robert G. Costantini
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10/5/2006
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Annual incentive
(Adjusted EBITDA)(5)
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6,058
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26,924
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33,657
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|
|
|
|
|
|
10/5/2006
|
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Annual incentive
(Net subscriber
additions)(5)
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6,058
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26,924
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33,657
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10/5/2006
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Time-based RSUs
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11,667
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(6)
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128,337
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|
|
10/5/2006
|
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Performance-based RSUs (Adjusted
EBITDA)
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|
|
|
|
|
|
|
|
|
|
|
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680
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|
|
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1,944
|
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|
|
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|
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21,384
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10/5/2006
|
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Performance-based RSUs
(Net subscriber additions)
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|
|
|
|
|
|
|
|
|
|
|
|
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681
|
|
|
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1,945
|
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|
|
|
|
|
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|
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21,395
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|
|
|
|
11/3/2006*
|
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Time-based SARs
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|
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|
|
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|
|
|
|
|
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|
|
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66,667
|
(7)
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|
11.00
|
|
|
|
360,668
|
|
|
|
|
11/3/2006*
|
|
|
Performance-based SARs (Adjusted
EBITDA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,889
|
|
|
|
11,111
|
|
|
|
|
|
|
|
|
|
|
|
11.00
|
|
|
|
57,555
|
|
|
|
|
11/3/2006*
|
|
|
Performance-based SARs
(Net subscriber additions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,889
|
|
|
|
11,111
|
|
|
|
|
|
|
|
|
|
|
|
11.00
|
|
|
|
57,555
|
|
Marc Eisenberg
|
|
|
10/5/2006
|
|
|
Annual incentive
(Adjusted EBITDA)
|
|
|
19,845
|
|
|
|
88,200
|
|
|
|
154,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/5/2006
|
|
|
Annual incentive
(Net subscriber additions)
|
|
|
36,855
|
|
|
|
163,800
|
|
|
|
286,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/5/2006
|
|
|
Time-based RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,000
|
(6)
|
|
|
|
|
|
|
|
|
|
|
1,232,000
|
|
|
|
|
10/5/2006
|
|
|
Performance-based RSUs (Adjusted
EBITDA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,574
|
|
|
|
13,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,737
|
|
|
|
|
10/5/2006
|
|
|
Performance-based RSUs
(Net subscriber additions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,494
|
|
|
|
24,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266,926
|
|
|
|
|
11/3/2006*
|
|
|
Performance-based SARs (Adjusted
EBITDA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,308
|
|
|
|
15,166
|
|
|
|
|
|
|
|
|
|
|
|
11.00
|
|
|
|
78,560
|
|
|
|
|
11/3/2006*
|
|
|
Performance-based SARs
(Net subscriber additions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,858
|
|
|
|
28,166
|
|
|
|
|
|
|
|
|
|
|
|
11.00
|
|
|
|
145,900
|
|
Emmett Hume
|
|
|
10/5/2006
|
|
|
Performance-based RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,074
|
|
|
|
|
10/5/2006
|
|
|
Time-based RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,734
|
(6)
|
|
|
|
|
|
|
|
|
|
|
41,074
|
|
John J.
Stolte, Jr.
|
|
|
10/5/2006
|
|
|
Annual incentive
(Adjusted EBITDA)
|
|
|
16,875
|
|
|
|
28,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/5/2006
|
|
|
Annual incentive
(Net subscriber additions)
|
|
|
16,875
|
|
|
|
28,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/5/2006
|
|
|
Annual incentive
(certain operational target #1)
|
|
|
|
|
|
|
56,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/5/2006
|
|
|
Annual incentive
(certain operational target #2)
|
|
|
|
|
|
|
56,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/5/2006
|
|
|
Time-based RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,667
|
(6)
|
|
|
|
|
|
|
|
|
|
|
667,337
|
|
|
|
|
10/5/2006
|
|
|
Performance-based RSUs (certain
operational target #1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
333,663
|
|
|
|
|
10/5/2006
|
|
|
Performance-based RSUs (certain
operational target #2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,837
|
|
|
|
|
10/5/2006
|
|
|
Performance-based RSUs (certain
operational target #3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,837
|
|
John P. Brady
|
|
|
10/5/2006
|
|
|
Time-based RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,555
|
(6)
|
|
|
|
|
|
|
|
|
|
|
13,715
|
|
(former executive)
|
|
|
10/5/2006
|
|
|
Performance-based RSUs (Adjusted
EBITDA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,862
|
|
|
|
|
10/5/2006
|
|
|
Performance-based RSUs
(Net subscriber additions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,862
|
|
(footnotes on following
page)
129
Compensation of
executive officers
|
|
|
* |
|
Our Compensation Committee approved and issued these SARs on
10/5/2006. |
|
(1) |
|
The amounts shown represent annual incentive payments payable
to Messrs. J. Eisenberg, Costantini, M. Eisenberg and
Stolte pursuant to employment agreements with us. See
ManagementEmployment Agreements for a summary
of the employment agreements. The actual annual incentive
payment amount paid to each of these Named Executive Officers
for fiscal 2006 is shown in the Summary Compensation Table under
the Non-Equity Incentive Plan Compensation column.
For 2006, the incentive payment is a percentage of the
executives 2006 base salary, determined based on the
achievement of our specified financial and operational
performance targets for fiscal 2006. The amount shown in the
Target column represents the target annual incentive
payment for each eligible Named Executive Officer if the
performance targets are achieved at the 100% level. For 2006,
the percentages of base salary payable as annual incentives if
the performance targets are achieved at the 100% level were as
follows: 80% for Messrs. J. Eisenberg, Costantini and M.
Eisenberg and 75% for Mr. Stolte. The amount shown in the
Maximum column represents the maximum amount payable
for each eligible Named Executive Officer if the performance
targets are achieved above the 100% level. For 2006, the maximum
percentages of base salary payable as annual compensation were
as follows: 140% for Messrs. J. Eisenberg and M. Eisenberg
if the performance targets are achieved at or above the 133%
level; and 100% for Mr. Costantini if the performance
targets are achieved at or above the 125% level. The amount
shown in the Threshold column represents the amount
payable for each eligible Named Executive Officer if the
performance targets are achieved at the 90% level, the minimum
performance required for any annual incentive payment to be
made. For 2006, the threshold percentages of base salary payable
as annual compensation were as follows: 18% for Messrs. J.
Eisenberg, Costantini and M. Eisenberg and 15% for
Mr. Stolte, if certain operational and performance targets
have been achieved. For 2006, neither Mr. Brady, whose
employment with us terminated on December 31, 2006, nor
Mr. Hume was eligible for any annual incentive payment
pursuant to the terms of their employment agreements, but were
eligible to participate in our discretionary annual cash bonus
program, which is described in Note 1 to the Summary
Compensation Table. Please see Compensation discussion and
analysisElements of CompensationAnnual Cash
Bonus for further a discussion regarding our annual cash
incentive payment programs. |
|
(2) |
|
On October 5, 2006, performance-based RSU awards and
performance-based SAR awards were issued under the 2006 LTIP
relating to the achievement of specified operational and
financial performance targets for fiscal 2006, 2007 and 2008.
Each RSU award represents the right to receive one share of our
common stock for each vested RSU and each SAR award represents
the right to receive, upon exercise of the SAR, the value
(payable in cash, stock or a combination of cash and stock at
our discretion) of the increase in the fair market value of a
specified number of shares of our common stock on the date of
exercise over the fair market value on the date of grant of the
SAR (the base price). The base price of
$11.00 per share of each SAR was equal to the price of our
common stock sold in our initial public offering in November
2006. See the Outstanding Equity Awards at Fiscal Year-End Table
and the related footnotes for additional information regarding
these RSU and SAR awards. |
|
|
|
The performance-based RSUs and SARs vest upon achievement of
various operational and financial performance targets
established for each of fiscal 2006, 2007 and 2008 and continued
employment through dates that our Compensation Committee has
determined the performance targets have been achieved. The
operational and financial performance targets for fiscal 2006
and certain operational performance targets for fiscal 2007 were
established in October 2006. Accordingly, the performance-based
RSUs and SARs that relate to those performance targets are
considered granted on that date for accounting purposes and are
shown in the table above. Operational and financial performance
targets for fiscal 2007 were established in February 2007 and
the performance-based RSUs and SARS that relate to these
performance targets are considered |
(footnotes continued on
following page)
130
Compensation of
executive officers
|
|
|
|
|
granted on that date for accounting purposes and are not
included in the table above. Operational and financial
performance targets for fiscal 2008 will be established by the
Compensation Committee by February 2008 and the
performance-based RSUs and SARs that relate to these performance
targets are not considered granted for accounting purposes and
are not included in the table above. The performance-based RSU
and SAR awards that relate to fiscal 2007 and 2008 performance
targets will be included in the fiscal years in which they are
considered granted for accounting purposes. |
|
|
|
The amounts of performance-based RSUs and SARs shown in the
table above represent those performance-based RSUs and SARs for
which performance targets for fiscal 2006 and, for grants to
Messrs. Stolte and Hume, certain operational performance
targets for fiscal 2007 were established in fiscal 2006. An
aggregate of 99,556, 7,778 and 74,667 performance-based RSUs and
100,000, 44,444 and 86,668 performance-based SARs granted to
Messrs. J. Eisenberg, Costantini and M. Eisenberg,
respectively, relate to fiscal 2007 and 2008 performance targets
that have not yet been established by our Compensation Committee
and are not considered granted for accounting purposes. |
|
(3) |
|
The amounts shown in the Target/Maximum column
represent the target and maximum number of performance-based
RSUs or SARs which will vest under these awards if the
performance targets are achieved at or above the 100% level. The
amounts shown in the Threshold column represent the
minimum number of performance-based RSUs or SARs that will vest
under each award if the minimum level of performance is achieved
at the 90% level. For Messrs. J. Eisenberg, Costantini, M.
Eisenberg and Brady the minimum number represents 35% of the
target number of performance-based RSUs or SARs shown under the
Target column. For Messrs. Stolte and Hume, no
performance-based RSUs will vest unless the target performance
is achieved. See Compensation discussion and
analysisElements of CompensationLong-Term
Equity-Based Incentives for a further discussion regarding
performance-based RSU and SAR awards. |
|
(4) |
|
The amounts shown in the Grant Date Fair Value of Stock
and Option Awards column represent the full grant date
fair value of the awards. The grant date fair value of the
time-and performance-based RSUs shown in the table was
determined to be $11.00 per share, the price of our common
stock sold in our initial public offering in November 2006. The
grant date fair value of the time- and performance-based SARs
shown in the table were estimated to be $5.41 and $5.18 per
share, respectively. For a discussion of valuation assumptions,
see Note 4 to consolidated financial statements for the
year ended December 31, 2006 included in this
prospectus. |
|
(5) |
|
The amounts shown have been pro rated to reflect
Mr. Costantinis period of employment with the Company
in 2006. |
|
(6) |
|
On October 5, 2006, time-based RSU awards were granted
to each of the Named Executive Officers under the 2006 LTIP.
These time-based RSUs vest in three equal installments, subject
to continuing employment, on January 1, 2007, 2008 and 2009
(except Mr. Stolte, whose time-based RSUs vest on
May 21, 2007, 2008 and 2009, and Mr. Brady, whose
time-based RSUs vest on May 21, 2007). See
Compensation discussion and analysisElements of
CompensationLong-Term Equity-Based Incentives for a
further discussion regarding time-based RSU awards. See the
Outstanding Equity Awards at Fiscal Year-End Table and the
related footnotes for additional information regarding these RSU
awards. |
|
(7) |
|
On October 5, 2006, time-based SAR awards were granted
to Mr. Costantini under the 2006 LTIP. The base price of
$11.00 per share of each SAR was equal to the price of our
common stock sold in our initial public offering in November
2006. These time-based SARs vest in three equal installments,
subject to continuing employment, on January 1, 2007, 2008
and 2009. See Compensation discussion and
analysisElements of CompensationLong-Term
Equity-Based Incentives for further a discussion regarding
time-based SAR awards. See the Outstanding Equity Awards at
Fiscal Year-End Table and the related footnotes for additional
information regarding these SAR awards. |
131
Compensation of
executive officers
Outstanding
Equity Awards at Fiscal Year-End
|
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Option
awards
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Stock
awards
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Equity
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incentive
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Equity
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plan awards:
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Equity
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incentive
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market
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incentive
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plan awards:
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or payout
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plan awards:
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number
|
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value of
|
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Number of
|
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Number of
|
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|
number of
|
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Market value
|
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of unearned
|
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unearned
|
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securities
|
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|
securities
|
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|
securities
|
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Number of
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of shares
|
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shares, units
|
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shares,
|
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|
underlying
|
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underlying
|
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underlying
|
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shares or
units
|
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or units
|
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or other
|
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units or
|
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|
unexercised
|
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|
unexercised
|
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unexercised
|
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Option
|
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of stock
|
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of stock
|
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rights that
|
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other rights
|
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options
|
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options
|
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unearned
|
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exercise
|
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Option
|
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that have
|
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that have
|
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have not
|
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that have
|
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(#)
|
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(#)
|
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options
|
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price
|
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expiration
|
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not vested
|
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|
not vested
|
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vested
|
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|
not vested
|
|
Name
|
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Exercisable
|
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Unexercisable
|
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|
(#)
|
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|
($)
|
|
|
date
|
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|
(#)
|
|
|
($)(1)
|
|
|
(#)
|
|
|
($)(1)
|
|
|
|
|
Jerome B. Eisenberg
|
|
|
166,667
|
|
|
|
|
|
|
|
|
|
|
$
|
2.33
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
33,334
|
|
|
|
|
|
|
|
|
|
|
|
2.33
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,334
|
|
|
|
|
|
|
|
|
|
|
|
2.78
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,334
|
|
|
|
|
|
|
|
|
|
|
|
3.38
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
8,334
|
(2)
|
|
|
|
|
|
|
4.26
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
(3)
|
|
|
11.00
|
|
|
|
10/5/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
(4)
|
|
|
11.00
|
|
|
|
10/5/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,334
|
(5)
|
|
|
1,317,126
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,889
|
(6)
|
|
|
219,521
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,889
|
(7)
|
|
|
219,521
|
(7)
|
Robert G. Costantini
|
|
|
|
|
|
|
|
|
|
|
11,111
|
(3)
|
|
|
11.00
|
|
|
|
10/5/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,111
|
(4)
|
|
|
11.00
|
|
|
|
10/5/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,667
|
(8)
|
|
|
|
|
|
|
11.00
|
|
|
|
10/5/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,667
|
(5)
|
|
|
102,903
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,944
|
(6)
|
|
|
17,146
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,944
|
(7)
|
|
|
17,146
|
(7)
|
Marc Eisenberg
|
|
|
166,667
|
|
|
|
|
|
|
|
|
|
|
|
2.33
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,334
|
|
|
|
|
|
|
|
|
|
|
|
2.33
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,334
|
|
|
|
|
|
|
|
|
|
|
|
2.78
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,334
|
|
|
|
|
|
|
|
|
|
|
|
3.38
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
8,334
|
(2)
|
|
|
|
|
|
|
4.26
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,166
|
(3)
|
|
|
11.00
|
|
|
|
10/5/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,167
|
(4)
|
|
|
11.00
|
|
|
|
10/5/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,000
|
(5)
|
|
|
987,840
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,067
|
(6)
|
|
|
115,251
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,266
|
(7)
|
|
|
214,026
|
(7)
|
Emmett Hume
|
|
|
54,169
|
|
|
|
29,165
|
(9)
|
|
|
|
|
|
|
4.26
|
|
|
|
12/3/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,734
|
(5)
|
|
|
32,934
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,734
|
(10)
|
|
|
32,934
|
(10)
|
John J.
Stolte, Jr.
|
|
|
11,667
|
|
|
|
|
|
|
|
|
|
|
|
2.33
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,667
|
|
|
|
|
|
|
|
|
|
|
|
2.78
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,334
|
|
|
|
|
|
|
|
|
|
|
|
3.38
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
3,334
|
(2)
|
|
|
|
|
|
|
4.26
|
|
|
|
2/17/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,667
|
(11)
|
|
|
535,083
|
(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,333
|
(12)
|
|
|
267,537
|
(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,167
|
(12)
|
|
|
133,773
|
(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,167
|
(13)
|
|
|
133,773
|
(13)
|
John P. Brady
|
|
|
83,334
|
|
|
|
|
|
|
|
|
|
|
|
4.26
|
|
|
|
12/31/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(former executive)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
778
|
(14)
|
|
|
6,862
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
778
|
(15)
|
|
|
6,862
|
(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,555
|
(16)
|
|
|
13,715
|
(16)
|
|
|
|
|
|
|
|
|
(footnotes on following
page)
132
Compensation of
executive officers
|
|
|
(1) |
|
Based on the $8.82 per share closing price of our common
stock on December 29, 2006, the last trading day in
2006. |
|
(2) |
|
Option awards that vest in quarterly installments through
December 31, 2007. |
|
(3) |
|
Performance-based SAR awards that have a base price equal to
$11.00 per share, the fair market value of our common stock
on the grant date, and vest in April 2007 dependent on achieving
performance relative to fiscal 2006 target adjusted EBITDA. See
Note 2 to the Grants of Plan-Based Awards Table for a
discussion of performance-based SAR and RSU awards that are
issued but not deemed granted for accounting purposes, which are
not included in this table. |
|
(4) |
|
Performance-based SAR awards that have a base price equal to
$11.00 per share, the fair market value of our common stock
on the grant date, and vest in April 2007 dependent on achieving
performance relative to the fiscal 2006 target number of net
subscriber communicator additions during fiscal 2006. See
Note 2 to the Grants of Plan-Based Awards Table for a
discussion of performance-based SAR awards that are issued but
not deemed granted for accounting purposes, which are not
included in this table. |
|
(5) |
|
Time-based RSU awards that vest in three equal installments
on January 1, 2007, 2008 and 2009. On January 1, 2007,
one-third of these time-based RSU awards vested. |
|
(6) |
|
Performance-based RSU awards that vest in April 2007 based on
achieving performance relative to fiscal 2006 target adjusted
EBITDA. See Note 2 to the Grants of Plan-Based Awards Table
for a discussion of performance-based RSU awards that are issued
but not deemed granted for accounting purposes, which are not
included in this table. |
|
(7) |
|
Performance-based RSU awards that vest in April 2007 based on
achieving performance relative to the fiscal 2006 target number
of net subscriber communicator additions during fiscal 2006.
See Note 2 to the Grants of Plan-Based Awards Table
for a discussion of performance-based RSU awards that are issued
but not deemed granted for accounting purposes, which are not
included in this table. |
|
(8) |
|
Time-based SAR awards that have a base price equal to
$11.00 per share, the fair market value of our common stock
on the grant date, and vest in three equal installments on
January 1, 2007, 2008 and 2009. On January 1, 2007,
one-third of these time-based SARs vested. |
|
(9) |
|
Option awards that vest in quarterly installments through
September 30, 2008. |
|
(10) |
|
Performance-based RSU awards that vest in April 2007 based on
satisfaction of a specified operational target. |
|
(11) |
|
Time-based RSU awards that vest in three equal installments
on May 21, 2007, 2008 and 2009. |
|
(12) |
|
Performance-based RSU awards that vest on May 21, 2007
based on satisfaction of specified operational targets for
fiscal 2006. |
|
(13) |
|
Performance-based RSU awards that vest on January 15,
2008 based on satisfaction of a specified operational target for
fiscal 2007. |
|
(14) |
|
Performance-based RSU awards that vest in on May 21,
2007 based on achieving performance relative to fiscal 2006
target adjusted EBITDA. See Note 2 to the Grants of
Plan-Based Awards Table for a discussion of performance-based
RSU awards that are issued but not deemed granted for accounting
purposes, which are not included in this table. |
|
(15) |
|
Performance-based RSU awards that vest on May 21, 2007
based on achieving performance relative to the fiscal 2006
target number of net subscriber communicator additions during
fiscal 2006. See Note 2 to the Grants of Plan-Based Awards
Table for a discussion of performance-based RSU awards that are
issued but not deemed granted for accounting purposes, which are
not included in this table. |
|
(16) |
|
Time-based RSU awards that vest on May 21, 2007. |
133
Compensation of
executive officers
POTENTIAL SERVICE
PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
The following tables reflect the amount of compensation payable
to each Named Executive Officer in the event of termination of
such executives employment or upon a change of control
based on the applicable provisions of the Named Executive
Officers employment agreement, stock option award
agreements, RSU award agreements and SAR award agreements. The
amount of compensation payable to each Named Executive Officer
upon voluntary termination, termination without cause, change of
control, disability or death is shown below for Messrs. J.
Eisenberg, Costantini, M. Eisenberg, Stolte, Hume and Brady. All
severance payments to the Named Executive Officers are
conditioned on the execution of a release discharging us of any
claims or liabilities in relation to the Named Executive
Officers employment with us.
Change of control
triggers
For the purposes of the severance payments, change of
control means:
|
|
Ø
|
our merger or consolidation with another corporation or entity;
|
|
Ø
|
our transfer of all or substantially all of our assets to
another person, corporation, or other entity; or
|
|
Ø
|
a sale of our stock in a single transaction or series of related
transactions that results in the holders of the outstanding
voting power of our securities immediately prior to such
transaction or series of transactions owning less than a
majority of the outstanding voting securities for the election
of directors of the surviving company or entity immediately
following such transaction or series of transactions (other than
any registered, underwritten public offering by us of our stock
or pursuant to any stock-based compensation plan).
|
For purposes of the stock option awards, a change of
control means the purchase or other acquisition by any
person, entity or group of persons, within the meaning of
Section 13(d) or 14(d) of the Exchange Act, or any
comparable successor provisions, of:
|
|
Ø
|
ownership of more than 50% or more of the combined voting power
of our then outstanding voting securities entitled to vote
generally; or
|
|
Ø
|
all or substantially all of our direct and indirect assets and
our subsidiaries, other than by a person, firm, entity or group,
which together with its affiliates, prior to such purchase or
other acquisition, owned at least 50% of our outstanding common
equity.
|
For purposes of the RSU awards and SAR awards, change of
control means a change in control event that
meets the requirements of Section 409A of the Code, as
amended from time to time, including any proposed and final
regulations and other guidance issued thereunder by the
Department of the Treasury
and/or the
Internal Revenue Service.
Post-termination
covenants
The RSU awards and SAR awards are subject to a non-competition
provision restricting the Named Executive Officers
employment with a competitor for six months following
termination. The RSU awards and SAR awards are also subject to a
non-solicitation provision restricting the Named Executive
Officer from soliciting certain business or the recruiting
certain of our employees for one year following termination. If
we determine that the Named Executive Officer violated these
provisions of the RSU award or SAR award, the Named Executive
Officer will forfeit all rights to any RSUs or SARs under the
awards and will have to return to us the value of any RSUs or
SARs we awarded to the Named Executive Officer. The Named
Executive Officers are also subject to post-termination
non-competition,
134
Compensation of
executive officers
non-solicitation and confidentiality provisions in their
employment agreements. See ManagementEmployment
Agreements.
Jerome B.
Eisenberg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary
|
|
|
Termination
|
|
|
|
|
|
|
|
Executive
payments
|
|
termination
with
|
|
|
without
|
|
|
For cause
|
|
|
Change in
|
|
upon
termination
|
|
good
reason
|
|
|
cause
|
|
|
termination
|
|
|
control(1)
|
|
|
|
|
Severance
paymentsTermination as Chairman and
CEO(2)
|
|
$
|
643,284
|
|
|
$
|
643,284
|
|
|
$
|
|
|
|
$
|
643,284
|
|
Severance
paymentsTermination as
CEO(3)
|
|
|
488,284
|
|
|
|
488,284
|
|
|
|
|
|
|
|
488,284
|
|
Severance
paymentsTermination as
Chairman(4)
|
|
|
|
|
|
|
710,000
|
|
|
|
|
|
|
|
155,000
|
|
Stock options (unvested and
accelerated)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,333
|
|
Time-based RSUs (unvested and
accelerated)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,317,126
|
|
Performance-based RSUs (unvested
and
accelerated)(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,317,126
|
|
Performance-based SARs (unvested
and
accelerated)(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Assumes an effective date of a change of control on
December 31, 2006. |
|
(2) |
|
Severance PaymentTermination as Chairman and
CEO: Under the terms of his employment agreement, in
the event Mr. Eisenbergs employment is involuntarily
terminated without cause by us, he voluntarily terminates his
employment as our Chief Executive Officer and Chairman of the
Board with good reason or his employment is not continued on
substantially equivalent economic terms, duties and
responsibilities following a change of control, he will be
entitled to one year of his base salary in effect at the time of
such termination payable in regular installments consistent with
our payroll practices. He is also entitled to continued health
insurance coverage for one year immediately following such
termination at then existing employee contribution rates,
representing a benefit valued at $4,284 at December 31,
2006. Mr. Eisenberg is also entitled to receive a pro rata
portion of his target bonus for the fiscal year in which such
termination occurs, estimated here to be $284,000. |
|
(3) |
|
Severance PaymentsTermination as CEO: Under
the terms of his employment agreement, in the event
Mr. Eisenbergs employment as Chief Executive Officer
is terminated by us without cause, he voluntarily terminates his
employment as our Chief Executive Officer with good reason or
his employment is not continued on substantially equivalent
economic terms, duties and responsibilities following a change
of control, but in either case continues to serve as our
Chairman of the Board, he will be entitled to severance payments
for a period of one year immediately following such termination
payable in regular installments consistent with our payroll
practices equal to the difference between (a) his annual
base salary at the time of such termination and (b) his
annual compensation of $155,000 while serving only as our
Chairman of the Board. He is also entitled to continued health
insurance coverage for one year immediately following such
termination at then existing employee contribution rates,
representing a benefit valued at $4,284 at December 31,
2006. Mr. Eisenberg is also entitled to receive a pro rata
portion of his target bonus for the fiscal year in which such
termination occurs, estimated here to be $284,000. |
(footnotes continued on
following page)
135
Compensation of
executive officers
|
|
|
(4) |
|
Severance PaymentsTermination as
Chairman: Under his employment agreement, in the
event Mr. Eisenbergs employment as our Chairman of
the Board is terminated by us without cause or his employment is
not continued on substantially equivalent economic terms, duties
and responsibilities following a change of control, he will be
entitled to continue to receive his then base salary at the time
of such termination for the period equal to the greater of
(a) one year immediately following such termination and
(b) the remainder of the term of his employment agreement,
payable in regular installments consistent with our payroll
practices; provided, however that if Mr. Eisenberg has
already received any severance payments pursuant to his
employment agreement, the amounts received would be offset on a
dollar for dollar basis, pursuant to this severance payment. |
|
(5) |
|
Stock Options (unvested and accelerated): Under
his employment agreement and the applicable award agreement, in
the event of a change of control having a value in excess of
$6.045 per share, he will be entitled to immediate vesting
on all unvested stock options. As of December 31, 2006,
Mr. Eisenberg had 8,333 and 16,667 unvested stock options
with exercise prices of $3.38 and $4.26 per share,
respectively. |
|
(6) |
|
Time-Based RSUs: Under his employment agreement
and the applicable award agreement, in the event of a change of
control having a value in excess of $6.045 per share,
Mr. Eisenberg will be entitled to immediate vesting on all
unvested time-based RSU awards. As of December 31, 2006, he
had 149,334 unvested time-based RSUs with a value based on the
closing price of our common stock of $8.82 per share as of
December 29, 2006, the last trading day of 2006. |
|
(7) |
|
Performance-Based RSUs: Under his employment
agreement and the applicable award agreement, in the event of a
change of control having a value in excess of $6.045 per
share, Mr. Eisenberg will be entitled to immediate vesting
on all unvested performance-based RSU awards, without regard to
the achievement of applicable performance targets. As of
December 31, 2006, he had 149,334 unvested
performance-based RSUs with a value based on the closing price
of our common stock of $8.82 per share as of
December 29, 2006, the last trading day of 2006. These
performance-based RSUs consist of 49,778 performance-based RSUs
that are considered granted for accounting purposes as they
relate to fiscal 2006 operational and performance targets that
have been established by the board of directors or the
Compensation Committee, which vest in April 2007 and 99,556
performance-based RSUS related to performance targets for fiscal
2007 and 2008 that were not considered granted for accounting
purposes as neither board of directors nor the Compensation
Committee had established performance targets for fiscal 2007
and 2008 as of December 31, 2006. The operational and
performance targets for fiscal 2007 were established in February
2007. |
|
(8) |
|
Performance-Based SARs: Under his employment
agreement and the applicable award agreement, in the event of a
change of control having a value in excess of $6.045 per
share, Mr. Eisenberg will be entitled to immediate vesting
on all unvested performance-based SAR awards, without regard to
the achievement of applicable performance targets. As of
December 31, 2006, he had 150,000 unvested
performance-based SAR awards. These performance-based SAR awards
consist of 50,000 performance-based SARs that are considered
granted for accounting purposes as they relate to fiscal 2006
performance targets that have been established by the board of
directors or the Compensation Committee and 100,000
performance-based SARs related to performance targets for fiscal
2007 and 2008 that were not considered granted for accounting
purposes as neither the board of directors nor the Compensation
Committee had established operational and performance targets
for fiscal 2007 and 2008 as of December 31, 2006. The
operational and performance targets for fiscal 2007 were
established in April 2007. The potential amounts earned by
Mr. Eisenberg as a result of the immediate vesting of these
performance-based SAR awards following a change of control are
not shown in the table as the closing price of our common stock
of $8.82 per share as of December 29, 2006, the last
trading day of 2006, was lower than the SAR base price of
$11.00 per share. |
136
Compensation of
executive officers
Robert
Costantini
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
Executive
payments
|
|
Voluntary
|
|
|
without
|
|
|
For cause
|
|
|
Change in
|
|
upon
termination
|
|
termination
|
|
|
cause
|
|
|
termination
|
|
|
control(1)
|
|
|
|
|
Severance
payments(2)
|
|
$
|
|
|
|
$
|
275,686
|
|
|
$
|
|
|
|
$
|
275,686
|
|
Time-based RSUs (unvested and
accelerated)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,903
|
|
Time-based SARs (unvested and
accelerated)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-based RSUs (unvested
and
accelerated)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,903
|
|
Performance-based SARs (unvested
and
accelerated)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Assumes an effective date of a change of control on
December 31, 2006. |
|
(2) |
|
Severance Payments: Under the terms of his
employment agreement, in the event Mr. Costantinis
employment is involuntarily terminated without cause by us or if
his employment is not continued on substantially equivalent
terms following a change of control, he will be entitled to one
year of his base salary in effect at the time of such
termination payable in regular installments consistent with our
payroll practices. He is also entitled to continued health
insurance coverage for one year immediately following such
termination at then existing employee contribution rates,
representing a benefit valued at $5,686 at December 31,
2006. |
|
(3) |
|
Time-Based RSUs: Under his employment agreement
and the applicable award agreement, in the event of a change of
control having a value in excess of $6.045 per share,
Mr. Costantini will be entitled to immediate vesting on all
unvested time-based RSU awards. As of December 31, 2006, he
had 11,667 unvested time-based RSUs with a value based on the
closing price of our common stock of $8.82 per share as of
December 29, 2006, the last trading day of 2006. |
|
(4) |
|
Time-Based SARs: Under his employment agreement
and the applicable award agreement, in the event of a change of
control having a value in excess of $6.045 per share,
Mr. Costantini will be entitled to immediate vesting on all
unvested time-based SAR awards. As of December 31, 2006, he
had 66,667 unvested time-based SARs. The potential amounts
earned by Mr. Costantini as a result of the immediate
vesting of these time-based SAR awards following a change of
control are not shown in the table as the closing price of our
common stock of $8.82 per share as of December 29,
2006, the last trading day of 2006, was lower than the SAR base
price of $11.00 per share. |
|
(5) |
|
Performance-Based RSUs: Under his employment
agreement and the applicable award agreement, in the event of a
change of control having a value in excess of $6.045 per
share, Mr. Costantini will be entitled to immediate vesting
on all unvested performance-based RSU awards, without regard to
the achievement of applicable performance targets. As of
December 31, 2006, he had 11,667 unvested performance-based
RSUs with a value based on the closing price of our common stock
of $8.82 per share as of December 29, 2006, the last
trading day of 2006. These performance-based RSUs consist of
3,888 performance-based RSUs that are considered granted for
accounting purposes as they relate to fiscal 2006 performance
targets that have been established by the board of directors or
the Compensation Committee, which vest in April 2007 and 7,779
performance-based RSUs related to performance targets for fiscal
2007 and 2008 that were not considered granted for accounting
purposes as neither the board of directors nor the Compensation
Committee had established performance targets for fiscal 2007
and 2008 as of December 31, 2006. The performance targets
for 2007 were established in February 2007. |
(footnotes continued on
following page)
137
Compensation of
executive officers
|
|
|
(6) |
|
Performance-Based SARs: Under his employment
agreement and the applicable award agreement, in the event of a
change of control having a value in excess of $6.045 per
share, Mr. Costantini will be entitled to immediate vesting
on all unvested performance-based SAR awards, without regard to
the achievement of applicable performance targets. As of
December 31, 2006, he had 66,667 unvested performance-based
SAR awards. These performance-based SAR awards consist of 22,222
performance-based SARs that are considered granted for
accounting purposes as they relate to fiscal 2006 performance
targets that have been established by the board of directors or
the Compensation Committee and 44,445 performance-based SARs
related to performance targets for fiscal 2007 and 2008 that
were not considered granted for accounting purposes as neither
the board of directors nor the Compensation Committee had
established performance targets for fiscal 2007 and 2008 as of
December 31, 2006. The performance targets for 2007 were
established in February 2007. The potential amounts earned by
Mr. Costantini as a result of the immediate vesting of
these performance-based SAR awards following a change of control
are not shown in the table as the closing price of our common
stock of $8.82 per share as of December 29, 2006, the
last trading day of 2006, was lower than the SAR base price of
$11.00 per share. |
Marc
Eisenberg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary
|
|
|
Termination
|
|
|
|
|
|
|
|
Executive
payments
|
|
termination
with
|
|
|
without
|
|
|
For cause
|
|
|
Change in
|
|
upon
termination
|
|
good
reason
|
|
|
cause
|
|
|
termination
|
|
|
control(1)
|
|
|
|
|
Severance
payments(2)
|
|
$
|
321,096
|
|
|
$
|
321,096
|
|
|
$
|
|
|
|
$
|
321,096
|
|
Stock options (unvested and
accelerated)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,333
|
|
Time-based RSUs (unvested and
accelerated)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
987,840
|
|
Performance-based RSUs (unvested
and
accelerated)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
987,840
|
|
Performance-based SARs (unvested
and
accelerated)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Assumes an effective date of a change of control on
December 31, 2006. |
|
(2) |
|
Severance Payments: Under the terms of his
employment agreement, in the event Mr. Eisenbergs
employment is involuntarily terminated without cause by us or he
voluntarily terminates his employment due to a change in
material status or if his employment is not continued on
substantially equivalent economic terms following a change of
control, he will be entitled to one year of his base salary in
effect at the time of such termination payable in regular
installments consistent with our payroll practices. He is also
entitled to continued health insurance coverage for one year
immediately following such termination at then existing employee
contribution rates, representing a benefit valued at $6,096 at
December 31, 2006. In the event Mr. Eisenbergs
employment is involuntarily terminated by us due to a change of
control, he will be entitled to the same severance payments and
health insurance coverage as described above. |
|
(3) |
|
Stock Options (unvested and accelerated): Under
his employment agreement and the applicable award agreement, in
the event of a change of control having a value in excess of
$6.045 per share, Mr. Eisenberg will be entitled to
immediate vesting on all unvested stock options. As of
December 31, 2006, he had 8,333 and 16,667 unvested stock
options with exercise prices of $3.38 and $4.26 per share,
respectively. |
(footnotes continued on
following page)
138
Compensation of
executive officers
|
|
|
(4) |
|
Time-Based RSUs: Under his employment agreement
and the applicable award agreement, in the event of a change of
control having a value in excess of $6.045 per share,
Mr. Eisenberg will be entitled to immediate vesting on all
unvested time-based RSU awards. As of December 31, 2006, he
had 112,000 unvested time-based RSUs with a value based on the
closing price of our common stock of $8.82 per share as of
December 29, 2006, the last trading day of 2006. |
|
(5) |
|
Performance-Based RSUs: Under his employment
agreement and the applicable award agreement, in the event of a
change of control having a value in excess of $6.045 per
share, Mr. Eisenberg will be entitled to immediate vesting
on all unvested performance-based RSU awards, without regard to
the achievement of applicable performance targets. As of
December 31, 2006, he had 112,000 unvested
performance-based RSUs with a value based on the closing price
of our common stock of $8.82 per share as of
December 29, 2006, the last trading day of 2006. These
performance-based RSUs consist of 37,333 performance-based RSUs
that are considered granted for accounting purposes as they
relate to fiscal 2006 performance targets that have been
established by the board of directors or the Compensation
Committee, which vest in April 2007 and 74,667 performance-based
RSUs related to operational and performance targets for fiscal
2007 and 2008 that were not considered granted for accounting
purposes as neither the board of directors nor the Compensation
Committee had established performance targets for fiscal 2007
and 2008 as of December 31, 2006. The performance targets
for 2007 were established in February 2007. |
|
(6) |
|
Performance-Based SARs: Under his employment
agreement and the applicable award agreement, in the event of a
change of control having a value in excess of $6.045 per
share, Mr. Eisenberg will be entitled to immediate vesting
on all unvested performance-based SAR awards, without regard to
the achievement of applicable performance targets. As of
December 31, 2006, he had 130,000 unvested
performance-based SAR awards. These performance-based SAR awards
consist of 43,332 performance-based RSUs that are considered
granted for accounting purposes as they relate to fiscal 2006
performance targets that have been established by the board of
directors or the Compensation Committee and 86,668
performance-based RSUs related to performance targets for fiscal
2007 and 2008 that were not considered granted as neither the
board of directors nor the Compensation Committee had
established operational and performance targets for fiscal 2007
and 2008 as of December 31, 2006. The performance targets
for fiscal 2007 were established in February 2007. The potential
amounts earned by Mr. Eisenberg as a result of the
immediate vesting of these performance-based SAR awards
following a change of control are not shown in the table as the
closing price of our common stock of $8.82 per share, as of
December 29, 2006, the last trading day of 2006, was lower
than the SAR base price of $11.00 per share. |
Emmett
Hume
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary
|
|
|
Termination
|
|
|
|
|
|
|
|
Executive
payments
|
|
termination
with
|
|
|
without
|
|
|
For cause
|
|
|
Change in
|
|
upon
termination
|
|
good
reason
|
|
|
cause
|
|
|
termination
|
|
|
control(1)
|
|
|
|
|
Severance
payments(2)
|
|
$
|
128,333
|
|
|
$
|
128,333
|
|
|
$
|
|
|
|
$
|
128,333
|
|
Stock options (unvested and
accelerated)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,024
|
|
Time-based RSUs (unvested and
accelerated)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,933
|
|
Performance-based RSUs (unvested
and
accelerated)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,933
|
|
|
|
|
(1) |
|
Assumes an effective date of a change of control on
December 31, 2006. |
(footnotes continued on
following page)
139
Compensation of
executive officers
|
|
|
(2) |
|
Severance Payments: Under the terms of his
employment agreement, in the event Mr. Humes
employment is involuntarily terminated without cause by us or he
voluntarily terminates his employment for good reason or in the
event of a change of control, if the successor entity does not
continue his employment under the terms of his employment
agreement, he will be entitled to the greater of (a) six
months of his base salary in effect at the time of such
termination or (b) his base salary payable for the
remainder of his term of employment plus a pro rata portion of
his bonus, payable in regular installments consistent with our
payroll practices. For purposes of this table, a termination
date of December 31, 2006 and remaining term of employment
of seven months is assumed. The amounts set forth in the table
do not include a bonus component because the bonus is
discretionary. |
|
(3) |
|
Stock Options (unvested and accelerated): Under his
employment agreement and the applicable award agreement, in the
event of a change of control having a value in excess of
$6.045 per share, Mr. Hume will be entitled to
immediate vesting on all unvested stock options. As of
December 31, 2006, he had 29,172 unvested stock options
with an exercise price of $4.26 per share. |
|
(4) |
|
Time-Based RSUs: Under his employment agreement
and the applicable award agreement, in the event of a change of
control having a value in excess of $6.045 per share,
Mr. Hume will be entitled to immediate vesting on all
unvested time-based RSU awards. As of December 31, 2006, he
had 3,734 unvested time-based RSUs with a value based on the
closing price of our common stock of $8.82 per share as of
December 29, 2006, the last trading day of 2006. |
|
(5) |
|
Performance-Based RSUs: Under his employment
agreement and the applicable award agreement, in the event of a
change of control having a value in excess of $6.045 per
share, Mr. Hume will be entitled to immediate vesting on
all unvested performance-based RSU awards, without regard to the
achievement of applicable performance targets. As of
December 31, 2006, he had 3,734 unvested performance-based
RSUs with a value based on the closing price of our common stock
of $8.82 per share as of December 29, 2006, the last
trading day of 2006. |
John J.
Stolte, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
payments
|
|
Voluntary
|
|
|
without
|
|
|
For cause
|
|
|
Change in
|
|
|
|
|
|
|
|
upon
termination
|
|
termination
|
|
|
cause
|
|
|
termination
|
|
|
control(1)
|
|
|
Death
|
|
|
Disability
|
|
|
|
|
Severance
payments(2)
|
|
$
|
|
|
|
$
|
225,000
|
|
|
$
|
|
|
|
$
|
225,000
|
|
|
$
|
225,000
|
|
|
$
|
225,000
|
|
Stock options (unvested and
accelerated)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,533
|
|
|
|
|
|
|
|
|
|
Time-based RSUs (unvested and
accelerated)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
535,082
|
|
|
|
|
|
|
|
|
|
Performance-based RSUs (unvested
and
accelerated)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
535,082
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Assumes an effective date of a change of control on
December 31, 2006. |
|
(2) |
|
Severance Payments: Under the terms of his
employment agreement, in the event Mr. Stoltes
employment is (a) involuntarily terminated without cause by
us, (b) terminated due to death or disability or
(c) not continued on substantially equivalent terms
following a change of control, he will be entitled to one year
of his base salary in effect at the time of such termination
payable in regular installments consistent with our payroll
practices. |
(footnotes continued on
following page)
140
Compensation of
executive officers
|
|
|
(3) |
|
Stock Options (unvested and accelerated): Under his
employment agreement and the applicable award agreement, in the
event of a change of control having a value in excess of
$6.045 per share, Mr. Stolte will be entitled to
immediate vesting on all unvested stock options. As of
December 31, 2006, he had 3,333 and 6,667 unvested stock
options with exercise prices of $3.38 and $4.26 per share,
respectively. |
|
(4) |
|
Time-Based RSUs: Under his employment agreement
and the applicable award agreement, in the event of a change of
control having a value in excess of $6.045 per share,
Mr. Stolte will be entitled to immediate vesting on all
unvested time-based RSU awards. As of December 31, 2006, he
had 60,667 unvested time-based RSUs with a value based on the
closing price of our common stock of $8.82 per share as of
December 29, 2006, the last trading day of 2006. |
|
(5) |
|
Performance-Based RSUs: Under his employment
agreement and the applicable award agreement, in the event of a
change of control having a value in excess of $6.045 per
share, Mr. Stolte will be entitled to immediate vesting on
all unvested performance-based RSU awards, without regard to the
achievement of applicable performance targets. As of
December 31, 2006, he had 60,667 unvested performance-based
RSUs with a value based on the closing price of our common stock
of $8.82 per share as of December 29, 2006, the last
trading day of 2006. |
John P.
Brady
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
Executive
payments
|
|
Voluntary
|
|
without
|
|
For cause
|
|
Change in
|
|
upon
termination
|
|
termination
|
|
cause
|
|
termination
|
|
control(1)
|
|
|
|
|
Time-based RSUs (unvested and
accelerated)(2)
|
|
$
|
|
$
|
|
$
|
|
$
|
13,715
|
|
Performance-based RSUs (unvested
and
accelerated)(3)
|
|
|
|
|
|
|
|
|
13,715
|
|
|
|
|
(1) |
|
Assumes an effective date of a change of control on
December 31, 2006. |
|
(2) |
|
Time-Based RSUs: Under his employment agreement
and the applicable award agreement, in the event of a change of
control having a value in excess of $6.045 per share,
Mr. Brady will be entitled to immediate vesting on all
unvested time-based RSU awards. As of December 31, 2006, he
had 1,556 unvested time-based RSUs with a value based on the
closing price of our common stock of $8.82 per share as of
December 29, 2006, the last trading day of 2006. |
|
(3) |
|
Performance-Based RSUs: Under his employment
agreement and the applicable award agreement, in the event of a
change of control having a value in excess of $6.045 per
share, Mr. Brady will be entitled to immediate vesting on
all unvested performance-based RSU awards, without regard to the
achievement of applicable performance targets. As of
December 31, 2006, he had 1,556 unvested performance-based
RSUs with a value based on the closing price of our common stock
of $8.82 per share as of December 29, 2006, the last
trading day of 2006. |
141
Certain
relationships and transactions with related persons
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 26%
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 52% interest in Satcom.
Subsequent to the acquisition of our 52% 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.
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.
142
Certain
relationships and transactions with related persons
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 March 31,
2007, approximately $2.6 million of the credit granted by
us to ORBCOMM Europe remained unused.
SATCOM
INTERNATIONAL GROUP PLC.
Satcom is our 52%-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 March 31, 2007, Satcom
owed us unpaid fees of approximately $230,000.
We acquired our 52% 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 initial public offering 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 initial public offering, 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 March 31, 2007, ORBCOMM Europe had a note payable to
Satcom in the amount of 1,466,920 ($1,959,512). 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
143
Certain
relationships and transactions with related persons
ORBCOMM Europe and Satcom with ORBCOMM Inc. We own 52% 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 scheduled to mature on
December 30, 2006, and is secured by all of Satcoms
assets, including its membership interest in ORBCOMM Europe. As
of March 31, 2007, Satcom had $465,000 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
March 31, 2007, 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 so 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 March 31,
2007 the principal balance of the note payable is
1,138,410 ($1,520,675) and it has a carrying value of
$930,000. 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 March 31, 2008.
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
144
Certain
relationships and transactions with related persons
certain price adjustments for late penalties and on-time or
early delivery incentives. As of March 31, 2007, we have
made payments totaling $8.0 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 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 March 31, 2007, 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 BusinessLegal 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
March 31, 2007, OJ owed us approximately $343,000 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.
145
Certain
relationships and transactions with related persons
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 March 31,
2007, KO owed us approximately $129,000 in unpaid service fees.
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.
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
On February 17, 2004, we entered into an IVAR Agreement
with SES (formerly named SES Global S.A.) 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 March 31, 2007, 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 and OHB Technology jointly have 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 transaction in which SES bought 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.
As a result of the transaction between SES and GE, GE is now a
significant stockholder of ours. See Principal
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,
146
Certain
relationships and transactions with related persons
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 outstanding shares of Series A
convertible preferred stock automatically converted into shares
of our common stock in connection with our initial public
offering.
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 our initial public
offering, we paid all accumulated dividends on our 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. On
November 8, 2006, we closed the initial public offering 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 our 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 initial public offering.
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
147
Certain
relationships and transactions with related persons
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 our initial public offering, (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 and we have obtained a
waiver of such piggyback registration rights with respect to
this offering.
INDEMNITY
AGREEMENTS
We have entered into indemnification agreements with each of our
directors. In addition, we have entered into indemnification
agreements with certain of our executive officers in their
capacity as our executive officers and as directors of certain
of our subsidiaries. Each indemnification agreement provides
that we will, subject to certain exceptions, indemnify the
indemnified person in respect of any and all expenses incurred
as a result of any threatened, pending or completed action, suit
or proceedings involving the indemnified person and relating to
the indemnified persons service as an executive officer or
director of ours. We will also indemnify the indemnified person
to the fullest extent as may be provided under the
non-exclusivity provisions of our bylaws and Delaware law. The
indemnification period lasts for as long as the indemnified
person is an executive officer or director of ours and continues
if the indemnified person is subject to any possible claim or
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, arbitration, administrative or
investigative, by reason of fact that the indemnified person was
serving in such capacity. Upon request, we must advance all
expenses incurred by the indemnified person in connection with
any proceeding, provided the indemnified person undertakes to
repay the advanced amounts if it is determined ultimately that
the indemnified person is not entitled to be indemnified under
any provision of the indemnification agreement, our bylaws,
Delaware law or otherwise.
POLICIES AND
PROCEDURES FOR RELATED PERSON TRANSACTIONS
Pursuant to the Audit Committees charter and applicable
Nasdaq rules, the Audit Committee is responsible for reviewing
and approving all related party transactions (as defined by the
Nasdaq rules).
148
Principal
stockholders
The following table shows information with respect to the
beneficial ownership of our common stock as of May 1, 2007,
and as adjusted to reflect the sale of common stock being
offered by us in this offering, and conversion of all
outstanding shares of preferred stock into shares of common
stock by:
|
|
Ø
|
each person, or group of affiliated persons, known to us to own
beneficially 5% or more of our outstanding common stock;
|
|
Ø
|
each of our directors;
|
|
Ø
|
each of our named executive officers; and
|
|
Ø
|
all of our directors and officers as a group.
|
Percentage ownership before the offering is based on
37,281,187 shares of common stock outstanding as of
May 1, 2007, as adjusted for the conversion of all
outstanding shares of preferred stock into shares of common
stock subject to the assumptions set forth below. Percentage
ownership after the offering is based on 40,266,187 shares
of common stock expected to be outstanding immediately after the
closing of this offering (based on the number of shares of
common stock outstanding on May 1, 2007). Beneficial
ownership is determined in accordance with the rules of the SEC.
Except as indicated by footnote and subject to community
property laws where applicable, to our knowledge, the persons
named in the table below have sole voting and investment power
with respect to all shares of common stock shown as beneficially
owned by them. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person,
shares of common stock subject to warrants and options held by
that person that are exercisable as of May 1, 2007, or will
become exercisable within 60 days thereafter are deemed
outstanding, while such shares are not deemed outstanding for
purposes of computing percentage ownership of any other person.
149
Principal
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
total
|
|
|
|
|
|
|
common stock
held
|
|
|
|
Shares of
|
|
|
|
|
|
|
|
|
After exercise
of
|
|
|
|
common stock
|
|
|
Before
|
|
|
After
|
|
|
over-allotment
|
|
Name of
beneficial owner
|
|
owned(1)
|
|
|
offering
|
|
|
offering
|
|
|
option in
full
|
|
|
|
|
Greater than 5%
Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCG Satellite Investments
LLC(2)
|
|
|
5,224,152
|
|
|
|
14.01
|
%
|
|
|
10.85
|
%
|
|
|
10.22
|
%
|
OHB Technology
A.G.(3)
|
|
|
2,845,555
|
|
|
|
7.62
|
%
|
|
|
5.90
|
%
|
|
|
5.56
|
%
|
MH Investors Satellite
LLC(4)
|
|
|
2,481,389
|
|
|
|
6.66
|
%
|
|
|
5.15
|
%
|
|
|
4.86
|
%
|
Ridgewood Satellite
LLC(5)
|
|
|
2,131,565
|
|
|
|
5.70
|
%
|
|
|
4.79
|
%
|
|
|
4.79
|
%
|
General Electric Capital
Corporation(6)
|
|
|
2,032,085
|
|
|
|
5.45
|
%
|
|
|
5.05
|
%
|
|
|
5.05
|
%
|
Estate and Family of Don
Franco(7)
|
|
|
2,031,953
|
|
|
|
5.41
|
%
|
|
|
4.19
|
%
|
|
|
3.95
|
%
|
Northwood Ventures
LLC(8)
|
|
|
1,966,030
|
|
|
|
5.25
|
%
|
|
|
4.07
|
%
|
|
|
3.89
|
%
|
Named Executive Officers and
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jerome B.
Eisenberg(9)
|
|
|
1,436,941
|
|
|
|
3.81
|
%
|
|
|
2.95
|
%
|
|
|
2.78
|
%
|
Robert G.
Costantini(10)
|
|
|
52,222
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Marc
Eisenberg(11)
|
|
|
422,142
|
|
|
|
1.12
|
%
|
|
|
*
|
|
|
|
*
|
|
Emmett
Hume(12)
|
|
|
204,732
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
John J.
Stolte, Jr.(13)
|
|
|
84,724
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Didier Delepine
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marco
Fuchs(4)
|
|
|
2,845,555
|
|
|
|
7.62
|
%
|
|
|
5.90
|
%
|
|
|
5.56
|
%
|
Ronald
Gerwig(14)
|
|
|
2,481,389
|
|
|
|
6.66
|
%
|
|
|
5.15
|
%
|
|
|
4.86
|
%
|
Hans E. W.
Hoffmann(15)
|
|
|
66,501
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Timothy
Kelleher(16)
|
|
|
5,224,152
|
|
|
|
14.01
|
%
|
|
|
10.85
|
%
|
|
|
10.22
|
%
|
John Major
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary H. Ritondaro
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John P.
Brady(17)
|
|
|
86,243
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
All executive officers and
directors as a group (13 persons)
|
|
|
12,904,602
|
|
|
|
33.55
|
%
|
|
|
26.05
|
%
|
|
|
24.40
|
%
|
|
|
|
* |
|
Represents beneficial ownership of less than 1% of the
outstanding shares of common stock. |
|
(1) |
|
Unless otherwise indicated, the amounts shown as being
beneficially owned by each stockholder or group listed above
represent shares over which that stockholder or group holds sole
investment power. |
|
(2) |
|
The managing member of PCG Satellite Investments LLC is
CalPERS/PCG Corporate Partners, LLC, whose manager is PCG
Corporate Partners Investments LLC. PCG Corporate Partners
Investments LLC is wholly owned by Pacific Corporate Group
Holdings, LLC. Pacific Corporate Group Holdings, LLC is owned
and managed by Christopher J. Bower, Timothy Kelleher, Douglas
Meltzer and Pacific Corporate Group Holdings, Inc., which is in
turn wholly owned and managed by Christopher J. Bower. Each of
CalPERS/PCG Corporate Partners, LLC, PCG Corporate Partners
Investments LLC, Pacific Corporate Group LLC, Pacific Corporate
Group Holdings, LLC, Christopher J. Bower, Timothy Kelleher,
Douglas Meltzer and Pacific Corporate Group Holdings, Inc.
disclaims beneficial ownership of any securities, except to the
extent of their pecuniary interest therein. PCG Satellite
Investments LLCs address is 1200 Prospect Street,
Suite 2000, La Jolla, California 92037. |
(footnotes continued on
following page)
150
Principal
stockholders
|
|
|
(3) |
|
Includes 2,682,457 shares of common stock held by OHB
Technology A.G., and 76,557 shares of common stock held by
ORBCOMM Deutschland A.G. Also includes 86,542 shares of
common stock issuable to OHB Technology A.G. upon exercise of
warrants that are currently exercisable. Marco Fuchs, one of our
directors, is Chief Executive Officer of OHB Technology A.G.
which owns ORBCOMM Deutschland A.G. Manfred Fuchs, Marco Fuchs
and Christa Fuchs hold voting and investment power with regard
to the shares held by OHB Technology A.G. and ORBCOMM
Deutschland A.G. Each of Manfred Fuchs, Marco Fuchs and Christa
Fuchs disclaims beneficial ownership of the shares held by OHB
Technology A.G. and ORBCOMM Deutschland except to the extent of
their respective pecuniary interest therein. OHB Technology
A.G.s address is Universitaetsalle
27-29,
Bremen, D-28539, Germany. |
|
(4) |
|
The sole manager of MH Investors Satellite LLC is MH Equity
Managing Member LLC, and the sole member and manager of MH
Equity Managing Member LLC is Ms. Tomisue Hilbert.
Ms. Hilbert disclaims beneficial ownership of the shares
held by MH Investors Satellite LLC except to the extent of her
pecuniary interest therein. MH Investors Satellite LLCs
address is 11405 N. Pennsylvania Street,
Suite 205, Carmel, Indiana 46032. |
|
(5) |
|
Includes 1,873,797 shares of common stock held by Ridgewood
Satellite LLC, 169,740 shares of common stock held by Ridgewood
Capital Management LLC and 88,028 shares of common stock
issuable to Ridgewood Satellite LLC upon exercise of warrants
that are currently exercisable. The manager of Ridgewood
Satellite LLC is Ridgewood Venture Management Corporation.
Ridgewood Venture Management Corporation and Ridgewood Capital
Management LLC are owned and controlled by Robert E. Swanson.
Ridgewood Satellite LLCs address is 947 Linwood Avenue,
Ridgewood, New Jersey 07450. |
|
(6) |
|
Includes 2,000,001 shares owned by GE Pacific-1
Holdings, Inc., GE Pacific-2 Holdings, Inc. and GE Pacific-3
Holdings Inc., which are wholly owned subsidiaries of GE
International Holdings Inc., which is a subsidiary of GE CFE
Luxembourg S.A.R.L. (GECFE) and GE Capital Equity
Holdings Inc. (GECH). GECFE is a wholly owned
subsidiary of GE Capital CFE, Inc. (GECFE Inc.).
GECH and GECFE Inc. are wholly owned subsidiaries of General
Electric Capital Corporation (GECC), which is a
wholly owned subsidiary of General Electric Capital Services,
Inc., which is a wholly owned subsidiary of General Electric
Company. GECC holds an additional 32,084 shares through its
affiliate Transport International Pool, Inc. GECCs address
is 260 Long Ridge Road, Stamford, Connecticut 06927. |
|
(7) |
|
Includes 933,334 shares of common stock held by Franco
Family L.P., 538,401 shares of common stock held by the
Nancy M. Franco GRAT, 5,844 shares of common stock held by
the Estate of Don Franco, 240,754 shares of common stock
held by the Estate of Don Franco, 38,617 shares of common
stock held by the Trust Under the Will of Don Franco
Article Fourth, and 275,003 shares of common stock issuable
upon exercise of outstanding options to Nancy M. Franco. The
general partner of Franco Family L.P. is Franco Mgt. L.L.C. and
the manager of Franco Mgt. L.L.C. is Bradley C. Franco. The
trustee of the Nancy Franco GRAT is Bradley C. Franco. The
trustees of the Trust Under the Will of Don Franco
Article Fourth are Nancy M. Franco, John Franco and Alan
Doerner. Nancy M. Franco is the executor of the Estate of Don
Franco. Mrs. Franco disclaims beneficial ownership of the
shares held by the Estate of Don Franco except to the extent of
her pecuniary interest therein. Bradley C. Franco disclaims
beneficial ownership of the shares held by Franco Mgt. L.L.C.
and the Nancy M. Franco GRAT, except to the extent of his
pecuniary interest therein, and Nancy M. Franco, John Franco and
Alan Doerner disclaim beneficial ownership in the trust in the
name of Nancy M. Franco, John Franco and Alan Doerner except to
the extent of their respective pecuniary interest therein. The
address for Franco Family L.P. and Franco Mgt. L.L.C. is
13 Webster Avenue, Summit, New Jersey 07901 and for the
Nancy M. Franco GRAT is 12 Hickory Hill Road, Saddle River,
New Jersey 07450. |
(footnotes continued on
following page)
151
Principal
stockholders
|
|
|
(8) |
|
Includes 1,488,865 shares of common stock held by
Northwood Ventures LLC, 299,103 shares of common stock held
by Northwood Capital Partners LLC, 36,413 shares of common
stock held by SK Partners, and 8,689 shares of common stock
held by the Richard K. Webel Trust. Also includes 92,836,
20,455, 15,735 and 3,934 shares of common stock issuable to
Northwood Ventures LLC, Northwood Capital Partners LLC, SK
Partners and the Richard K. Webel Trust, respectively, upon
exercise of warrants that are currently exercisable. Peter
Schiff, as President of Northwood Ventures LLC and Northwood
Capital Partners LLC, Managing General Partner of SK Partners
and trustee of the Richard K. Webel Trust, has investment power
with regard to these shares and warrants. Mr. Henry T.
Wilson also has investment power with regard to the shares owned
by, and is a Managing Director of, Northwood Ventures LLC and
Northwood Capital Partners LLC. Each of Mr. Schiff and
Mr. Wilson disclaims beneficial ownership of the shares
held by Northwood Ventures LLC, Northwood Capital Partners LLC,
SK Partners and the Richard K. Webel Trust except to the extent
of their respective pecuniary interest therein. Northwood
Ventures LLCs address is 485 Underhill Boulevard,
Suite 205, Syosset, New York 11791. |
|
(9) |
|
Includes 1,033,750 shares of common stock held by Jerome
B. Eisenberg and 20,000 shares of common stock held by
Cynthia Eisenberg, Mr. Eisenbergs wife. Also includes
43,855 and 295,836 shares of common stock issuable to
Mr. Eisenberg upon exercise of warrants and options,
respectively, that are exercisable within 60 days of May 1,
2007 and 43,500 shares of common stock underlying vested
performance-based SARs. Mr. Eisenberg disclaims beneficial
ownership of the shares held by Cynthia Eisenberg. |
|
(10) |
|
Includes 7,778 shares of common stock held by Robert G.
Costantini. Also includes 44,444 shares of common stock
underlying SARs that are currently exercisable. |
|
(11) |
|
Includes 82,430 shares of common stock held by Marc
Eisenberg. Also includes 7,867 and 295,836 shares of common
stock issuable to Mr. Eisenberg upon the exercise of
warrants and options, respectively, that are exercisable within
60 days of May 1, 2007 and 36,009 shares of common
stock underlying vested performance-based SARs. |
|
(12) |
|
Includes 3,765 shares of common stock held by Emmett
Hume, 50,610 shares of common stock held by Emmett Hume
IRA, 43,427 shares of common stock held by the David Hume
Trust and 44,427 shares of common stock held by the Cara
Hume Trust. Also includes 62,503 shares of common stock
issuable to Mr. Hume upon exercise of options that are
exercisable within 60 days of May 1, 2007. Mr. Hume is
the trustee for the David Hume Trust and the Cara Hume Trust.
Mr. Hume disclaims beneficial ownership of the shares held
by the David Hume Trust and the Cara Hume Trust. |
|
(13) |
|
Includes 49,335 shares of common stock issuable to John
J. Stolte, Jr. upon exercise of options that are
exercisable within 60 days of May 1, 2007 and
20,222 shares of common stock issuable upon the vesting of
outstanding time-based RSUs and 15,167 shares of common
stock issuable upon the vesting of outstanding performance-based
RSUs, in each case, expected to vest on May 21, 2007. |
|
(14) |
|
Mr. Gerwigs term as a director of the Company
expired on May 11, 2007. Includes 2,481,389 shares of
common stock held by MH Investors Satellite LLC. Mr. Gerwig
is the Assistant Treasurer of MH Investors Satellite LLC and he
disclaims beneficial ownership of the shares held by MH
Investors Satellite LLC except to the extent of his pecuniary
interest therein. |
|
(15) |
|
Includes 16,667 shares of common stock issuable to Hans
E. W. Hoffmann upon exercise of options that are currently
exercisable. |
(footnotes continued on
following page)
152
Principal
stockholders
|
|
|
(16) |
|
Mr. Kelleher is a Managing Director of Pacific Corporate
Group LLC, which is an affiliate of PCG Satellite Investments
LLC and disclaims beneficial ownership of the shares held by PCG
Satellite Investments LLC except to the extent of his pecuniary
interest therein. |
|
(17) |
|
Includes 83,334 shares of common stock issuable to John
P. Brady, a former executive, upon exercise of options that are
currently exercisable and 1,555 shares of common stock
issuable upon the vesting of outstanding time-based RSUs and
1,354 shares of common stock issuable upon the vesting of
outstanding performance-based RSUs, in each case, expected to
vest on May 21, 2007. |
153
Selling stockholders
The shares of our common stock which may be resold hereunder by
the selling stockholders are:
|
|
Ø
|
shares of common stock issued in private placements; and
|
|
Ø
|
shares of common stock received upon vesting of RSUs and
exercise of SARs, options and warrants.
|
The shares of common stock being sold by the selling
stockholders in this offering were generally issued in
transactions exempt from the registration requirements of the
Securities Act, other than shares acquired upon vesting of RSUs,
or exercise of SARs, options or warrants.
The following table sets forth information, as of May 1,
2007, with respect to the selling stockholders and the shares of
common stock beneficially owned by each selling stockholder that
may be offered pursuant to this prospectus. The information is
based on information provided by or on behalf of the selling
stockholders.
Unless otherwise indicated below or in the footnotes of the
table under Principal stockholders, the amounts
shown as being beneficially owned by each stockholder or group
listed above represent shares over which that stockholder or
group holds sole investment power.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
beneficially owned
|
|
|
|
Shares of
|
|
|
|
|
|
Shares of
|
|
|
shares of common
|
|
|
after offering if
|
|
|
|
common stock
|
|
|
|
|
|
common stock
|
|
|
stock offered if
|
|
|
over-allotment
|
|
|
|
beneficially owned
|
|
|
|
|
|
beneficially owned
|
|
|
over-allotment
|
|
|
option is
|
|
|
|
prior to the offering
|
|
|
Shares of common
|
|
|
after the offering
|
|
|
option
|
|
|
exercised in full
|
|
Name
|
|
Number
|
|
|
Percent
|
|
|
stock offered hereby
|
|
|
Number
|
|
|
Percent
|
|
|
is exercised in full
|
|
|
Number
|
|
|
Percent
|
|
|
|
|
PCG Satellite Investments
LLC(1)
|
|
|
5,224,152
|
|
|
|
14.01
|
%
|
|
|
855,216
|
|
|
|
4,368,936
|
|
|
|
10.85
|
%
|
|
|
252,461
|
|
|
|
4,116,475
|
|
|
|
10.22
|
%
|
OHB Technology
A.G.(2)
|
|
|
2,768,998
|
|
|
|
7.41
|
%
|
|
|
453,297
|
|
|
|
2,315,701
|
|
|
|
5.74
|
%
|
|
|
133,814
|
|
|
|
2,181,887
|
|
|
|
5.41
|
%
|
MH Investors Satellite
LLC(3)
|
|
|
2,481,389
|
|
|
|
6.66
|
%
|
|
|
406,214
|
|
|
|
2,075,175
|
|
|
|
5.15
|
%
|
|
|
119,916
|
|
|
|
1,955,260
|
|
|
|
4.86
|
%
|
Estate and Family of Don
Franco(4)
|
|
|
2,031,953
|
|
|
|
5.41
|
%
|
|
|
332,639
|
|
|
|
1,699,314
|
|
|
|
4.19
|
%
|
|
|
98,196
|
|
|
|
1,601,117
|
|
|
|
3.95
|
%
|
Ridgewood Satellite
LLC(5)
|
|
|
1,961,825
|
|
|
|
5.25
|
%
|
|
|
197,718
|
|
|
|
1,764,107
|
|
|
|
4.37
|
%
|
|
|
|
|
|
|
1,764,107
|
|
|
|
4.37
|
%
|
Northwood Ventures
LLC(6)
|
|
|
1,581,700
|
|
|
|
4.23
|
%
|
|
|
258,931
|
|
|
|
1,322,769
|
|
|
|
3.28
|
%
|
|
|
57,409
|
|
|
|
1,265,360
|
|
|
|
3.14
|
%
|
Jerome B.
Eisenberg(7)
|
|
|
1,416,941
|
|
|
|
3.76
|
%
|
|
|
231,959
|
|
|
|
1,184,982
|
|
|
|
2.92
|
%
|
|
|
68,476
|
|
|
|
1,116,506
|
|
|
|
2.75
|
%
|
Sagamore Hill Hub
Fund Ltd.
|
|
|
1,003,047
|
|
|
|
2.69
|
%
|
|
|
164,203
|
|
|
|
838,844
|
|
|
|
2.08
|
%
|
|
|
48,474
|
|
|
|
790,370
|
|
|
|
1.96
|
%
|
ORBCOMM Asia
Ltd.(8)
|
|
|
786,588
|
|
|
|
2.11
|
%
|
|
|
128,768
|
|
|
|
657,820
|
|
|
|
1.63
|
%
|
|
|
38,013
|
|
|
|
619,807
|
|
|
|
1.54
|
%
|
Marc
Eisenberg(9)
|
|
|
422,141
|
|
|
|
1.12
|
%
|
|
|
69,106
|
|
|
|
353,035
|
|
|
|
|
*
|
|
|
20,401
|
|
|
|
332,634
|
|
|
|
*
|
|
Northwood Capital Partners
LLC(6)
|
|
|
319,557
|
|
|
|
|
*
|
|
|
52,313
|
|
|
|
267,244
|
|
|
|
|
*
|
|
|
11,598
|
|
|
|
255,646
|
|
|
|
*
|
|
Aspen Orbital LLC
|
|
|
251,980
|
|
|
|
|
*
|
|
|
41,250
|
|
|
|
210,730
|
|
|
|
|
*
|
|
|
12,178
|
|
|
|
198,552
|
|
|
|
*
|
|
John and Mary
Franco(10)
|
|
|
240,001
|
|
|
|
|
*
|
|
|
39,289
|
|
|
|
200,712
|
|
|
|
|
*
|
|
|
711
|
|
|
|
200,001
|
|
|
|
*
|
|
Denis Nayden
|
|
|
238,414
|
|
|
|
|
*
|
|
|
39,030
|
|
|
|
199,385
|
|
|
|
|
*
|
|
|
11,523
|
|
|
|
187,862
|
|
|
|
*
|
|
Mark Sullivan
|
|
|
218,202
|
|
|
|
|
*
|
|
|
35,721
|
|
|
|
182,481
|
|
|
|
|
*
|
|
|
10,546
|
|
|
|
171,936
|
|
|
|
*
|
|
Hans Steininger
|
|
|
207,835
|
|
|
|
|
*
|
|
|
34,023
|
|
|
|
173,812
|
|
|
|
|
*
|
|
|
1,250
|
|
|
|
172,562
|
|
|
|
*
|
|
Orbcomm Ventures LLC
|
|
|
205,128
|
|
|
|
|
*
|
|
|
33,581
|
|
|
|
171,548
|
|
|
|
|
*
|
|
|
9,914
|
|
|
|
161,634
|
|
|
|
*
|
|
Cara Hume Trust and David Hume
Trust(11)
|
|
|
204,732
|
|
|
|
|
|
|
|
33,516
|
|
|
|
171,217
|
|
|
|
|
|
|
|
9,896
|
|
|
|
161,322
|
|
|
|
|
|
Hyung-Jin
Song(8)
|
|
|
200,666
|
|
|
|
|
*
|
|
|
32,850
|
|
|
|
167,816
|
|
|
|
|
*
|
|
|
2,150
|
|
|
|
165,666
|
|
|
|
*
|
|
Hoboken Partners 1
LLC(12)
|
|
|
188,348
|
|
|
|
|
*
|
|
|
28,748
|
|
|
|
159,600
|
|
|
|
|
*
|
|
|
|
|
|
|
159,600
|
|
|
|
*
|
|
Miller & Wrubel Asset
Company
|
|
|
171,278
|
|
|
|
|
*
|
|
|
28,039
|
|
|
|
143,239
|
|
|
|
|
*
|
|
|
8,278
|
|
|
|
134,961
|
|
|
|
*
|
|
Nakoma Investments LLC
|
|
|
162,279
|
|
|
|
|
*
|
|
|
26,566
|
|
|
|
135,713
|
|
|
|
|
*
|
|
|
7,843
|
|
|
|
127,870
|
|
|
|
*
|
|
Alex Porter
|
|
|
135,731
|
|
|
|
|
*
|
|
|
22,220
|
|
|
|
113,511
|
|
|
|
|
*
|
|
|
6,560
|
|
|
|
106,951
|
|
|
|
*
|
|
James Eagan
|
|
|
115,792
|
|
|
|
|
*
|
|
|
18,956
|
|
|
|
96,836
|
|
|
|
|
*
|
|
|
5,597
|
|
|
|
91,240
|
|
|
|
*
|
|
Walter H.
Sonnenfeldt(13)
|
|
|
111,515
|
|
|
|
|
*
|
|
|
18,255
|
|
|
|
93,260
|
|
|
|
|
*
|
|
|
5,390
|
|
|
|
87,869
|
|
|
|
*
|
|
William Vanden Heuvel
|
|
|
108,922
|
|
|
|
|
*
|
|
|
17,831
|
|
|
|
91,091
|
|
|
|
|
*
|
|
|
5,264
|
|
|
|
85,827
|
|
|
|
*
|
|
Michael Friedman
|
|
|
106,732
|
|
|
|
|
*
|
|
|
17,472
|
|
|
|
89,260
|
|
|
|
|
*
|
|
|
5,158
|
|
|
|
84,102
|
|
|
|
*
|
|
Mary Higgins Clark
|
|
|
102,447
|
|
|
|
|
*
|
|
|
16,771
|
|
|
|
85,676
|
|
|
|
|
*
|
|
|
4,951
|
|
|
|
80,725
|
|
|
|
*
|
|
Steven G. Chrust
(14)
|
|
|
95,058
|
|
|
|
|
*
|
|
|
15,561
|
|
|
|
79,497
|
|
|
|
|
*
|
|
|
4,594
|
|
|
|
74,903
|
|
|
|
*
|
|
John Levinson
|
|
|
87,756
|
|
|
|
|
*
|
|
|
14,366
|
|
|
|
73,390
|
|
|
|
|
*
|
|
|
634
|
|
|
|
72,756
|
|
|
|
*
|
|
Robert Schultz
|
|
|
86,326
|
|
|
|
|
*
|
|
|
10,000
|
|
|
|
76,326
|
|
|
|
|
*
|
|
|
|
|
|
|
76,326
|
|
|
|
*
|
|
John
Brady(15)
|
|
|
86,243
|
|
|
|
|
*
|
|
|
14,118
|
|
|
|
72,125
|
|
|
|
|
*
|
|
|
3,583
|
|
|
|
68,542
|
|
|
|
*
|
|
154
Selling
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
beneficially owned
|
|
|
|
Shares of
|
|
|
|
|
|
Shares of
|
|
|
shares of common
|
|
|
after offering if
|
|
|
|
common stock
|
|
|
|
|
|
common stock
|
|
|
stock offered if
|
|
|
over-allotment
|
|
|
|
beneficially owned
|
|
|
|
|
|
beneficially owned
|
|
|
over-allotment
|
|
|
option is
|
|
|
|
prior to the offering
|
|
|
Shares of common
|
|
|
after the offering
|
|
|
option
|
|
|
exercised in full
|
|
Name
|
|
Number
|
|
|
Percent
|
|
|
stock offered hereby
|
|
|
Number
|
|
|
Percent
|
|
|
is exercised in full
|
|
|
Number
|
|
|
Percent
|
|
|
|
|
John
Stolte(16)
|
|
|
84,724
|
|
|
|
|
*
|
|
|
13,870
|
|
|
|
70,854
|
|
|
|
|
*
|
|
|
4,094
|
|
|
|
66,760
|
|
|
|
*
|
|
Marble Arch Group Limited
|
|
|
82,713
|
|
|
|
|
*
|
|
|
13,540
|
|
|
|
69,173
|
|
|
|
|
*
|
|
|
3,997
|
|
|
|
65,175
|
|
|
|
*
|
|
John
Connelly(10)
|
|
|
79,684
|
|
|
|
|
*
|
|
|
13,045
|
|
|
|
66,639
|
|
|
|
|
*
|
|
|
3,851
|
|
|
|
62,789
|
|
|
|
*
|
|
ORBCOMM Deutschland
A.G.(2)
|
|
|
76,557
|
|
|
|
|
*
|
|
|
12,533
|
|
|
|
64,024
|
|
|
|
|
*
|
|
|
3,700
|
|
|
|
60,325
|
|
|
|
*
|
|
Aspen Orbital II LLC
|
|
|
70,807
|
|
|
|
|
*
|
|
|
11,591
|
|
|
|
59,216
|
|
|
|
|
*
|
|
|
3,422
|
|
|
|
55,794
|
|
|
|
*
|
|
Hans
Hoffman(17)
|
|
|
66,501
|
|
|
|
|
*
|
|
|
7,163
|
|
|
|
59,338
|
|
|
|
|
*
|
|
|
|
|
|
|
59,338
|
|
|
|
*
|
|
Korea Orbcomm
Ltd(8)
|
|
|
65,310
|
|
|
|
|
*
|
|
|
10,692
|
|
|
|
54,618
|
|
|
|
|
*
|
|
|
3,156
|
|
|
|
51,462
|
|
|
|
*
|
|
Harald D. Berghoefer
|
|
|
60,036
|
|
|
|
|
*
|
|
|
9,828
|
|
|
|
50,208
|
|
|
|
|
*
|
|
|
2,901
|
|
|
|
47,307
|
|
|
|
*
|
|
Oakwood Capital LLC
|
|
|
56,970
|
|
|
|
|
*
|
|
|
9,326
|
|
|
|
47,644
|
|
|
|
|
*
|
|
|
2,753
|
|
|
|
44,891
|
|
|
|
*
|
|
Edward B. Greene
|
|
|
56,786
|
|
|
|
|
*
|
|
|
9,296
|
|
|
|
47,490
|
|
|
|
|
*
|
|
|
2,744
|
|
|
|
44,746
|
|
|
|
*
|
|
Philip H. Lodewick
|
|
|
55,094
|
|
|
|
|
*
|
|
|
9,019
|
|
|
|
46,075
|
|
|
|
|
*
|
|
|
2,662
|
|
|
|
43,412
|
|
|
|
*
|
|
Robert
Costantini(18)
|
|
|
52,222
|
|
|
|
|
*
|
|
|
7,778
|
|
|
|
44,444
|
|
|
|
|
*
|
|
|
|
|
|
|
44,444
|
|
|
|
*
|
|
SK
Partners(6)
|
|
|
52,147
|
|
|
|
|
*
|
|
|
8,537
|
|
|
|
43,610
|
|
|
|
|
*
|
|
|
1,892
|
|
|
|
41,718
|
|
|
|
*
|
|
Paul Masters IRA
|
|
|
51,591
|
|
|
|
|
*
|
|
|
8,446
|
|
|
|
43,145
|
|
|
|
|
*
|
|
|
2,493
|
|
|
|
40,652
|
|
|
|
*
|
|
E. Bulkeley Griswold
|
|
|
48,535
|
|
|
|
|
*
|
|
|
7,945
|
|
|
|
40,590
|
|
|
|
|
*
|
|
|
2,345
|
|
|
|
38,244
|
|
|
|
*
|
|
William L. Jaffe
|
|
|
46,533
|
|
|
|
|
*
|
|
|
7,618
|
|
|
|
38,915
|
|
|
|
|
*
|
|
|
2,249
|
|
|
|
36,667
|
|
|
|
*
|
|
Christian Le
Brun(19)
|
|
|
44,142
|
|
|
|
|
*
|
|
|
7,226
|
|
|
|
36,916
|
|
|
|
|
*
|
|
|
1,501
|
|
|
|
35,415
|
|
|
|
*
|
|
Daniel J. Sullivan
|
|
|
43,877
|
|
|
|
|
*
|
|
|
7,183
|
|
|
|
36,694
|
|
|
|
|
*
|
|
|
2,120
|
|
|
|
34,574
|
|
|
|
*
|
|
James Higby
|
|
|
43,623
|
|
|
|
|
*
|
|
|
7,141
|
|
|
|
36,482
|
|
|
|
|
*
|
|
|
2,108
|
|
|
|
34,374
|
|
|
|
*
|
|
Dean
Brickerd(13)
|
|
|
43,440
|
|
|
|
|
*
|
|
|
7,111
|
|
|
|
36,329
|
|
|
|
|
*
|
|
|
2,099
|
|
|
|
34,229
|
|
|
|
*
|
|
Joan Roman
|
|
|
41,356
|
|
|
|
|
*
|
|
|
6,770
|
|
|
|
34,586
|
|
|
|
|
*
|
|
|
1,999
|
|
|
|
32,587
|
|
|
|
*
|
|
Robert Roman
|
|
|
41,356
|
|
|
|
|
*
|
|
|
6,770
|
|
|
|
34,586
|
|
|
|
|
*
|
|
|
1,999
|
|
|
|
32,587
|
|
|
|
*
|
|
Steve G.
Chrust IRA(14)
|
|
|
36,762
|
|
|
|
|
*
|
|
|
6,018
|
|
|
|
30,744
|
|
|
|
|
*
|
|
|
1,777
|
|
|
|
28,967
|
|
|
|
*
|
|
William
Molesworth(13)
|
|
|
33,986
|
|
|
|
|
*
|
|
|
5,236
|
|
|
|
28,750
|
|
|
|
|
*
|
|
|
|
|
|
|
28,750
|
|
|
|
*
|
|
Patrick A. Cliffford
|
|
|
33,128
|
|
|
|
|
*
|
|
|
5,423
|
|
|
|
27,705
|
|
|
|
|
*
|
|
|
1,601
|
|
|
|
26,104
|
|
|
|
*
|
|
Robert & Maxine
Peckar
|
|
|
33,085
|
|
|
|
|
*
|
|
|
5,416
|
|
|
|
27,669
|
|
|
|
|
*
|
|
|
1,599
|
|
|
|
26,070
|
|
|
|
*
|
|
Soaring Equities, LLC
|
|
|
32,408
|
|
|
|
|
*
|
|
|
5,305
|
|
|
|
27,103
|
|
|
|
|
*
|
|
|
1,230
|
|
|
|
25,873
|
|
|
|
*
|
|
Timothy
Maclay(13)
|
|
|
30,963
|
|
|
|
|
*
|
|
|
5,069
|
|
|
|
25,894
|
|
|
|
|
*
|
|
|
1,496
|
|
|
|
24,398
|
|
|
|
*
|
|
Michael S. Sullivan
|
|
|
29,730
|
|
|
|
|
*
|
|
|
4,867
|
|
|
|
24,863
|
|
|
|
|
*
|
|
|
1,437
|
|
|
|
23,426
|
|
|
|
*
|
|
Christopher Lust
|
|
|
28,556
|
|
|
|
|
*
|
|
|
4,675
|
|
|
|
23,881
|
|
|
|
|
*
|
|
|
325
|
|
|
|
23,556
|
|
|
|
*
|
|
Denis
Veilleux(13)
|
|
|
27,990
|
|
|
|
|
*
|
|
|
3,489
|
|
|
|
24,501
|
|
|
|
|
*
|
|
|
|
|
|
|
24,501
|
|
|
|
*
|
|
The Shippan Fund LP
|
|
|
27,807
|
|
|
|
|
*
|
|
|
4,553
|
|
|
|
23,255
|
|
|
|
|
*
|
|
|
1,344
|
|
|
|
21,911
|
|
|
|
*
|
|
Mike
Lord(13)
|
|
|
25,890
|
|
|
|
|
*
|
|
|
2,632
|
|
|
|
23,258
|
|
|
|
|
*
|
|
|
|
|
|
|
23,258
|
|
|
|
*
|
|
RBC Dain Rauscher Custodian
E. Andersen Griswold IRA
|
|
|
23,336
|
|
|
|
|
*
|
|
|
3,820
|
|
|
|
19,516
|
|
|
|
|
*
|
|
|
1,128
|
|
|
|
18,388
|
|
|
|
*
|
|
Jerry Kay
|
|
|
21,527
|
|
|
|
|
*
|
|
|
3,524
|
|
|
|
18,003
|
|
|
|
|
*
|
|
|
1,040
|
|
|
|
16,963
|
|
|
|
*
|
|
Zvi
Huber(13)
|
|
|
20,447
|
|
|
|
|
*
|
|
|
3,347
|
|
|
|
17,100
|
|
|
|
|
*
|
|
|
988
|
|
|
|
16,112
|
|
|
|
*
|
|
Cynthia
Eisenberg(7)
|
|
|
20,000
|
|
|
|
|
*
|
|
|
3,274
|
|
|
|
16,726
|
|
|
|
|
*
|
|
|
967
|
|
|
|
15,759
|
|
|
|
*
|
|
Greg
Flessate(13)
|
|
|
18,119
|
|
|
|
|
*
|
|
|
2,966
|
|
|
|
15,153
|
|
|
|
|
*
|
|
|
876
|
|
|
|
14,277
|
|
|
|
*
|
|
Mark A. and Joan B. Goldstein
|
|
|
17,634
|
|
|
|
|
*
|
|
|
2,887
|
|
|
|
14,747
|
|
|
|
|
*
|
|
|
852
|
|
|
|
13,895
|
|
|
|
*
|
|
Joe
Gruessing(13)
|
|
|
16,612
|
|
|
|
|
*
|
|
|
2,719
|
|
|
|
13,893
|
|
|
|
|
*
|
|
|
803
|
|
|
|
13,090
|
|
|
|
*
|
|
Murray Slimowitz IRA R/O
|
|
|
15,877
|
|
|
|
|
*
|
|
|
2,599
|
|
|
|
13,278
|
|
|
|
|
*
|
|
|
767
|
|
|
|
12,511
|
|
|
|
*
|
|
Jason
Carabetta(13)
|
|
|
15,403
|
|
|
|
|
*
|
|
|
2,522
|
|
|
|
12,881
|
|
|
|
|
*
|
|
|
744
|
|
|
|
12,137
|
|
|
|
*
|
|
Henry Wilson
|
|
|
14,489
|
|
|
|
|
*
|
|
|
2,372
|
|
|
|
12,117
|
|
|
|
|
*
|
|
|
628
|
|
|
|
11,489
|
|
|
|
*
|
|
Victoria
Schulte(13)
|
|
|
13,828
|
|
|
|
|
*
|
|
|
2,264
|
|
|
|
11,564
|
|
|
|
|
*
|
|
|
668
|
|
|
|
10,896
|
|
|
|
*
|
|
Joel Friedman
|
|
|
13,734
|
|
|
|
|
*
|
|
|
2,248
|
|
|
|
11,486
|
|
|
|
|
*
|
|
|
664
|
|
|
|
10,822
|
|
|
|
*
|
|
John
Gagliardo(13)
|
|
|
13,657
|
|
|
|
|
*
|
|
|
2,236
|
|
|
|
11,421
|
|
|
|
|
*
|
|
|
660
|
|
|
|
10,761
|
|
|
|
*
|
|
Tom
Brennan(20)
|
|
|
13,160
|
|
|
|
|
*
|
|
|
2,154
|
|
|
|
11,006
|
|
|
|
|
*
|
|
|
636
|
|
|
|
10,370
|
|
|
|
*
|
|
Bruce
Arnsbarger(13)
|
|
|
12,923
|
|
|
|
|
*
|
|
|
2,116
|
|
|
|
10,807
|
|
|
|
|
*
|
|
|
625
|
|
|
|
10,183
|
|
|
|
*
|
|
Eve Chrust
|
|
|
12,632
|
|
|
|
|
*
|
|
|
2,068
|
|
|
|
10,564
|
|
|
|
|
*
|
|
|
610
|
|
|
|
9,954
|
|
|
|
*
|
|
Liza Chrust
|
|
|
12,632
|
|
|
|
|
*
|
|
|
2,068
|
|
|
|
10,564
|
|
|
|
|
*
|
|
|
610
|
|
|
|
9,954
|
|
|
|
*
|
|
155
Selling
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
beneficially owned
|
|
|
|
Shares of
|
|
|
|
|
|
Shares of
|
|
|
shares of common
|
|
|
after offering if
|
|
|
|
common stock
|
|
|
|
|
|
common stock
|
|
|
stock offered if
|
|
|
over-allotment
|
|
|
|
beneficially owned
|
|
|
|
|
|
beneficially owned
|
|
|
over-allotment
|
|
|
option is
|
|
|
|
prior to the offering
|
|
|
Shares of common
|
|
|
after the offering
|
|
|
option
|
|
|
exercised in full
|
|
Name
|
|
Number
|
|
|
Percent
|
|
|
stock offered hereby
|
|
|
Number
|
|
|
Percent
|
|
|
is exercised in full
|
|
|
Number
|
|
|
Percent
|
|
|
|
|
Richard K. Webel Trust dated
4/20/98(6)
|
|
|
12,622
|
|
|
|
|
*
|
|
|
2,066
|
|
|
|
10,556
|
|
|
|
|
*
|
|
|
459
|
|
|
|
10,097
|
|
|
|
*
|
|
Jeffrey Riecker
|
|
|
11,828
|
|
|
|
|
*
|
|
|
1,936
|
|
|
|
9,892
|
|
|
|
|
*
|
|
|
572
|
|
|
|
9,320
|
|
|
|
*
|
|
Charles
Rose(13)
|
|
|
11,823
|
|
|
|
|
*
|
|
|
1,935
|
|
|
|
9,888
|
|
|
|
|
*
|
|
|
554
|
|
|
|
9,334
|
|
|
|
*
|
|
Doug Jones
|
|
|
10,495
|
|
|
|
|
*
|
|
|
1,718
|
|
|
|
8,777
|
|
|
|
|
*
|
|
|
507
|
|
|
|
8,270
|
|
|
|
*
|
|
Carle Their
|
|
|
8,271
|
|
|
|
|
*
|
|
|
1,354
|
|
|
|
6,917
|
|
|
|
|
*
|
|
|
400
|
|
|
|
6,517
|
|
|
|
*
|
|
Mark Frietas
|
|
|
8,092
|
|
|
|
|
*
|
|
|
1,325
|
|
|
|
6,767
|
|
|
|
|
*
|
|
|
391
|
|
|
|
6,376
|
|
|
|
*
|
|
Robert
Flannagan(13)
|
|
|
7,159
|
|
|
|
|
*
|
|
|
1,172
|
|
|
|
5,987
|
|
|
|
|
*
|
|
|
346
|
|
|
|
5,641
|
|
|
|
*
|
|
Mike
dAlessandro(13)
|
|
|
7,157
|
|
|
|
|
*
|
|
|
1,172
|
|
|
|
5,985
|
|
|
|
|
*
|
|
|
346
|
|
|
|
5,640
|
|
|
|
*
|
|
Chris
Tuttle(13)
|
|
|
7,123
|
|
|
|
|
*
|
|
|
1,166
|
|
|
|
5,957
|
|
|
|
|
*
|
|
|
344
|
|
|
|
5,613
|
|
|
|
*
|
|
RBC Dain Rauscher Custodian
E. Bulkeley Griswold SEP IRA
|
|
|
6,449
|
|
|
|
|
*
|
|
|
1,056
|
|
|
|
5,393
|
|
|
|
|
*
|
|
|
312
|
|
|
|
5,082
|
|
|
|
*
|
|
Bradley
Franco(4)(13)
|
|
|
5,818
|
|
|
|
|
*
|
|
|
952
|
|
|
|
4,866
|
|
|
|
|
*
|
|
|
281
|
|
|
|
4,584
|
|
|
|
*
|
|
Christian
Allred(13)
|
|
|
5,818
|
|
|
|
|
*
|
|
|
952
|
|
|
|
4,866
|
|
|
|
|
*
|
|
|
281
|
|
|
|
4,584
|
|
|
|
*
|
|
Steven
Heumann(13)
|
|
|
5,818
|
|
|
|
|
*
|
|
|
952
|
|
|
|
4,866
|
|
|
|
|
*
|
|
|
281
|
|
|
|
4,584
|
|
|
|
*
|
|
Chris
Becek(13)
|
|
|
5,727
|
|
|
|
|
*
|
|
|
822
|
|
|
|
4,905
|
|
|
|
|
*
|
|
|
|
|
|
|
4,905
|
|
|
|
*
|
|
E. Bulkeley Griswold IRA
|
|
|
5,700
|
|
|
|
|
*
|
|
|
933
|
|
|
|
4,767
|
|
|
|
|
*
|
|
|
275
|
|
|
|
4,491
|
|
|
|
*
|
|
Merle Rosenfelt
|
|
|
4,963
|
|
|
|
|
*
|
|
|
812
|
|
|
|
4,151
|
|
|
|
|
*
|
|
|
240
|
|
|
|
3,911
|
|
|
|
*
|
|
Le
Nghia(13)
|
|
|
4,734
|
|
|
|
|
*
|
|
|
622
|
|
|
|
4,112
|
|
|
|
|
*
|
|
|
|
|
|
|
4,112
|
|
|
|
*
|
|
Dolores
Raneri(13)
|
|
|
4,276
|
|
|
|
|
*
|
|
|
700
|
|
|
|
3,576
|
|
|
|
|
*
|
|
|
207
|
|
|
|
3,369
|
|
|
|
*
|
|
Stacey Brasington
|
|
|
4,135
|
|
|
|
|
*
|
|
|
677
|
|
|
|
3,458
|
|
|
|
|
*
|
|
|
200
|
|
|
|
3,258
|
|
|
|
*
|
|
Jerry
Spaid(13)
|
|
|
3,733
|
|
|
|
|
*
|
|
|
611
|
|
|
|
3,122
|
|
|
|
|
*
|
|
|
180
|
|
|
|
2,941
|
|
|
|
*
|
|
Chad Spodek 1999 Beneficiarys
Trust
|
|
|
3,334
|
|
|
|
|
*
|
|
|
546
|
|
|
|
2,788
|
|
|
|
|
*
|
|
|
161
|
|
|
|
2,627
|
|
|
|
*
|
|
David Spodek 1999
Beneficiarys Trust
|
|
|
3,334
|
|
|
|
|
*
|
|
|
546
|
|
|
|
2,788
|
|
|
|
|
*
|
|
|
161
|
|
|
|
2,627
|
|
|
|
*
|
|
Anthony
Robinson(13)
|
|
|
3,111
|
|
|
|
|
*
|
|
|
509
|
|
|
|
2,602
|
|
|
|
|
*
|
|
|
150
|
|
|
|
2,451
|
|
|
|
*
|
|
Keith Bolton
|
|
|
2,068
|
|
|
|
|
*
|
|
|
339
|
|
|
|
1,729
|
|
|
|
|
*
|
|
|
100
|
|
|
|
1,630
|
|
|
|
*
|
|
Lorraine Bolton
|
|
|
2,068
|
|
|
|
|
*
|
|
|
339
|
|
|
|
1,729
|
|
|
|
|
*
|
|
|
100
|
|
|
|
1,630
|
|
|
|
*
|
|
James
Smith(13)
|
|
|
1,743
|
|
|
|
|
*
|
|
|
285
|
|
|
|
1,458
|
|
|
|
|
*
|
|
|
84
|
|
|
|
1,373
|
|
|
|
*
|
|
Karl
Kyhl(13)
|
|
|
1,605
|
|
|
|
|
*
|
|
|
232
|
|
|
|
1,373
|
|
|
|
|
*
|
|
|
|
|
|
|
1,373
|
|
|
|
*
|
|
Abraham
Silbershatz(13)
|
|
|
1,555
|
|
|
|
|
*
|
|
|
255
|
|
|
|
1,300
|
|
|
|
|
*
|
|
|
75
|
|
|
|
1,225
|
|
|
|
*
|
|
Greg
Bland(13)
|
|
|
1,186
|
|
|
|
|
*
|
|
|
194
|
|
|
|
992
|
|
|
|
|
*
|
|
|
57
|
|
|
|
935
|
|
|
|
*
|
|
Total
|
|
|
25,365,740
|
|
|
|
68
|
%
|
|
|
4,015,000
|
|
|
|
21,350,740
|
|
|
|
53
|
%
|
|
|
1,050,000
|
|
|
|
20,300,070
|
|
|
|
50
|
%
|
|
|
|
* |
|
Represents beneficial ownership of less than 1% of the
outstanding shares of common stock. |
|
(1) |
|
See footnote 2 of the table under Principal
stockholders. |
|
(2) |
|
See footnote 3 of the table under Principal
stockholders and Certain relationships and
transaction with related personsOHB Technology
A.G. |
|
(3) |
|
See footnote 4 of the table under Principal
stockholders. |
|
(4) |
|
Don Franco was our Chairman of the Board until his death in
January 2006 and previously served as an executive officer,
including as Co-Chief Executive Officer from February through
December 2004. See footnote 7 of the table under
Principal stockholders. |
|
(5) |
|
See footnote 5 of the table under Principal
stockholders. This selling stockholder is an affiliate of
a registered broker dealer that is otherwise not participating
in this offering. |
|
(6) |
|
See footnote 8 of the table under Principal
stockholders. |
(footnotes continued on
following page)
156
Selling
stockholders
|
|
|
(7) |
|
Jerome B. Eisenberg is our Chairman of the Board and our
Chief Executive Officer. Mr. Eisenberg is also the father
of Marc Eisenberg and the husband of Cynthia Eisenberg. See
footnote 9 of the table under Principal
stockholders. |
|
(8) |
|
See Certain relationships and transaction with related
personsORBCOMM Asia Limited. |
|
(9) |
|
Marc Eisenberg is our Chief Operating Officer.
Mr. Eisenberg is also the son of Jerome B. and Cynthia
Eisenberg. See footnote 9 of the table under
Principal stockholders. |
|
(10) |
|
Mr. Connelly was a member of our board of directors from
February 2004 to December 2005. Mr. Franco was a member of
our board of directors from February 2006 to November 2006.
Mr. John Franco is the brother of Mr. Don Franco, our
former Chairman of the Board. |
|
(11) |
|
Emmett Hume is our Executive Vice President,
International. |
|
(12) |
|
The managing member of Hoboken Partners 1 LLC is a member of
Chadbourne & Parke LLP, our counsel in this offering.
See Legal Matters. |
|
(13) |
|
A current non-executive officer employee of the Company. |
|
(14) |
|
Mr. Chrust is the owner of SGC Advisory Services, Inc.,
which has in the past provided advisory services to us for which
we provided compensation, including in the form of warrants to
purchase shares of our common stock. |
|
(15) |
|
Mr. Brady was our Chief Financial Officer from 2004 to
2006. |
|
(16) |
|
Mr. Stolte is our Executive Vice President, Technology
and Operations. |
|
(17) |
|
Mr. Hoffmann is a member of our board of directors. |
|
(18) |
|
Mr. Costantini is our Chief Financial Officer. |
|
(19) |
|
Mr. Le Brun is our Senior Vice President and General
Counsel. |
|
(20) |
|
Mr. Brennan is our Senior Vice President, Finance. |
|
|
|
Indicates selling stockholders subject to the Second Amended
and Restated Registration Rights Agreement, dated as of
December 30, 2005, by and among us and certain stockholders
of ours. See Certain relationships and transactions with
related personsRegistration Rights Agreement. |
All of the shares owned by the selling stockholders, other than
certain shares issued upon exercise of options and SARs or
vesting of RSUs, were restricted securities under
the Securities Act prior to this registration.
157
Description of
capital stock
In this section, we, us and
our refer only to ORBCOMM Inc. and not its
subsidiaries. The following is a description of the material
terms of our amended and restated certificate of incorporation
and our amended bylaws. This description is subject to the
detailed provisions of, and is qualified by reference to, our
amended and restated certificate of incorporation and our
amended bylaws, copies of which have been filed as exhibits to
the registration statement of which this prospectus is a part.
GENERAL
We are authorized to issue (1) 250 million shares of
common stock, par value $0.001 per share and
(2) 50 million shares of preferred stock, par value
$0.001 per share. As of March 31, 2007, we had
37,187,134 shares of our common stock outstanding held by
122 holders of record. Immediately following the completion of
this offering, there are expected to be 40,172,134 shares
of our common stock outstanding (based on the number of shares
of common stock outstanding on March 31, 2007 and excluding
shares of common stock issued upon the exercise of warrants to
purchase common stock subsequent to such date) and no shares of
preferred stock outstanding. The authorized shares of our common
stock and preferred stock will be available for issuance without
further action by our stockholders, unless such action is
required by applicable law or the rules of any stock exchange or
automated quotation system on which our securities may be listed
or traded. If the approval of our stockholders is not required,
our board of directors may determine not to seek stockholder
approval.
Certain of the provisions described under this section entitled
Description of capital stock could discourage
transactions that might lead to a change of control of our
company. Our amended and restated certificate of incorporation
and amended bylaws:
|
|
Ø
|
establish a classified board of directors, whereby our directors
are elected for staggered terms in office so that only one-third
of our directors stand for election in any one year;
|
|
Ø
|
require stockholders to provide advance notice of any
stockholder nominations of directors or any proposal of new
business to be considered at any meeting of stockholders;
|
|
Ø
|
require a supermajority vote to remove a director or to amend or
repeal certain provisions of our amended and restated
certificate of incorporation or amended bylaws; and
|
|
Ø
|
preclude stockholders from calling a special meeting of
stockholders.
|
COMMON
STOCK
Our amended and restated certificate of incorporation permits us
to issue up to 250 million shares of our common stock.
Dividends. Holders of common stock are
entitled to such dividends as may be declared by our board of
directors out of funds legally available therefor. Dividends may
not be paid on common stock unless all accrued dividends on
preferred stock, if any, have been paid or set aside. In the
event of our liquidation, dissolution or
winding-up,
the holders of common stock will be entitled to share pro rata
in the assets remaining after payment to creditors and after
payment of the liquidation preference plus any unpaid dividends
to holders of any outstanding preferred stock. See
Dividend policy.
Voting. Each holder of common stock is
entitled to one vote for each such share outstanding in the
holders name. No holder of common stock is entitled to
cumulate votes in voting for directors.
Other Rights. Our amended and restated
certificate of incorporation provides that, unless otherwise
determined by our board of directors, no holder of shares of
common stock will have any right to purchase or subscribe for
any stock of any class that we may issue or sell.
158
Description of
capital stock
PREFERRED
STOCK
Our amended and restated certificate of incorporation permit us
to issue up to 50 million shares of our preferred stock in
one or more series and with rights and preferences that may be
fixed or designated by our board of directors without any
further action by our stockholders. The powers, preferences,
rights and qualifications, limitations and restrictions of the
preferred stock of any other series will be fixed by the
certificate of designation relating to such series, which will
specify the terms of the preferred stock, including:
|
|
Ø
|
the maximum number of shares in the series and the distinctive
designation;
|
|
Ø
|
the terms on which dividends, if any, will be paid;
|
|
Ø
|
the terms on which the shares may be redeemed, if at all;
|
|
Ø
|
the terms of any retirement or sinking fund for the purchase or
redemption of the shares of the series;
|
|
Ø
|
the liquidation preference, if any;
|
|
Ø
|
the terms and conditions, if any, on which the shares of the
series shall be convertible into, or exchangeable for, shares of
any other class or classes of capital stock;
|
|
Ø
|
the restrictions on the issuance of shares of the same series or
any other class or series; and
|
|
Ø
|
the voting rights, if any, of the shares of the series.
|
Although our board of directors has no intention at the present
time of doing so, it could issue a series of preferred stock
that could, depending on the terms of such series, impede the
completion of a merger, tender offer or other takeover attempt.
CERTAIN
PROVISIONS OF OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND AMENDED BYLAWS
Our amended and restated certificate of incorporation and
amended bylaws contain various provisions intended to
(1) promote the stability of our stockholder base and
(2) render more difficult certain unsolicited or hostile
attempts to take us over, which could disrupt us, divert the
attention of our directors, officers and employees and adversely
affect the independence and integrity of our business.
Classified Board of Directors. Pursuant to our
amended and restated certificate of incorporation and amended
bylaws the number of directors is fixed by our board of
directors. Other than directors elected by the holders of any
series of preferred stock or any other series or class of stock
except common stock, our directors are divided into three
classes. Each class consists as nearly as possible of one third
of the directors. Directors elected by stockholders at an annual
meeting of stockholders will be elected by a plurality of all
votes cast. The terms of office of the three classes of director
will expire, respectively, at our annual meetings in 2007, 2008
and 2009. The term of the successors of each such class of
directors will expire three years from the year of election.
Removal of directors; Vacancies. Under
Delaware law, unless otherwise provided in our amended and
restated certificate of incorporation, directors serving on a
classified board of directors may be removed by the stockholders
only for cause. Our amended and restated certificate of
incorporation provides that directors may be removed only for
cause upon the affirmative vote of holders of 75% of the voting
power of all the then outstanding shares of capital stock
entitled to vote generally in the election of directors, voting
together as a single class.
159
Description of
capital stock
Our amended and restated certificate of incorporation provides
that any vacancy created by removal of a director shall be
filled by a majority of the remaining members of the board of
directors even though such majority may be less than a quorum.
Special Meetings; Written Consent. Our amended
and restated certificate of incorporation and amended bylaws
provide that a special meeting of stockholders may be called
only by a resolution adopted by a majority of the entire board
of directors. Stockholders are not permitted to call, or to
require that the board of directors call, a special meeting of
stockholders. Moreover, the business permitted to be conducted
at any special meeting of stockholders will be limited to the
business brought before the meeting pursuant to the notice of
the meeting given by us. In addition, our amended and restated
certificate provides that any action taken by our stockholders
must be effected at an annual or special meeting of stockholders
and may not be taken by written consent instead of a meeting.
Our amended bylaws establish an advance notice procedure for
stockholders to nominate candidates for election as directors or
to bring other business before meetings of our stockholders.
Our amended and restated certificate of incorporation provides
that the affirmative vote of at least
662/3%
of the voting power of all of our outstanding capital stock
entitled to vote generally in the election of directors, voting
together as a single class, would be required to amend or repeal
the provisions of our amended and restated certificate of
incorporation with respect to:
|
|
Ø
|
the election of directors;
|
|
Ø
|
the right to call a special meeting of stockholders;
|
|
Ø
|
the right to act by written consent;
|
|
Ø
|
amending our restated certificate of incorporation or amended
bylaws; or
|
|
Ø
|
the right to adopt any provision inconsistent with the preceding
provisions.
|
In addition, our amended and restated certificate of
incorporation provides that our board of directors may make,
alter, amend and repeal our amended bylaws and that the
amendment or repeal by stockholders of any of our amended bylaws
would require the affirmative vote of at least
662/3%
of the voting power described above, voting together as a single
class.
Delaware takeover
statute
We are subject to Section 203 of the Delaware General
Corporation Law, which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any business
combination (as defined below) with any interested
stockholder (as defined below) for a period of three years
following the date that such stockholder became an interested
stockholder, unless: (1) prior to such date, the board of
directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder
becoming an interested stockholder; (2) on consummation of
the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at
the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned
(x) by persons who are directors and also officers and
(y) by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or
exchange offer; or (3) on or subsequent to such date, the
business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least
662/3%
of the outstanding voting stock that is not owned by the
interested stockholder.
160
Description of
capital stock
Section 203 of the Delaware General Corporation Law defines
business combination to include: (1) any merger
or consolidation involving the corporation and the interested
stockholder; (2) any sale, transfer, pledge or other
disposition of 10% or more of the assets of the corporation
involving the interested stockholder; (3) subject to
certain exceptions, any transaction that results in the issuance
or transfer by the corporation of any stock of the corporation
to the interested stockholder; (4) any transaction
involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or
(5) the receipt by the interested stockholder of the
benefit of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation. In
general, Section 203 defines an interested
stockholder as any entity or person beneficially owning
15% or more of the outstanding voting stock of the corporation
and any entity or person affiliated with or controlling or
controlled by such entity or person.
THE NASDAQ GLOBAL
MARKET
Our common stock is listed on The Nasdaq Global Market under the
symbol ORBC.
TRANSFER AGENT
AND REGISTRAR
The transfer agent and registrar for our common stock is Mellon
Investor Services LLC. Its address is 480 Washington
Boulevard, Jersey City, NJ 07310, and its telephone number is
(888) 829-7528.
161
Shares eligible for
future sale
Future sales of significant amounts of our common stock,
including shares of our outstanding common stock and shares of
our common stock issued upon exercise of outstanding options, in
the public market after this offering could adversely affect the
prevailing market price of our common stock and could impair our
future ability to raise capital through the sale of our equity
securities.
SALE OF
RESTRICTED SHARES AND
LOCK-UP
AGREEMENTS
Upon the closing of this offering, we will have outstanding
40,172,134 shares of common stock. Of these shares,
16,230,800 shares of common stock will be freely tradable
without restriction under the Securities Act, unless purchased
by affiliates of ours, as that term is defined in Rule 144
under the Securities Act.
The remaining shares of common stock were issued and sold by us
in private transactions, and are eligible for public sale if
registered under the Securities Act or sold in accordance with
Rule 144, 144(k) or 701 of the Securities Act. However,
approximately 31,000,000 of these remaining shares of common
stock are held by officers, directors, and existing stockholders
who are subject to
lock-up
agreements until June 1, 2007, subject to extension under
certain circumstances, under which they have agreed not to sell
or otherwise dispose of their shares of common stock (and any
shares purchased or acquired by them, whether pursuant to
options or warrants to purchase common stock, RSUs or SARs or
otherwise, after completion of our initial public offering).
We and UBS Securities LLC have jointly waived the
lock-up
provisions to permit us and the selling stockholders to
participate in this offering. In connection with this offering,
the stockholders party to the Second Amended and Restated
Registration Rights Agreement, dated as of December 30,
2005, including the selling stockholders, have agreed to be
bound by
lock-up
arrangements with UBS Securities LLC and us for a period of
90 days after the date of this prospectus pursuant to and
subject to the condition set forth in the Second Amended and
Restated Registration Rights Agreement. UBS Securities LLC and
we may jointly release the shares subject to the
lock-up
agreements in whole or in part at anytime with or without
notice. In the event we and UBS Securities LLC release any or
all of an individual stockholders shares from the
lock-up
agreement, we and UBS Securities LLC are required to similarly
release a similar percentage of the shares held by all other
stockholders who are subject to the
lock-up
agreements unless holders of the majority of shares subject to
lock-up
agreements otherwise consent to such release. We have been
advised by UBS Securities LLC that, when determining whether or
not to release shares from the
lock-up
agreements, UBS Securities LLC will consider, among other
factors, the stockholders reasons for requesting the
release, the number of shares for which the release is being
requested and market conditions at the time. UBS Securities LLC
has advised us that it has no present intention, and we have no
present intention, to release any of the shares subject to the
lock-up
agreements prior to the expiration of the
lock-up
period.
Certain investors also have piggyback registration rights as
specified in our Second Amended and Restated Registration Rights
Agreement and we have obtained a waiver of such piggyback
registration rights with respect to this offering.
RULE 144
In general, Rule 144 allows a stockholder (or stockholders
where shares are aggregated) who has beneficially owned shares
of our common stock for at least one year and who files a
Form 144 with the SEC to sell within any three month period
commencing 90 days after the date of this prospectus a
number of those shares that does not exceed the greater of:
|
|
Ø |
1% of the number of shares of common stock then outstanding,
which will equal approximately 363,041 shares immediately
after this offering; or
|
162
Shares eligible
for future sale
|
|
Ø |
the average weekly trading volume of the common stock during the
four calendar weeks preceding the filing of the Form 144
with respect to such sale.
|
Sales under Rule 144, however, are subject to specific
manner of sale provisions, notice requirements, and the
availability of current public information about our company. We
cannot estimate the number of shares of common stock our
existing stockholders will sell under Rule 144, as this
will depend on the market price for our common stock, the
personal circumstances of the stockholders, and other factors.
RULE 144(k)
Under Rule 144(k), in general, a stockholder who has
beneficially owned shares of our common stock for at least two
years and who is not deemed to have been an affiliate of ours at
any time during the immediately preceding 90 days may sell
shares without complying with the manner of sale provisions,
notice requirements, public information requirements, or volume
limitations of Rule 144. Affiliates of ours, however, must
always sell pursuant to Rule 144, even after the otherwise
applicable Rule 144(k) holding periods have been satisfied.
RULE 701
Rule 701 generally allows a stockholder who purchased
shares of our common stock pursuant to a written compensatory
plan or contract before the effective date of the registration
statement pursuant to which we made our initial public offering
and who is not deemed to have been an affiliate of ours to sell
these shares in reliance upon Rule 144, but without being
required to comply with the public information, holding period,
volume limitation, or notice provisions of Rule 144.
Rule 701 also permits affiliates of ours to sell their
Rule 701 shares under Rule 144 without complying
with the holding period requirements of Rule 144.
As of the date of this prospectus, no shares of our outstanding
common stock had been issued in reliance on Rule 701 as a
result of exercises of stock options.
OPTIONS, RSUS AND
SARS
In addition to the 40,172,134 shares of common stock
expected to be outstanding immediately after this offering, as
of March 31, 2007, there were 899,296 and
413,334 shares of common stock deliverable upon the vesting
of outstanding RSUs and the exercise of outstanding SARs,
respectively, and outstanding options to purchase
1,464,420 shares of our common stock. We have filed a
registration statement on
Form S-8
under the Securities Act covering shares of our common stock
issued or reserved for issuance under our 2004 stock option plan
and 2006 LTIP. Accordingly, shares of our common stock
registered under such registration statement will be available
for sale in the open market upon the vesting of RSUs or the
exercise of options or SARs by the holders, subject, in each
case, to vesting restrictions with us, contractual
lock-up
restrictions,
and/or
market stand-off provisions applicable to each award agreement
that prohibit the sale or other disposition of the shares of
common stock underlying the awards for a specified period,
subject to extension under certain circumstances, without the
prior written consent from both us and UBS Securities LLC.
163
The following is a summary of the material U.S. federal
income tax consequences that may be relevant to
Non-U.S. Holders
with respect to the acquisition, ownership and disposition of
our common stock. For purposes of this description, a
Non-U.S. Holder
is a beneficial owner of our common stock that, for
U.S. federal income tax purposes, is not:
|
|
Ø
|
an individual citizen or resident of the United States;
|
|
Ø
|
a corporation (or any other entity treated as a corporation for
U.S. federal income tax purposes) created or organized in
or under the laws of the United States or any state thereof,
including the District of Columbia;
|
|
Ø
|
an estate the income of which is subject to U.S. federal
income taxation regardless of its source; or
|
|
Ø
|
a trust if it (1) is subject to the primary supervision of
a court within the United States and one or more United States
persons have the authority to control all substantial decisions
of the trust or (2) has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a
United States person.
|
If a partnership (or any other entity treated as a partnership
for U.S. federal income tax purposes) or other pass-through
entity holds our common stock, the tax treatment of a partner or
owner of such partnership or other pass-through entity will
generally depend on the status of the partner or owner and the
activities of the partnership or pass-through entity. Such a
partnership or pass-through entity, or partner or owner of such
a partnership or pass-through entity, should consult its tax
advisor as to its tax consequences.
This description addresses only the U.S. federal income tax
considerations of holders that are initial purchasers of our
common stock pursuant to the offering and that will hold our
common stock as a capital asset and does not address all aspects
of U.S. federal income taxation that may be relevant in
light of a particular
Non-U.S. Holders
special tax status or situation. In particular, this description
does not address tax considerations applicable to holders that
are U.S. persons, financial institutions, insurance
companies, real estate investment trusts, regulated investment
companies, dealers or traders in securities or currencies,
tax-exempt entities, U.S. expatriates, partnerships or
other pass-through entities, passive foreign investment
companies, controlled foreign corporations, persons that will
hold our stock as part of a hedge, straddle or conversion
transaction, persons that have a functional currency
other than the U.S. dollar, or holders that own or are
deemed to own 10% or more, by voting power or value, of our
stock. This discussion does not address any tax consequences
that arise under the laws of any state, local or foreign
jurisdiction. Moreover, except as set forth below, this
description does not address the U.S. federal estate and
gift or alternative minimum tax consequences of the acquisition,
ownership and disposition of our common stock.
This description is based on the Code, existing, proposed and
temporary U.S. Treasury Regulations and judicial and
administrative interpretations thereof, in each case as in
effect and available on the date hereof. All of the foregoing
are subject to change, which change could apply retroactively
and could affect the tax consequences described below.
You should consult your own tax advisor with respect to the
U.S. federal, state, local and foreign tax consequences of
acquiring, owning and disposing of our common stock.
DIVIDENDS
Distributions on our common stock will constitute dividends to
the extent paid out of our current or accumulated earnings and
profits as determined for U.S. federal income tax purposes.
If a distribution
164
Material
U.S. federal income tax considerations for
non-U.S. holders
exceeds our current and accumulated earnings and profits, the
excess will be treated as a tax-free return of the
Non-U.S. Holders
investment to the extent of the
Non-U.S. Holders
adjusted tax basis in our common stock. Any remaining excess
will be treated as capital gain.
We currently do not intend to pay dividends with respect to our
common stock. However, if we were to pay dividends with respect
to our common stock, generally, but subject to the discussions
below under Status as United States Real Property
Holding Corporation and Backup Withholding Tax
and Information Reporting Requirements, if you are a
Non-U.S. Holder,
dividends of cash or property paid to you will be subject to
withholding of U.S. federal income tax at a 30% rate or
such lower rate as may be specified by an applicable United
States income tax treaty. In order to obtain the benefit of any
applicable United States income tax treaty, you will have to
file certain forms (e.g.,
Form W-8BEN
or an acceptable substitute form). Such forms generally would
contain your name and address and a certification that you are
eligible for the benefits of such treaty.
This United States withholding tax generally will not apply to
dividends that are effectively connected with the conduct of a
trade or business by the
Non-U.S. Holder
within the United States, and, if a treaty applies, attributable
to a United States permanent establishment or fixed base of the
Non-U.S. Holder.
Dividends effectively connected with the conduct of a trade or
business, as well as those attributable to a United States
permanent establishment or fixed base of the
Non-U.S. Holder
under an applicable treaty, are subject to United States federal
income tax generally in the same manner as if the
Non-U.S. Holder
were a U.S. person, as defined under the Code. Certain
Internal Revenue Service, or the IRS, certification and
disclosure requirements must be complied with (e.g., the
provision of a
Form W-8ECI
or an acceptable substitute form) in order for effectively
connected income to be exempt from withholding. Any such
effectively connected dividends received by a
Non-U.S. Holder
that is a foreign corporation may, under certain circumstances,
be subject to an additional branch profits tax at a
30% rate or such lower rate as may be specified by an applicable
income tax treaty.
SALE, EXCHANGE OR
OTHER TAXABLE DISPOSITION OF OUR COMMON STOCK
Generally, but subject to the discussions below under
Status as United States Real Property Holding
Corporation and Backup Withholding Tax and
Information Reporting Requirements, if you are a
Non-U.S. Holder,
you will not be subject to U.S. federal income or
withholding tax on any gain recognized on the sale, exchange or
other taxable disposition of our common stock unless
(1) such gain is effectively connected with your conduct of
a trade or business in the United States and, where a tax treaty
applies, is attributable to a permanent establishment or
(2) if you are an individual, you are present in the United
States for 183 days or more in the taxable year of such
disposition and certain other conditions are met. If you are a
corporate
Non-U.S. Holder,
effectively connected gains that you recognize may
also, under certain circumstances, be subject to an additional
branch profits tax at a 30% rate or at a lower rate
if you are eligible for the benefits of an income tax treaty
that provides for a lower rate.
STATUS AS UNITED
STATES REAL PROPERTY HOLDING CORPORATION
If you are a
Non-U.S. Holder,
under certain circumstances, gain recognized on the sale or
exchange of, and certain distributions in excess of basis with
respect to, our common stock would be subject to
U.S. federal income tax, notwithstanding your lack of other
connections with the United States, if we are or have been a
United States real property holding corporation for
U.S. federal income tax purposes at any time during the
five-year period ending on the date of such sale or exchange (or
distribution). We believe that we will not be classified as a
United States real property holding corporation as of the date
of this offering and do not expect to become a United States
real property holding corporation. However, the determination of
whether we are a United States real property
165
Material
U.S. federal income tax considerations for
non-U.S. holders
holding corporation is fact-specific and depends on the
composition of our assets. We cannot assure you that we will not
in the future become a United States real property holding
corporation.
FEDERAL ESTATE
TAX
Our common stock held by an individual at death, regardless of
whether such individual is a citizen, resident or domiciliary of
the United States, will be included in the individuals
gross estate for U.S. federal estate tax purposes, subject
to an applicable estate tax or other treaty, and therefore may
be subject to U.S. federal estate tax.
BACKUP
WITHHOLDING TAX AND INFORMATION REPORTING REQUIREMENTS
We must report annually to the IRS and to each
Non-U.S. Holder
the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns
reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the
Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
The United States imposes a backup withholding tax on dividends
and certain other types of payments to United States persons
(currently at a rate of 28% of the gross amount). Dividends paid
to a
Non-U.S. Holder
will not be subject to backup withholding if proper
certification of foreign status (usually on an IRS
Form W-8BEN)
is provided, and the payor does not have actual knowledge or
reason to know that the beneficial owner is a United States
person, or the holder is a corporation or one of several types
of entities and organizations that qualify for exemption, also
referred to as an exempt recipient.
Information reporting and backup withholding generally are not
required with respect to the amount of any proceeds from the
sale or other disposition of shares of common stock by a
Non-U.S. Holder
outside the United States through a foreign office of a foreign
broker that does not have certain specified connections to the
United States. However, if a
Non-U.S. Holder
sells or otherwise disposes of shares of common stock through
the U.S. office of a United States or foreign broker, the
broker will be required to report the amount of proceeds paid to
such holder to the IRS and to apply the backup withholding tax
(currently at a rate of 28%) to the amount of such proceeds
unless appropriate certification (usually on an IRS
Form W-8BEN)
is provided to the broker of the holders status as either
an exempt recipient or a
non-U.S. person,
and the payor does not have actual knowledge or reason to know
that the beneficial owner is a United States person. Information
reporting also applies if a
Non-U.S. Holder
sells or otherwise disposes of its shares of common stock
through the foreign office of a broker deriving more than a
specified percentage of its income from United States sources or
having certain other connections to the United States and the
foreign broker does not have certain documentary evidence in its
files of the
Non-U.S. Holders
foreign status.
Any amounts withheld under the backup withholding rules may be
allowed as a refund or a credit against such holders
U.S. federal income tax liability provided the required
information is timely furnished to the IRS.
The above description is not intended to constitute a
complete analysis of all tax consequences relating to the
acquisition, ownership and disposition of our common stock. You
should consult your own tax advisor concerning the tax
consequences of your particular situation.
166
Underwriting
We and the selling stockholders are offering the shares of our
common stock described in this prospectus through the
underwriters named below. UBS Securities LLC and Cowen and
Company, LLC are the representatives of the underwriters and
joint book-running managers of this offering. We have entered
into an underwriting agreement with the representatives. Subject
to the terms and conditions of the underwriting agreement, each
of the underwriters has severally agreed to purchase the number
of shares of common stock listed next to its name in the
following table.
|
|
|
|
|
Underwriter
|
|
Number of
Shares
|
|
|
|
|
UBS Securities LLC
|
|
|
2,800,000
|
|
Cowen and Company, LLC
|
|
|
1,750,000
|
|
Piper Jaffray & Co.
|
|
|
910,000
|
|
CIBC World Markets Corp.
|
|
|
770,000
|
|
Raymond James &
Associates, Inc.
|
|
|
770,000
|
|
|
|
|
|
|
Total
|
|
|
7,000,000
|
|
|
|
|
|
|
The underwriting agreement provides that the underwriters must
buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters over-allotment option
described below.
Our common stock is offered subject to a number of conditions,
including:
|
|
Ø
|
receipt and acceptance of our common stock by the underwriters;
and
|
|
Ø
|
the underwriters right to reject orders in whole or in
part.
|
We have been advised by the representatives that the
underwriters intend to make a market in our common stock, but
that they are not obligated to do so and may discontinue making
a market at any time without notice.
In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectuses electronically.
OVER-ALLOTMENT
OPTION
The selling stockholders have granted to the underwriters an
option to buy up to an aggregate of 1,050,000 additional shares
of our common stock. The underwriters may exercise this option
solely for the purpose of covering over-allotments, if any, made
in connection with this offering. The underwriters have
30 days from the date of this prospectus to exercise this
option. If the underwriters exercise this option, they will each
purchase additional shares approximately in proportion to the
amounts specified in the table above.
COMMISSIONS AND
DISCOUNTS
Shares sold by the underwriters to the public will initially be
offered at the offering price set forth on the cover of this
prospectus. Any shares sold by the underwriters to securities
dealers may be sold at a discount of up to $0.37 per share
from the public offering price. Any of these securities dealers
may resell any shares purchased from the underwriters to other
brokers or dealers at a discount of up to $0.10 per share
from the public offering price. If all the shares are not sold
at the public offering price, the representatives may change the
offering price and the other selling terms. Sales of shares made
outside of the United States may be made by affiliates of the
underwriters. Upon execution of the underwriting agreement, the
underwriters will be obligated to purchase the shares at the
prices and
167
Underwriting
upon the terms stated therein, and, as a result, will thereafter
bear any risk associated with changing the offering price to the
public or other selling terms.
The following table shows the per share and total underwriting
discounts and commissions we and the selling stockholders will
pay to the underwriters assuming both no exercise and full
exercise of the underwriters option to purchase up to an
additional 1,050,000 shares.
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
No
exercise
|
|
|
Full
exercise
|
|
|
|
|
Per Share
|
|
$
|
0.6325
|
|
|
$
|
0.6325
|
|
Total
|
|
$
|
4,427,500
|
|
|
$
|
5,091,625
|
|
|
|
|
|
|
|
|
|
|
We estimate that the total expenses of this offering payable by
us, not including the underwriting discounts and commissions,
will be approximately $1.2 million.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act. If we are unable to provide this
indemnification, we have agreed to contribute to payments the
underwriters may be required to make in respect of those
liabilities.
NO SALES OF
SIMILAR SECURITIES
Our executive officers and directors and certain of our existing
stockholders have entered into
lock-up
agreements with UBS Securities LLC. Under these agreements,
subject to certain exceptions, each of these persons may not,
without the prior written approval of UBS Securities LLC, offer,
sell, contract to sell or otherwise dispose of, directly or
indirectly, or hedge our common stock or securities convertible
into or exchangeable or exercisable for our common stock, or
warrants or other rights to purchase our common stock. These
restrictions will be in effect for a period of 90 days
after the date of this prospectus, subject to extension under
certain circumstances. At any time and without public notice, we
and UBS Securities LLC may jointly release all or some of the
securities from these
lock-up
agreements. See Shares eligible for future saleSale
of Restricted Shares and Lock Up Agreements.
We have entered into a
lock-up
agreement with UBS Securities LLC and Cowen and Company, LLC.
Under this agreement, subject to certain exceptions, we may not,
without the prior written approval of UBS Securities LLC and
Cowen and Company, LLC, offer, sell, contract to sell or
otherwise dispose of, directly or indirectly, or hedge our
common stock or securities convertible into or exchangeable or
exercisable for our common stock, or warrants or other rights to
purchase our common stock. These restrictions will be in effect
for a period of 90 days after the date of this prospectus,
subject to extension under certain circumstances. At any time
and without public notice, UBS Securities LLC and Cowen and
Company, LLC may jointly release all or some of the securities
from this lock-up agreement.
NASDAQ GLOBAL
MARKET
Our common stock is listed on Nasdaq under the trading symbol
ORBC.
PRICE
STABILIZATION, SHORT POSITIONS
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common stock, including:
|
|
Ø |
stabilizing transactions;
|
168
Underwriting
|
|
Ø
|
short sales;
|
|
Ø
|
purchases to cover positions created by short sales;
|
|
Ø
|
imposition of penalty bids; and
|
|
Ø
|
syndicate covering transactions.
|
Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common stock while this offering is in progress.
These transactions may also include making short sales of our
common stock, which involves the sale by the underwriters of a
greater number of shares of common stock than they are required
to purchase in this offering and purchasing shares of common
stock in the open market to cover positions created by short
sales. Short sales may be covered short sales, which
are short positions in an amount not greater than the
underwriters over-allotment option referred to above, or
may be naked short sales, which are short positions
in excess of that amount.
The underwriters may close out any covered short position by
either exercising their over-allotment option, in whole or in
part, or by purchasing shares in the open market. In making this
determination, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase
shares through the over-allotment option.
Naked short sales are sales in excess of the over-allotment
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common
stock in the open market that could adversely affect investors
who purchased in this offering.
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of that underwriter in stabilizing or short covering
transactions.
As a result of these activities, the price of our common stock
may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. The underwriters
may carry out these transactions on Nasdaq, in the
over-the-counter
market or otherwise.
AFFILIATIONS
Certain of the underwriters and their affiliates have in the
past and may in the future provide from time to time certain
commercial banking, financial advisory, investment banking and
other services for us in the ordinary course of their business
for which they will be entitled to receive separate fees. UBS
Securities LLC arranged the private placement of a portion of
the convertible notes and Series B preferred stock in
December 2005, for which it received customary fees. UBS
Securities LLC and Cowen and Company, LLC acted as underwriters
in the Companys initial public offering in November 2006
for which they received customary fees.
169
Controls and
procedures
The following material weaknesses in our internal control over
financial reporting were identified and communicated to us by
Deloitte & Touche LLP, our independent registered
public accounting firm, in connection with the audit of our
consolidated financial statements for the year ended
December 31, 2005:
|
|
Ø
|
inadequate internal communication procedures between our
management and the internal accounting staff on significant
and/or
complex transactions;
|
|
Ø
|
a lack of thorough and rigorous review of contractual documents
supporting complex transactions;
|
|
Ø
|
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;
|
|
Ø
|
the absence of formal internal control procedures and the
attendant control framework required to enforce those
procedures; and
|
|
Ø
|
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:
|
|
Ø
|
hired a new Chief Financial Officer and key senior accounting
and finance employees;
|
|
Ø
|
established weekly updates from our technical operations team to
provide enhanced communications throughout the Company;
|
|
Ø
|
established weekly finance meetings, which include all key
finance employees, to address significant
and/or
complex transactions;
|
|
Ø
|
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;
|
|
Ø
|
formalized the monthly closing process, which includes an
account reconciliation process for all balance sheet and income
statement accounts and a review of reconciliations by accounting
management; and
|
|
Ø
|
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.
|
We believe 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.
170
Legal matters
The validity of the shares of common stock offered hereby will
be passed upon for us by Chadbourne & Parke LLP, New
York, New York, and for the underwriters by Milbank, Tweed,
Hadley & McCloy LLP, New York, New York. As of the
date of this prospectus, a member of Chadbourne &
Parke LLP beneficially owns, through Hoboken Partners 1 LLC,
188,348 shares of our common stock and following the sale
by Hoboken Partners 1 LLC of shares in this offering
described under Selling stockholders,
159,600 shares of our common stock. Such member disclaims
beneficial ownership of these shares except to the extent of
70,767 shares of our common stock and following the sale by
Hoboken Partners 1 LLC of shares in this offering described
under Selling stockholders, 60,767 shares of
our common stock.
Experts
The consolidated financial statements and the related financial
statement schedule, as of December 31, 2006 and 2005 and
for each of the three years in the period ended
December 31, 2006, included in this prospectus have been
audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report
appearing herein (which report expresses an unqualified opinion
and includes an explanatory paragraph referring to a change in
method for accounting for stock-based compensation), and have
been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
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.
171
Where you can find
more information
We have filed with the SEC a registration statement on
Form S-1
(including the exhibits, schedules, and amendments to the
registration statement) under the Securities Act with respect to
the shares of common stock offered by this prospectus. This
prospectus does not contain all the information set forth in the
registration statement. For further information with respect to
us and the shares of common stock to be sold in this offering,
we refer you to the registration statement. Statements contained
in this prospectus as to the contents of any contract, agreement
or other document to which we make reference are not necessarily
complete. In each instance, we refer you to the copy of such
contract, agreement or other document filed as an exhibit to the
registration statement, each such statement being qualified in
all respects by the more complete description of the matter
involved.
We are required to file periodic and current reports, proxy and
information statements, and other information with the SEC
pursuant to the Securities Exchange Act of 1934. You may read
and copy this information at the Public Reference Room of the
SEC located at 100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the operation of the Public Reference
Room. Copies of all or any part of the registration statement
may be obtained from the SECs offices upon payment of fees
prescribed by the SEC. The SEC maintains an Internet site that
contains periodic and current reports, proxy and information
statements, and other information regarding issuers that file
electronically with the SEC. The address of the SECs
website is www.sec.gov.
We make available free of charge on our Internet address
www.orbcomm.com our annual, quarterly and current
reports, and amendments to these reports, as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC.
172
Index to
consolidated financial statements
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|
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|
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|
Page
|
|
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|
|
F-2
|
|
Consolidated Financial
Statements
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Condensed Consolidated
Financial Statements (unaudited)
|
|
|
|
|
|
|
|
F-44
|
|
|
|
|
F-45
|
|
|
|
|
F-46
|
|
|
|
|
F-47
|
|
|
|
|
F-62
|
|
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 (Except for Note 20,
as to which the date is May 12, 2007.)
F-2
Consolidated balance
sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(in thousands,
except share data)
|
|
|
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 receivablerelated
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 payablerelated 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
Consolidated
statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
(in thousands,
except share and per share data)
|
|
|
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
Consolidated
statements of changes in membership interests and
stockholders equity (deficit)
Years ended
December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
membership
|
|
|
|
|
|
|
Membership
|
|
|
|
|
|
|
Additional
|
|
|
other
|
|
|
|
|
|
interests and
|
|
|
|
|
|
|
interest
units
|
|
|
Common
Stock
|
|
paid-in
|
|
|
comprehensive
|
|
|
Accumulated
|
|
|
stockholders
|
|
|
Comprehensive
|
|
|
|
Units
|
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
capital
|
|
|
income
|
|
|
deficit
|
|
|
equity
(deficit)
|
|
|
loss
|
|
|
|
|
|
(in thousands,
except membership interest units and share data)
|
|
|
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
Consolidated
statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
(in
thousands)
|
|
|
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
payablerelated 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:
|
|
Ø
|
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.
|
|
Ø
|
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.
|
|
Ø
|
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.
|
|
Ø
|
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.
|
F-7
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 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
F-8
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 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.
F-9
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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.
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
F-10
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 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.
F-11
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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.
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
F-12
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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.
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.
F-13
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 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
CompensationTransition 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
F-14
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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.
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
F-15
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
compensationstock 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. 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
F-16
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
$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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of stock options
granted during 2006 and 2004 was $11.16 and $2.34, respectively.
F-17
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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-18
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.
F-19
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 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
F-20
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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.
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Acquisitions
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
F-21
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 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-22
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-23
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-24
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
F-25
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 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.
F-26
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
F-27
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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.
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
F-28
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 occurred
on or before February 28, 2007, (ii) $15.00 per
share if the public offering occurred after February 28,
2007 and on or before December 31, 2007, or
(iii) $18.00 per share if the public offering occurred
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 occurred on or before
February 28, 2007, (ii) $15.00 per share if the
Qualified Sale occurred after February 28, 2007 and on or
before December 31, 2007, or (iii) $18.00 per
share if the Qualified Sale occurred on or after January 1,
2008.
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).
F-29
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 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.
F-30
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
|
|
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. |
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
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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
F-32
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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). |
|
(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.
F-33
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 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.
F-34
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 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.
F-35
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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-36
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
F-37
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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.
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
F-38
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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 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
F-39
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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.
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 (see Note 20).
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.
F-40
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
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
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.
F-41
Notes to
consolidated financial statements
(In thousands, except share, unit, per share and per unit
amounts)
|
|
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-42
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
|
|
Note 20. Settlement
of Quake Litigation
On May 11, 2007, the Company entered into a global
settlement agreement with Quake relating to the legal
proceedings described in Note 16. Pursuant to the global
settlement agreement, the parties have agreed to
(1) dismiss with prejudice and without cost the Complaint
and any counterclaims; (2) discontinue in its entirety the
arbitration relating to the Subscriber Communicator
Manufacturing Agreement with prejudice and without cost; and
(3) dismiss with prejudice and without cost Quakes
counterclaims against ORBCOMM LLC in the pending action between
Quake and MobiApps. Each party will bear its own legal expenses
with respect to each of these legal proceedings. Under the terms
of the settlement, the Company agreed to separate and segregate
its officers and employees from those of New Stellar within
60 days and to maintain separate office, testing and
laboratory facilities for New Stellar by February 2008. In
addition, as part of the settlement, the Company and Quake have
entered into a new subscriber communicator manufacturing
agreement for a ten-year term with respect to the manufacture of
subscriber communicators for use on the Companys
communications system.
F-43
Condensed
consolidated balance sheets
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in thousands,
except
|
|
|
|
share
data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
47,012
|
|
|
$
|
62,139
|
|
Marketable securities
|
|
|
51,100
|
|
|
|
38,850
|
|
Accounts receivable, net of
allowances for doubtful accounts of $295 and $297 as of
March 31, 2007 and December 31, 2006
|
|
|
5,045
|
|
|
|
5,185
|
|
Inventories
|
|
|
2,128
|
|
|
|
3,528
|
|
Advances to contract manufacturer
|
|
|
150
|
|
|
|
177
|
|
Prepaid expenses and other current
assets
|
|
|
1,861
|
|
|
|
1,354
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
107,296
|
|
|
|
111,233
|
|
Long-term receivable
|
|
|
372
|
|
|
|
372
|
|
Satellite network and other
equipment, net
|
|
|
37,598
|
|
|
|
29,131
|
|
Intangible assets, net
|
|
|
6,686
|
|
|
|
7,058
|
|
Other assets
|
|
|
306
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
152,258
|
|
|
$
|
148,093
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,038
|
|
|
$
|
3,438
|
|
Accrued liabilities
|
|
|
10,451
|
|
|
|
4,915
|
|
Current portion of deferred revenue
|
|
|
2,223
|
|
|
|
2,083
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
15,712
|
|
|
|
10,436
|
|
Note payable related
party
|
|
|
930
|
|
|
|
879
|
|
Deferred revenue, net of current
portion
|
|
|
7,939
|
|
|
|
8,066
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
24,581
|
|
|
|
19,381
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001;
250,000,000 shares authorized; 37,187,134 and
36,923,715 shares issued and outstanding as of
March 31, 2007 and December 31, 2006
|
|
|
37
|
|
|
|
37
|
|
Additional paid-in capital
|
|
|
190,845
|
|
|
|
188,917
|
|
Accumulated other comprehensive loss
|
|
|
(419
|
)
|
|
|
(395
|
)
|
Accumulated deficit
|
|
|
(62,786
|
)
|
|
|
(59,847
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
127,677
|
|
|
|
128,712
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
152,258
|
|
|
$
|
148,093
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-44
Condensed
consolidated statements of operations
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in thousands,
except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
3,950
|
|
|
$
|
2,321
|
|
Product sales
|
|
|
2,011
|
|
|
|
4,059
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
5,961
|
|
|
|
6,380
|
|
|
|
|
|
|
|
|
|
|
Costs and
expenses(1):
|
|
|
|
|
|
|
|
|
Costs of services
|
|
|
2,353
|
|
|
|
2,057
|
|
Costs of product sales
|
|
|
2,106
|
|
|
|
4,076
|
|
Selling, general and administrative
|
|
|
5,311
|
|
|
|
3,328
|
|
Product development
|
|
|
360
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
10,130
|
|
|
|
9,959
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,169
|
)
|
|
|
(3,579
|
)
|
|
|
|
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,279
|
|
|
|
455
|
|
Other income
|
|
|
3
|
|
|
|
|
|
Interest expense
|
|
|
(52
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
1,230
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,939
|
)
|
|
$
|
(3,141
|
)
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common
shares (Note 5)
|
|
$
|
(2,939
|
)
|
|
$
|
(5,448
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common
share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
37,036
|
|
|
|
5,690
|
|
|
|
|
|
|
|
|
|
|
(1) Stock-based
compensation included in costs and expenses:
|
|
|
|
|
|
|
|
|
Costs of services
|
|
$
|
220
|
|
|
$
|
8
|
|
Costs of product sales
|
|
|
29
|
|
|
|
|
|
Selling, general and administrative
|
|
|
1,637
|
|
|
|
328
|
|
Product development
|
|
|
42
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,928
|
|
|
$
|
341
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-45
Condensed
consolidated statements of cash flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(in
thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,939
|
)
|
|
$
|
(3,141
|
)
|
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Change in allowance for doubtful
accounts
|
|
|
(2
|
)
|
|
|
(258
|
)
|
Inventory impairments
|
|
|
|
|
|
|
336
|
|
Depreciation and amortization
|
|
|
542
|
|
|
|
656
|
|
Accretion on note
payable related party
|
|
|
33
|
|
|
|
33
|
|
Stock-based compensation
|
|
|
1,928
|
|
|
|
341
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
142
|
|
|
|
(2,982
|
)
|
Inventories
|
|
|
1,400
|
|
|
|
(505
|
)
|
Advances to contract manufacturer
|
|
|
27
|
|
|
|
276
|
|
Prepaid expenses and other current
assets
|
|
|
(514
|
)
|
|
|
(186
|
)
|
Accounts payable and accrued
liabilities
|
|
|
105
|
|
|
|
(1,918
|
)
|
Deferred revenue
|
|
|
13
|
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
735
|
|
|
|
(6,669
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(3,007
|
)
|
|
|
(754
|
)
|
Purchases of marketable securities
|
|
|
(19,050
|
)
|
|
|
|
|
Sales of marketable securities
|
|
|
6,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(15,257
|
)
|
|
|
(754
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Payment of offering costs in
connection with initial public offering
|
|
|
(599
|
)
|
|
|
|
|
Proceeds from issuance of
Series B preferred stock, net of issuance costs of $113
|
|
|
|
|
|
|
1,465
|
|
Payment of Series A preferred
stock dividends
|
|
|
|
|
|
|
(8,027
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(599
|
)
|
|
|
(6,562
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
|
|
(6
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(15,127
|
)
|
|
|
(14,011
|
)
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
62,139
|
|
|
|
68,663
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
47,012
|
|
|
$
|
54,652
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
disclosures:
|
|
|
|
|
|
|
|
|
Non cash financing
activities Preferred stock dividends accrued
|
|
$
|
|
|
|
$
|
2,179
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-46
Notes to condensed
consolidated financial statements (unaudited)
(in thousands, except share and
per share amounts)
1. Business
ORBCOMM Inc. (ORBCOMM or the Company), a
Delaware corporation, is a satellite-based data communications
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 29 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 accompanying unaudited condensed consolidated financial
statements (the financial statements) have been
prepared pursuant to the rules of the Securities and Exchange
Commission (the SEC). Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or
omitted pursuant to SEC rules. These financial statements should
be read in conjunction with the Companys audited
consolidated financial statements for the year ended
December 31, 2006 included elsewhere in this prospectus.
In the opinion of management, the financial statements as of
March 31, 2007 and for the three month periods ended
March 31, 2007 and 2006 include all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation
of the consolidated financial position, results of operations
and cash flows for the periods presented. The results of
operations for the three months ended March 31, 2007 and
2006 are not necessarily indicative of the results to be
expected for the full year.
The 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 March 31, 2007 and
December 31, 2006. The Company had no equity in the
earnings or losses of those investees for the three months ended
March 31, 2007 and 2006. 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 March 31, 2007 and December 31, 2006.
The Company has incurred losses from inception including a net
loss of $2,939 for the three months ended March 31, 2007
and as of March 31, 2007, the Company has an accumulated
deficit of $62,786. As of March 31, 2007, the
Companys primary source of liquidity consisted of cash and
cash
F-47
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
equivalents and marketable securities, which the Company
believes will be sufficient to provide working capital and fund
capital expenditures, which primarily include additional
satellites which will be comprised of the quick-launch and
next-generation satellites, for the next twelve months.
Marketable
securities
Marketable securities consist of investment grade 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 March 31,
2007, the fair value of these securities approximates cost.
Concentration of
credit risk
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.
During the three months ended March 31, 2007 and 2006, one
customer comprised 39.7% and 62.7% of revenues, respectively. As
of March 31, 2007 and December 31, 2006, this customer
accounted for 61.2% and 60.3% of accounts receivable,
respectively.
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 evaluates the
realizability of inventories and adjusts the carrying value as
necessary. During the three months ended March 31, 2006,
the Company recorded an inventory impairment of $336 due to
reduced demand for older model Communicators.
Income
taxes
Effective January 1, 2007, the Company adopted the
provisions of 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. As of January 1, 2007,
the Company had no significant unrecognized tax benefits. During
the three months ended March 31, 2007, the Company
recognized no adjustments for uncertain tax benefits. The
Company is subject to U.S. federal and state examinations
by tax authorities for all years since its inception. The
Company does not expect any significant changes to its
unrecognized tax positions during the next twelve months.
The Company recognizes interest and penalties related to
uncertain tax positions in income tax expense. No interest and
penalties related to uncertain tax positions were accrued at
March 31, 2007.
The Company maintains a full valuation allowance on its deferred
tax assets. Accordingly, the Company has not recorded a benefit
for income taxes.
F-48
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
Proposed
underwritten sale of shares of the Companys common
stock.
During the quarter ended March 31, 2007, the Company began
preparation of a registration statement for a proposed
underwritten sale of shares of the Companys common stock
to be sold in a secondary offering registered under the
Securities Act of 1933, as amended. On April 25, 2007, the
Board of Directors formally authorized management to pursue the
offering. In connection with the proposed offering and sale, the
Company has incurred costs totaling $156, which have been
deferred at March 31, 2007. In the event the proposed
offering and sale is not consummated the deferred offering costs
will be expensed.
Recent accounting
pronouncements
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 on its 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 beginning
January 1, 2008. The Company is currently evaluating the
impact of adopting SFAS 159 on its financial statements.
3. Comprehensive
Loss
The components of comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net loss
|
|
$
|
(2,939
|
)
|
|
$
|
(3,141
|
)
|
Foreign currency translation
adjustment
|
|
|
(24
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(2,963
|
)
|
|
$
|
(3,201
|
)
|
|
|
|
|
|
|
|
|
|
4. Stock-based
Compensation
The Companys share-based compensation plans consist of its
2006 Long-Term Incentives Plan ( the 2006 LTIP) and
its 2004 Stock Option Plan. As of March 31, 2007, there
were 3,600,539 shares available for grant under the 2006 LTIP
and no shares available for grant under the 2004 stock option
plan.
F-49
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
The components of the Companys stock-based compensation
expense are presented below:
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Stock options
|
|
$
|
57
|
|
|
$
|
341
|
|
Restricted stock units
|
|
|
1,520
|
|
|
|
|
|
Stock appreciation rights
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,928
|
|
|
$
|
341
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007, the Company had an aggregate of
$6,396 of unrecognized compensation costs for share-based
payment arrangements.
RSUs
Performance-based
RSUs
During the three months ended March 31, 2007, 128,949
performance-based RSUs were granted when the Compensation
Committee established performance targets for fiscal 2007. These
RSUs will vest through May 2008 and the Company estimates that
100% of the performance targets will be achieved. The Company
expects that 142,015 performance-based RSUs will vest in the
second quarter of 2007.
A summary of the Companys performance-based RSUs for the
three months ended March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
grant date
fair
|
|
|
RSUs
|
|
|
value
|
|
|
Balance at January 1, 2007
|
|
|
257,484
|
|
|
$
|
11.00
|
Granted
|
|
|
128,949
|
|
|
|
13.00
|
Vested
|
|
|
(8,403
|
)
|
|
|
11.00
|
Forfeited or expired
|
|
|
(37,099
|
)
|
|
|
11.00
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
|
340,931
|
|
|
$
|
11.76
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2007, the Company
recorded stock-based compensation expense of $1,025 related to
the performance-based RSUs. As of March 31, 2007, $1,704 of
total unrecognized compensation cost related to the
performance-based RSUs granted is expected to be recognized
through May 2008.
Time-based
RSUs
In February 2007, the Company granted 11,000 time-based RSUs to
certain executive officers of the Company. These RSUs vest on
January 1, 2008.
F-50
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
A summary of the Companys time-based RSUs for the three
months ended March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
grant date
fair
|
|
|
RSUs
|
|
|
value
|
|
|
Balance at January 1, 2007
|
|
|
528,087
|
|
|
$
|
11.00
|
Granted
|
|
|
11,000
|
|
|
|
13.00
|
Vested
|
|
|
(120,129
|
)
|
|
|
11.00
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
|
418,958
|
|
|
$
|
11.05
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2007, the Company
recorded stock-based compensation expense of $495 related to the
time-based RSUs. As of March 31, 2007, $3,530 of total
unrecognized compensation cost related to the time-based RSUs
granted is expected to be recognized through January 2009.
The fair value of the performance- and time-based RSU awards
granted in 2007 is based upon the closing stock price of the
Companys common share on the date of grant.
SARs
Performance-based
SARs
During the three months ended March 31, 2007, 115,556
performance-based SARs were granted when the Compensation
Committee established performance targets for fiscal 2007. These
SARs will vest through March 2008 and the Company estimates that
100% of the performance targets will be achieved. The Company
expects that 101,731 performance based SARs will vest in the
second quarter of 2007.
A summary of the Companys performance-based SARs for the
three months ended March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted-average
|
|
Contractual
|
|
Intrinsic
value
|
|
|
shares
|
|
exercise
price
|
|
term
(years)
|
|
(in
thousands)
|
|
|
Outstanding at January 1, 2007
|
|
|
115,556
|
|
$
|
11.00
|
|
|
|
|
|
|
Granted
|
|
|
115,556
|
|
|
11.00
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
231,112
|
|
$
|
11.00
|
|
|
9.71
|
|
$
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
March 31, 2007
|
|
|
217,287
|
|
|
|
|
|
|
|
$
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of the
performance-based SARs granted during the three months ended
March 31, 2007 was $6.19 per share.
For the three months ended March 31, 2007, the Company
recorded stock-based compensation expense of $321 relating to
the performance-based SARs. As of March 31, 2007, $647 of
total unrecognized compensation cost related to the
performance-based SARs is expected to be recognized through the
first quarter of 2008.
F-51
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
Time-based
SARs
A summary of the Companys time-based SARs for the three
months ended March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
|
|
|
remaining
|
|
Aggregate
|
|
|
Number of
|
|
Weighted-average
|
|
contractural
|
|
intrinsic
value
|
|
|
shares
|
|
exercise
price
|
|
term
(years)
|
|
(in
thousands)
|
|
|
Outstanding at January 1, 2007
|
|
|
66,667
|
|
$
|
11.00
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
66,667
|
|
$
|
11.00
|
|
|
9.50
|
|
$
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007
|
|
|
22,222
|
|
|
|
|
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
March 31, 2007
|
|
|
66,667
|
|
|
|
|
|
|
|
$
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2007, the Company
recorded stock-based compensation expense of $30 relating to the
time-based SARs. As of March 31, 2007, $211 of total
unrecognized compensation cost related to the time-based SARs is
expected to be recognized ratably through January 1, 2009.
The fair value of each SAR award 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 the
simplified method based on the average of the
vesting term and the contractual term to calculate the expected
life of each SAR award. Estimated forfeitures were based on
voluntary and involuntary termination behavior as well as
analysis of actual SAR 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 SAR grants.
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
March 31,
|
|
|
2007
|
|
|
2006(1)
|
|
|
Risk-free interest rate
|
|
|
4.93
|
%
|
|
|
|
Expected life (years)
|
|
|
5.50
|
|
|
|
|
Estimated volatility factor
|
|
|
43.93
|
%
|
|
|
|
Expected dividends
|
|
|
None
|
|
|
|
|
|
|
|
(1) |
|
There were no SARs granted during the three months ended
March 31, 2006. |
2004 Stock Option
Plan
The fair value of each stock option award 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.
F-52
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
March 31,
|
|
|
|
2007(1)
|
|
2006
|
|
|
|
|
Risk-free interest rate
|
|
|
|
|
|
4.64
|
%
|
Expected life (years)
|
|
|
|
|
|
4.00
|
|
Estimated volatility factor
|
|
|
|
|
|
44.50
|
%
|
Expected dividends
|
|
|
|
|
|
None
|
|
|
|
|
(1) |
|
There were no options granted during the three months ended
March 31, 2007. |
A summary of the status of the Companys stock options as
of March 31, 2007 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, 2007
|
|
|
1,464,420
|
|
$
|
3.09
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
1,464,420
|
|
$
|
3.09
|
|
|
6.52
|
|
$
|
14,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007
|
|
|
1,389,084
|
|
$
|
3.02
|
|
|
6.58
|
|
$
|
13,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
March 31, 2007
|
|
|
1,461,951
|
|
$
|
3.09
|
|
|
6.62
|
|
$
|
14,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the Companys non-vested stock options as of
March 31, 2007 and changes during the three months ended
March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
Shares
|
|
|
grant date fair
value
|
|
|
Balance at January 1, 2007
|
|
|
92,805
|
|
|
$
|
4.03
|
Granted
|
|
|
|
|
|
|
|
Vested
|
|
|
(17,469
|
)
|
|
|
3.24
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
|
75,336
|
|
|
$
|
4.22
|
|
|
|
|
|
|
|
|
The Company applied a forfeiture rate of 3% calculating the
amount of options expected to vest as of March 31, 2007. As
of March 31, 2007, $304 of total unrecognized compensation
cost related to stock options issued to employees is expected to
be recognized over a weighted-average term of 1.6 years.
|
|
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, because
potentially dilutive securities such as RSUs,
F-53
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
SARs, stock options, stock warrants and convertible preferred
stock would have an antidilutive effect as the Company incurred
a net loss for the three months ended March 31, 2007 and
2006.
The potentially dilutive securities excluded from the
determination of basic and diluted loss per share, as their
effect is antidilutive, are as follows:
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
March 31,
|
|
|
2007
|
|
2006
|
|
|
Common stock warrants
|
|
|
1,443,985
|
|
|
1,917,998
|
Stock options
|
|
|
1,464,420
|
|
|
1,481,207
|
RSUs
|
|
|
759,889
|
|
|
|
SARs
|
|
|
297,779
|
|
|
|
Series A convertible
preferred stock
|
|
|
|
|
|
9,369,074
|
Series B convertible
preferred stock
|
|
|
|
|
|
12,014,227
|
Preferred stock warrants
|
|
|
|
|
|
318,928
|
|
|
|
|
|
|
|
|
|
|
3,966,073
|
|
|
25,101,434
|
|
|
|
|
|
|
|
For the three months ended March 31, 2007 and 2006,
the reconciliation between net loss and net loss applicable to
common shares is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net loss
|
|
$
|
(2,939
|
)
|
|
$
|
(3,141
|
)
|
Add: Preferred stock dividends and
accretion of preferred stock carrying value
|
|
|
|
|
|
|
(2,307
|
)
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common
shares
|
|
$
|
(2,939
|
)
|
|
$
|
(5,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Satellite Network
and Other Equipment
|
Satellite network and other equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful life
|
|
March 31,
|
|
|
December 31,
|
|
|
|
(years)
|
|
2007
|
|
|
2006
|
|
|
|
|
Land
|
|
|
|
|
$
|
381
|
|
|
$
|
379
|
|
Satellite network
|
|
|
5-7
|
|
|
9,319
|
|
|
|
7,373
|
|
Capitalized software
|
|
|
3-5
|
|
|
636
|
|
|
|
516
|
|
Computer hardware
|
|
|
5
|
|
|
914
|
|
|
|
867
|
|
Other
|
|
|
5-7
|
|
|
411
|
|
|
|
411
|
|
Assets under construction
|
|
|
|
|
|
33,427
|
|
|
|
26,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,088
|
|
|
|
36,451
|
|
Less: accumulated depreciation and
amortization
|
|
|
|
|
|
(7,490
|
)
|
|
|
(7,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,598
|
|
|
$
|
29,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2007 and 2006, the
Company capitalized costs attributable to the design and
development of internal-use software in the amount of $139 and
$12, respectively. Depreciation and amortization expense for the
three months ended March 31, 2007 and 2006 was $170 and
$410, respectively. This includes amortization of internal-use
software of $44 and $19 for the three months ended
March 31, 2007 and 2006, respectively.
F-54
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
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 9 and 13) 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 13) and
upgrades to its infrastructure and ground segment.
The Companys intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2007
|
|
December 31,
2006
|
|
|
Useful life
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
(years)
|
|
Cost
|
|
amortization
|
|
|
Net
|
|
Cost
|
|
amortization
|
|
|
Net
|
|
|
Acquired licenses
|
|
|
6
|
|
$
|
8,115
|
|
$
|
(1,429
|
)
|
|
$
|
6,686
|
|
$
|
8,115
|
|
$
|
(1,057
|
)
|
|
$
|
7,058
|
Amortization expense was $372 and $246 for the three months
ended March 31, 2007 and 2006, respectively.
Estimated amortization expense for intangible assets subsequent
to March 31, 2007 is as follows:
|
|
|
|
Years ending December 31,
|
|
|
|
Remainder of 2007
|
|
$
|
1,114
|
2008
|
|
|
1,486
|
2009
|
|
|
1,486
|
2010
|
|
|
1,486
|
2011
|
|
|
1,114
|
|
|
|
|
|
|
$
|
6,686
|
|
|
|
|
8. Accrued
Liabilities
The Companys accrued liabilities consisted of the
following:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
2007
|
|
|
2006
|
|
|
Gateway settlement obligation (see
Note 13)
|
|
$
|
644
|
|
|
$
|
945
|
Accrued compensation and benefits
|
|
|
1,966
|
|
|
|
2,094
|
Accrued milestone obligations in
connection with quick-launch satellites (see Note 13)
|
|
|
5,000
|
|
|
|
|
Accrued warranty obligations
|
|
|
15
|
|
|
|
45
|
Accrued interest
|
|
|
666
|
|
|
|
622
|
Accrued professional services
|
|
|
591
|
|
|
|
361
|
Other accrued expenses
|
|
|
1,569
|
|
|
|
848
|
|
|
|
|
|
|
|
|
|
|
$
|
10,451
|
|
|
$
|
4,915
|
|
|
|
|
|
|
|
|
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 three months
ended March 31, 2007, substantially all of the
Communicators sold by the Company were these newer models. As of
March 31, 2007, the Companys accrued warranty
obligation is not significant.
F-55
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
9. Deferred
Revenues
Deferred revenues consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Professional services
|
|
$
|
7,228
|
|
|
$
|
7,236
|
|
Service activation fees
|
|
|
1,366
|
|
|
|
1,326
|
|
Manufacturing license fees
|
|
|
86
|
|
|
|
89
|
|
Prepaid services
|
|
|
1,482
|
|
|
|
1,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,162
|
|
|
|
10,149
|
|
Less current portion
|
|
|
(2,223
|
)
|
|
|
(2,083
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
7,939
|
|
|
$
|
8,066
|
|
|
|
|
|
|
|
|
|
|
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 (see Note 13).
Deferred professional services revenues at March 31, 2007
and December 31, 2006 represent amounts received from the
USCG under the contract.
10. Note Payable
In connection with the acquisition of a majority interest in
Satcom in 2005, the Company has recorded an indebtedness to OHB
Technology A.G. (formerly known as OHB Teledata A.G.)
(OHB), a stockholder of the Company. At
March 31, 2007, the principal balance of the note payable
was 1,138 ($1,521) and it had a carrying value of $930. At
December 31, 2006, the principal balance of the note
payable was 1,138 ($1,502) and it had a carrying value of
$879. 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 for each of the
three months ended March 31, 2007 and 2006 was $33. 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 March 31, 2008.
F-56
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
11. Stockholders
Equity
Warrants to purchase common stock outstanding at March 31,
2007 were as follows:
|
|
|
|
|
|
Shares subject
|
Exercise
price
|
|
to
warrants
|
|
|
$2.33
|
|
|
937,137
|
$3.38
|
|
|
120,275
|
$4.26
|
|
|
386,573
|
|
|
|
|
|
|
|
1,443,985
|
|
|
|
|
During the three months ended March 31, 2007, the Company
issued 134,887 shares of common stock upon the cashless
exercise of warrants to purchase 173,311 common shares with per
share exercise prices of $2.33 to $4.26.
At March 31, 2007, 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
|
|
|
1,443,985
|
|
|
|
|
|
|
|
7,566,612
|
|
|
|
|
12. Geographic
Information
The Company operates in one reportable segment, satellite data
communications. Other than satellites in orbit, 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:
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
United States
|
|
|
89
|
%
|
|
|
92
|
%
|
Other(1)
|
|
|
11
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
No other single geographic areas are more than 10% of
revenues for the three months ended March 31, 2007. |
13. Commitments
and Contingencies
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. The Company
had options to require Orbital Sciences to manufacture, test and
deliver up to two additional satellite payloads at a cost of
F-57
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
$2,200 per payload which have expired unexercised. Payments
under the agreement are due upon the achievement of specified
milestones by Orbital Sciences. As of March 31, 2007, the
Company has made milestone payments of $10,500 under this
agreement. The Company anticipates making payments under the
contract of $5,800 during the remainder of 2007 and $700 in 2008.
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 payments under
the agreement of $11,600 during the remainder of 2007 and $400
in 2008, for the initial order of six satellite buses and the
related integration and launch services, inclusive of the
on-time delivery payments. As of March 31, 2007, the
Company has made milestone payments of $8,000 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.
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
procurement agreements with Orbital Sciences and OHB-System AG.
All expenditures relating to this project are being capitalized
as assets under construction. The satellite is expected to be
launched during 2007. At March 31, 2007 and
December 31, 2006, the Company has incurred $6,749 and
$6,622 of costs related to this project, respectively. At
March 31, 2007, the Companys remaining obligation
under these procurement agreements were $512.
Due to the fact that the launch of the original shared vehicle
has not yet taken place principally as a result of the
cancellation of the primary launch vehicle payload, the launch
services provider, with the Companys participation, has
been seeking an alternative launch vehicle for the Coast Guard
demonstration satellite. As a result of these delays, in
February 2007, the USCG issued a unilateral modification to the
contract setting a definitive launch date of July 2, 2007.
Although the Company has not agreed to this modification, the
Company and the launch services contractor have advised the USCG
that the Company intends to work with the USCG to establish
within the next several months a new definitive launch date. By
letter dated April 20, 2007, the USCG has advised the
Company that they intend to seek consideration, or other
contractual or statutory remedies, for any launch delay beyond
July 2, 2007. The Company has certain indemnity rights
against the launch services provider in the event of a default
under the launch services contract. The Company continues to be
in discussions with the USCG and the launch services providers
to secure an acceptable launch date and a successful resolution
of this matter.
Gateway
settlement obligation
In 1996, a predecessor to the 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
F-58
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
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. As of March 31, 2007 and
December 31, 2006, the accrued liability for the settlement
agreement was $644 and $945, respectively.
Airtime
credits
In 2001, in connection with the organization of ORBCOMM Europe
LLC and the reorganization of the ORBCOMM business in Europe,
the Company agreed to grant certain country representatives in
Europe approximately $3,736 in airtime credits. The Company has
not recorded the airtime credits as a liability for the
following reasons: (i) the Company has no obligation to pay
the unused airtime credits if they are not utilized; and
(ii) the airtime credits are earned by the country
representatives only when the Company generates revenue from the
country representatives. The airtime credits have no expiration
date. Accordingly, the Company is recording airtime credits as
services are rendered and these airtime credits are recorded net
of revenues from the country representatives. For the three
months ended March 31, 2007 and 2006, airtime credits used
totaled approximately $43 and $46, respectively. As of
March 31, 2007 and December 31, 2006, unused credits
granted by the Company were approximately $2,626 and $2,669,
respectively.
Litigation
Quake.
On May 11, 2007, ORBCOMM LLC, Stellar Satellite
Communications, Ltd. (New Stellar) and Quake Global,
Inc. (Quake) entered into a global settlement
agreement dismissing or discontinuing the legal proceedings with
Quake discussed below.
On February 24, 2005, Quake filed a four count action for
damages and injunctive relief against the Company, 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 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.
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
F-59
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
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. By order dated April 23, 2007, the court
granted Quakes motion to amend the complaint, but deferred
ruling on whether Quakes new claims must be arbitrated.
The court held that the issue of arbitrability may be raised by
ORBCOMM LLC in a subsequent motion. In March 2007, the Company
entered into an interim agreement with Quake for a term of two
months for Quake to continue to supply 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.
No provision for losses, if any, that might have resulted from
this matter was recorded in the Companys financial
statements as this action was in its preliminary stages and the
Company was unable to predict the outcome and therefore it was
not probable that a liability had been incurred and the amount
of loss if any, was 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.
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
F-60
Notes to
condensed consolidated financial statements (unaudited)
(in thousands, except share and per share amounts)
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
have resulted from this matter was recorded in the
Companys financial statements as this action was in its
preliminary stages and the Company was unable to predict the
outcome and therefore it was not probable that a liability had
been incurred and the amount of loss if any, was not reasonably
estimable.
On May 11, 2007, the Company entered into a global
settlement agreement with Quake. Pursuant to the terms of the
settlement agreement, the parties have agreed to
(1) dismiss with prejudice and without cost the Complaint
and any counterclaims; (2) discontinue in its entirety the
arbitration relating to the Subscriber Communicator
Manufacturing Agreement with prejudice and without cost; and
(3) dismiss with prejudice and without cost Quakes
counterclaims against ORBCOMM LLC in the pending action between
Quake and MobiApps. Each party will bear its own legal expenses
with respect to each of these legal proceedings. Under the terms
of the settlement, the Company agreed to separate and segregate
its officers and employees from those of New Stellar within
60 days and to maintain separate office, testing and
laboratory facilities for New Stellar by February 2008. In
addition, as part of the settlement, the Company and Quake have
entered into a new subscriber communicator manufacturing
agreement for a ten-year term with respect to the manufacture of
subscriber communicators for use on the Companys
communications system.
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
matter will not have a material adverse effect on the
Companys business or financial statements.
14. Subsequent
Events
In April 2007, the Companys Plane F polar satellite, one
of the Companys original prototype first generation
satellites launched in 1995, was retired due to intermittent
service. This retirement did not have a material impact on the
Companys service.
F-61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-62
Joint Book-Running Managers
|
|
UBS
Investment Bank |
Cowen
and Company |
|
|
|
Piper
Jaffray |
CIBC
World Markets |
Raymond
James |