10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-33118
ORBCOMM INC.
(Exact name of registrant in its
charter)
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Delaware
(State or other jurisdiction
of
incorporation of organization)
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41-2118289
(I.R.S. Employer
Identification Number)
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2115 Linwood Avenue
Fort Lee, New Jersey 07024
(Address of principal
executive offices)
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Registrants telephone number, including area code:
(201) 363-4900
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Common stock, par value $0.001 per share
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The Nasdaq Stock Market, LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check One):
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Large Accelerated
Filer o
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Accelerated
Filer þ
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Non-Accelerated
Filer o
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Smaller Reporting
Company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act) Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant (based on the closing
price reported on the Nasdaq Global Market on June 30,
2007) was $625,219,178
Shares held by all executive officers and directors of the
registrant have been excluded from the foregoing calculation
because such persons may be deemed to be affiliates of the
registrant.
The number of shares of the registrants common stock
outstanding as of March 7, 2008 was 41,815,567.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for the 2008
Annual Meeting of Stockholders to be held on May 2, 2008 is
incorporated by reference in Items 10, 11, 12, 13 and 14 of
Part III of this
Form 10-K.
Forward-
Looking Statements
Certain statements discussed in Part I, Item 1.
Business, Part I, Item 3. Legal
Proceedings, Part II, Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this
Annual Report on
Form 10-K
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements generally relate to our plans,
objectives and expectations for future events and include
statements about our expectations, beliefs, plans, objectives,
intentions, assumptions and other statements that are not
historical facts. Such forward-looking statements, including
those concerning the Companys expectations, are subject to
known and unknown risks and uncertainties, which could cause
actual results to differ materially from the results, projected,
expected or implied by the forward-looking statements, some of
which are beyond the Companys control, that may cause the
Companys actual results, performance or achievements, or
industry results, to be materially different from any future
results, performance or achievements expressed or implied by
such forward-looking statements. These risks and uncertainties
include but are not limited to: the substantial losses we have
incurred and expect to continue to incur; demand for and market
acceptance of our products and services and the applications
developed by our resellers; loss or decline or slowdown in the
growth in business from the Asset Intelligence division of
General Electric Company (GE or General
Electric or AI), other value-added resellers
or VARs and international valued added resellers or IVARs,
litigation proceedings, technological changes, pricing pressures
and other competitive factors; the inability of our
international resellers to develop markets outside the United
States; satellite launch failures, satellite launch and
construction delays and cost overruns and in-orbit satellite
failures or reduced performance; the failure of our system or
reductions in levels of service due to technological
malfunctions or deficiencies or other events; our inability to
renew or expand our satellite constellation; political, legal
regulatory, government administrative and economic conditions
and developments in the United States and other countries and
territories in which we operate; changes in our business
strategy; and others risks. In addition, specific consideration
should be given to various factors described in Part I,
Item 1A. Risk Factors and Part II,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, and
elsewhere in this Annual Report on
Form 10-K.
The Company undertakes no obligation to publicly revise any
forward-looking statements or cautionary factors, except as
required by law.
PART I
Overview
We operate the only global commercial wireless messaging system
optimized for narrowband communications. Our system consists of
a global network of 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. In 2007, we began providing terrestrial-based
cellular communication services through a re-seller agreement
with a major cellular wireless provider. These services
commenced in the third quarter of 2007 and revenues from such
services were not significant in 2007. In addition, a re-seller
agreement was signed with a second major cellular wireless
provider in the fourth quarter of 2007 and services with this
provider are expected to commence in the first half of 2008.
These terrestrial-based communication services enable our
customers who have higher bandwidth requirements to receive and
send messages from communication devices based on
terrestrial-based technologies using the cellular
providers wireless network as well as from dual-mode
devices combining our satellite subscriber communicators with
devices for terrestrial-based technologies. As a result, our
customers are now able to integrate into their applications a
terrestrial communications device that will allow them to add
messages, including data intensive messaging from the cellular
providers wireless network.
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-
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to-machine and telematic, or M2M, data communications. Our
customers have made significant investments in developing
ORBCOMM-based applications. Examples of assets that are
connected through our M2M data communications system include
trucks, trailers, railcars, containers, heavy equipment, fluid
tanks, utility meters, and pipeline monitoring equipment, marine
vessels and oil wells. Our customers include original equipment
manufacturers, or OEMs, such as Caterpillar Inc., Komatsu Ltd.,
Hitachi Construction Machinery Co., Ltd. and the Volvo Group,
IVARs, such as GE, VARs, such as Fleet Management Services, 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. Our customers can also use cellular
wireless subscriber identity modules, or SIMS, for use with
devices or equipment that enable the use of a cellular
providers wireless network, singularly or in conjunction
with satellite services, to send and receive information from
these devices. We believe that there is no other satellite or
terrestrial network currently in operation that can offer global
two-way wireless narrowband data service including coverage at
comparable cost using a single technology standard worldwide,
that also provides a parallel terrestrial network for data
intensive applications. 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.
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) a network of related ground
infrastructure, including 15 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) a combination of
subscriber communicators and cellular wireless SIMS attached to
a variety of fixed and mobile assets worldwide. See The
ORBCOMM Communications System.
In the second quarter of 2007, we revised our definition of
billable subscriber communicators to mean subscriber
communicators, including terrestrial units for our terrestrial
communication services that are shipped and activated for usage
and billing at the request of the customer, without forecasting
a timeframe for when individual units will be generating usage
and be billing. In the past, we reported billable subscriber
communicators defined as subscriber communicators activated and
currently billing or expected to be billing within 30 to
90 days.
Under the revised definition of billable subscribers described
above, as of December 31, 2007, we had approximately
351,000 billable subscriber communicators activated on our
communications system compared to approximately 225,000 billable
subscriber communicators as of December 31, 2006, an
increase of approximately 56.2%. We believe that our target
markets in commercial transportation, heavy equipment, fixed
asset monitoring, marine vessel, consumer transportation, and
government and homeland security markets are significant and
growing.
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 satellite network and proven
technology. We believe our global satellite
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 satellite 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
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orbital planes contain six to eight satellites each providing
built-in system redundancies in the event of a single satellite
malfunction. In addition, our satellite system uses a single
global technology standard and eliminates the need for multiple
network agreements and versions of hardware and software.
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Low cost structure. We have a significant cost
advantage over any potential new LEO satellite system competitor
with respect to our current satellite constellation, because we
acquired the majority of our current network assets from ORBCOMM
Global L.P., referred to as the Predecessor Company, and its
subsidiaries out of bankruptcy for a fraction of their original
cost. In addition, because our LEO satellites are relatively
small and deployed into low-Earth orbit, the constellation is
less expensive and easier to launch and maintain than larger LEO
satellites and large geostationary satellites. We believe that
we have less complex and less costly ground infrastructure and
subscriber communication equipment than other satellite
communications providers. Our low cost satellite system
architecture enables us to provide global two-way wireless
narrowband data communication services to end-users at prices
that we believe are the lowest in the industry for global
connectivity.
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Sole commercial satellite operator licensed in the VHF
spectrum. We are the sole commercial satellite
operator licensed to operate in the
137-150 MHz
VHF spectrum by the FCC or, to our knowledge, any other national
spectrum or radio-telecommunications regulatory agency in the
world. The spectrum that we use was allocated globally by the
International Telecommunication Union, or ITU, for use by
satellite fleets such as ours to provide mobile data
communications service. We are currently authorized, either
directly or 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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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 new competing
satellite-based system with the advantages of a VHF system
includes obtaining regulatory permits to launch and operate
satellites and to provide communications services, and the
design, development and construction of a communications system.
We believe that a minimum of five years and significant
investments in time and resources would be required for another
satellite-based M2M data communications service provider to
develop the capability to offer comparable services. Our VARs
and IVARs have made significant investments in developing
ORBCOMM-based applications. These applications often require
substantial time and financial investment to develop for
commercial use.
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Key distribution and OEM customer
relationships. Our strategic relationships with
key distributors and OEMs have enabled us to streamline our
sales and distribution channels and shift much of the risk and
cost of developing and marketing applications to others. We have
established strategic relationships with key service providers,
such as GE Equipment Services, the worlds largest lessor
of trailers, containers and railcars, and XATA Corporation, a
leading provider of tracking solutions for the trucking
industry, including to Penske Corporation, the leading truck
leasing company in the United States, and major OEMs, such as
Caterpillar, Komatsu, Hitachi and Volvo. We believe our close
relationships with these distributors and OEMs allows us to work
closely with them at all stages of application development, from
planning and design through implementation of our M2M data
communications services, and to benefit from their
industry-specific expertise. By fostering these strong
relationships with distributors and OEMs, we believe that once
we have become so integrated into our customers planning,
development and implementation process, and their equipment, we
anticipate it will be more difficult to displace us or our
communication services. In addition, the fixed and mobile assets
which are tracked, monitored, controlled and communicated with
by these customers generally have long useful lives and the cost
of replacing our communications equipment with an alternative
service providers equipment could be prohibitive for large
numbers of assets.
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Reliable, low cost subscriber
communicators. There are multiple manufacturers
that build subscriber communicators for our network. Through our
Stellar Satellite Communications, Ltd. subsidiary, we have an
arrangement with Delphi Corporation that provides us with
industrial-scale manufacturing capability for the supply of low
cost, reliable, ISO-9001 certified, automotive grade subscriber
communicators. We believe that Delphi possesses the ability to
scale up its manufacturing rapidly to meet additional demand. We
also have arrangements with independent third party
manufacturers who supply our customers and end-users directly
with low cost subscriber communicators. As a result of these
manufacturing relationships, technological advances and higher
volumes, we have significantly reduced the selling price of our
subscriber communicators from approximately $280 per unit in
2003 to as little as $100 per unit in volume in 2007. In
addition, the cost of communications components necessary for
our subscriber communicators to operate in the VHF band is
relatively low as they are based on readily available FM radio
components.
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Our
Strategy
Our strategy is to leverage our business strengths and key
competitive advantages to increase the number of subscriber
communicators activated on our M2M data communications system,
both in existing and new markets. We are focused on increasing
our market share of customers with the potential for a high
number of connections with lower usage applications. We believe
that the service revenue associated with each additional
subscriber 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, Mexico and Australia, directly or indirectly through
seven international licensees and 12 country representatives. We
are currently working with approximately 75 IVARs who,
generally, subject to certain regulatory restrictions, have the
right to market and sell their applications anywhere our
communications services are offered. We seek to enter into
agreements with strong distributors in each region. Our regional
distributors, which include country representatives and
international licensees, obtain the necessary regulatory
authorizations and develop local markets directly or by
recruiting local VARs. In some international markets where
distribution channels are in the early stages of development, we
seek to bring together VARs who have developed well-tested
applications with local distributors to create localized
solutions and accelerate the adoption of our M2M data
communications services. In addition, we have made efforts to
strengthen the financial positions of certain of our regional
distributors, including several, such as ORBCOMM Europe LLC, who
were former licensees of the predecessor company left weakened
by its bankruptcy, through restructuring transactions whereby we
obtained greater operating control over such regional
distributors. We believe that by strengthening the financial
condition of and our operating control over these established
regional
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distributors, they will be better positioned to promote and
distribute our products and services and enable us to achieve
our market potential in the relevant regions.
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Further reduce subscriber communicator
costs. We are working with our subscriber
communicator manufacturers to further reduce the cost of our
subscriber communicators, as well as to develop technological
advances, including further reductions in size, improvements in
power management efficiency, increased reliability and enhanced
capabilities. For example, our subscriber communicator supplier
Delphi, and independent supplier Mobile Applitech, Inc., are
developing next-generation subscriber communicators which will
contain custom integrated circuits combining the functionality
of several components, which we believe will lead to reduced
costs. Our ability to offer our customers less expensive
subscriber communicators that are smaller, more efficient and
more reliable is key to our ability to provide a complete low
cost solution to our customers and end-users.
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Reduce network latency. With the expected
launch of our quick-launch and next-generation satellites, we
expect to reduce the time lags in delivering messages and data,
or network latency, in most regions of the world. We believe
this will improve the quality and coverage of our system and
enable us to increase our customer base.
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Introduce new features and services. We will
continue to develop and introduce new features and services to
expand our customer base and increase our revenues. For example,
as a result of providing terrestrial-based cellular
communication services, our customers are now able to able to
integrate in their applications a terrestrial communications
device that will allow them to add messages, including data
intensive messaging from combined satellite and cellular
technologies. We have upgraded the technology capabilities of
our network operations center to deliver both satellite and
terrestrial messages through our ground infrastructure to the
ultimate destination. In addition, 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
believe that subscriber communicator technology advances, such
as dual mode devices, will broaden our addressable market by
providing optimal combinations of bandwidth and coverage at a
reasonable price. Dual-mode devices combine a satellite
subscriber communicator with a cellular network subscriber
communicator for higher bandwidth applications not typical of
ORBCOMMs applications. Dual-mode devices can also be used
as a back channel service for terrestrial or satellite-based
broadcast-only networks.
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Provide comprehensive technical support, customer service and
quality control. We have allocated additional
resources to provide customer support for training, integration
and testing in order to assist our VARs and other distributors
in the roll-out of their applications and to enhance end-user
acquisition and retention. We provide our VAR and OEM customers
with access to customer support technicians. We also deploy our
technicians to our VAR and OEM customers to facilitate the
integration of our M2M data communications system with their
applications during the planning, development and implementation
processes and to certify that these applications are compatible
with our system. Our support personnel include professionals
with application development, in-house laboratory and hardware
design and testing capabilities.
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Industry
Overview
Increasingly, businesses and governments face the need to track,
control, and monitor and communicate with fixed and mobile
assets that are located throughout the world. At the same time,
these assets increasingly
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incorporate microprocessors, sensors and other devices that can
provide a variety of information about the assets
location, condition, operation and environment and are capable
of responding to external commands and queries. As these
intelligent devices proliferate, we believe that the need to
establish two-way communications with these devices is greater
than ever. The owners and operators of these intelligent devices
are seeking low cost and efficient communications systems that
will enable them to communicate with these devices.
We operate in the machine-to-machine and telematics, or M2M,
industry, which includes various types of communications systems
that enable intelligent machines, devices and fixed or mobile
assets to communicate information from the machine, device or
fixed or mobile asset to and from back-office information
systems of the businesses and government agencies that track,
monitor, control and communicate with them. These M2M data
communications systems integrate a number of technologies and
cross several different industries, including computer hardware
and software systems, positioning systems, terrestrial and
satellite communications networks and information technologies
(such as data hosting and report generation).
There are three main components in any M2M data communications
system:
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Fixed or mobile assets. Intelligent or
trackable assets include devices and sensors that collect,
measure, record or otherwise gather data about themselves or
their environment to be used, analyzed or otherwise disseminated
to other machines, applications or human operators and come in
many forms, including devices and sensors that:
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Report the location, speed and fuel economy data from trucks and
locomotives;
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Monitor the location and condition of trailers, railcars and
marine shipping containers;
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Report operating data and usage for heavy equipment;
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Monitor fishing vessels to enforce government regulations
regarding geographic and seasonal restrictions;
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Report energy consumption from a utility meter;
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Monitor corrosion in a pipeline;
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Monitor fluid levels in oil storage tanks;
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Measure water delivery in agricultural pipelines;
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Detect movement along international borders; and
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Monitor environmental conditions in agricultural facilities.
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Communications network. The communications
network enables a connection to take place between the fixed or
mobile asset and the back-office systems and users of that
assets data. The proliferation of terrestrial and
satellite-based wireless networks has enabled the creation of a
variety of M2M data communications applications. Networks that
are being used to deliver M2M data include terrestrial
communications networks, such as cellular, radio paging and WiFi
networks, and satellite communications networks, utilizing
low-Earth-orbit or geosynchronous satellites.
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Back-office application or user. Data
collected from a remote asset is used in a variety of ways with
applications that allow the end-user to track, monitor, control
and communicate with these assets with a greater degree of
control and with much less time and expense than would be
required to do so manually.
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Market
Opportunity
Commercial
transportation
Large trucking and trailer leasing companies require
applications that report location, engine diagnostic data,
driver performance, fuel consumption, compliance, rapid
decelerations, fuel taxes, driver logs and zone adherence in
order to manage their truck fleets more safely and efficiently
and to improve truck and trailer utilization.
Truck and trailer fleet owners and operators, as well as truck
and trailer OEMs, are increasingly integrating M2M data
communications systems into their trucks and trailers. As older
analog cellular wireless networks
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currently used in truck and trailer tracking are phased out,
end-users will need to migrate to alternative communications
systems and we expect that an increasing number of customers
will be seeking long-term solutions for their M2M data
communications needs as they make their replacement decisions.
Trailer tracking represents a significantly larger potential
market as we estimate that there are approximately three
trailers to every truck. The trailer market also requires
additional applications, such as cargo sensor reporting, load
monitoring, control of refrigeration systems and door alarms.
Future regulations may require position tracking of specific
types of cargo, such as hazardous materials, and could also
increase trailer tracking market opportunities. The railcar
market also requires many of these same applications and many
trailer applications using M2M data communications system can
easily be translated to the railcar market.
Heavy
equipment
Heavy equipment fleet owners and leasing companies seeking to
improve fleet productivity and profitability require
applications that report diagnostic information, location
(including for purposes of geo-fencing), time-of-use
information, emergency notification, driver usage and
maintenance alerts for their heavy equipment, which may be
geographically dispersed, often in remote, difficult to reach
locations. Using M2M data communications systems, heavy
equipment fleet operators can remotely manage the productivity
and mechanical condition of their equipment fleets, potentially
lowering operating costs through preventive maintenance. OEMs
can also use M2M applications to better anticipate the
maintenance and spare parts needs of their customers, expanding
the market for more higher-margin spare parts orders for the
OEMs. Heavy equipment OEMs are increasingly integrating M2M data
communications systems into their equipment at the factory or
offering them as add-on options through certified after-market
dealers.
Since the heavy equipment market is dominated by a small number
of OEMs, M2M data communications service providers targeting
this market segment focus on building relationships with these
OEMs, such as Caterpillar, Komatsu, Hitachi and Volvo.
Fixed
asset monitoring
Companies with widely dispersed fixed assets require a means of
collecting data from remote assets to monitor productivity,
minimize downtime and realize other operational benefits, as
well as managing and controlling the functions of such assets,
for example, the remote operation of valves and electrical
switches. M2M data communications systems can provide industrial
companies with applications for automated meter reading, oil and
gas storage tank monitoring, pipeline monitoring and
environmental monitoring, which can reduce operating costs for
these companies, including labor costs, fuel costs, and the
expense of
on-site
monitoring and maintenance.
Marine
vessels
Marine vessels have a need for satellite-based communications
due to the absence of reliable terrestrial-based coverage more
than a few miles offshore. M2M data communications systems may
offer features and functions to luxury recreational marine
vessels and commercial fishing vessels, such as onboard
diagnostics and other marine telematics, alarms, requests for
assistance, security, location reporting and tracking,
e-mail and
two-way messaging, catch data and weather reports. In addition,
owners and operators of commercial fishing and other marine
vessels are increasingly subject to regulations governing, among
other things, commercial fishing seasons and geographic
limitations, vessel tracking, safety systems, and resource
management and protection using various M2M communications
systems.
Government
and homeland security
Governments worldwide are seeking to address the global terror
threat by monitoring land borders and hazardous materials, as
well as marine vessels and containers. In addition, modern
military and public safety forces use a variety of applications,
particularly in supply chain management, logistics and support,
which could incorporate our products and services. 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.
7
M2M communications systems can also be used in applications to
address infiltration across land borders, for example,
monitoring seismic sensors placed along the border to detect
incursions. We may also be able to leverage our work with AIS to
resell, subject in certain circumstances to U.S. Coast
Guard approval, AIS data collected by our network to other coast
guard services and governmental agencies.
Consumer
transportation
Automotive companies are seeking a means to address the growing
need for safety systems in passenger vehicles and to broadcast a
single message to multiple vehicles at one time. Within the
automotive market, there is no single communications technology
that satisfies the need for 100% coverage, high reliability and
low cost. An example of an automotive safety application is a
system that has the ability to detect and report the deployment
of a vehicles airbag, triggering the dispatch of an
ambulance, tow truck or other necessary response personnel. Many
automotive safety systems currently in service are based on
analog cellular communications networks, many of which are being
phased-out over the next several years in favor of digital
cellular networks. In addition, terrestrial cellular
communications systems have substantial dead zones,
where network coverage is not available, and are difficult to
manage globally, as vehicles may pass through multiple coverage
areas, requiring the system to roam across a number
of different cellular carriers networks. With emerging
technology, satellite-based automotive safety systems may be
able to provide near-real-time message delivery with minimal
network latencies, thereby providing a viable alternative to
cellular-based systems. In addition, many cellular-based
automotive safety systems adopted or being adopted lack
backwards compatibility that could limit their overall
functionality.
While our system currently has latency limitations which make it
impractical for us to address this market fully, we believe that
our existing network may be used with dual-mode devices,
combining our subscriber communicators with communications
devices for cellular networks, allowing our communications
services to function as an effective
back-up
system by filling the coverage gaps in current cellular or
wireless networks used in consumer transportation applications.
In addition, we may undertake additional capital expenditures
beyond our current capital plan in order to expand our satellite
constellation and lower our latencies to the level that
addresses the requirements of resellers and OEMs developing
applications for this market if we believe the economic returns
justify such an investment. We believe we can supplement our
satellite constellation within the lead time required to
integrate applications using our communications service into the
automotive OEM product development cycle.
Products
And Services
Our principal products and services are satellite-based data
communications services and product sales from subscriber
communicators. During the third quarter of 2007, we commenced
terrestrial-based cellular communications services, which
consist of reselling airtime using a cellular providers
wireless technology network and product sales from cellular
wireless SIMS for use with devices or equipment that enable the
use of the cellular providers wireless network for data
communications. Revenues from terrestrial-based services and
products were not significant in 2007.
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 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.
8
Terrestrial
cellular communication services
These communication services support higher bandwidth
applications that are not typical for an ORBCOMM application.
These data messages are sent by cellular wireless SIMS which are
routed through the cellular providers wireless network to
our ground facilities and forwarded to the ultimate destination
in real time. These services commenced in the third quarter of
2007 and revenues from such services were not significant in
2007.
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 and IVAR customers based upon the number of subscriber
communicators and SIMS activated on, and the amount of data
transmitted through, our communications system. Customers pay
between $1 and $59 in monthly service charges to access our
communications system (generally in addition to a one-time
provisioning fee ranging of up to $30) which we believe is the
lowest price point currently available for global two-way
connectivity.
9
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
|
|
DriverTech
GE Equipment Services
Volvo Group
XATA Corporation
Fleet Management Services
Air IQ
System Planning Corporation
Star Trak
|
|
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
requirements
|
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Heavy equipment
|
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Caterpillar, Inc.
Hitachi Construction . Machinery Co., Ltd
Komatsu Ltd.
Volvo Group
|
|
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 Equipment Services
Electronic Sensors, Inc.
Metrix Networks, Inc.
|
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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
|
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Marine vessels
|
|
Metocean Data Systems Ltd.
Recreational boaters*
Sasco Inc.
Skymate, Inc.
Volvo Group/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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|
|
|
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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*
|
|
Container tracking
Environmental monitoring
Automatic Identification System development
Border monitoring
Vehicle tracking
Vessel Tracking
|
|
Provide efficient monitoring of changing
environmental conditions
Address increasing need to monitor vessels in U.S.
waters
Minimize security threats and secure border
|
|
|
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* |
|
Represents an end-user from which we directly dervive revenue
through VARs or other resellers. |
Subscriber
communicators
Our wholly owned subsidiary, Stellar, markets and sells
subscriber communicators manufactured by Delphi directly to our
customers. We also earn a one-time royalty fee 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
10
developing next-generation subscriber communicators which will
contain a custom integrated circuit combining the functionality
of several components.
Wireless
subscriber identity modules, or SIMS
Our wholly owned subsidiary, ORBCOMM LLC, markets and sells
wireless SIMS which are purchased from the cellular wireless
provider and sold to our customers.
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 which represented approximately 40.3% of our revenues for
fiscal 2007, no other customer accounted for more than 10% of
our total sales in fiscal 2007.
Key
Strategic Relationships
Delphi
Automotive Systems LLC
In May 2004, we entered into a Cooperation Agreement with
Stellar and Delphi Corporation, a tier-one automotive components
supplier that designs, manufacturers and supplies advanced
automotive grade subscriber communicators for Stellar for use
with our satellite 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 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. We are in discussions with
Delphi to further extend the agreement. 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. As a result of lower subscriber communicator
costs from Delphi we have significantly reduced the selling
price from approximately $280 per unit in 2003 to as little as
$100 per unit in volume in 2007. 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, that provides access to a wide array of sales
channels and extends to several divisions and businesses,
including GE Equipment Services, which includes Trailer Fleet
Services, its Penske Truck Leasing joint venture, Rail Services
and its GE Asset Intelligence LLC subsidiary, or AI, among
others. All of these GE Equipment Services divisions directly or
indirectly sell applications utilizing our M2M data
communications services and subscriber communicators
manufactured by Stellar. As a result, GE Equipment Services has
a number of different sales channels for the distribution of our
asset monitoring and tracking products either to third party
end-users or to other GE divisions who are end-users.
AIs first application, VeriWise, enables GEs
customers to track and monitor their trailer assets and
shipments throughout the world. GE Rail Services is also
integrating our M2M data communications system into its RailWise
application for railcars. GE Equipment Services European
division offers RailWise and we expect GE Equipment Services to
begin marketing both VeriWise and RailWise into other
international markets. 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.
11
GE Equipment Services is a strategic partner that develops
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 2010. In March 2006, AI placed orders with our Stellar
subsidiary for subscriber communicator units which was used to
support deployments of 46,000 trailers for Wal-Mart Stores, Inc.
On October 10, 2006, our Stellar subsidiary entered into an
agreement (the 2006 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.
AI did not purchase its minimum committed volume for 2007 under
the 2006 Agreement and, as a result, AI is in default under the
terms of the 2006 Agreement. We are currently in discussions
with AI to amend the 2006 Agreement to extend the time periods
within which AI is required to purchase its minimum committed
volumes. However, there can be no assurance as to whether or
when a mutually satisfactory amendment will be agreed to by the
parties. In the event that we and AI are unable to reach a
mutually satisfactory resolution regarding the 2006 Agreement,
we may pursue remedies available to us.
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 2008 and will carry an AIS
receiver in addition to our standard communications payload. We
have included the AIS capability in our quick-launch satellites
and intend to outfit our subsequent satellites with the AIS
capability. We may be able to leverage this work to resell,
subject in certain circumstances to U.S. Coast Guard
approval, AIS data collected by our network to other coast guard
services and governmental agencies, as well as companies engaged
in security or logistics businesses for tracking shipping
activities or for other navigational purposes. AIS is a
shipboard broadcast system that transmits a marine vessels
identification and position to aid navigation and improve
maritime safety. The International Maritime Organization has
mandated the use of AIS on all Safety of Life at Sea (SOLAS)
vessels, which are vessels over 300 tons. Current
terrestrial-based AIS networks provide limited coverage and are
not able to provide the expanded coverage capability desired by
the U.S. Coast Guard. By using our satellite system, the
U.S. Coast Guard is expected to be able to collect and
process AIS data well beyond the coast of the United States in a
cost effective and timely fashion. As of December 31, 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.
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 this delay, 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. On
September 13, 2007, we and the U.S. Coast Guard
entered into an Amendment of Solicitation/Modification of
Contract amending the agreement to extend the definitive launch
date to December 31, 2007. In consideration for agreeing to
extend the launch date, we will provide up to 200 hours of
additional technical support for up to 14 months after the
launch date at no cost and reduce the U.S. Coast
Guards cost for the post-launch maintenance option and for
certain usage options.
The Coast Guard demonstration satellite was to be launched with
our quick-launch satellites, however the launch did not occur by
December 31, 2007. On January 14, 2008, we received a
cure notice from the U.S. Coast Guard notifying us that
unless the satellite is launched within 90 days after
receipt of the cure notice, the U.S. Coast Guard may
terminate the agreement for default. We believe that the launch
of the Coast Guard demonstration satellite will likely extend
beyond the 90 day cure period. On March 11, 2008, we
received a
12
proposed contract modification from the U.S. Coast Guard,
providing for an April 30, 2008 launch date deadline and
furnishing all AIS data transmitted by AIS over our complement
of AIS-equipped satellites (Coast Guard demonstration satellite
and quick-launch satellites) for a period of 60 continuous days
at no cost. The satellites are fully constructed and are
undergoing testing; however, certain issues have arisen in the
electromagnetic compatibility testing of the quick launch
satellites that need to be resolved before launch. We are
currently in discussions with the U.S. Coast Guard to
extend the deadline for the launch of the Coast Guard
demonstration satellite to a mutually acceptable date. However,
there can be no assurance as to whether or when a mutually
satisfactory agreement for an extension of the launch deadline
will be agreed to by the parties. In the event that we and the
U.S. Coast Guard are unable to reach a mutually
satisfactory resolution regarding the launch of the Coast Guard
demonstration satellite, the U.S. Coast Guard may terminate
the contract and pursue the remedies available to it. The
Company has indemnification rights against the launch services
provider for the Coast Guard demonstration satellite in the
event the launch services contract is terminated for default
from and against any and all claims, demands, assessments and
all liabilities and costs related thereto for which the Company
becomes liable, including but not limited to any assessment of
damages
and/or
reprocurement costs by the United States Government.
Sales,
Marketing and Distribution
We generally market our satellite and terrestrial communications
services through VARs and internationally through IVARs,
international licensees and country representatives. The
following chart shows how our low cost, multi-channel
distribution network is structured:
VARs and IVARs. We are currently working with
approximately 145 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 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.
13
We are currently working with approximately 75 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 monthly 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 150 countries and territories through
our seven international licensees and 12 country
representatives. As we seek to expand internationally, we expect
to continue to enter into agreements with additional
international licensees and country representatives,
particularly in Asia and Africa. International licensees and
country representatives are generally required to make the
system available in their designated regions to VARs and IVARs.
In territories with multiple countries, it is typical for our
international licensees to appoint country representatives.
Country representatives are sub-licensees within the territory.
They perform tasks assigned by the international licensee. In
return, the international licensees are responsible for, among
other things, operating and maintaining the necessary gateway
earth stations within their designated regions, obtaining the
necessary regulatory approvals to provide our services in their
designated regions, and marketing and distributing our services
in such regions.
Country representatives are entities that obtain local
regulatory approvals and establish local marketing channels to
provide ORBCOMM services in their designated countries. As a
U.S. company, we are not legally qualified to hold a
license to operate as a telecommunications provider in some
countries and our country representative program permits us to
serve many international markets. In some cases, a country
representative enters into a joint venture with us. In other
cases, the country representative is an independent entity that
pays us fees based on the amount of airtime usage on our system.
Country representatives may distribute our services directly or
through a distribution network made up of local VARs.
Subject to certain limitations, our service license agreements
grant to the international licensee, among other things, the
exclusive right (subject to our right to appoint IVARs) to
market services using our satellite system in a designated
region and a limited right to use certain of our proprietary
technologies and intellectual property.
International licensees and country representatives who are
appointed by us pay fees for access to the system in their
region based on the number of subscriber communicators activated
on the network in their territory and the amount of data
transmitted through the system. We may adjust pricing in
accordance with the terms of the relevant agreements. We pay
international licensees and country representatives a commission
based on the revenue we receive from IVARs that is generated
from subscriber communicators that IVARs activate in their
territories.
We have entered into or are negotiating new service license or
country representative agreements with several international
licensees and country representatives, respectively, including
former licensees of the Predecessor
14
Company and new groups consisting of affiliates of former
licensees of the Predecessor Company 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 the Predecessor
Company, as is currently the case in Japan, South Korea and
Morocco. There can be no assurance we will be successful in
negotiating new service license or country representative
agreements.
Subscriber
communicators
Our subsidiary, Stellar, markets and sells subscriber
communicators manufactured by Delphi directly to customers. We
also earn a one-time royalty fee from third parties for the use
of our proprietary communications protocol, which enables
subscriber communicators to connect to our M2M data
communications system. We believe that declining prices for our
subscriber communicators have opened further the market for
ORBCOMM-based applications. We will seek to increase the
functionality, variety and reliability of our subscriber
communicators, while at the same time providing cost savings to
end-users.
Competition
Currently, we are the only commercial provider of below
1 GHz band, or little LEO, two-way data satellite services
optimized for narrowband. However, we are not the only provider
of data communication services, and we face competition from a
variety of existing and proposed products and services.
Competing service providers can be divided into three main
categories: terrestrial tower-based, low-Earth orbit mobile
satellite and geostationary satellite service providers.
Terrestrial
tower-based networks
While terrestrial tower-based networks are capable of providing
services at costs comparable to ours, they lack seamless global
coverage. Terrestrial coverage is dependent on the location of
tower transmitters, which are generally located in densely
populated areas or heavily traveled routes. Several data and
messaging markets, such as long-haul trucking, railroads, oil
and gas, agriculture, utility distribution and heavy
construction, have significant activity in sparsely populated
areas with limited or no terrestrial coverage. In addition,
there are many different terrestrial systems and protocols, so
service providers must coordinate with multiple carriers to
enable service in different coverage areas. In some geographic
areas, terrestrial tower-based networks have gaps in their
coverage and may require a
back-up
system to fill in such coverage gaps. In 2007, we have entered
into re-seller agreements with two major cellular wireless
providers to provide terrestrial communications services to our
customers using the wireless communications networks of these
cellular wireless providers.
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. 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. However, big LEO satellite service providers are
expected to focus more on M2M data communications. These systems
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
15
cost and service fees for narrowband data communications using
these systems are also significantly higher than ours, and that
these geostationary providers cannot offer global service with
competitive communications devices and costs. In addition, these
geostationary systems have other limitations that we are not
subject to. For example, they require a clear line of sight
between the communicator equipment and the satellite, are
affected by adverse weather or atmospheric conditions, and are
vulnerable to catastrophic single point failures of their
satellites with limited backup options.
Research
and Development
VARs incur the majority of research and development costs
associated with developing applications for end-users. Although
we provide assistance and development expertise to our VARs. We
do not engage in significant research and development activities
of our own. With respect to development of our next-generation
satellites, we do not incur direct research and development
costs; however, we contract with third parties who undertake
research and development activities in connection with supplying
us with satellite payloads, buses and launch vehicles.
We have invested and continue to invest in development of
advanced features for our subscriber communicator hardware. For
instance, Stellar paid approximately $0.2 million and
$0.5 million to Delphi in 2007 and 2006, respectively, in
connection with the development of next-generation subscriber
communicators that should provide increased functionality at a
lower cost.
Backlog
The backlog of subscriber communicators at our Stellar
subsidiary as of December 31, 2007 was 211,463 units,
or approximately $29.4 million, which includes
203,750 units under the 2006 Agreement (see Key Strategic
Relationships General Electric Company). The backlog
as of December 31, 2006 was 413,652 units, or
approximately $58.5 million which included
142,000 units of additional cancelable volume under the
2006 Agreement. We believe that approximately $6.0 million
of the backlog as of December 31, 2007 will be filled
during fiscal 2008.
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 39,181 units as of December 31, 2007, as
compared with a pre-bill backlog of 23,986 units as of
December 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.
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. During the third quarter of 2007, we began providing
terrestrial cellular wireless data communications services
through a reseller agreement with a cellular wireless provider.
Our system has three operational segments:
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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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The ground and control segment, which consists of fifteen
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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The subscriber segment, which consists of the subscriber
communicators and terrestrial communications devices used by
end-users to transmit and receive messages to and from their
assets and our system.
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For most applications using our system, data is generated by
end-user developed software and currently transferred to either
a subscriber communicator, or a GPRS-based wireless device using
a SIM on the cellular providers wireless network. In the
case of the satellite subscriber communicator selection, data is
encapsulated and transmitted to the next satellite that comes
into view. The data is then 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 satellite
subscriber communicator that the entire data message content has
been received. In the case of the wireless device , a message is
routed through the cellular providers wireless network
Gateway GPRS Support Node, or GGSN, to the
associated ORBCOMM Access Point Name, or APN,
(located within the gateway control center) and forwarded to its
ultimate destination in real time. 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 the satellite 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. For
wireless-based applications, the ORBCOMM APN provides the
flexibility for developers to control the end-to-end
connectivity as needed for the application, using customizable
TCP, UDP, and SMS services. This allows existing legacy
applications to be retrofit and completely new system designs to
be implemented to integrate existing as well as new end user
business applications.
System
Status
Satellite
Replenishment
In 2008 we intend to conduct a satellite launch which includes
the Coast Guard demonstration satellite and five of our six
quick-launch satellites in a single mission to replenish
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. Due to delays
associated with the construction of the final quick-launch
satellite, we intend to retain it for future deployment.
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. 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.
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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 97.1% in 2007. Twenty-three of the
twenty-nine operational satellites have aggregate average
availability over 99.5%. 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 five 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 in
2001, 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.
Gateway
Health
We believe that the functionality of the ground segment of our
system remains stable and sufficient for the use of our
customers. The gateway earth stations in the United States are
performing well. Several infrastructure upgrades have been
completed over the past few years including software upgrades
which improved power conditioning and remote monitoring.
In general, our international gateway control centers are
stable. Our gateway control centers located in Korea and Japan
have all regularly exceeded 98% availability on a month-to-month
basis. In addition, our international gateway earth stations are
performing reasonably well. We intend to continue to proactively
provide preventative maintenance and training to the
international operators of gateway earth station and gateway
control center segments, we believe that our international
ground segment components remain sufficient to provide a
consistent level of availability and quality for the use of our
customers.
Network
Capacity
Over the last two years, we have conducted analyses 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 is measured
as the ratio of successfully received inbound communication
packets to the number of assignments made to 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 and 2007,
a number of improvements were made to raise this performance
ratio to over 60%. Several modifications also were made in 2007
that impacted satellite capacity directly, resulting in a
substantial increase in throughput capability. Further analysis
and code optimizations are now in progress, and preliminary
indications are that these will also contribute tangible
increases in overall satellite throughput. It should be noted
that failed messaging transactions do not result in lost
messages, but do require subscriber communicators to re-initiate
message transmissions. For the user, such instances could
translate into message delays.
Regulation
of Our 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 currently
authorizes construction, launch and operation of a constellation
of
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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.
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 likely
render them not technically identical to our current
satellites under the applicable Rules and policies of the FCC.
As a result, on May 31, 2007, we filed an application at
the FCC requesting modification of our satellite constellation
license to permit launch and operation of our quick-launch
satellites, the Coast Guard demonstration satellite, and our
next-generation satellites. On September 19, 2007, we filed
an application for special temporary authority, or STA, to
launch and operate the Coast Guard demonstration satellite and
the quick-launch satellites in the event that the FCC does not
act on the modification application in sufficient time prior to
the launch of these satellites. On November 16, 2007, we
filed a supplemental amendment to our modification application
to address issues raised by the FCC following the filing of the
STA application relating to the choice of satellite telecommand
frequencies for the quick-launch satellites. Both the
modification application, and the supplemental amendment to the
modification application, have been placed on Public Notice by
the FCC, and have completed the statutory period for submission
of petitions to deny with no oppositions filed. 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 our pending modification application, or any other
such modification application we may file in the future. There
is no assurance, however, that the FCC will grant our pending
modification application, our pending STA, or any future
modification applications on a timely basis or at all.
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. No oppositions to
the renewal application were filed during the statutory period
for such submissions following the issuance of that public
notice. 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.
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
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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 likely
render them not technically identical to our current
satellites under the applicable Rules and policies of the FCC.
As a result, on May 31, 2007, we filed an application at
the FCC requesting modification of our satellite constellation
license to permit launch and operation of our quick-launch
satellites, the Coast Guard demonstration satellite, and our
next-generation satellites. On September 19, 2007, we filed
an application for special temporary authority, or STA, to
launch and operate the Coast Guard demonstration satellite and
the quick-launch satellites in the event that the FCC does not
act on the modification application in sufficient time prior to
the launch of these satellites. On November 16, 2007, we
filed a supplemental amendment to our modification application
to address issues raised by the FCC following the filing of the
STA application relating to the choice of satellite telecommand
frequencies for the quick-launch satellites. Both the
modification application, and the supplemental amendment to the
modification application, have been placed on Public Notice by
the FCC, and have completed the statutory period for submission
of petitions to deny with no oppositions filed. 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 our pending modification application, or any other
such modification application we may file in the future. There
is no assurance, however, that the FCC will grant our pending
modification application, our pending STA, or any future
modification applications on a timely basis or at all.
Access in the United States to certain portions of the uplink
and downlink spectrum assigned to our system was made subject to
possible future spectrum sharing arrangements with as many as
four other little LEO systems that the FCC conditionally
authorized in March 1998. There are currently no other little
LEO licensees authorized in our spectrum. While other entities
could seek to be licensed in the little LEO service by the FCC,
to our knowledge no new applications have been submitted to
date. If any one or more new entities are licensed and do in
fact proceed with system deployment in accordance with the
previously established FCC requirements, we believe that there
would be no material adverse effect on our system operations,
although we cannot assure you it will be the case.
Non-common
carrier status
All of our systems FCC licenses authorize service
provision on a non-common carrier basis. As a
result, the system and the services provided thereby have been
subject to limited FCC regulations, but not the obligations,
restrictions and reporting requirements applicable to common
carriers or to providers of Commercial Mobile Radio Services, or
CMRS. There can be no assurance, however, that in the future, we
will not be deemed by the FCC to provide services that are
designated common carrier or CMRS, or that the FCC will not
exercise its discretionary authority to apply its common carrier
or CMRS rules and regulations to us or our system. If this were
to occur, we would be subject to FCC obligations that include
record retention requirements, limitations on use or disclosure
of customer proprietary network information and
truth-in-billing
regulations. In addition, we would need to obtain FCC approval
for foreign ownership in excess of 25 percent and authority
under Section 214 of the Communications Act of 1934, as
amended, to provide international services. Finally, we would be
subject to additional reporting obligations with regard to
international traffic and circuits, and Equal Employment
Opportunity compliance.
United
States import and export control regulations
We are subject to U.S. import and export control laws and
regulations, specifically the Arms Export Control Act, the
International Traffic in Arms Regulations, the Export
Administration Regulations and the trade sanctions laws and
regulations administered by the U.S. Department of the
Treasurys Office of Foreign Assets Control, and we believe
we are in full compliance with all such laws and regulations. We
also 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
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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, Mexico and Australia. As
part of our international initiative, we are in the process of
seeking or assessing the prospect of obtaining regulatory
authority in other countries and territories, including China,
India and Russia. Because our satellites are licensed by the
FCC, the scope of the local regulatory authority in any given
country or territory outside of the United States (with the
exception of countries where gateway earth stations are located)
is generally limited to the operation of subscriber communicator
equipment, but may also involve additional restrictions or
conditions. Based on available information, we believe that the
regulatory authorizations obtained by us, our international
licensees
and/or their
country representatives are sufficient for the provision of
commercial services in the subject countries and territories,
subject to continuing regulatory compliance. We also believe
that additional local service provision authorizations may be
obtained in other countries and territories in the near future.
Non-U.S.
gateway earth stations
To date, in addition to those in the United States, gateway
earth stations have been authorized and deployed in Argentina,
Australia, Brazil, Curaçao, Italy, Japan, Kazakhstan,
Malaysia, Morocco and South Korea. Gateway earth stations are
generally licensed on an individual facility basis. This process
normally entails radio frequency coordination within the country
of operation for the specific frequencies to be used in the
designated geographic location of the subject gateway earth
station. This domestic frequency coordination is in addition to
any international coordination that may be required, as
determined by the proximity of the gateway earth station
location to foreign borders (see International
Regulation of Our System). Based on the best available
information, we believe that each of the above-listed gateway
earth stations authorizations is sufficient for the provision of
our commercial services in the areas served by the relevant
facilities. We will need additional gateway earth station
authorizations in other countries as we install additional
gateway earth stations around the world.
Equipment
standards
Each manufacturer of the applicable subscriber communicator is
contractually responsible to obtain and maintain the
governmental authorizations necessary to operate their
subscriber communicators in each jurisdiction. Most countries
generally require all radio transmission equipment used within
their borders to comply with operating standards that may
include specifications relating to required minimum acceptable
levels for radiated power, power density and spurious emissions
into adjacent frequency bands not allocated for the intended
use. Technical criteria established by telecommunications
equipment standards issued by the FCC
and/or the
European Telecommunications Standards Institute, or ETSI, are
generally accepted,
and/or
closely duplicated by domestic equipment approval regulations in
most countries. All current models of subscriber communicators
comply with established FCC standards and many comply with ETSI
standards.
International
Regulation of our System
Our use of certain orbital planes and related system radio
frequency assignments, as licensed by the FCC, is subject to the
frequency coordination and registration process of the ITU. In
order to protect satellite systems from harmful radio frequency
interference from other satellite communications systems, the
ITU maintains a Master International Frequency Register, or
MIFR, of radio frequency assignments and their associated
orbital locations. Each ITU member state (referred to as an
administration) is required by treaty to give notice of,
coordinate and register its proposed use of radio frequency
assignments and associated orbital locations with the ITUs
Radio communication Bureau.
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The FCC serves as the notifying administration for the United
States and is responsible for filing and coordinating our
allocated radio frequency assignments and associated orbital
locations for the system with both the ITUs Radio
communication Bureau and the national administrations of other
countries in each satellites service region. While the
FCC, as our notifying administration, is responsible for
coordinating the system, in practice the satellite licensee is
generally responsible for identifying any potential interference
concerns with existing systems or those enjoying date priority
and to coordinate with such systems. If we are unable to reach
agreement and finalize coordination, the FCC would then assist
with such coordination.
When the coordination process is completed, the ITU formally
enters each satellite systems orbital and frequency use
characteristics in the MIFR. Such registration notifies all
proposed users of frequencies that the registered satellite
system is protected from interference from subsequent or
non-conforming uses by other nations. In the event disputes
arise during coordination, the ITUs radio regulations do
not contain mandatory dispute resolution or enforcement
mechanisms and dispute resolution procedures are based on the
willingness of the parties concerned to reach a mutually
acceptable agreement voluntarily. Neither the ITU specifically,
nor international law generally, provides clear remedies if this
voluntary process fails.
The FCC has notified the ITU that our system was initially
placed in service in April 1995 and that it has operated without
any substantiated complaints of interference since that time.
The FCC has also informed the ITU that our system has
successfully completed its coordination with all countries other
than Russia. We expect that we will successfully complete the
ITU coordination process with Russia in the near future, at
which time the complete system will be formally registered in
the MIFR. On September 27, 2007, the FCC transmitted an
Advance Publication submission to the ITU relating to the Coast
Guard demonstration satellite, the quick-launch satellites and
the next-generation satellites; the first step in the
international coordination process for our new satellites. If
design modifications to future system satellites entail
substantial changes to the frequency utilization by the subject
system component(s), additional international coordination may
be required or reasonably deemed advisable. However, we believe
that ITU coordination can be successfully completed in all
circumstances where such coordination is required, although we
cannot assure you that we will successfully complete such ITU
coordination. Failure to complete requisite ITU coordination
could have a material adverse effect on our business.
Regardless, to date, and to our best knowledge, the system has
not caused harmful interference to any other radio system, or
suffered harmful interference from any other radio system.
Intellectual
Property
We use and hold intellectual property rights for a number of
trademarks, service marks and logos for our system. We have one
main mark ORBCOMM which is
registered or is pending registration in approximately 125
countries. In addition, we currently have three issued patents
and one patent application relating to various aspects of our
system, and at any time we may file additional patent
applications in the appropriate countries for various aspects of
our system.
We believe that all intellectual property rights used in our
system were independently developed or duly licensed by us, by
those we license the rights from or by the technology companies
who supplied portions of our system. We cannot assure you,
however, that third parties will not bring suit against us for
patent or other infringement of intellectual property rights.
Our patents cover various aspects of the protocol employed by
our subscriber communicators. In addition, certain intellectual
property rights to the software used by the Stellar subscriber
communicators is cross-licensed between Stellar and Delphi.
Employees
As of December 31, 2007, we had 96 full-time
employees, 27 of whom are at our Fort Lee, New Jersey
headquarters and 69 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.
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Corporate
Information
Our principal executive offices are located at 2115 Linwood
Avenue, Fort Lee, New Jersey 07024, and our telephone
number is
(201) 363-4900.
Our website is www.orbcomm.com and information contained
on our website is not included as a part of, or incorporated by
reference into, this Annual Report on
Form 10-K.
Our annual, quarterly, and other reports, and amendments to
those reports can be obtained through the Investor Relations
section of our website or from the Securities and Exchange
Commission at www.sec.gov.
Executive
Officers of the Registrant
Certain information regarding our executive officers is provided
below:
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Name
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Age
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Position(s)
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Jerome B. Eisenberg
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68
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Chairman of the Board, Chief Executive Officer and President
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Robert G. Costantini
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48
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Executive Vice President and Chief Financial Officer
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Marc Eisenberg
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41
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Chief Operating Officer
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John J. Stolte, Jr.
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48
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Executive Vice President Technology and
Operations
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Jerome B. Eisenberg has been our Chairman of the Board
since January 2006, and our Chief Executive Officer and
President since December 2004. Effective March 31, 2008, he
will retire as Chief Executive Officer and President and will
continue as non-executive chairman of the Board.
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-President Finance of M.T. Maritime Management
Corp., a global maritime transportation company.
Mr. Costantini started his career with Peat Marwick,
Mitchell & Co. Mr. Costantini is a Certified
Public Accountant, Certified Management Accountant, and a member
of the bar of New York and Connecticut.
Marc Eisenberg is our Chief Operating Officer, a position
he has held since February 27, 2007 and a member of our
board of directors since March 7, 2008. Effective
March 31, 2008, he will become Chief Executive Officer and
President upon Jerome Eisenbergs retirement. From June
2006 to February 2007, he was our Chief Marketing Officer. From
March 2002 to June 2006, he was our Executive Vice President,
Sales and Marketing. He was a member of the board of directors
of ORBCOMM Holdings LLC from May 2002 until February 2004. Prior
to joining ORBCOMM, from 1999 to 2001, Mr. Eisenberg was a
Senior Vice President of Cablevision Electronics Investments,
where among his duties he was responsible for selling
Cablevision services such as video and internet subscriptions
through its retail channel. From 1984 to 1999, he held various
positions, most recently as the Senior Vice President of Sales
and Operations with the consumer electronics company The Wiz,
where he oversaw sales and operations and was responsible for
over 2,000 employees and $1 billion a year in sales.
Mr. Eisenberg is the son of Jerome B. Eisenberg.
23
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.
Set forth below and elsewhere in this Annual Report on
Form 10-K
are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the
forward-looking statements contained in this Annual Report on
Form 10-K.
Any of these risks could also materially and adversely affect
our business, financial condition or the price of our common
stock. Because of the following factors, as well as other
variables affecting our operating results, past financial
performance should not be considered as a reliable indicator of
future performance and investors should not use historical
trends to anticipate results or trends in future periods.
Risks
Relating to Our Business
We are
incurring substantial operating losses and net losses. We
anticipate additional future losses. We must significantly
increase our revenues to become profitable.
We have had annual net losses since our inception, including a
net loss of $3.6 million for fiscal year 2007 and at
December 31, 2007, we had an accumulated deficit of
$63.4 million. Our future results will continue to reflect
significant operating expenses, including expenses associated
with expanding our sales and marketing efforts, maintaining the
infrastructure to operate as a public company and product
development for our subscriber communicator products for use
with our system. As a result, we anticipate additional operating
losses and net losses in the future. The continued development
of our business also will require additional capital
expenditures for, among other things, the development,
construction and launch of additional satellites, including more
capable next-generation satellites, the development of more
advanced subscriber communicators for use with our system and
the installation of additional gateway earth stations and
gateway control centers around the world. Accordingly, as we
make these capital investments, our future results will include
greater depreciation and amortization expense which reflect the
full cost of acquiring these new assets.
In order to become profitable, we must achieve substantial
revenue growth. Revenue growth will depend on acceptance of our
products and services by end-users in current markets, as well
as in new geographic and industry markets. 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 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. We cannot assure you that we will have access to
additional sources of capital on favorable terms or at all.
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
24
Market require that we satisfy certain corporate governance
requirements relating to independent directors, audit
committees, distribution of annual and interim reports,
stockholder meetings, stockholder approvals, solicitation of
proxies, conflicts of interest, stockholder voting rights and
codes of conduct. Our management and other personnel devote a
substantial amount of time to these compliance initiatives.
Moreover, these rules and regulations have increased our legal
and financial compliance costs and will make some activities
more time-consuming and costly. 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.
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 satellite system is not capable of handling voice
traffic. Certain potential end-users, particularly those
requiring full time, real-time communications and those
requiring the transmission of large amounts of data (greater
than eight kilobytes per message) or voice traffic, may find
such limitations unacceptable.
In addition to the limitations imposed by the architecture of
our system, our failure to obtain the necessary regulatory and
other approvals or licenses in a given country or territory will
preclude the availability of our services in such country or
territory until such time, if at all, that such approvals or
licenses can be obtained. Certain potential end-users requiring
messaging services in those countries and territories may find
such limitations unacceptable.
We
face competition from existing and potential competitors in the
telecommunications industry, including numerous terrestrial and
satellite-based network systems with greater resources, which
could reduce our market share and revenues.
Competition in the telecommunications industry is intense,
fueled by rapid, continuous technological advances and alliances
between industry participants seeking to capture significant
market share. We face competition from numerous existing and
potential alternative telecommunications products and services
provided by various large and small companies, including
sophisticated two-way satellite-based data and voice
communication services and next-generation digital cellular
services, such as GSM and 3G. In addition, a continuing trend
toward consolidation and strategic alliances in the
telecommunications industry could give rise to significant new
competitors, and any foreign competitor may benefit from
subsidies from, or other protective measures by, its home
country. Some of these competitors may provide more efficient or
less expensive services than we are able to provide, which could
reduce our market share and adversely affect our revenues and
business.
Many of our existing and potential competitors have
substantially greater financial, technical, marketing and
distribution resources than we do. Additionally, many of these
companies have greater name recognition and more established
relationships with our target customers. Furthermore, these
competitors may be able to adopt more aggressive pricing
policies and offer customers more attractive terms than we can.
We
have a limited operating history, which makes it difficult to
evaluate your investment in us.
We have conducted commercial operations only since April 2001,
when we acquired substantially all of our current communications
system from ORBCOMM Global L.P. and its subsidiaries. Our
prospects and ability to implement our current business plan,
including our ability to provide commercial two-way data
communications
25
service in key markets on a global basis and to generate
revenues and positive operating cash flows, will depend on our
ability to, among other things:
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successfully construct, launch, place in commercial service,
operate and maintain our U.S Coast Guard demonstration and our
quick-launch and next-generation satellites in a timely and
cost-effective manner;
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develop licensing and distribution arrangements in key markets
within and outside the United States sufficient to capture and
retain an adequate customer base;
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install the necessary ground infrastructure and obtain and
maintain the necessary regulatory and other approvals in key
markets outside the United States through our existing or future
international licensees to expand our business
internationally; and
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provide for the timely design, manufacture and distribution of
subscriber communicators in sufficient quantities, with
appropriate functional characteristics and at competitive
prices, for various applications.
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Given our limited operating history, there can be no assurance
that we will be able to achieve these objectives or develop a
sufficiently large revenue-generating customer base to achieve
profitability. In particular, because we acquired a fully
operational satellite constellation and communications system
from ORBCOMM Global L.P. and its subsidiaries, our current
management team has limited experience with managing the design,
construction and launch of a satellite system.
We
rely on third parties to market and distribute our services to
end-users. If these parties are unwilling or unable to provide
applications and services to end-users, our business will be
harmed.
We rely on VARs to market and distribute our services to
end-users in the United States and on international licensees,
country representatives, VARs and IVARs, outside the United
States. The willingness of companies to become international
licensees, country representatives, VARs and IVARs (which we
refer to as resellers) will depend on a number of factors,
including whether they perceive our services to be compatible
with their existing businesses, whether they believe we will
successfully deploy next-generation satellites, whether the
prices they can charge end-users will provide an adequate
return, and regulatory restrictions, if any. We believe that
successful marketing of our services will depend on the design,
development and commercial availability of applications that
support the specific needs of the targeted end-users. The
design, development and implementation of applications require
the commitment of substantial financial and technological
resources on the part of these resellers. Certain resellers are,
and many potential resellers will be, newly formed or small
ventures with limited financial resources, and such entities
might not be successful in their efforts to design applications
or effectively market our services. The inability of these
resellers to provide applications to end-users could have a
harmful effect on our business, financial condition and results
of operations. We also believe that our success depends upon the
pricing of applications by our resellers to end-users, over
which we have no control.
Defects
or errors in applications could result in end-users not being
able to use our services, which would damage our reputation and
harm our financial condition.
VARs, IVARs, international licensees and country representatives
must develop applications quickly to keep pace with rapidly
changing markets. These applications have long development
cycles and are likely to contain undetected errors or defects,
especially when first introduced or when subsequent versions are
introduced, which could result in the disruption of our services
to the end-users. While we sometimes assist our resellers in
developing applications, we have limited ability to accelerate
development cycles to avoid errors and defects in their
applications. Such disruption could damage our reputation as
well as the reputation of the respective resellers, and result
in lost customers, lost revenue, diverted development resources,
and increased service and warranty costs.
Because
we depend on a significant customer for a substantial portion of
our revenues, the loss or decline or slowdown in growth in
business of this customer could seriously harm our
business.
GE, a significant customer, represented 40.3% and 49.5% of
our revenues in 2007 and 2006, respectively, primarily from
sales to GE Asset Intelligence LLC, or AI, a subsidiary of GE
Equipment Services, of subscriber communicators by our Stellar
subsidiary and service revenues from our ORBCOMM LLC subsidiary.
We expect
26
GE Equipment Services to continue to represent a substantial
part of our revenues in the near future. AI did not purchase its
minimum committed volume for 2007 under the 2006 Agreement and,
as a result, AI is in default under the terms of the 2006
Agreement. We are currently in discussions with AI to amend the
2006 Agreement to extend the time periods within which AI is
required to purchase its minimum committed volumes. However,
there can be no assurance as to whether or when a mutually
satisfactory amendment will be agreed to by the parties. In the
event that we and AI are unable to reach a mutually satisfactory
resolution regarding the 2006 Agreement, we may pursue remedies
available to us. As a result, the loss of this customer,
including the termination of the 2006 Agreement or decline or
slowdown in the growth in business of this customer, which could
occur at any time, could have a material adverse effect on our
business, financial condition and results of operations.
If our
international licensees and country representatives are not
successful in establishing their businesses outside of the
United States, the prospects for our business will be
limited.
Outside of the United States, we rely largely on international
licensees and country representatives to establish businesses in
their respective territories, including obtaining and
maintaining necessary regulatory and other approvals as well as
managing local VARs. International licensees and country
representatives may not be successful in obtaining and
maintaining the necessary regulatory and other approvals to
provide our services in their assigned territories and, even if
those approvals are obtained, international licensees
and/or
country representatives may not be successful in developing a
market
and/or
distribution network within their territories. Certain of the
international licensees
and/or
country representatives are, or are likely to be, newly formed
or small ventures with limited or no operational history and
limited financial resources, and any such entities may not be
successful in their efforts to secure adequate financing and to
continue operating. In addition, in certain countries and
territories outside the United States, we rely on international
licensees and country representatives to operate and maintain
various components of our system, such as gateway earth
stations. These international licensees and country
representatives may not be successful in operating and
maintaining such components of our communications system and may
not have the same financial incentives as we do to maintain
those components in good repair.
Some
of our international licensees and country representatives are
experiencing significant operational and financial difficulties
and have in the past defaulted on their obligations to
us.
Many of our international licensees and country representatives
were also international licensees and country representatives of
the Predecessor Company and, as a consequence of the bankruptcy
of ORBCOMM Global L.P., they were left in many cases with
significant financial problems, including significant debt and
insufficient working capital. Certain of our international
licensees and country representatives (including in Japan,
Korea, Malaysia, parts of South America and to a lesser extent,
Europe) have not been able to successfully or adequately
reorganize or recapitalize themselves and as a result have
continued to experience significant material difficulties,
including the failure to pay us for our services. To date,
several of our licensees and country representatives have had
difficulty in paying their usage fees and have not paid us or
have paid us at reduced rates, and in cases where collectibility
is not reasonably assured, we have not reflected invoices issued
to such licensees and country representatives in our revenues or
accounts receivable. The ability of these international
licensees and country representatives to pay their obligations
to us may be dependent, in many cases, upon their ability to
successfully restructure their business and operations or raise
additional capital. In addition, we have from time to time had
disagreements with certain of our international licensees
related to these operational and financial difficulties. To the
extent these international licensees and country representatives
are unable to reorganize
and/or raise
additional capital to execute their business plans on favorable
terms (or are delayed in doing so), our ability to offer
services internationally and recognize revenue will be impaired
and our business, financial condition and results of operations
may be adversely affected.
We
rely on a limited number of manufacturers for our subscriber
communicators. If we are unable to, or cannot find third parties
to, manufacture a sufficient quantity of subscriber
communicators at a reasonable price, the prospects for our
business will be negatively impacted.
The development and availability on a timely basis of relatively
inexpensive subscriber communicators are critical to the
successful commercial operation of our system. Our Stellar
subsidiary relies on a contract
27
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.
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. We
are currently in discussions with Delphi to extend our agreement
which expired on December 31, 2007.
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 subscriber
communicator manufacturing agreement 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.
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. We
and certain of our officers have been named as defendants in a
class action lawsuit claiming, among other
28
things, material misstatements or omissions in our registration
statement related to our initial public offering in November
2006. Litigation is subject to inherent uncertainties, and
unfavorable rulings could occur. An unfavorable ruling could
include money damages. If an unfavorable ruling were to occur,
it could have a material adverse effect on our business and
results of operations for the period in which the ruling
occurred or future periods.
Our
business is characterized by rapid technological change and we
may not be able to compete with new and emerging
technologies.
We operate in the telecommunications industry, which is
characterized by extensive research and development efforts and
rapid technological change. New and advanced technology which
can perform essentially the same functions as our service
(though without global coverage), such as next-generation
digital cellular networks (GSM and 3G), direct broadcast
satellites, and other forms of wireless transmission, are in
various stages of development by others in the industry. These
technologies are being developed, supported and rolled out by
entities that may have significantly greater resources than we
do. These technologies could adversely impact the demand for our
services. Research and development by others may lead to
technologies that render some or all of our services
non-competitive or obsolete in the future.
Because
we operate in a highly regulated industry, we may be subjected
to increased regulatory restrictions which could disrupt our
service or increase our operating costs.
System operators and service providers are subject to extensive
regulation under the laws of various countries and the rules and
policies they adopt. These rules and policies, among other
things, establish technical parameters for the operation of
facilities and subscriber communicators, determine the
permissible uses of facilities and subscriber communicators, and
establish the terms and conditions pursuant to which our
international licensees and country representatives operate
their facilities, including certain of the gateway earth
stations and gateway control centers in our system. These rules
and policies may also require our international licensees and
country representatives to cut-off the data passing through the
gateway earth stations or gateway control centers without
notifying us or our end-users, significantly disrupting the
operation of our communications system. These rules and policies
may also regulate the use of subscriber communicators within
certain countries or territories. International and domestic
licensing and certification requirements may cause a delay in
the marketing of our services and products, may impose costly
procedures on our international licensees and country
representatives, and may give a competitive advantage to larger
companies that compete with our international licensees and
country representatives. Possible future changes to regulations
and policies in the countries in which we operate may result in
additional regulatory requirements or restrictions on the
services and equipment we provide, which may have a material
adverse effect on our business and operations. Although we
believe that we or our international licensees and country
representatives have obtained all the licenses required to
conduct our business as it is operated today, we may not be able
to obtain, modify or maintain such licenses in the future.
Moreover, changes in international or domestic licensing and
certification requirements may result in disruptions of our
communications services or alternatively result in added
operational costs, which could harm our business. Our use of
certain orbital planes and VHF assignments, as licensed by the
FCC, is subject to the frequency coordination and registration
process of the ITU. In the event disputes arise during
coordination, the ITUs radio regulations do not contain
mandatory dispute resolution or enforcement mechanisms and
neither the ITU specifically, nor does international law
generally, provide clear remedies in this situation.
Our
business would be negatively impacted if the FCC revokes or
fails to renew or amend our licenses.
Our FCC licenses a license for the satellite
constellation, separate licenses for the four U.S. gateway
earth stations and a blanket license for the subscriber
communicators are subject to revocation if we fail
to satisfy certain conditions or to meet certain prescribed
milestones. While the FCC satellite constellation license is
valid until April 10, 2010, we 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
29
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 have applied 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. Because the FCC
may not act on our pending modification application prior to the
launch of the Coast Guard demonstration satellite or the
quick-launch satellites, we have also filed an application for
special temporary authority, or STA, to launch and operate these
satellites until the FCC acts on the underlying modification
application. There can be no assurance that these pending FCC
applications, or any such FCC application(s), will be granted on
a timely basis, or at all. Finally, our business could be
adversely affected by the adoption of new laws, policies or
regulations, or changes in the interpretation or application of
existing laws, policies and regulations that modify the present
regulatory environment.
Our
business would be harmed if our international licensees and
country representatives fail to acquire and retain all necessary
regulatory approvals.
Our business is affected by the regulatory authorities of the
countries in which we operate. Due to foreign ownership
restrictions in various jurisdictions around the world,
obtaining local regulatory approval for operation of our system
is the responsibility of our international licensees
and/or
country representatives in each of these licensed territories.
In addition, in certain countries regulatory frameworks may be
rudimentary or in an early stage of development, which can make
it difficult or impossible to license and operate our system in
such jurisdictions. There can be no assurance that our
international licensees
and/or
country representatives will be successful in obtaining any
additional approvals that may be desirable and, if they are not
successful, we will be unable to provide service in such
countries. Our inability to offer service in one or more
important new markets, particularly in China or India, would
have a negative impact on our ability to generate more revenue
and would diminish our business prospects.
There
are numerous risks inherent to our international operations that
are beyond our control.
International telecommunications services are subject to country
and region risks. Most of our coverage area and some of our
subsidiaries are outside the Unites States. As a result, we are
subject to certain risks on a
country-by-country
(or
region-by-region)
basis, including changes in domestic and foreign government
regulations and telecommunications standards, licensing
requirements, tariffs or taxes and other trade barriers,
exchange controls, expropriation, and political and economic
instability, including fluctuations in the value of foreign
currencies which may make payment in U.S. dollars more
expensive for foreign customers or payment in foreign currencies
less valuable for us. Certain of these risks may be greater in
developing countries or regions, where economic, political or
diplomatic conditions may be significantly more volatile than
those commonly experienced in the United States and other
industrialized countries.
We do
not currently maintain in-orbit insurance for our
satellites.
We do not currently maintain in-orbit insurance coverage for our
satellites to address the risk of potential systemic anomalies,
failures or catastrophic events affecting the existing satellite
constellation. We may obtain launch insurance for the launch of
our U.S. Coast Guard demonstration and five quick-launch
satellites combined in a single mission and our 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.
30
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 in 2008, 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 a satellite
launch in 2008 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 which includes the Coast
Guard demonstration satellite and five of the six quick-launch
satellites in a single mission 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. In addition, this launch which will
supplement and ultimately replace our existing Plane A
satellites is important to maintain adequate service levels and
to provide additional capacity for future subscriber growth. A
failure or delay or cost overrun of either our Coast Guard
demonstration satellite or our quick-launch satellites could
materially adversely affect our business, financial condition
and results of operations, including our obligations under our
contract with the U.S. Coast Guard. See We may be in
default under our contract with the U.S. Coast Guard with
respect to the Coast Guard demonstration satellite if we do not
launch the satellite within the cure period or any extension
thereof, which could have a material adverse effect on our
business, financial condition and results of operations.
Any launch failures of our additional satellites could result in
delays of at least six to nine months from the date of the
launch failure 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.
We may
be in default under our contract with the U.S. Coast Guard
with respect to the Coast Guard demonstration satellite if we do
not launch the satellite within the cure period or any extension
thereof, which could have a material adverse effect on our
business, financial condition and results of
operations.
The Coast Guard demonstration satellite is to be launched with
our quick-launch satellites; however, due to delays with the
quick-launch satellites, the launch did not occur by the
December 31, 2007 deadline specified in our contract with
the U.S. Coast Guard. On January 14, 2008, we received
a cure notice from the U.S. Coast Guard notifying us that
unless the Coast Guard demonstration satellite is launched
within 90 days after receipt of the cure notice, the
U.S. Coast Guard may terminate the contract for default. We
believe that the launch of the Coast Guard demonstration
satellite will likely extend beyond the 90 day cure period.
On March 11, 2008, we received a proposed contract
modification from the U.S. Coast Guard, providing for an
April 30, 2008 launch date deadline and furnishing all AIS
data transmitted by AIS over our complement of AIS-equipped
satellites (Coast Guard demonstration satellite and quick-launch
satellites) for a period of 60 continuous days at no additional
cost. The satellites are fully constructed and are undergoing
testing; however, certain issues have arisen in the
electromagnetic compatibility testing of the quick launch
satellites that need to be resolved before launch. We are
currently in discussions with the U.S. Coast Guard to
extend the deadline for the launch of the Coast Guard
demonstration satellite to a mutually acceptable date. However,
there can be no assurance as to whether or when a mutually
satisfactory agreement for an extension of the launch deadline
will be agreed to by the parties. In the event that we
31
and the U.S. Coast Guard are unable to reach a mutually
satisfactory resolution regarding the launch of the Coast Guard
demonstration satellite, the U.S. Coast Guard may terminate
the contract for default and pursue the remedies available to
it. The termination of the U.S. Coast Guard contract and
the resulting liability could have a material adverse effect 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. In 2008, we plan to launch five of
the six quick-launch satellites together with our Coast Guard
demonstration satellite in a single mission to supplement and
ultimately replace our existing Plane A satellites and we plan
to finance further development our next-generation satellites.
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 and funds generated from operations to
pay for costs relating to future satellites.
We are
dependent on a limited number of suppliers to provide the
payload, bus and launch vehicle for our quick-launch and
next-generation satellites and any delay or disruption in the
supply of these components and related services will adversely
affect our ability to replenish our satellite constellation and
adversely impact our business, financial condition and results
of operations.
In 2006, 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
Coast Guard demonstration and five quick-launch satellites which
are to be launched in a single mission in 2008 and additional
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 including putting us in
default under our contract with the U.S. Coast Guard. See
We may be in default under our contract with the
U.S. Coast Guard with respect to the Coast Guard
demonstration satellite if we do not launch the satellite within
the cure period or any extension thereof, which could have a
material adverse effect on our business, financial condition and
results of operations.
32
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:
|
|
|
|
|
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;
|
|
|
|
Circuit failures that reduce the power output of the solar array
panels on the satellites;
|
|
|
|
Failure of the battery cells that power the payload and
spacecraft operations during daily solar eclipse
periods; and
|
|
|
|
Communications system failures that affect overall system
capacity.
|
|
|
|
|
|
Equipment degradation during the satellites lifetime,
including:
|
|
|
|
|
|
Degradation of the batteries ability to accept a full
charge;
|
|
|
|
Degradation of solar array panels due to radiation; and
|
|
|
|
General degradation resulting from operating in the harsh space
environment.
|
|
|
|
|
|
Deficiencies of control or communications software, including:
|
|
|
|
|
|
Failure of the charging algorithm that may damage the
satellites batteries;
|
|
|
|
Problems with the communications and messaging servicing
functions of the satellite; and
|
|
|
|
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
system System Status Network
capacity. While we have already implemented a number of
system adjustments and have. 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
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 system System Status
Network Capacity 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
33
above or arising from the failure of other systems or
components, and operational redundancy may not be available upon
the occurrence of such an anomaly.
Technical
or other difficulties with our gateway earth stations could harm
our business.
Our system relies in part on the functionality of our gateway
earth stations, some of which are owned and maintained by third
parties. While we believe that the overall health of our gateway
earth stations remains stable, we may experience technical
difficulties or parts obsolescence with our gateway earth
stations which may negatively impact service in the region
covered by that gateway earth station. Certain problems with
these gateway earth stations can reduce their availability and
negatively impact the performance of our system in that region.
For example, the owner of the Malaysian gateway earth station
has been unable to raise sufficient capital to properly maintain
this gateway earth station. We are also experiencing commercial
disputes with the entities that own the gateway earth stations
in Japan and Korea. In addition, due to regulatory and licensing
constraints in certain countries in which we operate, we are
unable to wholly-own or majority-own some of the gateway earth
stations in our system located outside the United States. As a
result of these ownership restrictions, we rely on third parties
to own and operate some of these gateway earth stations. If our
relationship with these third parties deteriorates or if these
third parties are unable or unwilling to bear the cost of
operating or maintaining the gateway earth stations, or if there
are changes in the applicable domestic regulations that require
us to give up any or all of our ownership interests in any of
the gateway earth stations, our control over our system could be
diminished and our business could be harmed.
Our
system could fail to perform or perform at reduced levels of
service because of technological malfunctions or deficiencies or
events outside of our control which would seriously harm our
business and reputation.
Our system is exposed to the risks inherent in a large-scale,
complex telecommunications system employing advanced technology.
Any disruption to our services, information systems or
communication networks or those of third parties into which our
network connects could result in the inability of our customers
to receive our services for an indeterminate period of time.
Satellite anomalies and other technical and operational
deficiencies of our communications system described in this
Annual Report on
Form 10-K
could result in system failures or reduced levels of service. In
addition, certain components of our system are located in
foreign countries, and as a result, are potentially subject to
governmental, regulatory or other actions in such countries
which could force us to limit the operations of, or completely
shut down, components of our system, including gateway earth
stations or subscriber communicators. Any disruption to our
services or extended periods of reduced levels of service could
cause us to lose customers or revenue, result in delays or
cancellations of future implementations of our products and
services, result in failure to attract customers or result in
litigation, customer service or repair work that would involve
substantial costs and distract management from operating our
business. The failure of any of the diverse and dispersed
elements of our system, including our satellites, our network
control center, our gateway earth stations, our gateway control
centers or our subscriber communicators, to function and
coordinate as required could render our system unable to perform
at the quality and capacity levels required for success. Any
system failures or extended reduced levels of service could
reduce our sales, increase costs or result in liability claims
and seriously harm our business.
Risks
Related to an Investment in our Common Stock
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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|
|
|
|
liquidity of the market in, and demand for, our common stock;
|
|
|
|
changes in expectations as to our future financial performance
or changes in financial estimates, if any, of market analysts;
|
34
|
|
|
|
|
actual or anticipated fluctuations in our results of operations,
including quarterly results;
|
|
|
|
our financial performance failing to meet the expectations of
market analysts or investors;
|
|
|
|
our ability to raise additional funds to meet our capital needs;
|
|
|
|
the outcome of any litigation by or against us, including any
judgments favorable or adverse to us;
|
|
|
|
conditions and trends in the end markets we serve and changes in
the estimation of the size and growth rate of these markets;
|
|
|
|
announcements relating to our business or the business of our
competitors;
|
|
|
|
investor perception of our prospects, our industry and the
markets in which we operate;
|
|
|
|
changes in our pricing policies or the pricing policies of our
competitors;
|
|
|
|
loss of one or more of our significant customers;
|
|
|
|
changes in governmental regulation;
|
|
|
|
changes in market valuation or earnings of our
competitors; and
|
|
|
|
general economic conditions.
|
In addition, the stock market in general, and The Nasdaq Global
Market and the market for telecommunications companies in
particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate
to the operating performance of particular companies affected.
These broad market and industry factors may materially harm the
market price of our common stock, regardless of our operating
performance.
In the past, following periods of volatility in the market price
of a companys securities, securities
class-action
litigation has often been instituted against that company. Such
litigation has been instituted against us and 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. If we do not continue
to maintain adequate research coverage or if one or more of the
analysts who covers us downgrades our stock or publishes
inaccurate or unfavorable research about our business, our stock
price would likely decline. If one or more of these analysts
ceases coverage of our company or fails to publish reports on us
regularly, demand for our stock could decrease, which could
cause our stock price and trading volume to decline.
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
35
outstanding common stock. Although we believe these provisions
provide for an opportunity to receive a higher bid by requiring
potential acquirers to negotiate with our board of directors,
these provisions apply even if the offer may be considered
beneficial by some stockholders and may delay or prevent an
acquisition of our company.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We currently sublease approximately 7,000 square feet of
office space in Fort Lee, New Jersey and lease
approximately 25,000 and 6,000 square feet of office space
in Dulles, Virginia. In addition, we currently own and operate
six gateway earth stations at the following locations, four
situated on owned real property and two on real property subject
to long-term leases:
|
|
|
|
|
Gateway
|
|
Real Property Owned or Leased
|
|
Lease Expiration
|
|
St. Johns, Arizona
|
|
Owned
|
|
n/a
|
Arcade, New York
|
|
Owned
|
|
n/a
|
Curaçao, Netherlands Antilles
|
|
Owned
|
|
n/a
|
Rutherglen Vic, Australia
|
|
Owned
|
|
n/a
|
Ocilla, Georgia
|
|
Leased
|
|
March 12, 2013
|
East Wenatchee, Washington
|
|
Leased
|
|
May 4, 2008
|
We currently own or lease real property sufficient for our
business operations, although we may need to purchase or lease
additional real property in the future.
|
|
Item 3.
|
Legal
Proceedings
|
We discuss certain legal proceedings pending against the Company
in the notes to the consolidated financial statements and refer
you to that discussion for important information concerning
those legal proceedings, including the basis for such actions
and relief sought. See Note 15 to the consolidated
financial statements for this discussion.
|
|
Item 4.
|
Submission
of Matters to Vote of Security Holders
|
None.
36
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Price of
our Common Stock
Our common stock has traded on The Nasdaq Global Market under
the symbol ORBC since our initial public offering on
November 3, 2006. Prior to that time, there was no public
market for our common stock.
The following sets forth the high and low sales prices of our
common stock, as reported on The Nasdaq Global Market from
November 3, 2006 through December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2007
|
|
$
|
9.46
|
|
|
$
|
5.99
|
|
Quarter ended September 30, 2007
|
|
$
|
17.13
|
|
|
$
|
7.11
|
|
Quarter ended June 30, 2007
|
|
$
|
17.41
|
|
|
$
|
11.45
|
|
Quarter ended March 31, 2007
|
|
$
|
14.23
|
|
|
$
|
8.80
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
Fourth Quarter (beginning on November 3, 2006)
|
|
$
|
11.10
|
|
|
$
|
7.03
|
|
As of March 11, 2008 , there were 835 holders of record of
our common stock.
Use of
Proceeds from Initial Public Offering
On November 2, 2006, the SEC declared effective our
Registration Statement on
Form S-1
(Registration
No. 333-134088),
relating to our initial public offering. After deducting
underwriters discounts and commissions and other offering
costs, our net proceeds were approximately $68.3 million.
We intend to use the remaining net proceeds from our initial
public offering to provide working capital and fund capital
expenditures, primarily related to the deployment of additional
satellites, which will be comprised of our quick-launch and
next-generation satellites. As of December 31, 2007, we
have used $18.4 million for such purposes. Pending such
uses, we are investing the remaining net proceeds in short-term
interest bearing cash equivalents.
Exercise
of Warrants
During the year ended December 31, 2007, we issued
225,900 shares of common stock upon the exercise of
warrants at per share exercise prices of $2.33 to $4.26. We
received gross proceeds of $0.5 million from the exercise
of these warrants. In addition, we issued 704,042 shares of
common stock upon the cashless exercise of warrants to purchase
927,979 common shares with per share exercise prices of $2.33 to
$4.26.
Dividend
Payments
Common stock: We have never declared or paid
cash dividends on shares of our common stock.
Dividend
Policy
Our board of directors currently intends to retain all available
funds and future earnings to support operations and to finance
the growth and development of our business and does not intend
to pay cash dividends on our common stock for the foreseeable
future. Our board of directors may, from time to time, examine
our dividend policy and may, in its absolute discretion, change
such policy.
Securities
Authorized for Issuance under Equity Compensation
Plans
Reference is made to Equity Compensation Plan
Information, in our 2008 Proxy Statement for our 2008
annual meeting of stockholders, which information is hereby
incorporated by reference.
37
Stock
Performance Graph
The graph set forth below compares the cumulative total
shareholder return on our common stock between November 3,
2006 (the date of our initial public offering) and
December 31, 2007, with the cumulative total result of
(i) the Russell 2000 Index and (ii) the NASDAQ
Telecommunications Index, over the same period. This graph
assumes the investment of $100 on November 3, 2006 in our
common stock, the Russell 2000 Index and the NASDAQ
Telecommunications Index, and assumes the reinvestment of
dividends, if any. The graph assumes the initial value of our
common stock on November 3, 2006 was the closing sales
price of $7.75 per share.
The comparisons shown in the graph below are based on historical
data. We caution that the stock price performance show in the
graph below is not necessarily indicative of, nor is it intended
to forecast, the potential future performance of our common
stock. Information used in the graph was obtained from Research
Data Group, a source believed to be reliable, but we are not
responsible for any errors or omissions in such information.
COMPARISON
OF 14 MONTH CUMULATIVE TOTAL RETURN*
Among ORBCOMM Inc., The Russell 2000 Index
And The NASDAQ Telecommunications Index
*$100 invested on 11/3/06 in stock or 10/31/06 in
index-including reinvestment of dividends.
Fiscal year ending December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/06
|
|
|
|
12/06
|
|
|
|
12/07
|
|
ORBCOMM Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
113.81
|
|
|
|
$
|
81.16
|
|
Russell 2000
|
|
|
|
100.00
|
|
|
|
|
102.97
|
|
|
|
|
101.36
|
|
NASDAQ Telecommunications
|
|
|
|
100.00
|
|
|
|
|
108.30
|
|
|
|
|
112.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data should be
read together with the information under Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the related notes which are included elsewhere in this Annual
Report on
Form 10-K.
We have derived the consolidated statement of operations data
for the years ended December 31, 2007, 2006 and 2005 and
the consolidated balance sheet data as of December 31, 2007
and 2006 from our audited consolidated financial statements,
which are included elsewhere in this Annual Report on
Form 10-K.
We have derived the consolidated statement of operations data
for the years ended December 31, 2004 and 2003 and the
consolidated balance sheet data as of December 31, 2005,
2004 and 2003 from our audited consolidated financial
statements, which are not included in this Annual Report on
Form 10-K.
Our historical results are not necessarily indicative of future
results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Consolidated Statement of Operations Data:
|
|
2007
|
|
|
2006(1)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Service revenues
|
|
$
|
17,717
|
|
|
$
|
11,561
|
|
|
$
|
7,804
|
|
|
$
|
6,479
|
|
|
$
|
5,143
|
|
Product sales
|
|
|
10,435
|
|
|
|
12,959
|
|
|
|
7,723
|
|
|
|
4,387
|
|
|
|
1,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
28,152
|
|
|
|
24,520
|
|
|
|
15,527
|
|
|
|
10,866
|
|
|
|
7,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of services
|
|
|
7,990
|
|
|
|
8,714
|
|
|
|
6,223
|
|
|
|
5,884
|
|
|
|
6,102
|
|
Costs of product sales
|
|
|
10,078
|
|
|
|
12,092
|
|
|
|
6,459
|
|
|
|
4,921
|
|
|
|
1,833
|
|
Selling, general and administrative
|
|
|
17,687
|
|
|
|
15,731
|
|
|
|
9,344
|
|
|
|
8,646
|
|
|
|
6,577
|
|
Product development
|
|
|
1,060
|
|
|
|
1,814
|
|
|
|
1,341
|
|
|
|
778
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
36,815
|
|
|
|
38,351
|
|
|
|
23,367
|
|
|
|
20,229
|
|
|
|
15,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,663
|
)
|
|
|
(13,831
|
)
|
|
|
(7,840
|
)
|
|
|
(9,363
|
)
|
|
|
(7,977
|
)
|
Other income (expense), net
|
|
|
5,074
|
|
|
|
2,616
|
|
|
|
(1,258
|
)
|
|
|
(3,026
|
)
|
|
|
(5,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,589
|
)
|
|
$
|
(11,215
|
)
|
|
$
|
(9,098
|
)
|
|
$
|
(12,389
|
)
|
|
$
|
(13,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common
shares(2)
|
|
$
|
(3,589
|
)
|
|
$
|
(29,646
|
)
|
|
$
|
(14,248
|
)
|
|
|
(14,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(2.80
|
)
|
|
$
|
(2.51
|
)
|
|
|
(2.57
|
)
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
39,706
|
|
|
|
10,601
|
|
|
|
5,683
|
|
|
|
5,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Consolidated Balance Sheet Data:
|
|
2007
|
|
|
2006(1)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
115,587
|
|
|
$
|
62,139
|
|
|
$
|
68,663
|
|
|
$
|
3,316
|
|
|
$
|
78
|
|
Marketable securities
|
|
|
|
|
|
|
38,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
|
106,716
|
|
|
|
100,887
|
|
|
|
65,285
|
|
|
|
8,416
|
|
|
|
(19,389
|
)
|
Satellite network and other equipment, net
|
|
|
49,704
|
|
|
|
29,131
|
|
|
|
7,787
|
|
|
|
5,243
|
|
|
|
3,263
|
|
Intangible assets, net
|
|
|
5,572
|
|
|
|
7,058
|
|
|
|
4,375
|
|
|
|
317
|
|
|
|
|
|
Total assets
|
|
|
181,823
|
|
|
|
148,093
|
|
|
|
89,316
|
|
|
|
20,888
|
|
|
|
7,198
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,107
|
|
Note payable related party
|
|
|
1,170
|
|
|
|
879
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
112,221
|
|
|
|
38,588
|
|
|
|
|
|
Stockholders equity (deficit) (membership interests)
|
|
|
160,849
|
|
|
|
128,712
|
|
|
|
(42,654
|
)
|
|
|
(28,833
|
)
|
|
|
(15,547
|
)
|
|
|
|
(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 |
39
|
|
|
|
|
received proceeds of approximately $89.5 million. From
these net proceeds we paid accumulated and unpaid dividends
totaling $7.5 million to the holders of Series B
preferred stock, a $3.6 million contingent purchase price
payment relating to the acquisition of our interest in Satcom
International Group plc and $10.1 million to the holders of
Series B preferred stock in connection with obtaining
consents required for the conversion of the Series B
preferred stock into common stock. All outstanding shares of
Series A and B preferred stock automatically converted into
21,383,318 shares of common stock. |
|
(2) |
|
The net loss applicable to common shares for the year ended
December 31, 2004 is based on our net loss for the period
from February 17, 2004, the date on which the members of
ORBCOMM LLC contributed all of their outstanding membership
interests in exchange for shares of our common stock, through
December 31, 2004. Net loss attributable to the period from
January 1, 2004 to February 16, 2004 (prior to the
Company becoming a corporation and issuing its common shares),
has been excluded from the net loss applicable to common shares.
As a result, net loss per common share for 2004 is not
comparable to net loss per common share for subsequent periods. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with our Consolidated Financial Statements and Notes
which appear elsewhere in this Annual Report on
Form 10-K.
This discussion contains forward- looking statements that
involve risks, uncertainties and assumptions. Our actual results
could differ materially from those anticipated in these forward-
looking statements as a result of various factors, including
those set forth in Part I, Item 1A. Risk
Factors and elsewhere in this Annual Report on
Form 10-K.
Organization
ORBCOMM LLC was organized as a Delaware limited liability
company on April 4, 2001 and on April 23, 2001, we
acquired substantially all of the non-cash assets and assumed
certain liabilities of ORBCOMM Global L.P. and its subsidiaries,
which had filed for relief under Chapter 11 of the
U.S. Bankruptcy Code. The assets acquired from ORBCOMM
Global L.P. and its subsidiaries consisted principally of the
in-orbit satellites and supporting U.S. ground
infrastructure equipment that we own today. At the same time,
ORBCOMM LLC also acquired the FCC licenses required to own and
operate the communications system from a subsidiary of Orbital
Sciences Corporation, which was not in bankruptcy, in a related
transaction. Prior to April 23, 2001, ORBCOMM LLC did not
have any operating activities. We were formed as a Delaware
corporation in October 2003 and on February 17, 2004, the
members of ORBCOMM LLC contributed all of their outstanding
membership interests in ORBCOMM LLC to us in exchange for shares
of our common stock, representing ownership interests in us
equal in proportion to their prior ownership interest in ORBCOMM
LLC. As a result of, and immediately following the contribution,
ORBCOMM LLC became a wholly owned subsidiary of ours. We refer
to this transaction as the Reorganization.
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. In 2007, we began providing terrestrial-based
cellular communication services through a re-seller agreement
with a major cellular wireless provider. These services
commenced in the third quarter of 2007 and revenues from such
services were not significant in 2007. In addition, a re-seller
agreement was signed with a second major cellular wireless
provider in the fourth quarter of 2007 and services with this
provider are expected to commence in the first half of 2008.
These terrestrial-based communication services enable our
customers who have higher bandwidth requirements to receive and
send messages from communication devices based on
terrestrial-based technologies using the cellular
providers wireless network as well as from dual-mode
devices combining our satellite subscriber communicators with
devices for terrestrial-based technologies. As a result, our
customers are now able to integrate in to their applications a
terrestrial communications device that will allow them to add
messages, including data intensive messaging from the cellular
providers wireless networks.
40
Our products and services enable our customers and end-users to
enhance productivity, reduce costs and improve security through
a variety of commercial, government and emerging homeland
security applications. We enable our customers and end-users to
achieve these benefits using a single global technology standard
for machine-to-machine and telematic, or M2M, data
communications. Our customers have made significant investments
in developing ORBCOMM-based applications. Examples of assets
that are connected through our M2M data communications system
include trucks, trailers, railcars, containers, heavy equipment,
fluid tanks, utility meters, and pipeline monitoring equipment,
marine vessels and oil wells. Our customers include original
equipment manufacturers, or OEMs, such as Caterpillar Inc.,
Komatsu Ltd., Hitachi Construction Machinery Co., Ltd. and the
Volvo Group, IVARs, such as GE, VARs, such as Fleet Management
Services, XATA Corporation and American Innovations, Ltd., and
government agencies, such as the U.S. Coast Guard.
In the second quarter of 2007, we revised our definition of
billable subscriber communicators to mean subscriber
communicators which includes terrestrial units that are shipped
and activated for usage and billing at the request of the
customer, without forecasting a timeframe for when individual
units will be generating usage and be billing. In the past, we
reported billable subscriber communicators defined as subscriber
communicators activated and currently billing or expected to be
billing within 30 to 90 days.
Under the revised definition of billable subscriber
communicators, as of December 31, 2007, we had
approximately 351,000 billable subscriber communicators
activated on our communications system compared to approximately
225,000 billable subscriber communicators as of
December 31, 2006, an increase of approximately 56.2%.
During the year ended December 31, 2007, we added
approximately 126,000 net billable subscriber communicators
on our communications system compared to approximately
112,000 net billable subscriber communicators added during
the year ended December 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 markets are significant and
growing.
EBITDA
EBITDA is defined as earnings before interest income (expense),
provision for income taxes and depreciation and amortization. We
believe EBITDA is useful to our management and investors in
evaluating our operating performance because it is one of the
primary measures used by us to evaluate the economic
productivity of our operations, including our ability to obtain
and maintain our customers, our ability to operate our business
effectively, the efficiency of our employees and the
profitability associated with their performance; it also helps
our management and investors to meaningfully evaluate and
compare the results of our operations from period to period on a
consistent basis by removing the impact of our financing
transactions and the depreciation and amortization impact of
capital investments from our operating results. In addition, our
management uses EBITDA in presentations to our board of
directors to enable it to have the same measurement of operating
performance used by management and for planning purposes,
including the preparation of our annual operating budget.
EBITDA is not a performance measure calculated in accordance
with accounting principles generally accepted in the United
States, or GAAP. While we consider EBITDA to be an important
measure of operating performance, it should be considered in
addition to, and not as a substitute for, or superior to, net
loss or other measures of financial performance prepared in
accordance with GAAP and may be different than EBITDA measures
presented by other companies.
The following table reconciles our net loss to EBITDA for the
periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(3,589
|
)
|
|
$
|
(11,215
|
)
|
|
$
|
(9,098
|
)
|
Interest income
|
|
|
(5,258
|
)
|
|
|
(2,582
|
)
|
|
|
(66
|
)
|
Interest expense(a)
|
|
|
209
|
|
|
|
237
|
|
|
|
308
|
|
Depreciation and amortization
|
|
|
2,415
|
|
|
|
2,373
|
|
|
|
1,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(6,223
|
)
|
|
$
|
(11,187
|
)
|
|
$
|
(6,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes amortization of deferred debt issuance costs and debt
discount of approximately $31 in 2005. |
41
EBITDA in 2007 improved by $5.0 million over 2006. This
improvement was due to an increase in service revenues of
$6.1 million offset by an increase in operating expenses of
$0.5 million. Operating expenses increased in 2007 mostly
due to increases in stock-based compensation of
$0.5 million.
EBITDA in 2006 decreased by $4.3 million over 2005. This
decrease was due to an increase in operating expenses of
$9.3 million to support the growth of the business, which
was partially offset by higher net service revenues of
$3.8 million and a higher gross profit from product sales
of $1.4 million. Operating expenses increased due to an
increase in staffing as we prepared to become a public company,
an increase in stock-based compensation of $3.7 million
resulting from the granting of restricted stock units and stock
appreciation rights in October 2006, litigation expenses and
consulting fees related to preparing for compliance with
Section 404 of the Sarbanes-Oxley Act.
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).
During the third quarter of 2007, we began selling cellular
wireless subscriber identity modules, or SIMS, (for our
terrestrial-communication services) to our resellers and direct
customers. The revenues from these services were not significant
in 2007. We also recognize revenues upon the installation of
gateway earth stations.
We derive service revenues from our resellers and direct
customers from utilization of satellite subscriber communicators
on our communications system and the reselling of airtime from
the utilization of terrestrial-based subscriber communicators
using SIMS on the cellular providers wireless network.
These service revenues generally consist of a one-time
activation fee for each subscriber communicator and SIMS
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 and SIMS
activated by each customer. Revenues for usage fees from
currently billing subscriber communicators 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. For one international licensee customer, we charge
usage fees as a percentage of the international licensees
revenues. Service revenues also include a one-time royalty fee
from third parties for the use of our proprietary communications
protocol, which enables subscriber communicators to connect to
our M2M data communications system and fees from providing
engineering, technical and management support services to
customers.
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 intellectual property related to the
designs, processes and procedures developed under the contract.
However, a fee will be charged to the U.S. Coast Guard for
data delivered under the agreement. 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 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 2008) over the
expected life of the customer relationship.
As a result of 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. On September 13, 2007,
we and the U.S. Coast Guard entered into an Amendment of
Solicitation/Modification of Contract amending the agreement to
extend the definitive launch date to December 31, 2007. In
consideration for
42
agreeing to extend the launch date, we will provide up to
200 hours of additional technical support for up to
14 months after the launch date at no cost and reduce the
U.S. Coast Guards cost for the post-launch
maintenance option and for certain usage options.
The Coast Guard demonstration satellite is to be launched with
our quick-launch satellites; however, due to delays with the
quick-launch satellites, the launch did not occur by
December 31, 2007. On January 14, 2008, we received a
cure notice from the U.S. Coast Guard notifying us that
unless the Coast Guard demonstration satellite is launched
within 90 days after receipt of the cure notice, the
U.S. Coast Guard may terminate the contract for default. We
believe that the launch of the Coast Guard demonstration
satellite will likely extend beyond the 90 day cure period.
On March 11, 2008, we received a proposed contract
modification from the U.S. Coast Guard, providing for an
April 30, 2008 launch date deadline and furnishing all AIS
data transmitted by AIS over our complement of AIS-equipped
satellites (Coast Guard demonstration satellite and quick-launch
satellites) for a period of 60 continuous days at no cost. The
satellites are fully constructed and are undergoing testing;
however, certain issues have arisen in the electromagnetic
compatibility testing of the quick launch satellites that need
to be resolved before launch. We are currently in discussions
with the U.S. Coast Guard to extend the deadline for the
launch of the Coast Guard demonstration satellite to a mutually
acceptable date. However, there can be no assurance as to
whether or when a mutually satisfactory agreement for an
extension of the launch deadline will be agreed to by the
parties. In the event that we and the U.S. Coast Guard are
unable to reach a mutually satisfactory resolution regarding the
launch of the Coast Guard demonstration satellite, the
U.S. Coast Guard may terminate the contract and pursue the
remedies available to it. The Company has indemnification rights
against the launch services provider for the Coast Guard
demonstration satellite in the event the launch services
contract is terminated for default from and against any and all
claims, demands, assessments and all liabilities and costs
related thereto for which the Company becomes liable, including
but not limited to any assessment of damages
and/or
reprocurement costs by the United States Government.
Costs and
expenses
We own and operate a 29-satellite constellation, six of the
fifteen 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 have benefited from
lower amortization of capital costs than if the assets were
acquired at ORBCOMM Global L.P.s original cost. Our
current satellites became fully depreciated during the fourth
quarter of 2006. In 2008, as discussed above, we plan on
launching the Coast Guard demonstration satellite with five
quick-launch satellites in a single mission. 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.
We currently anticipate that when additional satellites are
placed into service, they will be depreciated over a period of
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. As of
December 31, 2007, we have 96 employees and we do not
expect a significant increase in 2008.
Capital
expenditures
The majority of our current fleet of satellites was put in
service in the late 1990s and has an estimated operating life of
approximately nine to twelve years. We plan to launch additional
satellites to supplement and ultimately replace our current
fleet in order to continue to provide our communications
services in the future. For the year ended 2007, we spent
$20.0 million on capital expenditures, of which
$0.5 million was for the Coast Guard demonstration
satellite and $16.1 million was for the quick-launch and
next-generation satellites. For the year ended
43
2006, we spent, $22.4 million on capital expenditures, of
which, $17.4 was for the quick-launch and next-generation
satellites and for the year ended December 31, 2005 we
spent, $4.1 million on capital expenditures of which
$3.5 million was for the Coast Guard demonstration
satellite.
Our current intention is to replenish our constellation in a
number of phases. First, we are under contract with the
U.S. Coast Guard to conduct a demonstration test to
validate the ability of an ORBCOMM satellite to receive AIS
signals from marine vessels over 300 tons. The satellite is in
the final integration and test phase which we intend to launch
with five of our six quick-launch satellites
together in 2008 in a single mission to supplement our Plane A
satellites with slightly upgraded communication capability
compared to our current first generation satellites. Due to
delays associated with the construction of the final
quick-launch satellite, we intend to retain it for future
deployment. Finally, we intend to launch our next-generation
satellites with increased communications capabilities with the
first of several launches commencing in 2010. We have started
the procurement activities for the next-generation satellites
and are planning to award the next-generation satellite and
launch services contract in 2008.
Through a series of launches, we intend to replenish the
existing constellation of satellites, which depending on the
capabilities of the replacement satellites, may require fewer
satellites than we currently have. Flexibility in the number of
satellites per launch, the number of satellites inserted into
each plane and target plane will allow us to modify our plans
within just a few months before launch. In addition, we intend
to require our satellite manufacturers to include options for
additional satellites that can be launched on an accelerated
schedule if the market demands such an increase or if lower
latencies are required or to mitigate a launch failure.
Since 2002, we have implemented several operational changes and
software demonstration updates that we believe have enhanced the
expected life of the satellites. The majority of these changes
focus on extending the life of the primary life limiting
component the nickel hydrogen batteries
which power the satellites.
Critical
Accounting Policies and Estimates
Our discussion and analysis of our results of operations,
liquidity and capital resources are based on our consolidated
financial statements which have been prepared in conformity with
accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates and judgments,
including those related to revenue recognition, costs of
revenues, accounts receivable, satellite network and other
equipment, capitalized development costs, intangible assets,
debt issuance costs and debt discount, convertible redeemable
preferred stock, valuation of deferred tax assets, uncertain tax
positions 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 satellite 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 satellite
subscriber communicators and other items are not subject to
return and title and risk of loss pass to the customer at the
time of shipment. Sales of SIMS are subject to return and title
and risk of loss pass to the customer at the time of shipment as
we do not have a sufficient historical experience which to make
a
44
reasonable estimate of SIMS returns that will occur, revenue on
the sales of SIMS is deferred until the return privilege has
substantially expired. Sales of subscriber communicators and
SIMS 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
installation, customer acceptance and when collectibility is
reasonably assured. Revenues from the activation of subscriber
communicators and SIMS 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. Revenues generated from royalties under our subscriber
communicator manufacturing agreements are recognized when we
issue to a third party manufacturer upon request a unique serial
number to be assigned to each unit manufactured by such third
party manufacturer.
Amounts received prior to the performance of services under
customer contracts are recognized as deferred revenues and
revenue recognition is deferred until such time that all revenue
recognition criteria have been met.
For arrangements with multiple obligations (e.g.,
deliverable and undeliverable products, and other post-contract
support), we allocate revenues to each component of the contract
based upon objective evidence of each components fair
value. We recognize revenues allocated to undelivered products
when the criteria for product revenues set forth above are met.
If objective and reliable evidence of the fair value of the
undelivered obligations is not available, the arrangement
consideration allocable to a delivered item is combined with the
amount allocable to the undelivered item(s) within the
arrangement. Revenues are recognized as the remaining
obligations are fulfilled.
Out-of-pocket expenses incurred during the performance of
professional service contracts are included in costs of services
and any amounts re-billed to clients are included in revenues
during the period in which they are incurred. Shipping costs
billed to customers are included in product sales revenues and
the related costs are included as costs of product sales.
Under our agreement with the U.S. Coast Guard with respect
to the Concept Validation Project and related services described
under Overview Revenues, the
deliverables do not qualify as separate units of accounting and
as a result, revenues from the agreement will be recognized
ratably commencing upon the launch of the demonstration
satellite (expected in 2008) 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 product sales and services
Costs of product sales includes the purchase price of products
sold, shipping charges, payroll and payroll related costs
including stock-based compensation 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.
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.
45
Satellite
network and other equipment
Satellite network and other equipment are stated at cost, less
accumulated depreciation and amortization. We use judgment to
determine the useful life of our satellite network based on the
estimated operational life of the satellites and periodic
reviews of engineering data relating to the operation and
performance of our satellite network.
Satellite network includes the costs of our constellation of
satellites, and the ground and control segments, which consists
of gateway earth stations, gateway control centers and the
network control center (the Ground Segment).
Assets under construction primarily consists of costs relating
to the design, development and launch of the Coast Guard
demonstration satellite, payload, bus and launch procurement
agreements for our quick-launch satellites and other related
costs, design of the next-generation satellites and upgrades to
our infrastructure and Ground Segment. Once these assets are
placed in service they will be transferred to satellite network
and other equipment and then depreciation and amortization will
be recognized using the straight-line method over the estimated
lives of the assets. No depreciation has been charged on these
assets as of December 31, 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. Management
reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of
assets may not be recoverable. In connection with this review,
we reevaluate the periods of depreciation and amortization. We
recognize an impairment loss when the sum of the future
undiscounted net cash flows expected to be realized from the
asset is less than its carrying amount. If an asset is
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset
exceeds its fair value, which is determined using the projected
discounted future net cash flows. We measure fair value by
discounting estimated future net cash flows using an appropriate
discount rate. Considerable judgment by the Company is necessary
to estimate the fair value of the assets and accordingly, actual
results could vary significantly from such estimates. Our most
significant estimates and judgments relating to the long-lived
asset impairments include the timing and amount of projected
future cash flows and the discount rate selected to measure the
risks inherent in future cash flows.
Capitalized
development costs
Judgments and estimates occur in the calculation of capitalized
development costs. We evaluate and estimate when a preliminary
project stage is completed and at the point when the project is
substantially complete and ready for use. We base our estimates
and evaluations on engineering data. We capitalize the costs of
acquiring, developing and testing software to meet our internal
needs. Capitalization of costs associated with software obtained
or developed for internal use commences when both the
preliminary project stage is completed and management has
authorized further funding for the project, based on a
determination that it is probable that the project will be
completed and used to perform the function intended. Capitalized
costs include only (1) external direct cost of materials
and services consumed in developing or obtaining internal-use
software, and (2) payroll and payroll-related costs for
employees who are directly associated with, and devote time to,
the internal-use software project. Capitalization of such costs
ceases no later than the point at which the project is
substantially complete and ready for its intended use. Internal
use software costs are amortized once the software is placed in
service using the straight-line method over periods ranging from
three to five years.
Income
taxes
We account for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes,
(SFAS 109). 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
46
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, except for an unrecognized tax benefit
of $0.2 million.
On January 1, 2007, we adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN 48) an
interpretation of SFAS 109. This interpretation
prescribes a recognition threshold and measurement attribute for
tax positions taken or expected to be taken in a tax return.
This interpretation also provides guidance on de-recognition,
classification, interest and penalties and disclosures of
matters related to uncertainty in income taxes, The evaluation
of a tax position in accordance with this interpretation is a
two-step process. In the first step, recognition, we determine
whether it is more-likely-than-not that a tax position will be
sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits
of the position. The second step addresses measurement of a tax
position that meets the more-likely-than-not criteria. The tax
position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon
ultimate settlement. Differences between tax positions taken in
a tax return and amounts recognized in the financial statements
will generally result in an increase in a liability for income
taxes payable or a reduction of an income tax refund receivable,
or a reduction in a deferred tax asset or an increase in a
deferred tax liability or both. Tax positions that previously
failed to meet the more-likely-than-not recognition threshold
should be recognized in the first subsequent financial reporting
period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not
recognition threshold should be de-recognized in the first
subsequent financial reporting period in which that threshold is
no longer met. Accounting for uncertainties in income taxes
positions under FIN 48 involves significant judgments by
management.
As of January 1, 2007, we had no significant unrecognized
tax benefits. During the year ended December 31, 2007, we
recognized adjustments for uncertain tax benefits totaling
$0.8 million. Due to the existence of our valuation
allowance the uncertain tax benefits if recognized would not
impact our effective income tax rate. We are subject to
U.S. federal and state examinations by tax authorities for
all years since its inception. We do not expect any significant
changes to its unrecognized tax positions during the next twelve
months.
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 2006 Long-Term
Incentives Plan (the 2006 LTIP) and the 2004 Stock
Option Plan. The 2006 Long-Term Incentives Plan, approved by our
stockholders in September 2006, provides for the grants of
non-qualified stock options, stock appreciation rights
(SARs), common stock, restricted stock, restricted
stock units (RSUs), performance units and
performance shares to our employees and non-employee directors
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.
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
47
model for determining the estimated fair value for all
share-based payment awards. Under that transition method,
stock-based compensation expense recognized subsequent to
January 1, 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).
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.
For the years ended December 31, 2007, 2006 and 2005, we
recognized $4.4 million $3.9 million and
$0.2 million of stock-based compensation expense,
respectively. As of December 31, 2007, we had an aggregate
of $2.4 million of unrecognized compensation costs for all
share-based payment arrangements.
We expect that our planned use of share-based payment
arrangements will continue to be a significant expense for us 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.
The grant date fair value of the performance-and time-based RSU
awards granted in 2007 is based upon the closing stock price of
our common stock on the date of grant. The grant date fair value
of the time and performance-based RSUs granted in 2006 was
determined to be $11.00 per common share, the price of our
common stock sold in our initial public offering
The fair value of each time and performance-based 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. We use 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.
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Years Ended December 31,
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2007
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2006
|
|
Risk-free interest rate
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|
4.93%
|
|
4.66%
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Expected life (years)
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|
5.5
|
|
5.50 to 6.00
|
Estimated volatility
|
|
43.95%
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43.85%
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Expected dividends
|
|
None
|
|
None
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48
2004
Stock Option Plan
In 2007, we did not grant any stock options.
In February 2006, we granted an option to an employee to
purchase 50,000 shares of our common stock. The fair value
of the share-based award was estimated on the date of grant
using the Black-Scholes option pricing model using the following
assumptions: expected volatility of 44.50% based on the stock
volatility for comparable publicly traded companies; estimated
fair value of our common stock on the date of grant of $15.00
per share; expected life of the option of four years, giving
consideration to the contractual term and vesting schedule;
risk-free interest rate of 4.64% based on the U.S. Treasury
yield curve at the time of the grant over the expected term of
the stock option grant; and zero dividend yield. The exercise
price of these options was $4.88 per share and the estimated
fair value of these options was $11.16 per share.
We determined the fair value of our common stock underlying
stock options issued in February 2006 to be $15.00 per share. At
the time options were issued in February 2006, we concluded that
the fair value of our common stock had increased significantly
to $15.00 per share, as a result of the completion of the
Series B preferred stock financing, recent developments in
our business, our projected financial performance and the
commencement of the process for our initial public offering,
which was completed in 2006. In reaching our conclusion, we took
into account a number of factors, including: (i) the $6.045
conversion price of our Series B preferred stock issued in
December 2005 and January 2006, after giving effect to the
2-for-3
reverse stock split effected in October 2006; (ii) our
improved liquidity due to the receipt of net proceeds from the
Series B preferred stock financing, resulting in cash and
cash equivalents of over $60 million in the beginning of
2006, which would permit us to continue to fund working capital
and a portion of our capital expenditure plan; (iii) recent
business developments which we believed improved our operations
and prospects, including substantial net increases in billable
subscriber communicators activated on our system during the
fourth quarter of 2005 and the beginning of the first quarter of
2006 and customer wins with large resellers such as GE Equipment
Services; (iv) the then-current and projected increases in
our revenues and gross margins; (v) preliminary estimated
price ranges related to the commencement of our process for our
initial public offering completed in November 2006; and
(vi) a discounted cash flow analysis of our projected
financial results.
We also considered the following factors in assessing the fair
value: the fact that our common stock was an illiquid security
of a private company without a trading market; the likelihood of
a liquidity event, such as an initial public offering; and
potential risks and uncertainties in our business. We made such
determination by considering a number of factors including the
conversion price of our Series A and B preferred stock
issued December 2005 and January 2006, recent business
developments, a discounted cash flow analysis of its projected
financial results, and preliminary estimated price ranges
related to the commencement of our process for a potential
public offering.
We did not obtain a contemporaneous valuation from an unrelated
valuation specialist. Determining the fair value of our common
stock requires making complex and subjective judgments and is
subject to assumptions and uncertainties. We believe that we
have used reasonable methodologies, approaches and assumptions
consistent with the American Institute of Certified Public
Accountants Practice Guide, Valuation of
Privately-Held-Company Equity Securities Issued as
Compensation to determine the fair value of our common
stock.
49
Results
of Operations
Revenues
The table below presents our revenues (in thousands) for the
years ending December 31, 2007, 2006 and 2005, together
with the percentage of total revenue represented by each revenue
category:
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|
|
Years Ended December 31,
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|
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2007
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|
|
2006
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|
|
2005
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|
|
|
|
|
|
% of
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|
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|
% of
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|
% of
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Total
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|
|
|
|
Total
|
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|
|
|
|
Total
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|
|
Service revenues
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|
$
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17,717
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|
|
|
62.9
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%
|
|
$
|
11,561
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|
|
|
47.2
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%
|
|
$
|
7,804
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|
|
|
50.3
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%
|
Product sales
|
|
|
10,435
|
|
|
|
37.1
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%
|
|
|
12,959
|
|
|
|
52.8
|
%
|
|
|
7,723
|
|
|
|
49.7
|
%
|
|
|
|
|
|
|
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|
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|
$
|
28,152
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|
|
|
100.0
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%
|
|
$
|
24,520
|
|
|
|
100.0
|
%
|
|
$
|
15,527
|
|
|
|
100.0
|
%
|
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|
|
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|
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2007 vs. 2006: Total revenues for 2007
increased $3.6 million, or 14.8%, to $28.2 million
from $24.5 million in 2006. This increase was due to an
increase in service revenues of $6.1 million, offset by a
decrease in product sales of $2.5 million. Excluding
revenue recognized from the sale of a gateway earth station of
$1.5 million in 2007 pursuant to a contract entered into in
2006 and $0.2 million in 2006 pursuant to a contract
entered into in 2003 revenues increased $2.3 million or
9.5% over 2006.
2006 vs. 2005: Total revenues for 2006
increased $9.0 million or 57.9% to $24.5 million from
$15.5 million in 2005. This increase was due to an increase
in service revenues of $3.8 million and product sales of
$5.2 million. Excluding revenue recognized from the sale of
the gateway earth station, pursuant to a contract entered into
in 2003, of $0.2 million and $2.1 million in 2006 and
2005 respectively, 2006 revenues increased $11.0 million or
81.8% over 2005.
Service
revenues
2007 vs. 2006: Service revenues increased
$6.1 million in 2007, or 53.2% to $17.7 million, or
approximately 62.9% of total revenues, from $11.6 million,
or approximately 47.2% of total revenues in 2006. As of
December 31, 2007, under the revised definition of billable
subscriber communicators, we had approximately 351,000 billable
subscriber communicators activated on our communications system
compared to approximately 225,000 billable subscriber
communicators at December 31, 2006, an increase of
approximately 56.2%.
The increases in service revenue for 2007, was primarily due to
an increase in the number of billable subscriber communicators
activated on our communications system. Service revenue growth
can be impacted by the customary lag between subscriber
communicator activations and the recognition of service revenues
from these units.
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. As of
December 31, 2006, under the revised definition of billable
subscriber communicators, the number of billable subscriber
communicators activated on our communications system increased
approximately 99.1% from approximately 113,000 billable
subscriber communicators as of December 31, 2005.
For 2006 and 2005, the number of billable subscriber
communicators grew at a faster pace than our total service
revenues due in part to customary lags between subscriber
communicator activations and recognition of service revenues
from these units. Consistent with our strategy to focus on
customers with the potential for a high number of connections
with lower usage applications, we experienced an increase in the
mix of lower revenue per subscriber communicator applications
and negotiated a lower priced plan with a customer in order to
accommodate revisions to its applications. The increase in the
number of billable subscriber communications was primarily by
customers with trailer tracking, heavy equipment monitoring and,
in-cab truck monitoring applications.
50
Product
sales
2007 vs. 2006: Revenue from product sales
decreased $2.5 million in 2007 or 19.5%, to
$10.4 million, or approximately 37.1% of total revenues,
from $12.9 million, or approximately 52.8% of total
revenues in 2006.
50.1
Included in product sales in 2007 is $1.5 million of
revenue recognized from the sale of a gateway earth station
pursuant to a contract entered into in 2006. Included in product
sales in 2006 is $0.2 million of revenue recognized from
the sale of a gateway earth station pursuant to a contract
entered into in 2003. We recognize the revenue from the sale of
a gateway earth station upon installation, customer acceptance
and when collectibility is reasonably assured. In 2007, sales of
subscriber communicators and other equipment, excluding the
gateway earth station sale decreased $3.8 million or 30.0%
compared to 2006. This decrease was primarily due to lower sales
to GE and decrease in our average selling price of subscriber
communicators based on volume price reductions we are receiving
from our contract manufacturer Delphi in 2007.
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
pursuant to a contract entered into in 2003. 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, offset by a
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.
2007 vs. 2006: Costs of services decreased by
$0.7 million, or 8.3%, to $8.0 million in 2007 from
$8.7 million in 2006. The decrease is due to a decrease in
labor costs of $0.2 million due to an increase in the
number of capitalizable internal projects and lower maintenance
costs of $0.3 million. As a percentage of service revenues,
cost of services were 45.1% of service revenues in 2007 compared
to 75.4% in 2006. The decrease in costs of services as a
percentage of service revenues is primarily due to lower
depreciation on our satellites, which became fully depreciated
during the fourth quarter of 2006 and a increase in service
revenues.
2006 vs. 2005: Cost of services increased by
$2.5 million, or 39.9%, to $8.7 million in 2006 from
$6.2 million in 2005. This increase was primarily due to
increased headcount in our engineering groups, which added
$1.1 million of costs including an increase of
$0.4 million in stock-based compensation expense resulting
from the adoption of SFAS 123(R) on January 1, 2006
using the modified prospective transition method, higher
equipment maintenance costs of $0.7 million as we made
improvements to our existing system infrastructure and the
amortization of licenses acquired in our acquisition of Satcom
of $0.7 million. Included in our costs of services in 2005
is the stock-based compensation expense that was being
recognized over the vesting periods for stock options that were
granted to employees in 2004 having an exercise price per share
less than the fair value of our common stock at the date of
grant. These amounts were not significant in 2005.
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 and cellular
wireless communication technologies related to our ORBBCOMM LLC
subsidiary.
2007 vs. 2006: Costs of product sales
decreased by $2.0 million, or 16.7%, to $10.1 million
in 2007 from $12.1 million in 2006. Product cost
represented 85.6% of the cost of product sales in 2007, which
decreased by $2.2 million, or 20.4% to $8.7 million in
2007 from $10.9 million in 2006. In 2007 product cost also
includes $0.6 million of costs associated with the gateway
earth station sale pursuant to a contract entered into in 2006.
In 2006 product cost also includes $0.2 million of
installation costs associated with the sale of the gateway earth
station recognized in 2005 pursuant to a contract entered into
in 2003. Excluding sales of gateway earth stations recognized in
2007 and 2006, which had gross margins of $0.8 million and
$0.2 million, respectively, we had a gross loss from
product sales (revenues from product sales minus costs of
product sales) of $0.4 million for 2007 as compared to a
51
gross profit from product sales of $0.7 million in 2006.
The decrease in the gross profit from product sales in 2007 were
related to lower revenues from subscriber communicator sales and
a decrease in selling prices as described above in Product
Sales, which did not cover the distribution, fulfillment and
customer service costs associated with completing customer
orders. The gross profit from product sales for 2006 was reduced
by an inventory impairment charge of $0.3 million.
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 2003 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 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.
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, legal expenses and
regulatory matters.
2007 vs. 2006: Selling, general and
administrative expenses increased $2.0 million, or 12.4%,
to $17.7 million in 2007 from $15.7 million in 2006.
This increase is primarily due to higher employee costs,
resulting primarily from an increase in stock-based compensation
of $0.5 million, a $0.7 million increase in insurance
costs and professional service fees related to being a public
company, a $0.5 million increase in costs for travel and
marketing expenses and a $0.2 million increase in
depreciation due to upgrades to our administrative
infrastructure.
2006 vs. 2005: Selling general and
administrative expenses increased $6.4 million, or 68.4%,
to $15.7 million in 2006 from $9.3 million in 2005.
This increase is primarily due to a $0.9 million increase
in professional service fees, primarily related to consulting
fees related to preparing for compliance with Section 404
of the Sarbanes-Oxley Act and other professional fees,
regulatory matters and investor relations and a
$5.1 million increase in payroll costs due to increased
headcount as we prepared to become a public company including an
increase of $3.2 million in stock-based compensation
resulting primarily from the granting of restricted stock units
and stock appreciation rights in October 2006.
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.
2007 vs. 2006: Product development expenses
decreased $0.8 million, or 41.5% to $1.1 million in
2007 from $1.8 million in 2006. This decrease is primarily
due to lower spending with third parties.
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.
Other
income (expense)
Other income (expense) is comprised primarily of interest income
from our cash and cash equivalents, which consists of
U.S. Treasuries, 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 and loss on the extinguishment of our
notes payable.
52
2007 vs. 2006: Other income was
$5.1 million in 2007 compared to $2.6 million in 2006.
The increase was primarily due to increased investment balances
resulting from net proceeds received from our initial public
offering completed in November 2006 and our secondary offering
completed in May 2007. We expect interest income to decrease in
future periods due to lower interest rates from investing in low
risk U.S. Treasury Securities during the third quarter of
2007 and lower investment balances.
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. 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 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.
Net
loss and net loss applicable to common shares
2007 vs. 2006: As a result of the items
described above, our net loss narrowed to $3.6 million in
2007 compared to a net loss of $11.2 million in 2006,
decreasing by $7.6 million, an improvement of 68.0%.
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 $14.2 million in 2005, an increase of
$15.4 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.
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 from sales of our
common stock through public offerings and private placements of
debt, convertible redeemable preferred stock, membership
interests and common stock. We have incurred losses from
operations since inception, including a net loss of
$3.6 million in 2007 and as of December 31, 2007 we
have an accumulated deficit of $63.4 million. As of
December 31, 2007, our primary source of liquidity
consisted of cash and cash equivalents including
U.S. Treasury Securities, totaling $115.6 million.
Public
Offerings
On November 8, 2006, we completed our initial public
offering of 9,230,800 shares of common stock at a price of
$11.00 per share. After deducting underwriters discounts
and commissions and offering expenses we received proceeds of
approximately $89.5 million. From these net proceeds we
paid accumulated and unpaid dividends totaling $7.5 million
to the holders of Series B preferred stock, a
$3.6 million contingent purchase price payment relating to
the acquisition of Satcom and a $10.1 million payment to
the holders of Series B preferred stock in connection with
obtaining consents required for the automatic conversion of the
Series B preferred stock into common stock upon completion
of the IPO. As a result all outstanding shares of Series A
and B preferred stock converted into 21,383,318 shares of
common stock.
On May 31, 2007, we closed a secondary public offering of
8,050,000 shares of common stock at a price of $11.50 per
share. An aggregate of 2,985,000 shares of common stock
were sold by us and 5,065,000 shares were sold by certain
stockholders, which included 1,050,000 shares sold upon
full exercise of the underwriters over-allotment option.
We received net proceeds of approximately $31.0 million
after deducting underwriters discounts
53
and commissions and offering costs of $3.3 million. We did
not receive any proceeds from the shares sold by the selling
stockholders.
Operating
activities
Cash provided by our operating activities in 2007 was
$3.8 million resulting from a net loss of
$3.6 million, offset by adjustments for non-cash items of
$7.1 million and $0.3 million generated by working
capital. Adjustments for non-cash items primarily consisted of
$2.4 million for depreciation and amortization and
$4.4 million for stock-based compensation. Working capital
activities primarily consisted of net uses of cash of
$0.4 million for an increase in accounts receivable
primarily related to the increase in our revenues and the timing
of collections and $0.4 million for an increase in prepaid
expenses and other assets, offset by sources of cash from
increases of $0.2 million in accounts payable and accrued
expenses and $0.8 million in inventories.
Cash used in our operating activities in 2006 was
$8.9 million resulting from a net loss of
$11.2 million, offset by adjustments for non-cash items of
$6.4 million and $4.1 million used for working
capital. Adjustments for non-cash items primarily consisted of
$2.4 million for depreciation and amortization,
$0.3 million for inventory impairments and
$3.9 million for stock-based compensation. Working capital
activities primarily consisted of a net use of cash of
$1.2 million for an increase in accounts receivable
primarily related to the increase in our revenues and the timing
of collections, a use of cash of $2.0 million for
inventories primarily related to the increase in our revenues
due to the strong demand of our newer DS 300 and DS 100 model
subscriber communicators and a net use of cash of
$2.9 million for a decrease in accounts payable and accrued
expenses primarily related to payments for professional fees in
connection with our Series B stock financing and our
initial public offering. The uses of cash described above were
offset by sources of cash from an increase of $1.5 million
in deferred revenue primarily related to billings we rendered in
connection with our Coast Guard demonstration satellite 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 and an
increase of $2.9 million to accounts payable and accrued
liabilities primarily related to the increase in professional
fees in connection with our Series B stock financing and
our initial public offering.
Investing
activities
Cash generated from our investing activities in 2007 was
$18.8 million resulting from sales of marketable securities
of $97.0 million offset by capital expenditures of
$20.0 million and purchases of marketable securities
consisting of investment grade floating rate redeemable
municipal debt securities totaling $58.3 million. Capital
expenditures included $0.5 million for the Coast Guard
demonstration satellite and $16.1 million for the
quick-launch and next-generation satellites and
$3.4 million of improvements to our internal infrastructure
and Ground Segment.
Cash used in our investing activities in 2006 was
$64.8 million resulting from capital expenditures of
$22.4 million and purchases of marketable securities
consisting of floating rate redeemable municipal debt securities
totaling $43.9 million and a contingent purchase price
payment of $3.6 million relating to the acquisition of
Satcom offset by sales of marketable securities of
$5.0 million. Capital expenditures included
$1.4 million for the Coast Guard demonstration satellite
and $17.4 million for the quick-launch and next-generation
satellites and $3.6 million of improvements to our internal
infrastructure and Ground Segment.
Cash used in our investing activities in 2005 was
$4.0 million resulting primarily from capital expenditures
of $3.5 million for the Coast Guard demonstration satellite
and $0.5 million of improvements to our internal
infrastructure.
54
All of our costs incurred with the construction of the Coast
Guard demonstration satellite and our quick-launch and
next-generation satellites are recorded as assets under
construction in our consolidated financial statements. As of
December 31, 2007, we have incurred $41.9 million of
such costs with $7.1 million of costs related to the
construction of the Coast Guard demonstration satellite and
$34.8 million related to our quick-launch and
next-generation satellites.
Financing
activities
Cash provided by our financing activities in 2007 was
$31.0 million resulting primarily from the net proceeds
received from our secondary public offering of common stock,
after deducting underwriters discounts and commissions and
offering 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 IPO. We also received net proceeds of
$1.4 million from the issuance of an additional
260,895 shares of Series B preferred stock, after
deducting issuance costs, and proceeds of $1.5 million from
the issuance of an aggregate of 619,580 shares of common
stock upon the exercise of warrants to purchase common stock at
per share exercise prices ranging from $2.33 to $4.26. We made
dividend payments to our Series A preferred stock holders
totaling $8.0 million in January of 2006.
Cash provided by our financing activities in 2005 was
$65.7 million resulting from $25.0 million in gross
proceeds received from the issuance of convertible notes in
November and December 2005, offset by deferred financing costs
payments of $1.0 million. In December, 2005, we issued
17.6 million shares of Series B preferred stock, which
included the conversion of the convertible notes into
Series B preferred stock and we received additional net
proceeds of $41.7 million, after deducting issuance costs
of $4.3 million.
Future
Liquidity and Capital Resource Requirements
We expect cash flows from operating activities, along with our
existing cash and cash equivalents will be sufficient to provide
working capital and fund capital expenditures, which primarily
includes the deployment of additional satellites for the next
12 months. In 2008, we expect to incur between
$35.0 million and $40.0 million of additional capital
expenditures primarily for our quick-launch and next-generation
satellites.
Contractual
Obligations
The following table summarizes our contractual obligations at
December 31, 2007 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
|
|
$
|
6,250
|
|
|
$
|
5,150
|
|
|
$
|
1,100
|
|
|
$
|
|
|
Operating leases
|
|
|
1,227
|
|
|
|
838
|
|
|
|
379
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,477
|
|
|
$
|
5,988
|
|
|
$
|
1,479
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quick-launch
procurement agreements
On April 21, 2006, we entered into an agreement with
Orbital Sciences Corporation to supply the payloads for our six
quick-launch satellites. The price of the six payloads is
$17 million, subject to price adjustments for late
penalties and on-time or early delivery incentives. As
December 31, 2007, we had made payments totaling
approximately $16.1 million pursuant to this agreement.
55
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
had 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 which
expired unexercised. As of December 31, 2007, we have made
payments totaling $14.6 million pursuant to this agreement.
Related
parties
The information in Part III, Item 13, Certain
Relationships and Related Transactions, is incorporated
herein by reference.
Off-
Balance sheet Arrangements
None
Recent
Accounting Pronouncements
In 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 us beginning January 1, 2008, except with
respect to our non financial assets and liabilities, for which
the effective date is January 1, 2009. We do not believe that
the adoption of SFAS 157 will have a material impact on our
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 expands
opportunities to use fair value measurements in financial
reporting and permits entities to choose to measure many
financial instruments and certain other items at fair value.
SFAS 159 is effective for us on January 1, 2008. We
did not elect the fair value option for any of our eligible
financial instruments on the effective date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 requires that a
noncontrolling interest in a subsidiary be reported as equity
and the amount of consolidated net income specifically
attributable to the noncontrolling interest be identified in the
consolidated financial statements. It also calls for consistency
in the manner of reporting changes in the parents
ownership interest and requires fair value measurement of any
noncontrolling equity investment retained in a deconsolidation.
SFAS 160 is effective for us on January 1, 2009. We
are currently evaluating the impact SFAS 160 will have on
our consolidated financial statements.
In December 2007, the FASB issued No. 141 (revised 2007),
Business Combinations (SFAS 141R).
SFAS 141R broadens the guidance of SFAS 141, extending
its applicability to all transactions and other events in which
one entity obtains control over one or more other businesses. It
broadens the fair value measurement and recognition of assets
acquired, liabilities assumed, and interests transferred as a
result of business combinations. SFAS 141R expands on
required disclosures to improve the statement users
abilities to evaluate the nature and financial effects of
business combinations. SFAS 141R is effective for us on
January 1, 2009. The impact of adopting SFAS 141R will
be dependent on the business combinations that we may pursue
after its effective date.
56
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
rate risk
We do not have any material interest rate risk.
Effects
of inflation risk
Overall, we believe that the impact of inflation risk on our
business will not be significant.
Foreign
currency risk
We expect that an increasing percentage of our revenues will be
derived from sources outside of the United States, which will
subject us to foreign currency risk. The majority of our
existing contracts require our customers to pay us in
U.S. dollars. However, our licensees, country
representatives and resellers generally derive their revenues
from their customers outside of the United States in local
currencies. Accordingly, changes in exchange rates between the
U.S. dollar and such local currencies could make the cost
of our services uneconomic for our customers and we may be
required to reduce our rates to make the cost of our services
economical in certain markets. In addition, currency controls,
trade restrictions and other disruptions in the currency
convertibility or foreign currency exchange markets could
negatively impact the ability of our customers to obtain
U.S. dollars with which to pay our fees.
It is also possible in the future that we may not be able to
contractually require that our service fees be paid in
U.S. dollars in which case we will be exposed to foreign
currency risks directly.
Concentration
of credit risk
Our customers are primarily commercial organizations
headquartered in the United States. Accounts receivable are
generally unsecured. In 2007, 2006 and 2005, one customer, GE
Equipment Services accounted for 40.3%, 49.5% and 31.4% of our
revenues, respectively. We have no bad debt expense from this
customer. In 2005, we recognized $2.1 million, or 13% of
our consolidated revenues, upon installation of a gateway earth
station sold pursuant to a contract entered into with LeoSat LLP
in 2003.
Vendor
risk
Currently, substantially all of our subscriber communicators are
manufactured by a contract manufacturer, Delphi Automotive
Systems LLC, a subsidiary of Delphi Corporation, which is under
bankruptcy protection. Our communicators are manufactured by a
Delphi affiliate in Mexico, which we do not believe will be
impacted by the Delphi bankruptcy.
Market
rate risk
As of December 31, 2007, included in cash and cash
equivalents are U.S. Treasury Securities totaling
$112.4 million. 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. Due to the high investment
quality and short duration of these U.S. Treasury
Securities, we do not believe that we have any material exposure
to changes in the fair value as a result of changes in interest
rates. Declines in interest rates, however will reduce future
income. A hypothetical 1% movement in market interest rates
would not have a significant impact on interest income.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The consolidated financial statements of ORBCOMM Inc., and
subsidiaries including the notes thereto and the report thereon,
is presented beginning at
page F-1
of this Annual Report on
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
57
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
In connection with preparation of this Annual Report on From
10-K, we
carried out an evaluation, under the supervision and with the
participation of our management including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of December 31, 2007. The term disclosure controls
and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to
be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its
principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating
the cost-benefit relationship of possible controls and
procedures. Based on the evaluation of our disclosure controls
and procedures as of December 31, 2007, our Chief Executive
Officer and Chief Financial Officer concluded that, as of such
date, our disclosure controls and procedures were effective.
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in Exchange Act
Rule 13a-15(f).
Management, including our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the
framework set forth in Internal Control -Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management
concluded that our internal control over financial reporting was
effective as of December 31, 2007. The effectiveness of our
internal control over financial reporting as of
December 31, 2007 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as
stated in its attestation report which is included below.
Changes
in Internal Control over Financial Reporting
There were no changes in the Companys internal controls
over financial reporting during the quarter ended
December 31, 2007, that are materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
ORBCOMM Inc.
We have audited the internal control over financial reporting of
ORBCOMM Inc. and subsidiaries (the Company) as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material
58
weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers or persons performing similar functions, and effected
by the companys board of directors, management and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2007, of
the Company and our report dated March 17, 2008 expressed
an unqualified opinion on the consolidated financial statements
and financial statement schedule and included an explanatory
paragraph which indicates that the Company changed its method of
accounting for uncertain tax positions to adopt the provisions
of FASB Interpretation No. 48, Accounting for
Uncertainty in Income taxes, an interpretation of FASB Statement
No. 109.
/s/ Deloitte & Touche LLP
New York, New York
March 17, 2008
|
|
Item 9B.
|
Other
information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Identification
of Directors
Reference is made to the information regarding directors under
the heading Election of Directors (Proposal 1)
in the Proxy Statement for our 2008 Annual Meeting of
stockholders to be held on May 2, 2008, ( the 2008
Proxy Statement), which information is hereby incorporated
by reference.
59
Identification
of Executive Officers
Reference is made to the information regarding executive
officers under the heading Executive Officers of the
Registrant in Part I, Item 1 of this Annual
Report on
Form 10-K.
Identification
of Audit Committee and Audit Committee Financial
Expert
Reference is made to the information regarding directors under
the heading Election of Directors
(Proposal 1) Board of Directors and
Committees Audit Committee in our 2008 Proxy
Statement, which information hereby is incorporated by reference.
Material
Changes to Procedures for Recommending Directors
Reference is made to the information regarding directors under
the heading Election of Directors (Proposal 1)
in our 2008 Proxy Statement, which information is hereby
incorporated by reference.
Compliance
with Section 16(a) of the Exchange Act
Reference is made to the information under the heading
Section 16(a) Beneficial Ownership Reporting
Compliance Board of Directors and Committees
in our 2008 Proxy Statement, which information is hereby
incorporated by reference.
Code of
Ethics
We have adopted a code of ethics, or Code of Business Conduct,
to comply with the rules of the SEC and Nasdaq. Our Code of
Business Conduct applies to our directors, officers and
employees, including our principal executive officer and senior
financial officers. A copy of our Code of Business Conduct is
maintained on our website at www.orbcomm.com.
|
|
Item 11.
|
Executive
Compensation
|
Reference is made to the information under the heading
Executive Compensation in our 2008 Proxy Statement,
which information is hereby incorporated by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Beneficial
Ownership
Reference is made to the information under the heading
Security Ownership of Certain Beneficial Owners and
Management in our 2008 Proxy Statement, which information
is hereby incorporated by reference.
Equity
Compensation Plan Information
Reference is made to the information under the heading
Equity Compensation Plan Information in our 2008
Proxy Statement, which information is hereby incorporated by
reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Reference is made to the information under the heading
Certain Relationships and Transactions with Related
Persons in our 2008 Proxy Statement, which information is
hereby incorporated by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Reference is made to the information under the heading
Ratification of Selection of Independent Registered Public
Accounting Firm (Proposal 2) Principal
Accountant Fees in our 2008 Proxy Statement, which
information is hereby incorporated by reference.
60
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statements Schedules
|
(a)(1) Financial
Statements
See Index to Consolidated Financial Statements appearing on
page F-1.
(a)(2) Financial
Statement Schedules
Schedule II-
See Index to Consolidated Financial Statements appearing on
page F-1
Financial statement schedules not filed herein have been omitted
as they are not applicable or the required information or
equivalent information has been included in the financial
statements or the notes thereto.
(a)(3) Exhibits
See Exhibit Index attached hereto and incorporated by
reference herein.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, ORBCOMM Inc. has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fort Lee, State
of New Jersey, on March 17, 2008.
ORBCOMM Inc.
|
|
|
|
By:
|
/s/ Jerome
B. Eisenberg
|
Jerome B. Eisenberg
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed on March 17, 2008 by the
following persons in the capacities indicated:
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Jerome
B. Eisenberg
Jerome
B. Eisenberg
|
|
Chairman of the Board and Chief Executive Officer, and Director
(principal executive officer)
|
|
|
|
/s/ Marco
Fuchs*
Marco
Fuchs
|
|
Director
|
|
|
|
/s/ Didier
Delepine*
Didier
Delepine
|
|
Director
|
|
|
|
/s/ John
Major*
John
Major
|
|
Director
|
|
|
|
/s/ Hans
E.W. Hoffmann*
Hans
E.W. Hoffmann
|
|
Director
|
|
|
|
/s/ Gary
H. Ritondaro*
Gary
H. Ritondaro
|
|
Director
|
|
|
|
/s/ Marc
J. Eisenberg
Marc
J. Eisenberg
|
|
Director
|
|
|
|
/s/ Robert
G. Costantini
Robert
G. Costantini
|
|
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
|
|
|
|
|
|
*By:
|
|
/s/ Christian
G. LeBrun
Christian
G. LeBrun,
Attorney-in-Fact**
|
|
|
|
**By authority of the power of attorney filed as Exhibit 24
hereto.
|
62
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-37
|
|
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, 2007 and 2006, and the related consolidated
statements of operations, stockholders equity (deficit),
and cash flows for each of the three years in the period ended
December 31, 2007. Our audits also included the financial
statement schedule listed in the Index at Item 15. 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2007 and 2006, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such 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
uncertain tax positions to adopt the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB No. 109,
effective January 1, 2007, and 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.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2007, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 17, 2008 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 17, 2008
F-2
ORBCOMM
Inc.
Consolidated
Balance Sheets
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
115,587
|
|
|
$
|
62,139
|
|
Marketable securities
|
|
|
|
|
|
|
38,850
|
|
Accounts receivable, net of allowances for doubtful accounts of
$388 and $297
|
|
|
5,284
|
|
|
|
5,185
|
|
Inventories
|
|
|
2,722
|
|
|
|
3,528
|
|
Advances to contract manufacturer
|
|
|
158
|
|
|
|
177
|
|
Prepaid expenses and other current assets
|
|
|
1,078
|
|
|
|
1,354
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
124,829
|
|
|
|
111,233
|
|
Long-term receivable
|
|
|
542
|
|
|
|
372
|
|
Satellite network and other equipment, net
|
|
|
49,704
|
|
|
|
29,131
|
|
Intangible assets, net
|
|
|
5,572
|
|
|
|
7,058
|
|
Other assets
|
|
|
992
|
|
|
|
299
|
|
Deferred tax asset
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
181,823
|
|
|
$
|
148,093
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,373
|
|
|
$
|
3,438
|
|
Accrued liabilities
|
|
|
12,305
|
|
|
|
4,915
|
|
Current portion of deferred revenue
|
|
|
1,435
|
|
|
|
2,083
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
18,113
|
|
|
|
10,436
|
|
Note payable related party
|
|
|
1,170
|
|
|
|
879
|
|
Deferred revenue, net of current portion
|
|
|
1,507
|
|
|
|
8,066
|
|
Other liability
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
20,974
|
|
|
|
19,381
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001; 250,000,000 shares
authorized; 41,658,066 and 36,923,715 shares issued and
outstanding
|
|
|
42
|
|
|
|
37
|
|
Additional paid-in capital
|
|
|
224,899
|
|
|
|
188,917
|
|
Accumulated other comprehensive loss
|
|
|
(656
|
)
|
|
|
(395
|
)
|
Accumulated deficit
|
|
|
(63,436
|
)
|
|
|
(59,847
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
160,849
|
|
|
|
128,712
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
181,823
|
|
|
$
|
148,093
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
ORBCOMM
Inc.
Consolidated
Statements of Operations
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
17,717
|
|
|
$
|
11,561
|
|
|
$
|
7,804
|
|
Product sales
|
|
|
10,435
|
|
|
|
12,959
|
|
|
|
7,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
28,152
|
|
|
|
24,520
|
|
|
|
15,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of services
|
|
|
7,990
|
|
|
|
8,714
|
|
|
|
6,223
|
|
Costs of product sales
|
|
|
10,078
|
|
|
|
12,092
|
|
|
|
6,459
|
|
Selling, general and administrative
|
|
|
17,687
|
|
|
|
15,731
|
|
|
|
9,344
|
|
Product development
|
|
|
1,060
|
|
|
|
1,814
|
|
|
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
36,815
|
|
|
|
38,351
|
|
|
|
23,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,663
|
)
|
|
|
(13,831
|
)
|
|
|
(7,840
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,258
|
|
|
|
2,582
|
|
|
|
66
|
|
Other income
|
|
|
25
|
|
|
|
271
|
|
|
|
|
|
Interest expense, including amortization of deferred debt
issuance costs and debt discount of $31 in 2005
|
|
|
(209
|
)
|
|
|
(237
|
)
|
|
|
(308
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(1,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
5,074
|
|
|
|
2,616
|
|
|
|
(1,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,589
|
)
|
|
$
|
(11,215
|
)
|
|
$
|
(9,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shares (Note 5)
|
|
$
|
(3,589
|
)
|
|
$
|
(29,646
|
)
|
|
$
|
(14,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(2.80
|
)
|
|
$
|
(2.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
39,706
|
|
|
|
10,601
|
|
|
|
5,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Stock-based compensation included in costs and
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of services
|
|
$
|
383
|
|
|
$
|
425
|
|
|
$
|
7
|
|
Costs of product sales
|
|
|
116
|
|
|
|
71
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,878
|
|
|
|
3,355
|
|
|
|
183
|
|
Product development
|
|
|
68
|
|
|
|
94
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,445
|
|
|
$
|
3,945
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
ORBCOMM
Inc.
Consolidated
Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,589
|
)
|
|
$
|
(11,215
|
)
|
|
$
|
(9,098
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in allowance for doubtful accounts
|
|
|
91
|
|
|
|
(374
|
)
|
|
|
82
|
|
Inventory impairments
|
|
|
|
|
|
|
361
|
|
|
|
115
|
|
Depreciation and amortization
|
|
|
2,415
|
|
|
|
2,373
|
|
|
|
1,982
|
|
Amortization of deferred debt issuance costs and debt discount
|
|
|
|
|
|
|
|
|
|
|
31
|
|
Accretion on note payable related party
|
|
|
131
|
|
|
|
131
|
|
|
|
33
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
1,016
|
|
Stock-based compensation
|
|
|
4,445
|
|
|
|
3,945
|
|
|
|
201
|
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(360
|
)
|
|
|
(1,161
|
)
|
|
|
1,014
|
|
Inventories
|
|
|
806
|
|
|
|
(1,964
|
)
|
|
|
(642
|
)
|
Advances to contract manufacturer
|
|
|
19
|
|
|
|
524
|
|
|
|
3,046
|
|
Prepaid expenses and other assets
|
|
|
(417
|
)
|
|
|
(95
|
)
|
|
|
(366
|
)
|
Accounts payable and accrued liabilities
|
|
|
207
|
|
|
|
(2,913
|
)
|
|
|
2,902
|
|
Deferred revenue
|
|
|
21
|
|
|
|
1,522
|
|
|
|
3,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
3,769
|
|
|
|
(8,866
|
)
|
|
|
3,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(20,043
|
)
|
|
|
(22,357
|
)
|
|
|
(4,066
|
)
|
Purchases of marketable securities
|
|
|
(58,325
|
)
|
|
|
(43,850
|
)
|
|
|
|
|
Sales of marketable securities
|
|
|
97,175
|
|
|
|
5,000
|
|
|
|
|
|
Contingent purchase price payment made in connection with the
acquisition of Satcom International Group plc
|
|
|
|
|
|
|
(3,631
|
)
|
|
|
|
|
Acquisition of business, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
18,807
|
|
|
|
(64,838
|
)
|
|
|
(4,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
Proceeds from issuance of common stock in connection with
secondary public offering, net of underwriters discounts
and commissions and offering costs of $3,318
|
|
|
31,010
|
|
|
|
|
|
|
|
|
|
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 10% convertible bridge notes
|
|
|
|
|
|
|
|
|
|
|
25,019
|
|
Proceeds from exercise of warrants and options
|
|
|
572
|
|
|
|
1,558
|
|
|
|
|
|
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
|
)
|
|
|
|
|
Payment of Series A preferred stock dividends
|
|
|
|
|
|
|
(8,027
|
)
|
|
|
|
|
Payment of Series B preferred stock dividends
|
|
|
|
|
|
|
(7,467
|
)
|
|
|
|
|
Payment of offering costs in connection with initial public
offering
|
|
|
(609
|
)
|
|
|
|
|
|
|
|
|
Payments for deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
(1,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
30,973
|
|
|
|
67,510
|
|
|
|
65,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
(101
|
)
|
|
|
(330
|
)
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
53,448
|
|
|
|
(6,524
|
)
|
|
|
65,347
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
62,139
|
|
|
|
68,663
|
|
|
|
3,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
115,587
|
|
|
$
|
62,139
|
|
|
$
|
68,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures (Note 17):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
|
$
|
|
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
ORBCOMM
Inc.
Consolidated
Statements of Stockholders Equity (Deficit)
Years ended December 31, 2007, 2006 and 2005
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
paid-in
|
|
|
comprehensive
|
|
|
Accumulated
|
|
|
stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
income (loss)
|
|
|
deficit
|
|
|
equity (deficit)
|
|
|
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2005
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secondary public offering of common stock, net of
underwriters discounts and commissions and offering costs
|
|
|
2,985,000
|
|
|
|
3
|
|
|
|
30,967
|
|
|
|
|
|
|
|
|
|
|
|
30,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants and options
|
|
|
1,419,230
|
|
|
|
2
|
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
|
572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of restricted stock units
|
|
|
330,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
4,445
|
|
|
|
|
|
|
|
|
|
|
|
4,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,589
|
)
|
|
|
(3,589
|
)
|
|
$
|
(3,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(261
|
)
|
|
|
|
|
|
|
(261
|
)
|
|
|
(261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
41,658,066
|
|
|
$
|
42
|
|
|
$
|
224,899
|
|
|
$
|
(656
|
)
|
|
$
|
(63,436
|
)
|
|
$
|
160,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
Notes to
consolidated financial statements
(In thousands, except share and per share 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. In 2007, the
Company began providing terrestrial-based cellular communication
services through a re-seller agreement with a major cellular
wireless provider. These terrestrial-based cellular
communications services commenced in the third quarter of 2007
and revenues from such services were not significant in 2007.
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) and cellular wireless subscriber
identity modules, or SIMS, that can be connected to other public
or private networks, including the Internet and the cellular
wireless providers networks (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
shares of common stock of the Company, representing ownership
interests in the Company equal in proportion to the prior
ownership interests of ORBCOMM LLC. As a result, ORBCOMM LLC
became a wholly owned subsidiary of the Company (such
transaction, in combination with the issuances of Series A
preferred stock pursuant to the Stock Purchase Agreement is
referred to as the Reorganization). The
Reorganization was accounted for as a reverse acquisition of the
Company by ORBCOMM LLC. Accordingly, the historical consolidated
financial statements of ORBCOMM LLC became the historical
consolidated financial statements of the Company
On November 8, 2006, the Company completed 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 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 6) and a consent fee
of $10,111 to the holders of Series B preferred 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.
On May 31, 2007, the Company closed a secondary public
offering of 8,050,000 shares of its Common stock at a price
of $11.50 per share. An aggregate of 2,985,000 shares of
common stock were sold by the Company and 5,065,000 shares
were sold by certain stockholders of the Company, which included
1,050,000 shares sold upon full exercise of the
underwriters over-allotment option. The Company received
net proceeds of approximately $30,970, after deducting
underwriters discounts and commissions and offering costs
of $3,358 of which $40 has not been paid as of December 31,
2007. The Company did not receive any proceeds from the shares
of common stock sold by the selling stockholders (see
Note 12).
The Company has incurred losses from inception including a net
loss $3,589 in 2007 and as of December 31, 2007, the
Company has an accumulated deficit of $63,436. As of
December 31, 2007, the Companys primary source of
liquidity consisted of cash and cash equivalents, which the
Company believes will be sufficient to provide working capital
and fund capital expenditures including the deployment of its
quick-launch satellites and investments in its next-generation
satellites for the next twelve months.
F-7
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
|
|
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, 2007 and 2006, and the Company had no equity
in the earnings or losses of those investees for the years ended
December 31, 2007, 2006 and 2005. 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, 2007 and 2006.
Use of
estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenues and expenses at
the date of the consolidated financial statements and during the
reporting periods, and to disclose contingent assets and
liabilities at the date of the consolidated financial
statements. Actual results could differ from those estimates.
The most significant estimates relate to the allowances for
doubtful accounts, the useful lives and impairment of the
Companys satellite network, other equipment and license
rights, inventory valuation, the fair value of acquired assets,
the fair value of securities underlying share-based payment
arrangements, uncertain tax positions and the realization of
deferred tax assets.
Revenue
recognition
Product revenues are derived sales of Communicators, SIMS, and
other equipment such as gateway earth stations and gateway
control centers to customers. The Company derives service
revenues from both the utilization of Communicators and SIMS, on
the ORBCOMM System from its resellers (i.e., its value added
resellers (VARs), international value added
resellers (IVARs), international licensees and
country representatives) and direct customers and reselling of
airtime using the cellular providers wireless network.
These service revenues consist of subscriber-based and recurring
monthly usage fees and generally a one-time activation fee for
each Communicator and SIMS activated for use. 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 and SIMS 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 and SIMS activated
by the VAR, IVAR, international licensee or country
representative and the total amount of data transmitted by their
customers. The Company also earns revenues from providing
engineering, technical and management support services to
customers, and a one-time royalty fee relating to the
manufacture of Communicators from third parties under a
manufacturing agreement.
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
F-8
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
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 SIMS are subject to return and title and risk
of loss pass to the customer at the time of shipment as the
Company does not have a sufficient historical experience on
which to make a reasonable estimate of the amount of SIMS
returns that will occur, accordingly revenues on the sales of
SIMS is deferred until the return privilege has substantially
expired. Sales of Communicators and SIMS 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 both Communicators and SIMS 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. Revenues generated from royalties
relating to the manufacture of Communicators by third parties
are recognized when the third party notifies the Company of the
units it has manufactured and a unique serial number is assigned
to each unit by the Company.
Amounts received prior to the performance of services under
customer contracts are recognized as deferred revenues and
revenue recognition is deferred until such time that all revenue
recognition criteria have been met.
For arrangements with multiple obligations (e.g., deliverable
and undeliverable products, and other post-contract support),
the Company allocates revenues to each component of the contract
based on objective evidence of its fair value. The Company
recognizes revenues allocated to undelivered products when the
criteria for product revenues set forth above are met. If
objective and reliable evidence of the fair value of the
undelivered obligations is not available, the arrangement
consideration allocable to a delivered item is combined with the
amount allocable to the undelivered item(s) within the
arrangement. Revenues are recognized as the remaining
obligations are fulfilled.
Out-of-pocket expenses incurred during the performance of
professional service contracts are included in costs of services
and any amounts re-billed to clients are included in revenues
during the period in which they are incurred. Shipping costs
billed to customers are included in product sales revenues and
the related costs are included as costs of product sales.
The Company, on occasion, issues options to purchase its equity
securities or the equity securities of its subsidiaries, or
issues shares of its common stock as an incentive in soliciting
sales commitments from its customers. The grant date fair value
of such equity instruments is recorded as a reduction of
revenues on a pro-rata basis as products or services are
delivered under the sales arrangement.
Costs
of revenues
Costs of product sales includes the purchase price of products
sold, shipping charges, payroll and payroll related costs,
including stock-based compensation 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 recognized in accumulated other comprehensive
loss. 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.
F-9
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
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, 2007, the Company did not have any
marketable securities. As of December 31, 2006, the fair
value of these securities approximates cost.
Concentration
of risk
The Companys customers are primarily commercial
organizations headquartered in the United States. Accounts
receivable are generally unsecured.
Accounts receivable are due in accordance with payment terms
included in contracts negotiated with customers. Amounts due
from customers are stated net of an allowance for doubtful
accounts. Accounts that are outstanding longer than the
contractual payment terms are considered past due. The Company
determines its allowance for doubtful accounts by considering a
number of factors, including the length of time accounts are
past due, the customers current ability to pay its
obligations to the Company, and the condition of the general
economy and the industry as a whole. The Company writes-off
accounts receivable when they are deemed uncollectible.
Long-term receivables represent amounts due from the sale of
products and services to customers that are collateralized by
assets whose estimated fair value exceeds the carrying value of
the receivables.
During the years ended December 31, 2007, 2006 and 2005,
one customer comprised 40.3%, 49.5%, 31.4% 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, 2007 and 2006, one customer
accounted for 42.8% and 60.3% of accounts receivable,
respectively.
A significant portion of the Companys Communicators are
manufactured under a contract with 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, 2007, 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
F-10
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
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 and $115 for the years ended
December 31, 2006 and 2005.
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, design of the next-generation satellites 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 recorded on these assets as of
December 31, 2007.
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. 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
amortized using the straight line method over the estimated
useful lives of the assets. Intangible assets are stated at
their acquisition cost less accumulated amortization. The
Company does not have any indefinite lived intangible assets at
December 31, 2007 and 2006.
F-11
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
Impairment
of long-lived assets
The Companys reviews its long-lived assets and amortizable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. In connection with this review, the Company
also reevaluates the periods of depreciation and amortization
for these assets. The Company recognizes an impairment loss when
the sum of the future undiscounted net cash flows expected to be
realized from the asset is less than its carrying amount. If an
asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset, which
is determined using the present value of net future operating
cash flows to be generated by the asset.
Debt
issuance costs and debt discount
Loan fees and other costs incurred in connection with the
issuance of notes payable are deferred and amortized over the
term of the related loan using the effective interest method.
Such amortization is reported as a component of interest expense.
The Company accounts for the intrinsic value of beneficial
conversion rights arising from the issuance of convertible debt
instruments with conversion rights that are
in-the-money at the commitment date pursuant to
Emerging Issues Task Force (EITF) Issue
No. 98-5
and EITF Issue
No. 00-27.
Such value is measured based on the relative fair value of the
detachable convertible instrument and the associated debt and is
allocated to additional
paid-in-capital
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 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, 2007 and 2006, the Company did not have any
issued and outstanding convertible redeemable preferred stock.
Income
taxes
The Company accounts for income taxes in accordance with
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.
F-12
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
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 SFAS 109. 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
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.
The Company recognizes interest and penalties related to
uncertain tax positions in income tax expense.
Loss
contingencies
The Company accrues for costs relating to litigation, claims and
other contingent matters when such liabilities become probable
and reasonably estimable. Such estimates may be based on advice
from third parties or on managements judgment, as
appropriate. Actual amounts paid may differ from amounts
estimated, and such differences will be charged to operations in
the period in which the final determination of the liability is
made.
Stock-based
compensation
On January 1, 2006, the Company adopted
SFAS No. 123 (Revised 2004), Share-Based Payment
(SFAS 123(R)), which requires the
measurement and recognition of stock-based compensation expense
for all share-based payment awards made to employees and
directors based on estimated fair values.
The Company adopted SFAS 123(R) using the modified
prospective transition method. Under that transition method,
stock-based compensation expense recognized subsequent to
January 1, 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 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 is made 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 period prior to January 1,
2006 (see note 4), 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
year ended December 31, 2005 , the Company recorded the
intrinsic value per share as stock-based compensation over the
applicable vesting period, using the straight-line method.
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.
F-13
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
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 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, except with respect
to its nonfinancial assets for which the effective date is
January 1, 2009. The Company does not believe that the
adoption of SFAS 157 will have a material impact on its
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 did not elect the fair value
option for any of its eligible financial instruments on the
effective date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 requires that a
noncontrolling interest in a subsidiary be reported as equity
and the amount of consolidated net income specifically
attributable to the noncontrolling interest be identified in the
consolidated financial statements. It also calls for consistency
in the manner of reporting changes in the parents
ownership interest and requires fair value measurement of any
noncontrolling equity investment retained in a deconsolidation.
SFAS 160 is effective for the Company on January 1,
2009. The Company is currently evaluating the impact
SFAS 160 will have on its consolidated financial statements.
In December 2007, the FASB issued No. 141 (revised 2007),
Business Combinations (SFAS 141R).
SFAS 141R broadens the guidance of SFAS 141, extending
its applicability to all transactions and other events in which
one entity obtains control over one or more other businesses. It
broadens the fair value measurement and recognition of assets
acquired, liabilities assumed, and interests transferred as a
result of business combinations. SFAS 141R expands on
required disclosures to improve the statement users
abilities to evaluate the nature and financial effects of
business combinations. SFAS 141R is effective for the
Company on January 1, 2009. The impact of adopting
SFAS 141R will be dependent on the business combinations
that the Company may pursue after its effective date.
|
|
Note 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 December 31, 2007, there
were 3,512,620 available for grant under the 2006 LTIP and no
shares were available for grant under the 2004 stock option plan.
For the years ended December 31, 2007, 2006 and 2005, the
Company recognized stock-based compensation expense of $4,445,
$3,945 and $201, respectively. The Company has not recognized
and does not expect to recognize in the foreseeable future, any
tax benefit related to stock-based compensation as a result of
the full valuation allowance on its net deferred tax assets and
its net operating loss carryforwards.
F-14
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
The components of the Companys stock-based compensation
expense are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Stock options
|
|
$
|
254
|
|
|
$
|
651
|
|
|
$
|
201
|
|
Restricted stock units
|
|
|
3,586
|
|
|
|
2,904
|
|
|
|
|
|
Stock appreciation rights
|
|
|
605
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,445
|
|
|
$
|
3,945
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company had unrecognized
compensation costs for all share-based payment arrangements
totaling $2,397.
2006
LTIP
In September 2006, the Companys stockholders approved the
2006 LTIP under which awards for an aggregate amount of
4,658,207 shares of common stock are authorized for grants
to directors and employees. The number of shares authorized 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. At December 31, 2007, the number of shares
available for grant under the 2006 LTIP increased by
11,832 shares underlying awards under the 2004 stock option
plan that have been cancelled or forfeited during 2007. The 2006
LTIP provides for grants and awards of stock options, stock
appreciation rights (SARs), common stock, restricted
stock, restricted stock units (RSUs), performance
units and performance shares. Stock options granted pursuant to
the 2006 LTIP Plan have a maximum term of 10 years. The
SARs expire 10 years from the date of grant and are payable
in cash, shares of common stock or a combination of both upon
exercise, as determined by the Compensation Committee. 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 October 2006, the Compensation Committee approved the
issuance of 1,059,280 RSUs to employees of the Company. Upon
vesting, subject to payment of withholding taxes, the holders of
the RSUs are entitled to receive an equivalent number of common
shares.. An aggregate of 532,880 RSUs are time-based awards that
vest in three equal installments, subject to continued
employment on January 1, 2007, 2008 and 2009. An aggregate
of 526,400 RSUs are performance-based awards that will vest upon
attainment of various operational and financial performance
targets established for each of fiscal 2006, 2007 and 2008 by
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 approved the
issuance of 413,334 SARs to certain executive officers of the
Company. An aggregate of 66,667 are time-based SARs that vest in
three equal installments subject to continued employment on
January 1, 2007, 2008 and 2009. 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.
Time-Based
Restricted Stock Units
In 2007, the Company granted 20,900 time-based RSUs. These RSUs
vest over various periods through January 2009.
F-15
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
A summary of the Companys time-based RSUs for the year
ended December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Balance at January 1, 2007
|
|
|
528,087
|
|
|
$
|
11.00
|
|
Granted
|
|
|
20,900
|
|
|
|
12.74
|
|
Vested
|
|
|
(185,990
|
)
|
|
|
10.81
|
|
Forfeited or expired
|
|
|
(6,459
|
)
|
|
|
11.00
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
356,538
|
|
|
$
|
11.20
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007 and 2006, the Company
recorded stock-based compensation expense of $2,174 and $1,925
related to the time-based RSUs, respectively. As of
December 31, 2007, $1,906 of total unrecognized
compensation cost related to the time-based RSUs granted is
expected to be recognized through January 2009.
Performance-Based
Restricted Stock Units
In 2007, 144,058 previously issued performance-based RSUs were
granted for accounting purposes when the Compensation Committee
established performance targets for fiscal 2007. As of
December 31, 2007, the Company estimates that these
performance targets will be achieved at a rate of 43%, resulting
in 61,502 performance-based RSUs vesting over various periods
through January 2009. During 2007, the achievement of
performance targets resulted in the vesting of 151,531
performance-based RSUs.
As of December 31, 2007 the Company has issued 129,784,
performance-based RSUs that are not considered granted for
accounting purposes as the Compensation Committee has not
established performance targets for fiscal 2008.
A summary of the Companys performance-based RSUs for the
year ended December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Balance at January 1, 2007
|
|
|
257,484
|
|
|
$
|
11.00
|
|
Granted
|
|
|
144,058
|
|
|
|
13.00
|
|
Vested
|
|
|
(151,531
|
)
|
|
|
11.00
|
|
Forfeited or expired
|
|
|
(70,607
|
)
|
|
|
11.07
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
179,404
|
|
|
$
|
12.58
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007 and 2006, the Company
recorded stock-based compensation expense of $1,412 and $979
related to the performance-based RSUs, respectively. As of
December 31, 2007, $214 of total unrecognized compensation
cost related to the performance-based RSUs granted is expected
to be recognized over periods through January 2009.
The grant date fair value of the performance-and time-based RSU
awards granted in 2007 is based upon the closing stock price of
the Companys common stock on the date of grant. The grant
date fair value of the time and performance-based RSUs granted
in 2006 was determined to be $11.00 per common share, the price
of the Companys common stock sold in its IPO.
F-16
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
Time-based
Stock Appreciation Rights
A summary of the Companys time-based SARs for the year
ended December 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
|
|
|
66,667
|
|
|
$
|
11.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
66,667
|
|
|
$
|
11.00
|
|
|
|
8.75
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
22,222
|
|
|
$
|
11.00
|
|
|
|
8.75
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2007
|
|
|
66,667
|
|
|
$
|
11.00
|
|
|
|
8.75
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007 and 2006, the Company
recorded stock-based compensation expense of $122 and $119
relating to the time-based SARs, respectively. As of
December 31, 2007, $120 of total unrecognized compensation
cost related to the time-based SARs is expected to be recognized
ratably through January 1, 2009. The grant date fair value
of these SARs was $5.41.
Performance-Based
Stock Appreciation Rights
In 2007, 115,556 previously issued performance-based SARs were
granted for accounting purposes when the Compensation Committee
established performance targets for fiscal 2007. As of
December 31, 2007, the Company estimates that the
performance targets will be achieved at a rate of 39%, resulting
in 44,610 performance-based SARs vesting through March 2008.
During 2007, the achievement of performance targets resulted in
the vesting of 101,731 performance-based SARs.
As of December 31, 2007, the Company has issued 115,555
performance-based SARs that are not considered granted for
accounting purposes as the Compensation Committee has not
established performance targets for fiscal 2008.
A summary of the Companys performance-based SARs for the
year ended December 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
|
|
|
115,556
|
|
|
$
|
11.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
115,556
|
|
|
|
11.00
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(13,823
|
)
|
|
|
11.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
217,289
|
|
|
$
|
11.00
|
|
|
|
8.97
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
101,733
|
|
|
$
|
11.00
|
|
|
|
8.75
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2007
|
|
|
146,344
|
|
|
$
|
11.00
|
|
|
|
8.88
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of the
performance-based SARs granted during the years ended
December 31, 2007 and 2006 was $6.19 and $5.18 per share,
respectively.
For the years ended December 31, 2007 and 2006, the Company
recorded stock-based compensation expense of $483 and $271
relating to the performance-based SARs, respectively. As of
December 31, 2007, $49 of total
F-17
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
unrecognized compensation cost related to the performance-based
SARs is expected to be recognized through the first quarter of
2008.
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.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Risk-free interest rate
|
|
|
4.93
|
%
|
|
|
4.66
|
%
|
Expected life (years)
|
|
|
5.5
|
|
|
|
5.50 to 6.00
|
|
Estimated volatility
|
|
|
43.95
|
%
|
|
|
43.85
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
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 value of
Companys common stock on the date of modification was
lower then the fair value at the grant date.
Stock
Options
Options granted under the 2004 Stock Option Plan have a maximum
term of 10 years and vest over a period determined by the
Companys Board of Directors (generally four years) at an
exercise price per share determined by the Board of Directors at
the time of the grant. The 2004 stock option plan expires
10 years from the effective date, or when all options have
been granted, whichever is sooner.
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 weighted-average grant
date fair value of the option was $11.16. 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.
The fair value of the 2006 stock option award was estimated on
the date of grant using the Black-Scholes option pricing model
with the assumptions described below. Expected volatility was
based on the stock volatility for comparable publicly traded
companies. The Company used the simplified method to
anticipate the expected life of the 2006 stock option award
based on the average of the vesting term and the contractual
term. Estimated forfeitures were based on voluntary and
involuntary termination behavior as well as analysis of actual
stock 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 2006 stock option award.
F-18
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005(1)
|
|
|
Risk-free interest rate
|
|
|
|
|
|
|
4.64
|
%
|
|
|
|
|
Expected life (years)
|
|
|
|
|
|
|
4.00
|
|
|
|
|
|
Expected volatility factor
|
|
|
|
%
|
|
|
44.50
|
%
|
|
|
|
%
|
Expected dividends
|
|
|
None
|
|
|
|
|
|
|
|
None
|
|
|
|
|
(1) |
|
There were no options granted in 2007 and 2005. |
A summary of the status of the Companys stock options as
of December 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
|
|
|
(619,631
|
)
|
|
|
3.17
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(11,832
|
)
|
|
|
4.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
832,957
|
|
|
$
|
3.02
|
|
|
|
6.15
|
|
|
$
|
2,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
822,538
|
|
|
$
|
3.00
|
|
|
|
6.13
|
|
|
$
|
2,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2007
|
|
|
832,616
|
|
|
$
|
3.02
|
|
|
|
6.15
|
|
|
$
|
2,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2007, the Company issued
478,267 shares of common stock upon the cashless exercise
of stock options to purchase 608,610 common shares with per
share exercise prices of $2.33 to $4.26. In addition, the
Company issued 11,021 shares of common stock upon the
exercise of stock options at per share exercise prices of $2.33
to $4.26 and received gross proceeds of $36.
As of December 31, 2007, $108 of total unrecognized
compensation cost related to stock options issued to employees
is expected to be recognized over a weighted-average term of
1.2 years.
In 2005, the Company recognized $201 of stock-based compensation
that was being recognized over the vesting periods for stock
options that were granted to employees in 2004 having an
exercise price per share less than the fair value of the
Companys common stock on the date of grant.
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.
F-19
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
The following table illustrates the pro forma effect on net loss
and basic and diluted net loss per share for 2005 had the
Company accounted for employee stock-based compensation in
accordance with SFAS No. 123:
|
|
|
|
|
|
|
2005
|
|
|
Net loss applicable to common shares, as reported
|
|
$
|
(14,248
|
)
|
Add: Stock-based employee compensation determined under APB
No. 25 and included in reported net loss
|
|
|
201
|
|
Deduct: Employee stock-based compensation determined under the
fair value method for all awards, net of related tax effects
|
|
|
(530
|
)
|
|
|
|
|
|
Pro forma net loss applicable to common shares
|
|
$
|
(14,577
|
)
|
|
|
|
|
|
Net loss per common share, basic and diluted:
|
|
|
|
|
As reported
|
|
$
|
(2.51
|
)
|
|
|
|
|
|
Pro forma
|
|
$
|
(2.57
|
)
|
|
|
|
|
|
|
|
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, because
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, 2007, 2006 and 2005. 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Common stock warrants
|
|
|
473,907
|
|
|
|
1,617,296
|
|
|
|
1,917,998
|
|
Stock options
|
|
|
832,957
|
|
|
|
1,464,420
|
|
|
|
1,461,707
|
|
RSUs
|
|
|
535,942
|
|
|
|
785,571
|
|
|
|
|
|
SARs
|
|
|
283,956
|
|
|
|
182,223
|
|
|
|
|
|
Series A convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
9,369,074
|
|
Series B convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
11,753,333
|
|
Series A preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
318,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,126,762
|
|
|
|
4,049,510
|
|
|
|
24,821,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-20
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
For the years ended December 31, 2006 and 2005, the
reconciliation between net loss and net loss applicable to
common shares is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Net loss
|
|
$
|
(11,215
|
)
|
|
$
|
(9,098
|
)
|
Add: Preferred stock dividends and accretion of preferred stock
carrying value
|
|
|
(8,320
|
)
|
|
|
(5,150
|
)
|
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 11)
|
|
|
(10,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shares
|
|
$
|
(29,646
|
)
|
|
$
|
(14,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Note 6.
|
Acquisition
of interest in Satcom International Group plc.
|
On February 17, 2004, as a condition of the Reorganization,
two officers of the Company, 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 representing a
majority of the outstanding voting shares of Satcom
International Group plc. (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 IPO
of the Company. However, the definitive agreement 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. The officers of the
Company held a substantial portion of the outstanding debt of
Satcom. 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 chose
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 IPO exceeding $250,000, $300,000 or
$500,000, respectively, subject to proration for amounts that
fall in between these thresholds.
On October 7, 2005, Satcom and certain of its stockholders
and noteholders consummated the reorganization of Satcom under
the terms of the definitive agreement. Accordingly, the Company
acquired, from the two officers, a 51% interest in 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.
Satcom owns 50% of ORBCOMM Europe LLC, a Delaware limited
liability company (ORBCOMM Europe). Satcom has
entered into country representative agreements with ORBCOMM
Europe covering the United Kingdom, Ireland and Switzerland and
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, as well
as a gateway services agreement with the Company. ORBCOMM Europe
has entered into a service license agreement covering 43
jurisdictions in Europe and a gateway services agreement with
the Company.
Upon the acquisition of Satcom on October 7, 2005, the
Company became the primary beneficiary for accounting purposes
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 legal recourse to the
general credit of the Company.
Upon review of the activities of Satcom, the Company determined
that the operations of Satcom did not qualify as a business as
it had no employees, no sales force, insignificant revenues, and
its only assets of value were its granted licenses. Satcom had
been inactive for several years at the time of acquisition.
Accordingly, the acquisition was accounted for as an asset
purchase. The assets acquired were recorded at their estimated
fair value at the date of acquisition of $4,655. As
consideration, the Company issued 620,000 shares of
Series A preferred
F-21
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
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 Satcom and ORBCOMM Europes 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 to certain
former shareholders of Satcom based on the valuation of the
Company established by the IPO. The entire amount was attributed
to acquired licenses and is being amortized over the remaining
life of the licenses. As a result of the contingent payment, the
Companys interest in Satcom increased to 52%.
|
|
Note 7.
|
Satellite
Network and Other Equipment
|
Satellite network and other equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
|
|
|
|
$
|
381
|
|
|
$
|
379
|
|
Satellite network
|
|
|
5-10
|
|
|
|
9,463
|
|
|
|
7,373
|
|
Capitalized software
|
|
|
3-5
|
|
|
|
887
|
|
|
|
516
|
|
Computer hardware
|
|
|
5
|
|
|
|
920
|
|
|
|
867
|
|
Other
|
|
|
5-7
|
|
|
|
565
|
|
|
|
411
|
|
Assets under construction
|
|
|
|
|
|
|
45,706
|
|
|
|
26,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,922
|
|
|
|
36,451
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(8,218
|
)
|
|
|
(7,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,704
|
|
|
$
|
29,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2007 and 2006, the
Company capitalized costs attributable to the design and
development of internal-use software in the amount of $633 and
$386, respectively.
Depreciation and amortization expense for the years ended
December 31, 2007, 2006 and 2005 was $929, $1,424, and
$1,556, respectively. This includes amortization of internal-use
software of $255, $104 and $42 for the years ended
December 31, 2007, 2006 and 2005, 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 15) 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 15) and
upgrades to its infrastructure and Ground Segment.
F-22
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
|
|
Note 8.
|
Intangibles
Assets
|
The Companys intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Useful Life
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
(Years)
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Acquired licenses
|
|
|
6
|
|
|
$
|
8,115
|
|
|
$
|
(2,543
|
)
|
|
$
|
5,572
|
|
|
$
|
8,115
|
|
|
$
|
(1,057
|
)
|
|
$
|
7,058
|
|
Intellectual property
|
|
|
3
|
|
|
|
715
|
|
|
|
(715
|
)
|
|
|
|
|
|
|
715
|
|
|
|
(715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,830
|
|
|
$
|
(3,258
|
)
|
|
$
|
5,572
|
|
|
$
|
8,830
|
|
|
$
|
(1,772
|
)
|
|
$
|
7,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2007,
2006 and 2005 was $1,486, $948 and $426, respectively.
Estimated amortization expense for the acquired licenses is as
follows:
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
2008
|
|
$
|
1,486
|
|
2009
|
|
|
1,486
|
|
2010
|
|
|
1,486
|
|
2011
|
|
|
1,114
|
|
|
|
|
|
|
|
|
$
|
5,572
|
|
|
|
|
|
|
|
|
Note 9.
|
Accrued
Liabilities
|
The Companys accrued liabilities consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
Advances from USCG (See Note 15)
|
|
$
|
7,228
|
|
|
$
|
|
|
Gateway settlement obligation (see Note 15)
|
|
|
644
|
|
|
|
945
|
|
Accrued compensation and benefits
|
|
|
1,821
|
|
|
|
2,094
|
|
Accrued warranty obligations
|
|
|
|
|
|
|
45
|
|
Accrued interest
|
|
|
712
|
|
|
|
622
|
|
Accrued professional fees
|
|
|
425
|
|
|
|
361
|
|
Other accrued expenses
|
|
|
1,475
|
|
|
|
848
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,305
|
|
|
$
|
4,915
|
|
|
|
|
|
|
|
|
|
|
F-23
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
|
|
Note 10.
|
Deferred
Revenue
|
Deferred revenues consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
Professional services
|
|
$
|
|
|
|
$
|
7,236
|
|
Service activation fees
|
|
|
1,796
|
|
|
|
1,326
|
|
Manufacturing license fees
|
|
|
75
|
|
|
|
89
|
|
Prepaid services
|
|
|
1,071
|
|
|
|
1,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,942
|
|
|
|
10,149
|
|
Less current portion
|
|
|
(1,435
|
)
|
|
|
(2,083
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
1,507
|
|
|
$
|
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 2008) over the expected life of
the customer relationship.
Deferred professional services revenues at December 31,
2006 represent amounts received from the USCG under the
contract. At December 31, 2007 amounts received from the
USCG have been reflected as a current liability in the
consolidated balance sheet (See Notes 9 and 15).
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, 2007, the principal balance of the
note payable was 1,138 ($1,661) and it had a carrying
value of $1,170. 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 was
$131 for the years ended December 31, 2007 and 2006 and $33
for the year ended December 31, 2005. 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, 2008.
F-24
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
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.
|
|
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.
Conversion
of Series A and B Preferred Stock
On October 12, 2006, as a condition to the conversion of
all outstanding shares of Series A and B preferred stock
into common stock, the Company obtained written consents of
holders who collectively held in excess of two-thirds of the
Series B preferred stock. The holders consented to the
automatic conversion of the Series B preferred stock into
shares of common stock upon the closing of the Companys
IPO at an initial public offering price per share of not less
than $11.00 required for the automatic conversion of the
Series B preferred stock into common stock. In
consideration for providing their consents, the Company agreed
to make a contingent payment to all of the holders of the
Series B preferred stock if the price per share of the IPO
was between $11.00 and $12.49 per share, determined as follows:
(i) 12,014,227 (the number of shares of the Companys
common stock into which all of the shares of the Series B
preferred stock converted at the current conversion price)
multiplied by (ii) the difference between (a) $6.045
and (b) the quotient of (I) the initial public
offering price divided by (II) 2.114. The maximum amount
payable was $10,111. Upon closing of the IPO, the Company made a
payment of $10,111 to the holders of the Series B preferred
stock from the net proceeds of the IPO. The $10,111 payment was
accounted for similar to a dividend.
Convertible
Redeemable Preferred Stock
On December 30, 2005, the Company issued
17,629,999 shares of Series B convertible preferred
stock and received net proceeds of $66,721, after deducting
issuance costs of $4,328, which included the conversion of the
convertible notes issued in November and December 2005 (see
Note 11). In January 2006, the Company issued an additional
260,895 shares of Series B preferred stock and
received net proceeds of $1,465, after deducting issuance costs
of $113.
F-25
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
On November 8, 2006, upon closing of the IPO, all
outstanding Series A warrants were converted into warrants
to purchase shares of common stock on the basis of two shares of
common stock for every three shares of Series A preferred
stock.
The terms of the Series A and Series B preferred stock
were as follows:
Dividends
The Series A preferred stock holders were entitled to
receive a cumulative 12% annual dividend. The Series A
preferred stock dividend was eliminated upon the issuance of the
Series B preferred stock in December 2005. In January 2006,
the Company paid all accumulated dividends on its Series A
preferred stock totaling $8,027. Holders of the Series B
preferred stock were entitled to receive a cumulative 12%
dividend annually payable in cash in arrears. On
November 8, 2006, upon the closing of its IPO, the Company
paid all accumulated dividends on its Series B preferred
stock totaling $7,467.
Conversion
Shares of preferred stock were convertible into two shares of
common stock for every three shares of preferred stock, subject
to adjustment in the event of certain dilutive issuances. Each
share of preferred stock was convertible into common stock at
any time by the holder or automatically at any time upon the
earlier of one of the following events: (i) the closing of
a Qualified Public Offering of the Companys common stock;
or (ii) the closing of a Qualified Sale; or (iii) upon
the vote of the holders of not less than two-thirds of the
Series B preferred shares.
For purposes of an automatic conversion of preferred stock:
(1) A Qualified Public Offering was defined as a public
offering with gross cash proceeds of not less than
$75 million at a per share price of not less than
(i) $12.78 per share if the public offering 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.
F-26
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
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).
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
The Company issued no warrants to purchase common stock in 2007,
2006 and 2005.
Warrants to purchase common stock outstanding at
December 31, 2007 were as follows:
|
|
|
|
|
|
|
Shares Subject
|
|
Exercise Price
|
|
to Warrants
|
|
|
$2.33
|
|
|
172,278
|
|
$3.38
|
|
|
43,642
|
|
$4.26
|
|
|
257,987
|
|
|
|
|
|
|
|
|
|
473,907
|
|
|
|
|
|
|
These warrants expire on various dates through 2009.
During the year ended December 31, 2007, the Company issued
225,900 shares of common stock upon the exercise of
warrants at per share exercise prices ranging from $2.33 to
$4.26. The Company received gross proceeds of $536 from the
exercise of these warrants. In addition, the Company issued
704,042 shares of common stock upon the cashless exercise
of warrants to purchase 927,979 common shares with per share
exercise prices ranging from $2.33 to $4.26.
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.
F-27
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
At December 31, 2007, the Company has reserved the
following shares of common stock for future issuance:
|
|
|
|
|
|
|
Shares
|
|
|
Employee stock compensation plans
|
|
|
5,165,475
|
|
Warrants to purchase common stock
|
|
|
473,907
|
|
|
|
|
|
|
|
|
|
5,639,382
|
|
|
|
|
|
|
In 2005, the Company issued 32,083 shares of common stock
to a significant customer upon the issuance of a non cancellable
order for the purchase of Company products. The common stock was
determined to have a fair value of $136 which was recorded as a
reduction of product sales revenues over the delivery of the
underlying equipment.
|
|
Note 13.
|
Geographical
Information
|
The Company operates in one reportable segment, satellite data
communications. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
|
85
|
%
|
|
|
90
|
%
|
|
|
74
|
%
|
Central Asia(1)
|
|
|
|
|
|
|
|
|
|
|
14
|
%
|
Other(2)
|
|
|
15
|
%
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007, 2006 and 2005. |
The following is a summary of the tax provision of the Company
for the years ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
155
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
184
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(342
|
)
|
|
$
|
(4,635
|
)
|
|
$
|
(2,512
|
)
|
State
|
|
|
(65
|
)
|
|
|
(604
|
)
|
|
|
(160
|
)
|
International
|
|
|
64
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(343
|
)
|
|
|
(5,290
|
)
|
|
|
(2,672
|
)
|
Valuation allowance
|
|
|
159
|
|
|
|
5,290
|
|
|
|
2,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(184
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
The components of net deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
$
|
888
|
|
|
$
|
3,706
|
|
Allowance for doubtful accounts
|
|
|
214
|
|
|
|
216
|
|
Inventory reserves
|
|
|
146
|
|
|
|
155
|
|
Deferred compensation
|
|
|
1,569
|
|
|
|
1,546
|
|
Bonus accruals
|
|
|
428
|
|
|
|
274
|
|
Vacation accrual
|
|
|
231
|
|
|
|
210
|
|
Other
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
3,476
|
|
|
|
6,124
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(3,476
|
)
|
|
|
(6,124
|
)
|
|
|
|
|
|
|
|
|
|
Net current deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Satellite network and other property
|
|
$
|
284
|
|
|
$
|
241
|
|
Deferred revenues
|
|
|
2,977
|
|
|
|
|
|
Tax loss carryforwards
|
|
|
7,584
|
|
|
|
7,859
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
10,845
|
|
|
|
8,100
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(10,661
|
)
|
|
|
(8,100
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax asset
|
|
$
|
184
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income tax benefit at U.S. statutory rate of 34%
|
|
$
|
(1,220
|
)
|
|
$
|
(3,813
|
)
|
|
$
|
(3,093
|
)
|
State income taxes, net of federal benefit
|
|
|
(23
|
)
|
|
|
(392
|
)
|
|
|
(279
|
)
|
Effect of foreign subsidiaries
|
|
|
280
|
|
|
|
(1,251
|
)
|
|
|
669
|
|
Other permanent items
|
|
|
259
|
|
|
|
166
|
|
|
|
31
|
|
Adjustment of tax reserves and other
|
|
|
545
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
159
|
|
|
|
5,290
|
|
|
|
2,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A valuation allowance has been provided for all of the
Companys deferred tax assets except for an unrecognized
tax benefit totaling $184 because it is more likely than not
that the Company will not recognize the benefits of these
deferred tax assets. The net change in the total valuation
allowance for the years ended December 31, 2007, 2006 and
2005 was an increase of $159, $5,290 and $4,083, respectively.
The $4,083 increase in 2005 includes $1,411 attributable to net
operating loss carryforwards of Satcom, which was acquired in
2005.
As a result of the adoption of SFAS 123(R), the Company
recognizes tax benefits associated with the exercise of stock
options and vesting of RSUs directly to stockholders
equity only when the tax benefit reduces income tax payable on
the basis that a cash tax savings has occurred. Accordingly,
deferred tax assets are not recognized for net
F-29
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
operating loss carryforwards resulting from tax benefits. As of
December 31, 2007, the Company has not recognized in its
deferred tax assets an aggregate of $4,157 of windfall tax
benefits associated with the exercise of stock options and the
vesting of RSUs.
At December 31, 2007 and December 31, 2006, the
Company had potentially utilizable federal net operating loss
tax carryforwards of $18,772 and $14,412, respectively. The net
operating loss carryforwards expire at various times through
2027. At December 31, 2007 and December 31, 2006, the
Company had potentially utilizable foreign net operating loss
carryforwards of $7,692 and $8,159, 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.
As of January 1, 2007, the Company had no significant
unrecognized tax benefits. During the year ended
December 31, 2007, the Company recognized gross adjustments
for uncertain tax benefits of $775. Due to the existence of the
Companys valuation allowance, the uncertain tax benefits
if recognized would not impact the Companys effective
income tax rate. 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.
No interest and penalties related to uncertain tax positions
were accrued at December 31, 2007.
The following table is a reconciliation of the beginning and
ending amount of unrecognized tax benefits:
|
|
|
|
|
|
|
2007
|
|
|
Balance at January 1, 2007
|
|
$
|
|
|
Additions for tax positions related to prior years
|
|
|
591
|
|
Additions for tax positions related to 2007
|
|
|
184
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
775
|
|
|
|
|
|
|
As of December 31, 2007, unrecognized tax benefits totaling
$184 have been recorded in other liabilities in the
Companys consolidated balance sheet. Unrecognized tax
benefits amounting to $591 have been recorded as a reduction to
the Companys federal and state net operating loss tax
carryforwards in deferred tax assets.
|
|
Note 15.
|
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 10).
In connection with this agreement, the Company entered into
procurement agreements discussed below. All expenditures
directly relating to this project are being capitalized as
assets under construction. As of December 31, 2007, the
Company has incurred $7,138 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, 2007,
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, under which
the Company will purchase, among other things, overall Concept
Demonstration Satellite, design, bus module and payload module
F-30
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
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, 2007, the Companys
remaining obligation under this agreement was $362.
As a result of delays in launching the satellite, in February
2007, the USCG issued a unilateral modification to the contract
setting a definitive launch date of July 2, 2007. On
September 13, 2007, the Company and the USCG entered into
an amendment to the agreement to extend the definitive launch
date to December 31, 2007. In consideration for agreeing to
extend the launch date, the Company will provide up to
200 hours of additional technical support for up to
14 months after the launch date at no cost and reduce
USCGs cost for the post launch maintenance option and for
certain usage options.
The USCG project is to be launched with the Companys
quick-launch satellites, however the launch did not occur by
December 31, 2007. On January 14, 2008, the Company
received a cure notice from the USCG notifying the Company that
unless the satellite is launched within 90 days after
receipt of the cure notice, the USCG may terminate the contract
for default. The Company believes that the launch of the Coast
Guard demonstration satellite will likely extend beyond the
90 day cure period. The satellites are fully constructed
and are undergoing testing; however, certain electromagnetic
compatibility issues have arisen in the testing of the quick
launch satellites that need to be resolved before launch. The
Company is currently in discussions with the USCG to extend the
deadline for the launch of the Coast Guard demonstration
satellite to a mutually acceptable date. However, there can be
no assurance as to whether or when a mutually satisfactory
agreement for an extension of the launch deadline will be agreed
to by the parties. In the event that the Company and the USCG
are unable to reach a mutually satisfactory resolution regarding
the launch of the Coast Guard demonstration satellite, the USCG
may terminate the contract and pursue the remedies available to
it, one of which is procuring supplies and services similar to
those terminated and holding the Company liable for any excess
costs of procurement. The Company has indemnification rights
against the launch services provider for the Coast Guard
demonstration satellite in the event the launch services
contract is terminated for default from and against any and all
claims, demands, assessments and all liabilities and costs
related thereto for which the Company becomes liable, including
but not limited to any assessment of damages
and/or
reprocurement costs by the United States Government.
The Company has reflected all amounts received under the USCG
contract in accrued liabilities in its December 31, 2007
consolidated balance sheet. Such amounts were included in long
term deferred revenues at December 31, 2006. No provision
for losses that may be incurred pursuant to this cure notice has
been recorded in the accompanying financial statements as the
amount of loss, if any, is not reasonably estimable.
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, 2007,
the Company has made milestone payments of approximately $16,150
under this agreement. The Company anticipates making the
remaining payments subject to adjustments under the agreement of
$150 and $700 in 2008 and 2009, 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. As of December 31, 2007, the Company has
made milestone payments of $14,600 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.
F-31
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
Due to delays associated with the construction of the final
quick-launch satellite, the Company intends to retain it for
future deployment.
The Company anticipates making the remaining payments under the
agreement of $5,000 and $400 in 2008 and 2009, respectively, for
the initial order of six satellite buses and the related
integration and launch services, inclusive of the on-time
delivery payments
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 Companys predecessor filed for
bankruptcy, approximately $11,000 had been paid to ViaSAT,
leaving approximately $3,700 owing under the GESs Contract for
8.5 GESs manufactured and stored by ViaSAT. In December 2004,
the Company and ViaSAT entered into a settlement agreement
whereby the Company was granted title to 4 completed GESs in
return for a commitment to pay an aggregate of $1,000 by
December 2007. ViaSAT maintains a security interest and lien in
the 4 GESs and has the right to possession of each GESs until
the lien associated with the GESs has been satisfied. The
Company has options, expiring in December 2007, to purchase any
or all of the remaining 4.5 GESs for aggregate consideration of
$2,700. However, the Company must purchase one of the remaining
4.5 GESs for $1,000 prior to the sale or disposition of the last
of the 4 GESs for which title has been transferred The Company
and ViaSAT are in discussions to extend the option. The Company
recorded the 4 GESs in inventory at an aggregate value of $1,644
upon execution of the settlement agreement. At December 31,
2007 and 2006, the accrued liability for the settlement
agreement was $644 and $944, respectively.
Airtime
credits
In 2001, in connection with the organization of ORBCOMM Europe
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 years
ended December 31, 2007, 2006 and 2005 airtime credits used
totaled approximately $179, $201 and $176, respectively. As of
December 31, 2007 and 2006 unused credits granted by the
Company were approximately $2,490 and $2,669, respectively.
Operating
leases
The Company leases office, storage and other facilities under
agreements classified as operating leases which expire through
2011. 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, 2007
are as follows:
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
2008
|
|
$
|
838
|
|
2009
|
|
|
251
|
|
2010
|
|
|
128
|
|
2011
|
|
|
10
|
|
|
|
|
|
|
|
|
$
|
1,227
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2007, 2006
and 2005 was approximately $988, $973 and $956, respectively.
F-32
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
Litigation
From time to time, the Company is involved in various litigation
matters involving ordinary and routine claims incidental to its
business. Management currently believes that the outcome of
these proceedings, either individually or in the aggregate, will
not have a material adverse effect on the Companys
business, results of operations or financial condition. The
Company is also involved in certain other litigation matters as
discussed below.
Class Action
Litigation
On September 20 and 25, 2007, two separate plaintiffs filed
purported class action lawsuits in the United States District
Court for the District of New Jersey against the Company and
certain of its officers. The actions allege that the
Companys registration statement related to its initial
public offering in November 2006 contained material
misstatements and omissions in violation of the Securities Act
of 1933. The actions cited a drop in the trading price of the
Companys common stock that followed disclosure on
August 14, 2007 of reduced guidance for the remainder of
2007 released with the Companys second quarter financial
results. The actions seek to recover compensatory, and in one
complaint rescissory damages, on behalf of a class of
shareholders who purchased common stock in
and/or
traceable to the Companys initial public offering on or
about November 3, 2006 through August 14, 2007. The
court has yet to certify the class or appoint a lead
plaintiff(s). The Company intends to defend the matter
vigorously. No provision for losses, if any, that might result
from the 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.
Quake
On May 11, 2007, the Company 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, the
Companys wholly owned subsidiary, Stellar Satellite
Communications, Ltd. (New Stellar), and Delphi
Corporation, in the U.S. District Court for the Central
District of California, Western Division (the
Complaint). The Complaint alleges antitrust
violations, breach of contract, tortious interference and
improper exclusive dealing arrangements. Quake claims damages in
excess of $15,000 and seeks treble damages, costs and reasonable
attorneys fees, unspecified compensatory damages, punitive
damages, injunctive relief and that the Company be required to
divest itself of the assets it acquired from Stellar Satellite
Communications, Ltd. (Old Stellar) and reconstitute
a new and effective competitor. On April 21, 2005, the
Company filed a motion to dismiss or to compel arbitration and
dismiss or stay the proceedings, which the District Court
denied. On July 19, 2005, the Company and New Stellar took
an interlocutory appeal as of right to the Court of Appeals for
the Ninth Circuit from the denial of the Companys motion
to dismiss. 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 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. 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
F-33
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
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.
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.
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
F-34
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
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, which
has been completed, and to maintain separate office, testing and
laboratory facilities for New Stellar by February 2008, which
has been completed. 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.
|
|
Note 16.
|
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, 2007, 2006 and 2005.
|
|
Note 17.
|
Supplemental
Disclosure of Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures incurred not yet paid
|
|
$
|
1,459
|
|
|
$
|
|
|
|
$
|
|
|
Gateway received in consideration for payment for accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
157
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public offering expenses incurred not yet paid
|
|
|
40
|
|
|
|
610
|
|
|
|
|
|
Conversion of notes payable for Series B preferred stock
|
|
|
|
|
|
|
|
|
|
|
25,019
|
|
Preferred stock dividends accrued
|
|
|
|
|
|
|
|
|
|
|
4,709
|
|
Conversion of Series A preferred stock into common stock
|
|
|
|
|
|
|
37,882
|
|
|
|
|
|
Conversion of Series B preferred stock into common stock
|
|
|
|
|
|
|
68,629
|
|
|
|
|
|
F-35
Notes to
consolidated financial statements
(In thousands, except share and per share amounts)
|
|
Note 18.
|
Quarterly
Financial Data (Unaudited)
|
The quarterly results of operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,961
|
|
|
$
|
6,627
|
|
|
$
|
6,912
|
|
|
$
|
8,652
|
|
Income (loss) from operations
|
|
|
(4,169
|
)
|
|
|
(2,613
|
)
|
|
|
(1,978
|
)
|
|
|
97
|
|
Net Income (loss)
|
|
|
(2,939
|
)
|
|
|
(1,297
|
)
|
|
|
(422
|
)
|
|
|
1,069
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.08
|
)
|
|
|
(0.03
|
)
|
|
|
(0.01
|
)
|
|
|
0.03
|
|
Diluted
|
|
|
(0.08
|
)
|
|
|
(0.03
|
)
|
|
|
(0.01
|
)
|
|
|
0.03
|
|
Weighted-average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,035,553
|
|
|
|
38,669,269
|
|
|
|
41,444,270
|
|
|
|
41,603,765
|
|
Diluted
|
|
|
37,035,553
|
|
|
|
38,669,269
|
|
|
|
41,444,270
|
|
|
|
42,496,840
|
|
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
|
|
F-36
Schedule II
Valuation and Qualifying Accounts
ORBCOMM
Inc.
December 31,
2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Col. E
|
|
|
|
Col. B
|
|
|
Col. C
|
|
|
|
|
|
Col. E
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Other
|
|
|
Col. D
|
|
|
End of the
|
|
Description
|
|
the Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(Amounts in thousands)
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful receivables
|
|
$
|
297
|
|
|
|
286
|
|
|
|
(195
|
)1
|
|
|
|
|
|
$
|
388
|
|
Deferred tax asset valuation allowance
|
|
$
|
14,224
|
|
|
|
159
|
|
|
|
(246
|
)2
|
|
|
|
|
|
$
|
14,137
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful receivables
|
|
$
|
671
|
|
|
|
30
|
|
|
|
(404
|
)1
|
|
|
|
|
|
$
|
297
|
|
Deferred tax asset valuation allowance
|
|
$
|
8,784
|
|
|
|
5,290
|
|
|
|
150
|
2
|
|
|
|
|
|
$
|
14,224
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful receivables
|
|
$
|
564
|
|
|
|
291
|
|
|
|
(184
|
)1
|
|
|
|
|
|
$
|
671
|
|
Deferred tax asset valuation allowance
|
|
$
|
4,701
|
|
|
|
4,083
|
|
|
|
|
|
|
|
|
|
|
$
|
8,784
|
|
|
|
|
(1) |
|
Amounts relate to recoveries. |
|
(2) |
|
Amounts relate to differences in foreign exchange rates. |
F-37
Exhibit Index
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
Description
|
|
Page No.
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation of the Company, filed as
Exhibit 3.1 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2006
(File No. 000-1361983),
is incorporated herein by reference.
|
|
|
|
3
|
.2
|
|
Amended Bylaws of the Company, filed as Exhibit 3.2 to the
Companys Annual Report on Form 10-K for the year ended
December 31, 2006 (File No. 000-1361983), is incorporated herein
by reference.
|
|
|
|
10
|
.1
|
|
Validation Services Agreement, dated May 20, 2004, between the
Company and the United States Coast Guard, filed as Exhibit 10.1
to the Companys Registration Statement on Form S-1
(Registration No. 333-134088), is incorporated herein by
reference.
|
|
|
|
10
|
.1.2
|
|
Amendment of Solicitation/Modification of Contract dated
September 13, 2007 amending the Validation Services
Agreement dated as of May 12, 2004 by and between the
Company and U.S. Coast Guard filed as Exhibit 10.1 to
the Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 2007 (File
No. 000-1361983) is incorporated herein by reference.
|
|
|
|
10
|
.2.1
|
|
Cooperation Agreement, dated May 18, 2004, among the
Company, Stellar Satellite Communications Ltd. and Delphi
Corporation, filed as Exhibit 10.2.1 to the Companys
Registration Statement on
Form S-1
(Registration No. 333-134088), is incorporated herein by
reference.
|
|
|
|
10
|
.2.2
|
|
Amendment Number One to Cooperation Agreement, dated December
27, 2005, among the Company, Stellar Satellite Communications
Ltd. and Delphi Corporation, filed as Exhibit 10.2.2 to the
Companys Registration Statement on Form S-1 (Registration
No. 333-134088), is incorporated herein by reference.
|
|
|
|
10
|
.2.3
|
|
Pricing Letter Agreement, dated May 6, 2004, between the Company
and Delphi Corporation, filed as Exhibit 10.2.3 to the
Companys Registration Statement on
Form S-1
(Registration No. 333-134088), is incorporated herein by
reference.
|
|
|
|
10
|
.3.1
|
|
ORBCOMM Concept Demonstration Satellite Bus, Integration Test
and Launch Services Procurement Agreement, dated March 10, 2005,
between the Company and OHB-System AG, filed as Exhibit 10.3.1
to the Companys Registration Statement on Form S-1
(Registration No. 333-134088), is incorporated herein by
reference.
|
|
|
|
10
|
.3.2
|
|
Amendment to the Procurement Agreement, dated June 5, 2006,
between the Company and OHB-System AG, filed as Exhibit 10.3.2
to the Companys Registration Statement on Form S-1
(Registration No. 333-134088), is incorporated herein by
reference.
|
|
|
|
10
|
.4
|
|
ORBCOMM Concept Demonstration Communication Payload Procurement
Agreement, dated November 3, 2004, between the Company and
Orbital Sciences Corporation, filed as Exhibit 10.4 to the
Companys Registration Statement on Form S-1 (Registration
No. 333-134088), is incorporated herein by reference.
|
|
|
|
10
|
.5.1
|
|
Amendment to the Procurement Agreement, dated April 21, 2006,
between the Company and Orbital Sciences Corporation, filed as
Exhibit 10.5 to the Companys Registration Statement on
Form S-1 (Registration No. 333-134088), is incorporated herein
by reference.
|
|
|
|
10
|
.5.2
|
|
Memorandum of Agreement, dated October 10, 2007, between the
Company and Orbital Sciences Corporation concerning modification
to the Amendment to the procurement agreement as
Exhibit 10.5.1 hereto.
|
|
|
|
10
|
.6
|
|
Second Amended and Restated Registration Rights Agreement, dated
as of December 30, 2005, by and among the Company and certain
preferred stockholders of the Company, filed as Exhibit 10.6 to
the Companys Registration Statement on Form S-1
(Registration No. 333-134088), is incorporated herein by
reference.
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|
|
|
10
|
.7.1
|
|
International Value Added Reseller Agreement, dated March 14,
2003, between the Company and Transport International Pool,
filed as Exhibit 10.9.1 to the Companys Registration
Statement on Form S-1 (Registration No. 333-134088), is
incorporated herein by reference.
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|
|
|
|
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|
|
Exhibit
|
|
|
|
|
No.
|
|
Description
|
|
Page No.
|
|
|
10
|
.7.2
|
|
Amendment to International Value Added Reseller Agreement, dated
January 26, 2006, between the Company and Transport
International Pool, filed as Exhibit 10.9.2 to the
Companys Registration Statement on Form S-1 (Registration
No. 333-134088), is incorporated herein by reference.
|
|
|
|
10
|
.7.3
|
|
Assignment and Assumption Agreement, dated February 28, 2006,
between ORBCOMM LLC, Transport International Pool and GE Asset
Intelligence, LLC, filed as Exhibit 10.9.3 to the
Companys Registration Statement on
Form S-1
(Registration
No. 333-134088),
is incorporated herein by reference.
|
|
|
|
10
|
.7.4
|
|
Amendment to International Value Added Reseller Agreement dated
July 11, 2006 between ORBCOMM LLC and GE Asset Intelligence,
filed as Exhibit 10.9.4 to the Companys Registration
Statement on Form S-1 (Registration No. 333-134088), is
incorporated herein by reference.
|
|
|
|
10
|
.7.5
|
|
Amendment to International Value Added Resellers Agreement,
dated August 3, 2006, between ORBCOMM LLC and GE Asset
Intelligence, LLC, filed as Exhibit 10.9.5 to the Companys
Registration Statement on Form S-1 (Registration No.
333-134088), is incorporated herein by reference.
|
|
|
|
10
|
.8
|
|
Form of Common Stock Warrants, filed as Exhibit 10.10 to the
Companys Registration Statement on Form S-1 (Registration
No. 333-134088), is incorporated herein by reference.
|
|
|
|
10
|
.9
|
|
Form of Series A Preferred Stock Warrants, filed as Exhibit
10.11 to the Companys Registration Statement on Form S-1
(Registration No. 333-134088), is incorporated herein by
reference.
|
|
|
|
10
|
.10
|
|
Form of Ridgewood Preferred Stock Warrants, filed as Exhibit
10.12 to the Companys Registration Statement on Form S-1
(Registration No. 333-134088), is incorporated herein by
reference.
|
|
|
|
10
|
.11
|
|
Form of Indemnification Agreement between the Company and the
executive officers and directors of the Company, filed as
Exhibit 10.13 to the Companys Registration Statement on
Form S-1 (Registration No. 333-134088), is incorporated herein
by reference.
|
|
|
|
10
|
.12
|
|
Schedule identifying agreements substantially identical to the
Form of Indemnification Agreement constituting Exhibit 10.11
hereto, filed as Exhibit 10.14 to the Companys
Registration Statement on Form S-1 (Registration No.
333-134088), is incorporated herein by reference.
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|
|
|
*10
|
.13
|
|
2004 Stock Option Plan, filed as Exhibit 10.15 to the
Companys Registration Statement on Form S-1 (Registration
No. 333-134088), is incorporated herein by reference.
|
|
|
|
*10
|
.14
|
|
2006 Long-Term Incentives Plan, filed as Exhibit 10.16 to the
Companys Registration Statement on Form S-1 (Registration
No. 333-134088), is incorporated herein by reference.
|
|
|
|
*10
|
.15
|
|
Form of Incentive Stock Option Agreement under the 2004 Stock
Option Plan, filed as Exhibit 10.17 to the Companys
Registration Statement on Form S-1 (Registration No.
333-134088), is incorporated herein by reference, filed as
Exhibit 10.17 to the Companys Registration Statement on
Form S-1 (Registration No. 333-134088), is incorporated herein
by reference.
|
|
|
|
*10
|
.16
|
|
Form of Non Statutory Stock Option Agreement under the 2004
Stock Option Plan, filed as Exhibit 10.18 to the Companys
Registration Statement on Form S-1 (Registration No.
333-134088), is incorporated herein by reference.
|
|
|
|
*10
|
.17
|
|
Employment Agreement, effective as of June 1, 2006, between
Jerome B. Eisenberg and the Company, filed as Exhibit 10.19 to
the Companys Registration Statement on Form S-1
(Registration No. 333-134088), is incorporated herein by
reference.
|
|
|
|
*10
|
.18
|
|
Employment Agreement, effective as of June 1, 2006, between Marc
Eisenberg and the Company, filed as Exhibit 10.20 to the
Companys Registration Statement on Form S-1 (Registration
No. 333-134088), is incorporated herein by reference.
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
Description
|
|
Page No.
|
|
|
*10
|
.20
|
|
Employment Agreement, effective as of June 1, 2006, between John
J. Stolte, Jr. and the Company, filed as Exhibit 10.22 to the
Companys Registration Statement on Form S-1 (Registration
No. 333-134088), is incorporated herein by reference.
|
|
|
|
*10
|
.21
|
|
Employment Agreement, effective as of August 2, 2004, between
Emmett Hume and the Company, filed as Exhibit 10.23 to the
Companys Registration Statement on Form S-1 (Registration
No. 333-134088), is incorporated herein by reference.
|
|
|
|
10
|
.21.1
|
|
Separation agreement dated July 30, 2007 between the
Company and Emmet Hume, filed as Exhibit 99.1 to the
Companys Current Report on Form 8-K dated
August 3, 2007, is incorporated by reference herein.
|
|
|
|
*10
|
.22
|
|
Form of Restricted Stock Unit Award Agreement under the 2006
Long-Term Incentives Plan, filed as Exhibit 10.24 to the
Companys Registration Statement on Form S-1 (Registration
No. 333-134088), is incorporated herein by reference.
|
|
|
|
*10
|
.23
|
|
Form of Stock Appreciation Rights Award Agreement under the 2006
Long-Term Incentives Plan, filed as Exhibit 10.25 to the
Companys Registration Statement on Form S-1 (Registration
No. 333-134088), is incorporated herein by reference.
|
|
|
|
*10
|
.24
|
|
Employment Agreement, effective as of October 1, 2006, between
Robert G. Costantini and the Company, filed as Exhibit 10.26 to
the Companys Registration Statement on Form S-1
(Registration No. 333-134088), is incorporated herein by
reference.
|
|
|
|
10
|
.25
|
|
Summary of Non-Employee Director Compensation, filed as
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
for the period ended June 30, 2007 (File
No. 000-1361983),
is incorporated herein by reference.
|
|
|
|
10
|
.26
|
|
Letter agreement, dated October 10, 2006, between Stellar
Satellite Communications Ltd. and GE Asset Intelligence, LLC,
filed as Exhibit 10.27 to the Companys Registration
Statement on Form S-1 (Registration No. 333-134088), is
incorporated herein by reference.
|
|
|
|
16
|
|
|
Letter of J.H. Cohn LLP regarding change in certifying
accountant, filed as Exhibit 16.1 to the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2006
(File No. 000-1361983),
is incorporated herein by reference.
|
|
|
|
21
|
|
|
Subsidiaries of the Company.
|
|
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP, an independent registered
public accounting firm.
|
|
|
|
24
|
|
|
Power of Attorney authorizing certain persons to sign this
Annual Report on behalf of certain directors and executive
officers of the Company.
|
|
|
|
31
|
.1
|
|
Certification of the Chairman of the Board and Chief Executive
Officer.
|
|
|
|
31
|
.2
|
|
Certification of the Executive Vice President and Chief
Financial Officer.
|
|
|
|
32
|
.1
|
|
Certification of the Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
|
|
|
|
32
|
.2
|
|
Certification of the Executive Vice President and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act.
|
|
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment. The omitted portions have been
separately filed with the Securities and Exchange Commission. |