item 14 exhibits financial statement schedules reports form 8k following filed part report form 10k 1 following financial statements included indicated page report 2 following additional financial data transmitted report read conjunction consolidated financial statements financial statements report schedules listed omitted inapplicable required 3 exhibits b reports form 8k iridium llc iridium world communications ltd filed 8k july 18 1997 reporting motorola advised iridium llc lost contact one iridium satellites iridium llc iridium world communications ltd filed 8k october 13 1997 reporting iridium llc iridium capital corporation issued 300 million aggregate principal amount 11 14 senior notes due 2005 series c unregistered offering addition form 8k reported motorola informed iridium llc motorola experienced problem one iridium satellites prior attaining final orbit form 8k also reported motorola advised iridium llc factored satellite loss planning constellation deployment ii remained course commercial activation september 1998 iii iridium would bear financial risk loss satellite iridium llc iridium operating llc iridium world communications ltd filed 8k december 19 1997 reporting iridium llc entered asset dropdown transaction iridium operating llc newly formed whollyowned subsidiary iridium llc form 8k also reported pursuant asset dropdown transaction substantially assets liabilities iridium llc transferred iridium operating llc ii asset dropdown transaction consummated connection establishment 1000000000 credit facility iridium operating llc iii credit facility would secured security interest substantially assets iridium operating llc membership interests iridium operating llc independent auditors report board directors stockholders iridium world communications ltd audited accompanying balance sheets iridium world communications ltd december 31 1997 1996 related statements loss stockholders equity cash flows year ended december 31 1997 period december 12 1996 inception december 31 1996 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position iridium world communications ltd december 31 1997 1996 results operations cash flows year ended december 31 1997 period december 12 1996 inception december 31 1996 conformity generally accepted accounting principles kpmg peat marwick llp mclean virginia january 16 1998 iridium world communications ltd balance sheets thousands except share data accompanying notes integral part financial statements iridium world communications ltd statements loss thousands except share data accompanying notes integral part financial statements iridium world communications ltd statements stockholders equity thousands except share data accompanying notes integral part financial statements iridium world communications ltd statements cash flows thousands accompanying notes integral part financial statements iridium world communications ltd notes financial statements 1 organization business iridium world communications ltd iwcl incorporated laws bermuda december 12 1996 inception iwcl wholly owned iridium llc limited liability company june 1997 iwcl registered securities exchange commission total 13800000 shares class common stock class common stock sale initial public offering june 13 1997 iwcl consummated offering issued 12000000 shares class common stock pursuant 1997 subscription agreement iwcl iridium llc approximately 225 million net proceeds offering invested class 1 membership interests iridium llc class 1 interests time outstanding shares class common stock held iridium llc retired iwcl became member iridium llc iridium llc whollyowned subsidiary iridium operating llc iridium delaware limited liability company currently devoting substantially efforts establishing commercializing iridium communications system iridium system iwcls sole asset investment iridium llc december 31 1997 iwcls investment approximately 85 total outstanding membership interests iridium llc 2 significant accounting policies investment iridium llc investment iridium llc accounted using equity method accordance equity method accounting iwcls carrying amount investment affiliate initially recorded cost increased reflect share affiliates income reduced reflect share affiliates losses period since initial investment december 31 1997 iridium llc total assets total liabilities total members equity approximately 3646000000 2011000000 1635000000 respectively december 31 1996 iridium llc total assets total liabilities total members equity 2434000000 862000000 1572000000 respectively iridium llc reported net loss 293553000 73598000 years ended december 31 1997 1996 respectively management estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reported periods actual results could differ estimates income taxes iwcl recognizes income taxes using asset liability method asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date iridium world communications ltd notes financial statements continued 3 stockholders equity july 161997 iridium llc iridium capital corporation wholly owned subsidiary iridium completed offering high yield offering 300000 units consisting 1000 principal amount iridium llc 13 senior notes due 2005 series notes one iwcl warrant representing right purchase 52 shares class common stock iwcl ii 500 million aggregate principal amount iridium llc 14 senior notes due 2005 series b series b notes iridium subsequently substituted iridium llc obligor series notes series b notes series notes series b notes guaranteed iridium roaming llc iridium ip llc also whollyowned subsidiaries iridium iwcl obligor guarantor series notes series b notes iwcl warrants represent aggregate right purchase 1560000 shares class common stock iwcl approximately 17113000 proceeds high yield offering allocated fair value purchase price iwcl warrants exercise price iwcl warrant 2090 per share iwcl warrants exercisable anytime one year date original issuance expire july 15 2005 concurrent issuance iwcl warrants high yield offering iridium llc issued iwcl 1560000 llc interest warrants exercisable one iridium llc class 1 interest exercise price 2090 per llc interest warrant iwcl iridium llc agreed iwcl exercise one llc interest warrant upon exercise iwcl warrant exchange rights iridium llc members concurrent offering iwcl iridium llc executed interest exchange agreement conditionally permits holders class 1 interests iridium llc exchange interests subject restrictions transfer iridium llc limited liability agreement shares class common stock iwcl ratio one share class common stock iridium llc class 1 interest subject antidilution adjustments interest exchange agreement exchanges iridium llc class 1 interests permitted 90 days iridium llc achieved one full quarter positive earnings interest taxes depreciation amortization addition exchange shall take place unless approved pursuant authorization directors representing least 66 23 iridium llc board directors global ownership program iwcl iridium llc intend commence global ownership program designed offer aggregate 2500000 shares iwcls class b common stock purchase price 1333 per share certain governmental telecommunication administrations related entities part comprehensive program enhance market access improve competitive standing iridium system achieve appropriate regulatory approvals time issuance purchasers class b common stock required pay amount equal per share par value class b common stock 01 per share balance purchase price payable withholding dividends would otherwise payable shares class b common stock holder class b common stock may elect pay purchase price cash time class b common stock convertible class common stock oneforone basis subject antidilution adjustments certain conditions met including full payment shares expiration minimum holding period proceeds generated sale class b common stock used purchase class 1 interests iridium llc payment terms respect iridium llc class 1 interests mirror payment terms class b common stock december 31 1997 shares class b common stock issued program iridium world communications ltd notes financial statements continued share issuance agreement iwcl iridium llc also executed share issuance agreement provides net proceeds future primary offerings securities iwcl invested class 1 interests iridium llc voting rights holders class common stock entitled one vote per share holders class b common stock voting rights except required bermuda law connection matters involving variation terms class b common stock participation governance iridium providing iwcls interest iridium llc represents five percent total outstanding class 1 interests iridium llc occurred upon consummation iwcl ipo iwcl shall entitled designate two independent company directors iridium llc stock option plan iridium llc iridium llc established plan executive officers managers independent directors iridium llc awarded options purchase class common stock iwcl option plan option plan covers 2625000 shares class common stock option plan also permits award stock appreciation rights connection grant options december 31 1997 options covering 2004556 shares class common stock outstanding exercise prices ranging 1333 5250 december 31 1997 397145 options exercisable weighted average exercise price 1333 date stock appreciation rights granted right exercise options vest pro rata period five years pursuant share issuance agreement iwcl agreed upon exercise options issue iridium llc delivery exercising option holder number shares class common stock covered exercised options iridium llc agreed simultaneously deliver iwcl like number iridium llc class 1 interests subject antidilution adjustments exercise price option paid iridium llc represents payment class common stock exercising option holder iridium llc class 1 interests iwcl year ended december 31 1997 options acquire 3262 shares class common stock exercised iwcl issued shares names optionees iridium llc issued 3262 class 1 interests iwcl management services agreement connection iwcl ipo iridium llc iwcl entered management services agreement pursuant management services agreement iridium llc agreed supervise manage daytoday operations iwcl among things iridium llc responsible administering following functions iwcl treasury accounting legal tax insurance licenses permits securities law compliance iridium llc receives fees reimbursement iwcl services iwcl management services agreement operating costs incurred iwcl period since inception paid iridium llc significant 4 earnings per share february 1997 financial accounting standards board issued statement 128 earnings per sharestatement 128 statement 128 supersedes accounting principles board opinion 15 earnings per share apb 15 related interpretations promulgates new accounting standards iridium world communications ltd notes financial statements continued computation manner presentation earnings loss per share data statement 128 requires presentation basic diluted earnings loss per share data basic earnings loss per class common share calculated dividing net income loss weighted average number class common shares outstanding period diluted earnings loss per share calculated dividing net income loss weighted average number class common shares extent dilutive potentially dilutive securities outstanding period potentially dilutive securities comprised warrants purchase class common stock issued conjunction series notes stock options due loss incurred year ended december 31 1997 impact warrants stock options antidilutive included diluted earnings loss per share calculation adoption statement 128 effect earnings loss per share previously presented 5 income taxes iwcl subject income taxation based ratable portion iridium llcs income loss year ended december 31 1997 period december 12 1996 inception december 31 1996 iwcl recognized current deferred income tax expense benefit december 31 1997 iwcls deferred tax asset relates entirely investment iridium llc amounted approximately 7446000 full valuation allowance established assessing realizability deferred tax assets management considers whether likely portion deferred tax asset realized ultimate realization deferred tax asset dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies implemented making assessment independent auditors report board directors members iridium llc subsidiaries audited accompanying consolidated balance sheets iridium llc subsidiaries development stage limited liability company december 31 1997 1996 related consolidated statements loss members equity deficit cash flows years threeyear period ended december 31 1997 period june 14 1991 inception december 31 1997 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position iridium llc subsidiaries development stage limited liability company december 31 1997 1996 results operations cash flows years threeyear period ended december 31 1997 period june 14 1991 inception december 31 1997 conformity generally accepted accounting principles kpmg peat marwick llp mclean virginia january 16 1998 iridium llc development stage limited liability company consolidated balance sheets thousands except member interest data accompanying notes integral part consolidated financial statements iridium llc development stage limited liability company consolidated statements loss thousands except member interest data accompanying notes integral part consolidated financial statements iridium llc development stage limited liability company consolidated statements members equity deficit thousands except interest data accompanying notes integral part consolidated financial statements iridium llc development stage limited liability company consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements iridium llc development stage limited liability company notes consolidated financial statements 1 organization business iridium llc parent subsidiaries devoting present efforts developing commercializing global wireless system iridiumr communications system iridium system enable subscribers send receive telephone calls virtually anywhere world one phone one phone number one customer bill iridium inc incorporated june 14 1991 iridium inc operated whollyowned subsidiary motorola inc motorola july 29 1993 july 29 1993 iridium inc closed first capital draw private placement shares common stock subscribed u foreign investors result three private placements equity five supplemental private placements certain additional equity investors proceeds received initial public offering common stock iridium world communications ltd iwcl see note 3 motorolas direct indirect class 1 membership interest parent reduced approximately 18 december 31 1997 considering unexercised warrants held motorola july 29 1996 parent formed limited liability company terms conditions limited liability agreement llc agreement pursuant provisions delaware limited liability company act also july 29 1996 iridium inc merged parent surviving entity concurrent merger shares common stock iridium inc exchanged class 1 membership interests parent class 1 interests december 18 1997 parent entered asset dropdown transaction asset dropdown transaction iridium operating llc iridium newly formed whollyowned subsidiary parent pursuant asset dropdown transaction substantially assets liabilities parent transferred iridium including without limitation liabilities respect outstanding 13 senior notes due 2005 series 14 senior notes due 2005 series b 11 14 senior notes due 2005 series c collectively senior notes pursuant indentures relating senior notes iridium substituted parent released obligations indentures relating senior notes assets liabilities transferred iridium parents carrying value accordingly unless otherwise specified references within notes iridium relate action prior date asset dropdown transaction construed references parent predecessor iridium result asset dropdown transaction parents significant asset investment iridium contracted motorola design develop produce deliver orbit space segment component iridium system scheduled date delivery 345 billion space segment 1998 iridium plans begin commercial operations september 1998 1997 46 66 satellites iridium system successfully placed orbit iridium communications system subject regulation federal communications commission fcc foreign administrations regulatory bodies january 31 1995 motorola obtained license fcc construct launch operate iridium system subject certain conditions 2 significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts parent whollyowned subsidiary iridium iridiums whollyowned subsidiaries iridium capital corporation iridium roaming llc iridium ip llc significant intercompany transactions eliminated iridium llc development stage limited liability company notes consolidated financial statements continued development stage enterprise parent iridium currently devoting entire efforts establishing commercializing iridium system december 18 1997 parent iridium entered asset dropdown transaction whereby substantially assets liabilities parent transferred iridium purpose asset dropdown transaction facilitate pledge substantially assets parent connection establishment secured bank financing development construction iridium system december 31 1997 parents ownership interest iridium constituted substantially parents assets accordingly iridiums current principal activities relate managing design construction development system preparing daytoday operations management estimates preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting periods actual results could differ estimates cash equivalents parent considers highly liquid investments original maturity three months less date purchase cash equivalents restricted cash restricted cash consists first stage borrowing 1 billion secured credit facility syndicate lenders led chase securities inc barclays capital division barclays bank plc funds restricted subject iridium meeting specified milestones property equipment property equipment carried historical cost less accumulated depreciation amortization depreciation amortization calculated using straightline method following estimated useful lives costs constructing placing satellites service capitalized losses satellite failures iridium financial responsibility contractual arrangements motorola recognized currently motorola bears risk loss launch failures satellite failures satellite placed service system construction system construction includes costs incurred related construction space ground components iridium system depreciation expense recognized satellitebysatellite basis satellites placed service following delivery satellite mission orbit depreciation related ground control stations commence placement service station iridium llc development stage limited liability company notes consolidated financial statements continued interest costs incurred construction iridium system capitalized total interest cost incurred capitalized years ended december 31 1996 1997 approximately 28127000 163747000 respectively interest paid years ended december 31 1996 1997 approximately 1485000 30191000 respectively interest incurred paid capitalized year ended december 31 1995 1996 parent adopted statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed statement 121 statement 121 requires longlived assets held used reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable impairment loss recognized undiscounted net cash flows associated asset less assets carrying amount impairment losses measured excess carrying amount asset estimated fair market value adoption statement 121 material impact parents results operations years ended december 31 1996 1997 member interestbased compensation 1996 parent adopted statement financial accounting standards 123 accounting stockbased compensation statement 123 encourages require recognition member interestbased employee compensation fair value parent elected continue account member interestbased employee compensation using intrinsic value method prescribed accounting principles board opinion 25 accounting stock issued employees related interpretations accordingly compensation cost options purchase class common stock iwcl granted employees measured excess fair value class 1 interests date grant exercise price employee must pay acquire interest compensation expense recognized period earned employee 152000 year ended december 31 1997 compensation expense recognized year ended december 31 1996 options acquire class 1 interests granted exercise price equal fair market value date grant warrants options purchase member interests granted employees consideration goods services rendered recognized fair market value equity issuance costs parent classifies costs incurred connection issuance equity reduction members equity costs include fees paid investment bankers attorneys others connection issuance equity deferred financing costs incurred connection securing debt financing deferred amortized terms related debt manner approximates effective yield method costs future debt financing also deferred included noncurrent assets accompanying consolidated balance sheets total deferred financing costs approximately 30200000 113394000 december 31 1996 1997 respectively october 1995 parent withdrew intended public offering certain subordinated debt financing accordingly parent wroteoff approximately 3200000 deferred costs associated intended financing costs included operating expenses accompanying consolidated statement loss year ended december 31 1995 iridium llc development stage limited liability company notes consolidated financial statements continued income taxes iridium inc subject federal state local income taxes directly result merger iridium inc parent became limited liability company limited liability company parent longer subject u federal income tax directly rather class 1 member subject us federal income taxation based ratable portion parents income loss however parents primary operations district columbia recognize limited liability status tax purposes accordingly parent subject district columbia franchise taxes directly parent recognizes provision income taxes asset liability method asset liability method deferred tax assets deferred tax liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date net income loss per class 1 interest february 1997 financial accounting standards board issued statement 128 earnings per share statement 128 statement 128 supersedes accounting principles board opinion 15 earnings per share apb 15 related interpretations promulgates new accounting standards computation manner presentation parents loss per class 1 interest data statement 128 requires presentation basic diluted earnings loss per interest data basic earnings loss per class 1 interest calculated dividing net income loss considering required dividends class 2 interests weighted average number class 1 interests outstanding period diluted earnings loss per share calculated dividing net income loss considering required dividends class 2 interests weighted average number class 1 interests extent dilutive potentially dilutive securities outstanding period potentially dilutive securities comprised options warrants convertible class 2 interests due losses incurred years ended december 31 1995 1996 1997 impact potentially dilutive securities antidilutive included diluted earnings loss per class 1 interest calculation adoption statement 128 effect earnings loss per class 1 interest previously presented new accounting pronouncement june 1997 financial accounting standards board issued statement 130 reporting comprehensive income statement 130 statement 130 establishes standards reporting display comprehensive income components consolidated financial statements parent required adopt provisions statement 130 year ending december 31 1998 earlier application permitted however upon adoption statement 130 parent required reclassify previously reported annual interim consolidated financial statements disclosure comprehensive income accordance provisions statement 130 impact manner presentation parents consolidated financial statements currently previously reported reclassifications certain 1995 1996 amounts reclassified conform 1997 presentation iridium llc development stage limited liability company notes consolidated financial statements continued 3 members equity classes membership interests members interests parent divided two classes class 1 interests represent common equity class 2 interests represent preferred equity llc agreement authorizes parent issue 225000000 class 1 interests 50000 series class 2 interests 300000 additional class 2 interests description classes membership interests follows class 1 interests subject rights holders series class 2 interests voting rights members vested class 1 interests member entitled appoint one director 5250000 class 1 interests owned class 1 members may aggregate class 1 interests class 1 members appoint one director 5250000 class 1 interests owned aggregate members may manage parent designated directors authority capacity members act behalf bind parent llc agreement contains reserve capital call provision certain members agreed purchase additional class 1 interests reserve capital call board elects exercise option parent could raise additional 243 million 18206550 class 1 interests however reserve capital call pledged secure secured bank facility see note 5 series class 2 interests motorola owns warrant purchase series class 2 interests amount convertible 25 outstanding class 1 interests time exercise warrant calculated fully diluted basis price 1000 per series class 2 interest series class 2 interest nonvoting currently convertible 75 class 1 interests initial series conversion price 1333 subject antidilution adjustments time dividends series class 2 interests cumulative accrue rate 8 per annum series class 2 interests outstanding series class 2 interests series class 2 interests convertible preferred interests pay dividends rate 14 12 per annum dividends series class 2 interests payable either inkind cash option parent february 28 2001 commencing march 1 2001 dividends series class 2 interests payable cash dividends series class 2 interests accrue whether declared whether profits funds parent legally available payment dividends dividend may declared paid class 1 interests unless accrued dividends series class 2 interests paid full series class 2 interests nonvoting convertible class 1 interests time option holder currently series class 2 interest may converted 1851 class 1 interests series class 2 interests redeemable option parent anytime march 1 2001 subject premium redeemed prior march 1 2005 series b series c class 2 interests connection motorolas guarantee 450 million credit facility guarantee agreement see note 5 parent issued motorola one series b class 2 interest 75 series c class 2 interests series b class 2 interest series c class 2 interests pay dividends series b class 2 interest entitles motorola one seat board directors addition directors may appoint owner class 1 interests series class 2 interests series c class 2 interests entitle motorola appoint majority board directors event certain events default series b series c class 2 interests redeemable option parent 01 per interest upon later termination expiration guarantee agreement ii reimbursement payments made motorola pursuant guarantee agreement see note 5 iridium llc development stage limited liability company notes consolidated financial statements continued llc agreement provides parent may merge consolidate one limited liability companies corporations similar entities provided transaction approved board directors class 1 members holding less 66 23 outstanding class 1 interests event merger members hold interests vote favor consent writing merger entitled appraisal repurchase rights interests specified llc agreement dividend liquidation rights class 1 members entitled receive dividends declared board directors discretion class 2 members entitled receive dividends accordance terms relevant series class 2 interests declared board directors class 2 interests rank senior class 1 interests dividends distributions upon liquidation dissolution windingup parent llc agreement requires board directors extent legally available funds declare pay dividend sufficient assure nonu class 1 member receives amount least equal amount members u federal state local income tax liability resulting allocations parents taxable income member parents current source funds dividend distributions iridium required declare pay dividend parent amount required llc agreement however iridium restricted terms certain debt obligations declaring paying dividends excess required made parent llc agreement contains significant restrictions ability member transfer interests parent including limited conditions majority directors approve transfer ii transfer result member beneficially owning right beneficially 45 outstanding class 1 interests exchange rights iridium llc members concurrent initial public offering iwcl iridium llc executed interest exchange agreement conditionally permits holders class 1 interests iridium llc exchange interests subject restrictions transfer iridium llc limited liability agreement shares class common stock iwcl ratio one share class common stock iridium llc class 1 interest subject antidilution adjustments interest exchange agreement exchanges iridium llc class 1 interests permitted 90 days iridium achieved one full quarter positive earnings interest taxes depreciation amortization addition exchange shall take place unless approved pursuant authorization directors representing least 66 23 iridium llc board directors global ownership program parent conjunction iwcl commenced global ownership program designed offer aggregate 2500000 shares iwcls class b common stock purchase price 1333 per share certain governmental telecommunication administrations related entities part comprehensive program enhance market access improve competitive standing iridium system achieve appropriate regulatory approvals december 31 1997 shares issued program limitations liability members generally liable debts obligations liabilities parent iridium llc development stage limited liability company notes consolidated financial statements continued recent equity transactions april 16 1997 llc agreement amended increase authorized number class 1 interests 3000000 225000000 may 9 1997 parent effected 75 1 subdivision class 1 membership interests whereby existing class 1 interest subdivided 75 class 1 interests interest per interest data appearing consolidated financial statements notes thereto retroactively adjusted subdivision may 9 1997 parent entered definitive agreement south pacific iridium holdings limited spi affiliate p bakrie communications corporation pursuant spi acquired parent 7500000 class 1 interests 1333 per interest transaction closed may 30 1997 40 total purchase price paid date remainder due may 1998 december 31 1997 parent received aggregate 592 million spi satisfaction commitment june 13 1997 iwcl whollyowned subsidiary parent date consummated initial public offering 12000000 shares class common stock resulted proceeds approximately 225 million iwcl expenses offering paid parent pursuant 1997 subscription agreement parent iwcl proceeds used purchase 12000000 class 1 interests parent upon consummation offering outstanding shares iwcl held parent retired cancelled iwcl became member parent 4 property equipment property equipment december 31 1996 1997 consists following thousands 5 debt guaranteed bank facility august 21 1996 parent entered 750 million credit agreement group banks led chase manhattan bank na barclays bank plc date parent entered guarantee agreement whereby motorola agreed guarantee entire 750 million commitment amount motorola guarantee connection asset dropdown transaction parents obligations guaranteed bank facility assigned iridium guaranteed bank facility provides iridium may elect borrow amounts current shortterm eurodollar rate plus 14 current base rate generally higher federal funds rate established federal reserve bank new york plus 050 chase manhattan banks prime commercial lending rate iridium also pays commitment fee 110 1 unused portion 750 million credit facility interest rates guaranteed bank facility ranged 563 850 1997 575 594 1996 july 21 1997 commitment bank lenders guaranteed bank facility permanently iridium llc development stage limited liability company notes consolidated financial statements continued reduced 750 million 655 million october 22 1997 commitment bank lenders guaranteed bank facility permanently reduced 450 million depending market conditions iridium may make additional senior note offerings order reduce guaranteed bank facility guaranteed bank facility matures june 30 1999 guarantee agreement parent required issue warrants motorola purchase 150000 class 1 interests consideration guarantee motorola earns 82500 warrants year 750 million guarantee outstanding result permanent reductions guaranteed bank facility maximum number warrants motorola may earn compensation guarantee facility maturity june 1999 131377 warrants purchase approximately 9853275 class 1 interests warrants earned issued motorola quarterly basis warrant entitles motorola purchase 75 class 1 interests exercise price 01 per interest subject antidilution adjustments warrants may exercised five years date issuance expire ten years date issuance motorola earned 29836 64518 warrants purchase class 1 interests accordance guarantee agreement years ended december 31 1996 1997 respectively parent recognized 25719000 55615000 expense reflect fair market value warrants earned motorola years ended december 31 1996 1997 respectively december 31 1996 1997 505000000 210000000 respectively outstanding guaranteed bank facility senior secured bank line credit iridium entered credit agreement chase securities inc chase manhattan bank barclays bank plc barclays capital investment banking division barclays bank plc syndicate lenders secured lenders senior bank facility principal amount 1 billion secured bank facility 250 million available borrowings prior commercial activation date secured bank facility secured substantially iridiums assets secured bank facility secured reserve capital call parents membership interests iridium availability secured bank facility subject significant conditions including technical conditions relating iridium system conditions relating regulatory approvals conditions relating financing sources borrowings secured bank facility mature september 30 1998 subject iridiums right extend maturity june 30 1999 demonstrate july 1 1998 sufficient available committed financing budgeted project costs extended maturity december 31 1997 350000000 outstanding secured bank facility notes payable july 16 1997 parent iwcl iridium capital corporation completed offering high yield offering 300000 units consisting 1000 principal amount 13 senior notes due 2005 series notes one iwcl warrant representing right purchase 52 shares class common stock iwcl ii 500 million aggregate principal amount 14 senior notes due 2005 series b series b notes concurrent asset dropdown transaction parents obligations series notes series b notes assigned iridium series notes series b notes guaranteed iridium roaming llc iridium ip llc aggregate net proceeds received approximately 746 million interest series notes series b notes payable cash semiannually january 15th july 15th year commencing january 15 1998 notes redeemable option iridium whole part time july 15 2002 series b notes mature july 15 2005 iwcl warrants represent aggregate right purchase 1560000 shares class common stock iwcl exercise price iwcl warrant 2090 per share iwcl warrants exercisable time one year date original issuance expire july 15 2005 concurrent issuance iwcl warrants high iridium llc development stage limited liability company notes consolidated financial statements continued yield offering parent issued iwcl 1560000 llc interest warrants exercisable one class 1 interest exercise price 2090 per llc interest warrant iwcl parent agreed one llc interest warrant must exercised upon exercise iwcl warrant approximately 17113000 proceeds high yield offering allocated purchase price llc interest warrants october 17 1997 parent iridium capital corporation completed offering 300 million principal amount 11 14 senior notes due 2005 series c series c notes concurrent asset dropdown transaction parents obligations series c notes assigned iridium series c notes guaranteed iridium roaming llc iridium ip llc net proceeds received approximately 293 million interest series c notes payable cash semiannually january 15th july 15th year commencing january 15 1998 series c notes redeemable option iridium whole part time july 15 2002 series c notes mature july 15 2005 notes payable net discounts year ended december 31 1997 consists following thousands longterm debt due members 1996 parent sold units certain members affiliates unit consisting 1000 principal amount maturity 14 12 senior subordinated discount notes due 2006 notes one warrant purchase 1040775 class 1 interests aggregate proceeds approximately 238453000 concurrent asset dropdown transaction parents obligations notes assigned iridium notes unsecured subordinate senior debt iridium notes fully accrete aggregate face value 480150000 march 1 2001 mature march 1 2006 note accrues cash interest rate 14 12 per annum payable semiannually commencing september 1 2001 notes subject redemption option iridium time march 1 2001 warrants entitle holder purchase class 1 interests exercise price 01 per interest exercisable march 1 2001 expire march 1 2006 parent recognized estimated fair market value warrants 31761000 addition members equity 6 income taxes inception july 29 1996 iridium inc subject us federal state local income taxes directly accordingly recognized provisions income taxes us federal state local jurisdictions subsequent merger iridium inc limited liability company parent longer subject us federal income tax directly however parent subject district columbia franchise taxes iridium llc development stage limited liability company notes consolidated financial statements continued parents provision income taxes years ended december 31 1995 1996 1997 consists following thousands primary reconciling differences income tax expense amount tax benefit would expected result applying federal statutory rate 35 loss income taxes years ended december 31 1995 period january 1 1996 july 29 1996 date merger iridium inc iridium relate primarily capitalization tax purposes certain startup expenditures state local taxes capitalization startup expenditures resulted iridium incs significant deferred tax asset 19944000 december 31 1995 100 valuation allowance established subsequent date merger iridium inc parent recognizes deferred taxes jurisdictions parent taxed directly resulting deferred tax asset capitalized startup expenditures 4774000 34599000 december 31 1996 1997 respectively 100 valuation allowance established assessing realizability deferred tax assets management considers whether likely portion deferred tax asset realized ultimate realization deferred tax asset dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies implemented making assessment 7 transactions members management services agreement connection iwcl ipo parent iwcl entered management services agreement management services agreement amended restated connection asset dropdown transaction add iridium party pursuant management services agreement parent agreed supervise manage daytoday activities iridium among things parent responsible administering following functions iridium contract administration including space system contract tndc om contract treasury accounting legal tax insurance licenses permits securities law compliance parent similarly agreed supervise manage daytoday operations iwcl among things parent responsible administering following functions iwcl treasury accounting legal tax insurance licenses permits securities law compliance addition parent agreed advance funds iwcl event iwcl sufficient funds pay income similar taxes parent receive fees reimbursement iwcl services iwcl management services agreement however cost services provided iwcl date significant return services iridium agreed provide sufficient funds cost reimbursable basis parent enable parent manage business operations iridium iwcl iridium llc development stage limited liability company notes consolidated financial statements continued including payments parents obligations employees consultants directors payments parents office space equipment sales general operating administrative expenses insurance obligations certain contracts support agreement support agreement motorola provides certain general administrative support parent subsidiaries cost reimbursable basis motorola provided payroll processing related benefits parent employees processed payments certain contractors providing support parent provided administrative support connection asset dropdown transaction parent assigned support agreement iridium amounts nature costs years ended december 31 1995 1996 1997 consist following thousands december 31 1996 1997 balance payable motorola support agreement approximately 563000 0 respectively space system contract parent entered space system contract motorola design develop produce deliver space segment component iridium system connection asset dropdown transaction parent assigned space system contract iridium fixed priced contract motorola construct space vehicles place lowearth orbits contract price 345 billion subject certain adjustments scheduled date commencement commercial operations september 1998 years ended december 31 1995 1996 1997 802 million 836 million 577 million respectively incurred space system contract costs capitalized system construction accompanying consolidated balance sheets transferred property equipment underlying assets placed service december 31 1996 1997 balance payable motorola space system contract 100 million 0 respectively aggregate fixed determinable portion remaining obligations space system contract 589 million expected payable 1998 terrestrial network development contract parent entered terrestrial network development contract tndc motorola original amount 160 million connection asset dropdown transaction parent assigned tndc iridium tndc motorola designing developing terrestrial gateway hardware software payments original contract tied completion milestones specified contract 1996 tndc amended obligate motorola provide additional services support tndc exchange additional 189 million lieu cash payment 189 million iridium parent may election issue 5545 warrants purchase class 1 interests motorola warrants issued exercise price 01 may exercised beginning march 1 2001 expire march 1 2006 1997 tndc amended obligate motorola provide additional services support bringing total contract price tndc 284 million certain parents members individual gateways obligation iridium llc development stage limited liability company notes consolidated financial statements continued iridium parent amounts due motorola tndc years ended december 31 1996 1997 iridium incurred 64 million 74 million respectively tndc costs capitalized system construction accompanying consolidated balance sheets december 31 1996 1997 balance payable motorola tndc 0 11 million respectively aggregate fixed determinable portion remaining obligations tndc assuming obligations settled cash follows thousands operations maintenance contract provide operations maintenance space segment upon completion space system contract parent entered operations maintenance contract om motorola connection asset dropdown transaction parent assigned om contract iridium contract obligates motorola period five years completion final milestone space system contract operate space system exert best efforts monitor upgrade replace hardware software space segment including individual space vehicles specified levels exchange specified quarterly payments expected begin 1998 aggregate approximately 288 billion 1996 twoyear option agreement entered extension om contract motorola completion initial fiveyear term option exercised iridium obligated make quarterly payments expected aggregate additional 133 billion upon commencement om iridium capitalize portion costs incurred pertain hardware software components space segment extend useful life portion costs om associated daytoday operations expensed incurred assuming commercial operations commence september 1998 aggregate fixed determinable portion obligations om expected follows thousands gateway owners incentives parent agreed issue warrants purchase 300000 class 1 interests gateway owner whose specified gateway activities completed schedule warrants purchase 7500 class 1 interests 1 million cumulative iridium system service revenue generated within 15 months commercial activation event warrants purchase aggregate 9165000 class 1 interests issued gateway owners warrants terms identical issued motorola iridium llc development stage limited liability company notes consolidated financial statements continued guarantee agreement see note 5 iwcl iridium llc executed share issuance agreement provides net proceeds future primary offerings securities iwcl invested class 1 interests iridium llc 8 employee benefits parent adopted comprehensive performance incentive retirement benefit package performance incentive program became effective 1993 various retirement plans became effective february 1 1994 incentive programs parent established short longterm incentive plans primarily based employee performance effective december 31 1995 parent terminated longterm incentive plan remaining liability longterm incentive plan approximately 2426000 1738000 december 31 1996 1997 respectively expected paid 1999 plans parent incurred expenses approximately 1300000 1252000 3412000 years ended december 31 1995 1996 1997 respectively 401k employee retirement savings plan parent adopted 401k employee retirement savings plan 1994 covering employees parent makes matching contributions qualified plan behalf participating employees 3 employees compensation employee contributions plan vest immediately parents contributions vest ratably sevenyear period including service credit prior employment motorola plan parent incurred approximately 161000 288000 558000 years ended december 31 1995 1996 1997 respectively retirement plans employees parent covered noncontributory defined benefit retirement plan vesting plan benefits generally occurs five years benefits plan based years credited service including prior employment motorola age retirement average earnings last four years plan funded annually accordance employee retirement income security act 1974 early 1995 parent adopted nonqualified defined benefit plan covering employees earnings excess maximum amounts may considered qualified plan excluding executives participating supplemental executive plans described also participate qualified defined benefit plan supplemental executive plans parent maintains nonqualified defined benefit plan selected senior officers vesting plans generally occurs upon attainment age 55 five years service benefits plans based average annual compensation prior retirement parent also agreed provide payment certain taxes associated plan benefits supplemental executive plans funded net periodic pension cost recognized plans approximately 1256000 1925000 2420000 years ended december 31 1995 1996 1997 respectively years ended december 31 1996 1997 amounts provided cover taxes associated plan benefits 736000 693000 respectively addition parent recorded additional minimum pension liability iridium llc development stage limited liability company notes consolidated financial statements continued adjustment 332000 90000 years ended december 31 1996 1997 respectively nonqualified plans additional minimum pension liability included reduction members equity summary defined benefit plans pension cost qualified nonqualified defined benefit plans total years ended december 31 1995 1996 1997 follows thousands following table describes funded status plans december 31 1996 1997 thousands actuarial calculations determined parents consulting actuaries option plan iridium llc parent established plan executive officers managers parent awarded options purchase class common stock option plan iwcl option plan covers 2625000 shares class common stock iwcl option plan also permits award stock appreciation rights connection grant options december 31 1997 options covering 2004556 shares class common stock iwcl granted date stock appreciation iridium llc development stage limited liability company notes consolidated financial statements continued awards granted right exercise options vests pro rata period five years pursuant share issuance agreement iwcl agreed upon exercise options issue parent delivery exercising option holder number shares class common stock iwcl covered exercised options parent agreed simultaneously deliver iwcl like number class 1 interests subject antidilution adjustments exercise price option paid parent represent payment class common stock exercising option holder class 1 interests iwcl december 31 1996 1997 2625000 class 1 interests reserved issuance iwcl connection option plan permitted statement 123 parent applies intrinsic value method accounting compensation cost plan accordingly compensation expense recognized options acquire class common stock iwcl granted exercise price equal exceeding fair market value date grant year ended december 31 1997 parent recognized 152000 compensation expense options acquire class common stock iwcl granted exercise price fair market value date grant compensation cost determined consistent fair value method statement 123 parents net loss net loss per class 1 interest would increased pro forma amounts indicated thousands except per interest data years ended december 31 1996 1997 1996 1997 fair value options granted estimated dates grants using blackscholes option pricing model following weightedaverage assumptions dividend yield 00 expected volatility 45 riskfree interest rates 597 676 expected life five years effects compensation cost determined statement 123 net loss 1996 1997 may representative effects pro forma net income loss future periods weightedaverage contractual life options outstanding december 31 1996 1997 939 892 years respectively summary parents stock option activity related information years ended december 31 1996 1997 follows iridium llc development stage limited liability company notes consolidated financial statements continued range exercise prices options outstanding december 31 1997 1333 5250 9 fair value financial instruments following table presents carrying amounts estimated fair values financial instruments december 31 1996 1997 thousands fair value longterm debt estimated based current rates offered similar debt carrying amounts due affiliates accounts payable accrued expenses approximate fair market value december 31 1996 1997 relatively short duration assets 10 operating lease commitments parent leases corporate headquarters office space office space equipment noncancelable operating lease agreements initial lease term corporate headquarters office space seven years future minimum payments operating lease arrangements follows thousands rental expense operating leases years ended december 31 1995 1996 1997 approximately 1025000 1194000 7821000 respectively 11 quarterly financial information unaudited thousands except member interest data following summary results operations fiscal quarters 1995 iridium llc development stage limited liability company notes consolidated financial statements continued following summary results operations fiscal quarters 1996 following summary results operations fiscal quarters 1997 independent auditors report board directors member iridium operating llc subsidiaries audited accompanying consolidated balance sheets iridium operating llc subsidiaries whollyowned subsidiary iridium llc development stage limited liability company december 31 1997 1996 related consolidated statements loss members equity deficit cash flows years threeyear period ended december 31 1997 period june 14 1991 inception december 31 1997 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position iridium operating llc subsidiaries development stage limited liability company december 31 1997 1996 results operations cash flows years threeyear period ended december 31 1997 period june 14 1991 inception december 31 1997 conformity generally accepted accounting principles kpmg peat marwick llp mclean virginia january 16 1998 iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company consolidated balance sheets thousands accompanying notes integral part consolidated financial statements iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company consolidated statements loss thousands accompanying notes integral part consolidated financial statements iridium operating llc development stage limited liability company whollyowned subsidiary iridium llc consolidated statements members equity deficit thousands accompanying notes integral part consolidated financial statements iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements 1 organization business iridium operating llc iridium whollyowned subsidiary iridium llc parent devoting present efforts developing commercializing global wireless system iridiumr communications system iridium system enable subscribers send receive telephone calls virtually anywhere world one phone one phone number one customer bill iridium inc incorporated june 14 1991 iridium inc operated whollyowned subsidiary motorola inc motorola july 29 1993 july 29 1993 iridium inc closed first capital draw private placement shares common stock subscribed u foreign investors result three private placements equity five supplemental private placements certain additional equity investors proceeds received initial public offering common stock iridium world communications ltd iwcl see note 3 motorolas direct indirect class 1 membership interest parent reduced approximately 18 december 31 1997 considering unexercised warrants held motorola july 29 1996 parent formed limited liability company terms conditions limited liability agreement llc agreement pursuant provisions delaware limited liability company act also july 29 1996 iridium inc merged parent surviving entity concurrent merger shares common stock iridium inc exchanged class 1 membership interests parent class 1 interests december 18 1997 parent entered asset dropdown transaction asset dropdown transaction iridium operating llc iridium newly formed whollyowned subsidiary parent pursuant asset dropdown transaction substantially assets liabilities parent transferred iridium including without limitation liabilities respect outstanding 13 senior notes due 2005 series 14 senior notes due 2005 series b 11 14 senior notes due 2005 series c collectively senior notes pursuant indentures relating senior notes iridium substituted parent released obligations indentures relating senior notes assets liabilities transferred iridium parents carrying value accordingly unless otherwise specified references within notes iridium relate action prior date asset dropdown transaction construed references parent predecessor iridium result asset dropdown transaction parents significant asset investment iridium contracted motorola design develop produce deliver orbit space segment component iridium system scheduled date delivery 345 billion space segment 1998 iridium plans begin commercial operations september 1998 1997 46 66 satellites iridium system successfully placed orbit iridium communications system subject regulation federal communications commission fcc foreign administrations regulatory bodies january 31 1995 motorola obtained license fcc construct launch operate iridium system subject certain conditions iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued 2 significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts iridium whollyowned subsidiaries iridium capital corporation iridium roaming llc iridium ip llc significant intercompany transactions eliminated accompanying consolidated financial statements present financial position results operations iridium prior periods asset dropdown transaction iridium occurred june 14 1991 inception development stage enterprise iridium currently devoting entire efforts establishing commercializing iridium system accordingly iridiums current principal activities relate managing design construction development system preparing daytoday operations management estimates preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting periods actual results could differ estimates cash equivalents iridium considers highly liquid investments original maturity three months less date purchase cash equivalents restricted cash restricted cash consists first stage borrowing 1 billion secured credit facility syndicate lenders led chase securities inc barclays capital division barclays bank plc funds restricted subject iridium meeting specified milestones property equipment property equipment carried historical cost less accumulated depreciation amortization depreciation amortization calculated using straightline method following estimated useful lives costs constructing placing satellites service capitalized losses satellite failures iridium financial responsibility contractual arrangements motorola recognized currently motorola bears risk loss launch failures satellite failures satellite placed service iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued system construction system construction includes costs incurred related construction space ground components iridium system depreciation expense recognized satellitebysatellite basis satellites placed service following delivery satellite mission orbit depreciation related ground control stations commence placement service station interest costs incurred construction iridium system capitalized total interest cost incurred capitalized years ended december 31 1996 1997 approximately 28127000 163747000 respectively interest paid years ended december 31 1996 1997 approximately 1485000 30191000 respectively interest incurred paid capitalized year ended december 31 1995 1996 iridium adopted statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed statement 121 statement 121 requires longlived assets held used reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable impairment loss recognized undiscounted net cash flows associated asset less assets carrying amount impairment losses measured excess carrying amount asset estimated fair market value adoption statement 121 material impact iridiums results operations years ended december 31 1996 1997 deferred financing costs incurred connection securing debt financing deferred amortized terms related debt manner approximates effective yield method costs future debt financing also deferred included noncurrent assets accompanying consolidated balance sheets total deferred financing costs approximately 30200000 113394000 december 31 1996 1997 respectively october 1995 parent withdrew intended public offering certain subordinated debt financing accordingly approximately 3200000 deferred costs associated intended financing written costs included operating expenses accompanying consolidated statement loss year ended december 31 1995 income taxes iridium files federal state income tax returns member consolidated returns parent iridium inc subject federal state local income taxes directly result merger iridium inc parent became limited liability company limited liability company parent iridium longer subject u federal income tax directly rather member iridium subject us federal income taxation based ratable portion iridiums income loss however iridiums primary operations district columbia recognize limited liability status tax purposes accordingly iridium subject district columbia franchise taxes directly iridium recognizes provision income taxes asset liability method filed income tax returns separate basis asset liability method deferred tax assets deferred tax liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using tax rates expected apply taxable income years iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date new accounting pronouncement june 1997 financial accounting standards board issued statement 130 reporting comprehensive income statement 130 statement 130 establishes standards reporting display comprehensive income components consolidated financial statements iridium required adopt provisions statement 130 year ending december 31 1998 earlier application permitted however upon adoption statement 130 iridium required reclassify previously reported annual interim consolidated financial statements disclosure comprehensive income accordance provisions statement 130 impact manner presentation iridiums consolidated financial statements currently previously reported reclassifications certain 1995 1996 amounts reclassified conform 1997 presentation 3 members equity sole member iridium parent holds outstanding membership interests iridium limited liability company agreement iridium provides members parent may manage iridium designated directors authority capacity members act behalf iridium parent generally liable debts obligations liabilities iridium parent entitled receive dividends declared iridium board directors discretion event parent required terms parents limited liability agreement declare pay dividend members iridium required declare pay dividend parent amount parent currently required declare pay dividend sufficient assure nonus class 1 member parent receives amount least equal amount members us federal state local income tax liability resulting allocations parents taxable income member iridium presently restricted terms certain debt obligations declaring paying dividends parent amounts excess required made parent generally liable debts obligations liabilities iridium 4 property equipment property equipment december 31 1996 1997 consists following thousands iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued 5 debt guaranteed bank facility august 21 1996 parent entered 750 million credit agreement group banks led chase manhattan bank na barclays bank plc date parent entered guarantee agreement whereby motorola agreed guarantee entire 750 million commitment amount motorola guarantee connection asset dropdown transaction parents obligations guaranteed bank facility assigned iridium guaranteed bank facility provides iridium may elect borrow amounts current shortterm eurodollar rate plus 14 current base rate generally higher federal funds rate established federal reserve bank new york plus 050 chase manhattan banks prime commercial lending rate iridium also pays commitment fee 110 1 unused portion 750 million credit facility interest rates guaranteed bank facility ranged 563 850 1997 575 594 1996 july 21 1997 commitment bank lenders guaranteed bank facility permanently reduced 750 million 655 million october 22 1997 commitment bank lenders guaranteed bank facility permanently reduced 450 million depending market conditions iridium may make additional senior note offerings order reduce guaranteed bank facility guaranteed bank facility matures june 30 1999 guarantee agreement parent required issue warrants motorola purchase 150000 class 1 interests consideration guarantee motorola earns 82500 warrants year 750 million guarantee outstanding result permanent reductions guaranteed bank facility maximum number warrants motorola may earn compensation guarantee facility maturity june 1999 131377 warrants purchase approximately 9853275 class 1 interests parent warrants earned issued motorola quarterly basis warrant entitles motorola purchase 75 class 1 interests exercise price 01 per interest subject antidilution adjustments warrants may exercised five years date issuance expire ten years date issuance motorola earned 29836 64518 warrants purchase class 1 interests accordance guarantee agreement years ended december 31 1996 1997 respectively iridium recognized 25719000 55615000 expense accompanying consolidated statements operations reflect fair market value warrants earned motorola years ended december 31 1996 1997 respectively december 31 1996 1997 505000000 210000000 respectively outstanding guaranteed bank facility senior secured bank line credit iridium entered credit agreement chase securities inc chase manhattan bank barclays bank plc barclays capital investment banking division barclays bank plc syndicate lenders secured lenders senior bank facility principal amount 1 billion secured bank facility 250 million available borrowings prior commercial activation date secured bank facility secured substantially iridiums assets secured bank facility secured 243 million reserve capital call members parent parents membership interests iridium availability secured bank facility subject significant conditions including technical conditions relating iridium system conditions relating regulatory approvals conditions relating financing sources borrowings secured bank facility mature september 30 1998 subject iridiums right extend maturity june 30 1999 demonstrate july 1 1998 sufficient available committed financing budgeted project costs extended maturity december 31 1997 350000000 outstanding secured bank facility iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued notes payable july 16 1997 parent iwcl iridium capital corporation completed offering high yield offering 300000 units consisting 1000 principal amount 13 senior notes due 2005 series notes one iwcl warrant representing right purchase 52 shares class common stock iwcl ii 500 million aggregate principal amount 14 senior notes due 2005 series b series b notes concurrent asset dropdown transaction parents obligations series notes series b notes assigned iridium series notes series b notes guaranteed iridium roaming llc iridium ip llc aggregate net proceeds received approximately 746 million interest series notes series b notes payable cash semiannually january 15th july 15th year commencing january 15 1998 notes redeemable option iridium whole part time july 15 2002 series b notes mature july 15 2005 october 17 1997 parent iridium capital corporation completed offering 300 million principal amount 11 14 senior notes due 2005 series c series c notes concurrent asset dropdown transaction parents obligations series c notes assigned iridium series c notes guaranteed iridium roaming llc iridium ip llc net proceeds received approximately 293 million interest series c notes payable cash semiannually january 15th july 15th year commencing january 15 1998 series c notes redeemable option iridium whole part time july 15 2002 series c notes mature july 15 2005 notes payable net discounts year ended december 31 1997 consists following thousands longterm debt due members parent 1996 parent sold units certain members affiliates unit consisting 1000 principal amount maturity 14 12 senior subordinated discount notes due 2006 notes one warrant purchase 1040775 class 1 interests parent aggregate proceeds approximately 238453000 concurrent asset dropdown transaction parents obligations notes assigned iridium notes unsecured subordinate senior debt iridium notes fully accrete aggregate face value 480150000 march 1 2001 mature march 1 2006 note accrues cash interest rate 14 12 per annum payable semiannually commencing september 1 2001 notes subject redemption option iridium time march 1 2001 6 income taxes inception july 29 1996 iridium inc subject us federal state local income taxes directly accordingly recognized provisions income taxes us federal state local jurisdictions subsequent merger iridium inc limited liability company parent iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued iridium longer subject us federal income tax directly however iridium subject district columbia franchise taxes iridiums provision income taxes years ended december 31 1995 1996 1997 consists following thousands primary reconciling differences income tax expense amount tax benefit would expected result applying federal statutory rate 35 loss income taxes years ended december 31 1995 period january 1 1996 july 29 1996 date merger iridium inc parent relate primarily capitalization tax purposes certain startup expenditures state local taxes capitalization startup expenditures resulted iridium incs significant deferred tax asset 19944000 december 31 1995 100 valuation allowance established subsequent date merger iridium inc parent deferred taxes recognized jurisdictions parent iridium taxed directly resulting deferred tax asset capitalized startup expenditures 4774000 34599000 december 31 1996 1997 respectively 100 valuation allowance established assessing realizability deferred tax assets management considers whether likely portion deferred tax asset realized ultimate realization deferred tax asset dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies implemented making assessment 7 transactions members parent management services agreement connection iwcl ipo parent iwcl entered management services agreement management services agreement amended restated connection asset dropdown transaction add iridium party pursuant management services agreement parent agreed supervise manage daytoday activities iridium among things parent responsible administering following functions iridium contract administration including space system contract tndc om contract treasury accounting legal tax insurance licenses permits securities law compliance parent similarly agreed supervise manage daytoday operations iwcl among things parent responsible administering following functions iwcl treasury accounting legal tax insurance licenses permits securities law compliance addition parent agreed advance funds iwcl event iwcl sufficient funds pay income similar taxes parent receive fees reimbursement iwcl services iwcl iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued management services agreement however cost services provided iwcl date significant return services iridium agreed provide sufficient funds cost reimbursable basis parent enable parent manage business operations iridium iwcl including payments parents obligations employees consultants directors payments parents office space equipment sales general operating administrative expenses insurance obligations certain contracts support agreement support agreement motorola provides certain general administrative support parent iridium subsidiaries cost reimbursable basis motorola provided payroll processing related benefits parent employees processed payments certain contractors providing support parent iridium provided administrative support connection asset dropdown transaction parent assigned support agreement iridium amounts nature costs years ended december 31 1995 1996 1997 consist following thousands december 31 1996 1997 balance payable motorola support agreement approximately 563000 0 respectively space system contract parent entered space system contract motorola design develop produce deliver space segment component iridium system connection asset dropdown transaction parent assigned space system contract iridium fixed priced contract motorola construct space vehicles place lowearth orbits contract price 345 billion subject certain adjustments scheduled date commencement commercial operations september 1998 years ended december 31 1995 1996 1997 802 million 836 million 577 million respectively incurred space system contract costs capitalized system construction accompanying consolidated balance sheets transferred property equipment underlying assets placed service december 31 1996 1997 balance payable motorola space system contract 100 million 0 respectively aggregate fixed determinable portion remaining obligations space system contract 589 million expected payable 1998 terrestrial network development contract parent entered terrestrial network development contract tndc motorola original amount 160 million connection asset dropdown transaction parent assigned tndc iridium tndc motorola designing developing terrestrial gateway hardware software payments original contract tied completion milestones specified contract 1996 tndc amended obligate motorola provide additional services support tndc exchange additional 189 million lieu cash payment iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued 189 million iridium parent may election issue 5545 warrants purchase class 1 interests parent motorola warrants issued exercise price 01 may exercised beginning march 1 2001 expire march 1 2006 1997 tndc amended obligate motorola provide additional services support bringing total contract price tndc 284 million certain parents members individual gateways obligation iridium parent amounts due motorola tndc years ended december 31 1996 1997 iridium incurred 64 million 74 million respectively tndc costs capitalized system construction accompanying consolidated balance sheets december 31 1996 1997 balance payable motorola tndc 0 11 million respectively aggregate fixed determinable portion remaining obligations tndc assuming obligations settled cash follow thousands operations maintenance contract provide operations maintenance space segment upon completion space system contract parent entered operations maintenance contract om motorola connection asset dropdown transaction parent assigned om contract iridium contract obligates motorola period five years completion final milestone space system contract operate space system exert best efforts monitor upgrade replace hardware software space segment including individual space vehicles specified levels exchange specified quarterly payments expected begin 1998 aggregate approximately 288 billion 1996 twoyear option agreement entered extension om contract motorola completion initial fiveyear term option exercised iridium obligated make quarterly payments expected aggregate additional 133 billion upon commencement om iridium capitalize portion costs incurred pertain hardware software components space segment extend useful life portion costs om associated daytoday operations expensed incurred assuming commercial operations commence september 1998 aggregate fixed determinable portion obligations om expected follows thousands iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued 8 employee benefits parent adopted comprehensive performance incentive retirement benefit package terms management services agreement see note 7 iridium committed reimburse parent costs associated employee benefits except noncash compensation related employee stock options performance incentive program became effective 1993 various retirement plans became effective february 1 1994 incentive programs parent established short longterm incentive plans primarily based employee performance effective december 31 1995 parent terminated longterm incentive plan remaining liability longterm incentive plan approximately 2426000 1738000 december 31 1996 1997 respectively expected paid 1999 plans parent incurred expenses approximately 1300000 1252000 3412000 years ended december 31 1995 1996 1997 respectively 401k employee retirement savings plan parent adopted 401k employee retirement savings plan 1994 covering employees parent makes matching contributions qualified plan behalf participating employees 3 employees compensation employee contributions plan vest immediately parents contributions vest ratably sevenyear period including service credit prior employment motorola plan parent incurred approximately 161000 288000 558000 years ended december 31 1995 1996 1997 respectively retirement plans employees parent covered noncontributory defined benefit retirement plan vesting plan benefits generally occurs five years benefits plan based years credited service including prior employment motorola age retirement average earnings last four years plan funded annually accordance employee retirement income security act 1974 early 1995 parent adopted nonqualified defined benefit plan covering employees earnings excess maximum amounts may considered qualified plan excluding executives participating supplemental executive plans described also participate qualified defined benefit plan supplemental executive plans parent maintains nonqualified defined benefit plan selected senior officers vesting plans generally occurs upon attainment age 55 five years service benefits plans based average annual compensation prior retirement parent also agreed provide payment certain taxes associated plan benefits supplemental executive plans funded net periodic pension cost recognized plans approximately 1256000 1925000 2420000 years ended december 31 1995 1996 1997 respectively years ended december 31 1996 1997 amounts provided cover taxes associated plan benefits 736000 693000 respectively addition additional minimum pension liability adjustment 332000 90000 recorded years ended december 31 1996 1997 respectively nonqualified plans additional minimum pension liability included reduction members equity iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued summary defined benefit plans pension cost qualified nonqualified defined benefit plans total years ended december 31 1995 1996 1997 follows thousands following table describes funded status plans december 31 1996 1997 thousands actuarial calculations determined parents consulting actuaries iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued 9 fair value financial instruments following table presents carrying amounts estimated fair values financial instruments december 31 1996 1997 thousands fair value longterm debt estimated based current rates offered similar debt carrying amounts due affiliates accounts payable accrued expenses approximate fair market value december 31 1996 1997 relatively short duration assets 10 operating lease commitments parent leases corporate headquarters office space office space equipment noncancelable operating lease agreements initial lease term corporate headquarters office space seven years future minimum payments operating lease arrangements follows thousands rental expense operating leases years ended december 31 1995 1996 1997 approximately 1025000 1194000 7821000 respectively 11 iridium subsidiaries series notes series b notes series c notes coissued iridium capital corporation capital fully unconditionally guaranteed jointly severally senior unsecured basis iridium roaming llc iridium ip llc collectively guarantor subsidiaries together capital iridium subsidiaries iridium subsidiaries whollyowned subsidiary iridium december 31 1997 iridium subsidiaries iridium subsidiaries capital formed capitalized parent june 16 1997 subscribed capital 100 iridium roaming llc formed parent june 15 1997 iridium ip llc formed parent february 28 1997 connection asset dropdown transaction parents interest iridium subsidiaries transferred iridium following summarized financial information capital december 31 1997 period inception december 31 1997 full financial statements capital presented management believes material investors iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued iridium recognized obligations relating series notes series b notes series c notes iridium operations service obligations following summarized financial information guarantor subsidiaries december 31 1997 period inception guarantor subsidiaries december 31 1997 full financial statements guarantor subsidiaries presented management believes material investors 12 quarterly financial information unaudited thousands following summary results operations fiscal quarters 1995 following summary results operations fiscal quarters 1996 iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements continued following summary results operations fiscal quarters 1997 independent auditors report board directors members iridium llc date january 16 1998 reported consolidated balance sheets iridium llc subsidiaries development stage limited liability company december 31 1997 1996 related consolidated statements loss members equity deficit cash flows years threeyear period ended december 31 1997 period june 14 1991 inception december 31 1997 contained annual report form 10k year 1997 connection audits aforementioned consolidated financial statements also audited related financial statement schedule listed item 14a2 annual report form 10k year 1997 financial statement schedule responsibility companys management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg peat marwick llp mclean virginia january 16 1998 s1 schedule 1 iridium llc schedule 1 condensed financial information registrant thousands condensed balance sheets condensed statements loss condensed statements cash flows s2 note condensed financial statements registrant basis presentation accompanying condensed financial statements represent accounts iridium llc development stage limited liability company standalone basis substantially footnote disclosures omitted reference made audited consolidated financial statements footnotes iridium llc subsidiaries development stage limited liability company december 31 1997 1996 years threeyear period december 31 1997 period june 14 1991 inception december 31 1997 appear 1997 form 10k s3 signatures pursuant requirements section 13 15d securities exchange act 1934 registrants duly caused report signed behalf undersigned thereunto duly authorized iridium world communications ltd edward f staiano edward f staiano chairman chief executive officer date march 23 1998 iridium llc robert w kinzie robert w kinzie chairman date march 23 1998 iridium operating llc edward f staiano edward f staiano vice chairman chief executive officer date march 23 1998 iridium capital corporation edward f staiano edward f staiano chairman chief executive officer date march 23 1998 iridium roaming llc edward f staiano edward f staiano acting chief executive officer date march 23 1998 iridium ip llc edward f staiano edward f staiano acting chief executive officer date march 23 1998 pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated ii iii iv exhibit index filed herewith confidential treatment previously granted connection form s1 1997 form s4 management compensation plan item 14 exhibits financial statement schedules reports form 8k following filed part report form 10k 1 following financial statements included indicated page report 2 following additional financial data transmitted report read conjunction consolidated financial statements financial statements report schedules listed omitted inapplicable required 3 exhibits list exhibits included part report form 10k set forth exhibit index immediately precedes exhibits incorporated herein reference b reports form 8k iridium world communications ltd iridium llc iridium operating llc iridium capital corporation iridium ip llc iridium roaming llc iridium facilities corporation filed current report form 8k september 10 1998 reporting introduction iridium system select number subscribers worldwide beginning september 23 1998 full commercial service expected follow november 1 1998 iridium world communications ltd iridium llc iridium operating llc iridium capital corporation iridium ip llc iridium roaming llc iridium facilities corporation filed 8k november 4 1998 reporting october 28 1998 november 1 1998 iridium llc issued press releases october 28 release announced third quarter progress included successful launch seven additional satellites aboard two launch vehicles advancement technical infrastructure licensing marketing distribution activities november 1 press release reported iridium llc announced worlds first handheld global satellite phone paging system commercially available customers iridium llc iridium operating llc iridium world communications ltd iridium capital corporation iridium ip llc iridium roaming llc iridium facilities corporation filed 8k december 30 1998 reporting iridium llc iridium aero acquisition sub inc entered stock purchase agreement att wireless services inc rogers cantel inc acquire outstanding capital stock claircom communications group inc estimated aggregate price approximately 65 million form 8k also reported transition development stage company operating company begun result iridium operating llc closed three new bank credit facilities provide aggregate approximately 155 billion borrowings iridium world communications ltd iridium llc iridium operating llc iridium capital corporation iridium ip llc iridium roaming llc iridium facilities corporation filed 8k january 27 1999 reporting press release announcing revenues fourth quarter iridium world communications ltd iridium llc iridium operating llc iridium capital corporation iridium ip llc iridium roaming llc iridium facilities corporation filed 8k march 3 1999 reporting press release issued iridium llc response inquires regarding companys financial arrangements due delay subscriber rampup caused distribution problems iridium world communications ltd iridium llc iridium operating llc iridium capital corporation iridium ip llc iridium roaming llc iridium facilities corporation filed 8k march 29 1999 reporting press releases issued iridium llc announcing iridium operating llc requested received waiver compliance march 31 1999 revenue subscriber covenants secured bank facility ii roy grant cfo iridium world communications ltd iridium llc iridium operating llc iridium capital corporation resign registrants effective april 16 1999 independent auditors report board directors stockholders iridium world communications ltd audited accompanying balance sheets iridium world communications ltd december 31 1997 1998 related statements loss stockholders equity cash flows period december 12 1996 inception december 31 1996 years ended december 31 1997 1998 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position iridium world communications ltd december 31 1997 1998 results operations cash flows period december 12 1996 inception december 31 1996 years ended december 31 1997 1998 conformity generally accepted accounting principles kpmg llp mclean virginia january 14 1999 except note 6 january 21 1999 iridium world communications ltd balance sheets thousands except share data accompanying notes integral part financial statements iridium world communications ltd statements loss thousands except share data accompanying notes integral part financial statements iridium world communications ltd statements stockholders equity thousands except share data accompanying notes integral part financial statements iridium world communications ltd statements cash flows thousands accompanying notes integral part financial statements iridium world communications ltd notes financial statements 1 organization business iridium world communications ltd iwcl incorporated laws bermuda december 12 1996 inception iwcl wholly owned iridium llc limited liability company june 1997 iwcl registered securities exchange commission total 13800000 shares class common stock class common stock sale initial public offering june 13 1997 iwcl consummated offering issued 12000000 shares class common stock pursuant 1997 subscription agreement iwcl iridium llc approximately 225 million net proceeds offering invested class 1 membership interests iridium llc class 1 interests time outstanding shares class common stock held iridium llc retired iwcl became member iridium llc iridium llc whollyowned subsidiary iridium operating llc iridium delaware limited liability company currently transitioning development stage limited liability company operating limited liability company iwcls sole asset investment iridium llc december 31 1997 1998 iwcls investment approximately 85 86 respectively total outstanding class membership interests iridium llc 2 significant accounting policies investment iridium llc investment iridium llc accounted using equity method accordance equity method accounting iwcls carrying amount investment affiliate initially recorded cost increased reflect share affiliates income reduced reflect share affiliates losses period since initial investment iwcl activities investment participation management iridium llc accordingly iwcl also subject risks uncertainties iridium llc faces include limited discussed iridium llc highly leveraged capital structure result required satisfy substantial periodic cash debt service obligations future may constrained covenants bank facilities debt securities iridium llc currently transitioning development stage limited liability company operating limited liability company generated substantial revenues positive cash flows operations accordingly assurance iridium llc able generate sufficient cash flow otherwise obtain funds cover principal interest payments associated currently outstanding future debt obligations iridium llcs continuing operations expected require substantial capital expenditures ability fund expenditures dependent upon ability generate substantial revenues raise additional financing iridium llcs existing credit agreements debt securities constrain ability raise additional financing failure generate revenues otherwise raise sufficient capital could material adverse effect iridium llcs business results operations financial condition recoverability iwcls investment iridium llc december 31 1997 iridium llc total assets total liabilities total members equity 3646000000 2011000000 1635000000 respectively december 31 1998 iridium llc total assets total liabilities total members equity approximately 3739000000 3262000000 477000000 respectively iridium llc reported net loss 73598000 293553000 1252801000 years ended december 31 1996 1997 1998 respectively management estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reported periods actual results could differ estimates income taxes iwcl recognizes income taxes using asset liability method asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date 3 stockholders equity july 161997 iridium llc iridium capital corporation wholly owned subsidiary iridium completed offering high yield offering 300000 units consisting 1000 principal amount iridium llc 13 senior notes due 2005 series notes one iwcl warrant representing right purchase 52 shares class common stock iwcl ii 500 million aggregate principal amount iridium llc 14 senior notes due 2005 series b series b notes iridium subsequently substituted iridium llc obligor series notes series b notes series notes series b notes guaranteed iridium roaming llc iridium ip llc iridium facilities corporation also whollyowned subsidiaries iridium iwcl obligor guarantor series notes series b notes iwcl warrants represent aggregate right purchase 1560000 shares class common stock iwcl approximately 17113000 proceeds high yield offering allocated fair value purchase price iwcl warrants exercise price iwcl warrant 2090 per share iwcl warrants exercisable anytime one year date original issuance expire july 15 2005 concurrent issuance iwcl warrants high yield offering iridium llc issued iwcl 1560000 llc interest warrants exercisable one iridium llc class 1 interest exercise price 2090 per llc interest warrant iwcl iridium llc agreed iwcl exercise one llc interest warrant upon exercise iwcl warrant 1998 98800 warrants exercised exchange rights iridium llc members concurrent offering iwcl iridium llc executed interest exchange agreement conditionally permits holders class 1 interests iridium llc exchange interests subject restrictions transfer iridium llc limited liability agreement shares class common stock iwcl ratio one share class common stock iridium llc class 1 interest subject antidilution adjustments interest exchange agreement exchanges iridium llc class 1 interests permitted 90 days iridium llc achieved one full quarter positive earnings interest taxes depreciation amortization addition exchange shall take place unless approved pursuant authorization directors representing least 66 23 iridium llc board directors global ownership program iwcl iridium llc commenced global ownership program designed offer aggregate 2500000 shares iwcls class b common stock purchase price 1333 per share certain governmental telecommunication administrations related entities part comprehensive program enhance market access improve competitive standing iridium system achieve appropriate regulatory approvals time issuance purchasers class b common stock required pay amount equal per share par value class b common stock 01 per share balance purchase price payable withholding dividends would otherwise payable shares class b common stock holder class b common stock may elect pay purchase price cash time class b common stock convertible class common stock oneforone basis subject antidilution adjustments certain conditions met including full payment shares expiration minimum holding period proceeds generated sale class b common stock used purchase class 1 interests iridium llc payment terms respect iridium llc class 1 interests mirror payment terms class b common stock 1998 20625 shares class b common stock issued program shares fair market value 692000 date issuance share issuance agreement iwcl iridium llc also executed share issuance agreement provides net proceeds primary offerings securities iwcl invested class 1 interests iridium llc voting rights holders class common stock entitled one vote per share holders class b common stock voting rights except required bermuda law connection matters involving variation terms class b common stock participation governance iridium llc providing iwcls interest iridium llc represents five percent total outstanding class 1 interests iridium llc occurred upon consummation iwcl offering iwcl shall entitled designate two independent company directors iridium llc stock option plan iridium llc iridium llc established plan executive officers managers independent directors iridium llc awarded options purchase class common stock iwcl option plan 1998 option plan amended include 5625000 shares class common stock option plan also permits award stock appreciation rights connection grant options december 31 1997 1998 options covering 2004556 2469810 shares class common stock outstanding exercise prices ranging 1333 5250 1997 1333 5713 1998 december 31 1997 1998 397145 827777 options respectively exercisable weighted average exercise prices 1333 1620 respectively december 31 1998 stock appreciation rights granted right exercise options vests pro rata period five years pursuant share issuance agreement iwcl agreed upon exercise options issue iridium llc delivery exercising option holder number shares class common stock covered exercised options iridium llc agreed simultaneously deliver iwcl like number iridium llc class 1 interests subject antidilution adjustments exercise price option paid iridium llc represents payment class common stock exercising option holder iridium llc class 1 interests iwcl years ended december 31 1997 1998 options acquire 3262 78586 shares class common stock exercised iwcl issued shares names optionees iridium llc issued 3262 78586 class 1 interests iwcl management services agreement connection iwcl offering iridium llc iwcl entered management services agreement pursuant management services agreement iridium llc agreed supervise manage daytoday operations iwcl among things iridium llc responsible administering following functions iwcl treasury accounting legal tax insurance licenses permits securities law compliance iridium llc receives fees reimbursement iwcl services iwcl management services agreement operating costs incurred iwcl period since inception paid iridium llc significant 4 earnings per share february 1997 financial accounting standards board issued statement 128 earnings per share statement 128 statement 128 supersedes accounting principles board opinion 15 earnings per share apb 15 related interpretations promulgates new accounting standards computation manner presentation earnings loss per share data statement 128 requires presentation basic diluted earnings loss per share data basic earnings loss per class common share calculated dividing net income loss weighted average number class common shares outstanding period diluted earnings loss per share calculated dividing net income loss weighted average number class common shares extent dilutive potentially dilutive securities outstanding period potentially dilutive securities comprised warrants purchase class common stock issued conjunction series notes stock options shares class b common stock due losses incurred years ended december 31 1997 1998 impact warrants options shares antidilutive included diluted earnings loss per share calculation adoption statement 128 effect earnings loss per share previously presented 5 income taxes iwcl subject income taxation based ratable portion iridium llcs income loss effectively connected us business years ended december 31 1997 1998 iwcl recognized current deferred income tax expense benefit december 31 1997 1998 iwcls deferred tax assets relate entirely investment iridium llc amounted approximately 7446000 16433000 respectively full valuation allowance established december 31 1998 iwcl net operating loss carryforwards effectively connected us business amounted 12804000 scheduled expire 2018 assessing realizability deferred tax assets management considers whether likely portion deferred tax asset realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies implemented making assessment 6 subsequent event january 211999 iwcl issued 7500000 shares class common stock resulting net proceeds 242400000 pursuant 1997 subscription agreement iwcl iridium llc proceeds used purchase 7500000 class 1 interests iridium llc increasing iwcls interest class 1 membership interests iridium llc approximately 1323 independent auditors report board directors members iridium llc subsidiaries audited accompanying consolidated balance sheets iridium llc subsidiaries development stage limited liability company december 31 1997 1998 related consolidated statements loss members equity deficit cash flows years threeyear period ended december 31 1998 period june 14 1991 inception december 31 1998 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position iridium llc subsidiaries development stage limited liability company december 31 1997 1998 results operations cash flows years threeyear period ended december 31 1998 period june 14 1991 inception december 31 1998 conformity generally accepted accounting principles kpmg llp mclean virginia january 14 1999 except note 12 january 21 1999 iridium llc development stage limited liability company consolidated balance sheets thousands except member interest data accompanying notes integral part consolidated financial statements iridium llc development stage limited liability company consolidated statements loss thousands except member interest data accompanying notes integral part consolidated financial statements iridium llc development stage limited liability company consolidated statements members equity deficit thousands except interest data continued accompanying notes integral part consolidated financial statements iridium llc development stage limited liability company consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements iridium llc development stage limited liability company notes consolidated financial statements 1 organization business iridium llc parent subsidiaries completed effort develop commercialize global wireless system iridiumr communications system iridium system enables subscribers send receive telephone calls virtually anywhere world one phone one phone number one customer bill iridium commenced commercial satellite phone service november 1 1998 commercial satellite paging service november 15 1998 parent subsidiaries currently transitioning development stage limited liability company operating limited liability company iridium inc incorporated june 14 1991 iridium inc operated whollyowned subsidiary motorola inc motorola july 29 1993 july 29 1993 iridium inc closed first capital draw private placement shares common stock subscribed us foreign investors result three private placements equity five supplemental private placements certain additional equity investors proceeds received initial public offering common stock iridium world communications ltd iwcl see note 3 motorolas direct indirect class 1 membership interest class 1 interest parent reduced approximately 19 december 31 1998 considering unexercised warrants held motorola iridium system subject regulation federal communications commission fcc foreign administrations regulatory bodies january 31 1995 motorola obtained license fcc construct launch operate iridium system subject certain conditions july 29 1996 parent formed limited liability company terms conditions limited liability agreement llc agreement pursuant provisions delaware limited liability company act also july 29 1996 iridium inc merged parent surviving entity concurrent merger shares common stock iridium inc exchanged class 1 interests parent december 18 1997 parent entered asset dropdown transaction asset dropdown transaction iridium operating llc iridium whollyowned subsidiary parent pursuant asset dropdown transaction substantially assets liabilities parent transferred iridium including without limitation liabilities respect outstanding 13 senior notes due 2005 series 14 senior notes due 2005 series b 11 14 senior notes due 2005 series c collectively senior notes pursuant indentures relating senior notes iridium substituted parent released obligations indentures relating senior notes assets liabilities transferred iridium parents carrying value accordingly unless otherwise specified references within notes iridium relate action prior date asset dropdown transaction construed references parent predecessor iridium result asset dropdown transaction parents significant asset investment iridium december 22 1998 parent entered stock purchase agreement att wireless services inc atgi inc rogers cantel inc pursuant parent agreed purchase outstanding capital stock claircom communications group inc provider inflight phone service commercial private aircraft estimated aggregate purchase price approximately 65 million closing purchase expected occur latter half 1999 subject regulatory approval certain conditions 2 significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts parent whollyowned subsidiaries iridium geolink llc iridium promotions inc iridium aero acquisition sub inc iridiums whollyowned subsidiaries iridium capital corporation iridium roaming llc iridium ip llc iridium facilities corporation iridium canada facilities inc significant intercompany transactions eliminated operations 1998 iridium geolink llc iridium promotions inc iridium canada facilities inc inconsequential business iridium development stage enterprise end 1998 parent iridium devoted entire efforts establishing commercializing iridium system december 18 1997 parent iridium entered asset dropdown transaction whereby substantially assets liabilities parent transferred iridium purpose asset dropdown transaction facilitate pledge substantially assets parent connection establishment secured bank financing development construction iridium system december 31 1998 parents ownership interest iridium constituted substantially parents assets accordingly iridiums principal activities related managing design construction development system preparing daytoday operations iridium commenced commercial activation november 1 1998 began transition development stage enterprise operating company management estimates preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting periods actual results could differ estimates cash equivalents parent considers highly liquid investments original maturity three months less date purchase cash equivalents restricted cash 1997 restricted cash consisted first stage borrowing 1 billion secured credit facility syndicate lenders led chase securities inc barclays capital division barclays bank plc funds restricted subject iridium meeting specified milestones met january 1998 restriction lifted property equipment property equipment carried historical cost less accumulated depreciation amortization depreciation amortization calculated using straightline method following estimated useful lives costs constructing placing satellites service capitalized losses satellite failures iridium financial responsibility contractual arrangements motorola recognized currently motorola bears risk loss launch failures satellite failures satellite placed service system construction system construction includes costs incurred related construction space ground components iridium system depreciation expense recognized satellitebysatellite basis satellites placed service following delivery satellite mission orbit depreciation related ground control stations commenced placement service station portion interest costs incurred construction iridium system capitalized total interest costs 1998 amounted approximately 443308000 interest cost capitalized years ended december 31 1997 1998 approximately 163747000 170089000 respectively interest costs amounting 273219000 expensed incurred 1998 interest paid years ended december 31 1997 1998 approximately 30191000 186897000 respectively costs capitalized system construction transferred property equipment underlying assets placed service december 31 1998 costs associated system placed service parent adopted statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed statement 121 statement 121 requires longlived assets held used reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable impairment loss recognized undiscounted net cash flows associated asset less assets carrying amount impairment losses measured excess carrying amount asset estimated fair market value adoption statement 121 material impact parents results operations years ended december 31 1997 1998 member interestbased compensation 1996 parent adopted statement financial accounting standards 123 accounting stockbased compensation statement 123 encourages require recognition member interestbased employee compensation fair value parent elected continue account member interestbased employee compensation using intrinsic value method prescribed accounting principles board opinion 25 accounting stock issued employees related interpretations accordingly compensation cost options purchase class common stock iwcl granted employees measured excess fair value class common stock date grant exercise price employee must pay acquire interest compensation expense recognized period earned employee 152000 292000 respectively years ended december 31 1997 1998 compensation expense recognized year ended december 31 1996 options acquire class 1 interests granted exercise price equal fair market value date grant warrants options purchase member interests granted employees consideration goods services rendered measured fair market value recognized goods services provided equity issuance costs parent classifies costs incurred connection issuance equity reduction members equity costs include fees paid investment bankers attorneys others connection issuance equity deferred financing costs incurred connection securing debt financing deferred amortized terms related debt manner approximates effective yield method costs included noncurrent assets accompanying consolidated balance sheets total deferred financing costs net accumulated amortization approximately 113394000 96136000 december 31 1997 1998 respectively income taxes iridium inc subject federal state local income taxes directly result merger iridium inc parent became limited liability company limited liability company parent longer subject u federal income tax directly rather class 1 member subject us federal income taxation based ratable portion parents income loss however parents primary operations district columbia recognize limited liability status tax purposes accordingly parent subject district columbia franchise taxes directly parent recognizes provision income taxes asset liability method asset liability method deferred tax assets deferred tax liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date revenues parent recognizes revenue phone paging services provided revenue 1998 relates solely satellite phone usage revenue earned gateway owners whose subscribers utilize phone paging services gateway owners also members parent executed 60day settlement agreement gateway owners purposes collecting earned revenues operations maintenance contract parent recognizes obligations operations maintenance contract note 7 straightline basis term contract costs incurred contract extend useful life space system capitalized costs expensed net income loss per class 1 interest february 1997 financial accounting standards board issued statement 128 earnings per share statement 128 statement 128 supersedes accounting principles board opinion 15 earnings per share apb 15 related interpretations promulgates new accounting standards computation manner presentation parents loss per class 1 interest data statement 128 requires presentation basic diluted earnings loss per interest data basic earnings loss per class 1 interest calculated dividing net income loss considering required dividends class 2 interests weighted average number class 1 interests outstanding period diluted earnings loss per share calculated dividing net income loss considering required dividends class 2 interests weighted average number class 1 interests extent dilutive potentially dilutive securities outstanding period potentially dilutive securities comprised options warrants convertible class 2 interests due losses incurred years ended december 31 1996 1997 1998 impact potentially dilutive securities antidilutive included diluted earnings loss per class 1 interest calculation adoption statement 128 effect earnings loss per class 1 interest previously presented comprehensive income june 1997 financial accounting standards board issued statement 130 reporting comprehensive income statement 130 statement 130 establishes standards reporting display comprehensive income components consolidated financial statements amounts associated components comprehensive income relate parents adjustment minimum pension liability material reclassifications certain 1996 1997 amounts reclassified conform 1998 presentation 3 members equity classes membership interests members interests parent divided two classes class 1 interests represent common equity class 2 interests represent preferred equity llc agreement authorizes parent issue 225000000 class 1 interests 50000 series class 2 interests 300000 additional class 2 interests description classes membership interests follows class 1 interests subject rights holders series class 2 interests voting rights members vested class 1 interests member entitled appoint one director 5250000 class 1 interests owned class 1 members may aggregate class 1 interests class 1 members appoint one director 5250000 class 1 interests owned aggregate members may manage parent designated directors authority capacity members act behalf bind parent llc agreement contains reserve capital call provision certain members agreed purchase additional class 1 interests reserve capital call board elects exercise option parent could raise additional 243 million 18206550 class 1 interests however reserve capital call pledged secure secured bank facility see note 5 series class 2 interests motorola owns warrant purchase series class 2 interests amount convertible 25 outstanding class 1 interests time exercise warrant calculated fully diluted basis price 1000 per series class 2 interest series class 2 interest nonvoting currently convertible 75 class 1 interests initial series conversion price 1333 subject antidilution adjustments time dividends series class 2 interests cumulative accrue rate 8 per annum series class 2 interests outstanding series class 2 interests series class 2 interests convertible preferred interests pay dividends rate 14 12 per annum dividends series class 2 interests payable either inkind cash option parent february 28 2001 commencing march 1 2001 dividends series class 2 interests payable cash dividends series class 2 interests accrue whether declared whether profits funds parent legally available payment dividends dividend may declared paid class 1 interests unless accrued dividends series class 2 interests paid full series class 2 interests nonvoting convertible class 1 interests time option holder conversion price effect initially 5403 conversion price adjusted time reflect among things distributions reclassifications class 1 interests currently series class 2 interest may converted 1851 class 1 interests series class 2 interests redeemable option parent anytime march 1 2001 subject premium redeemed prior march 1 2005 series b series c class 2 interests connection motorolas guarantee 450 million credit facility guarantee agreement see note 5 parent issued motorola one series b class 2 interest 75 series c class 2 interests series b class 2 interest series c class 2 interests pay dividends series b class 2 interest entitles motorola one seat board directors addition directors may appoint owner class 1 interests series class 2 interests series c class 2 interests entitle motorola appoint majority board directors event certain events default series b series c class 2 interests redeemable option parent 01 per interest upon later termination expiration guarantee agreement ii reimbursement payments made motorola pursuant guarantee agreement see note 5 llc agreement provides parent may merge consolidate one limited liability companies corporations similar entities provided transaction approved board directors class 1 members holding less 66 23 outstanding class 1 interests event merger members hold interests vote favor consent writing merger entitled appraisal repurchase rights interests specified llc agreement dividend liquidation rights class 1 members entitled receive dividends declared board directors discretion class 2 members entitled receive dividends accordance terms relevant series class 2 interests declared board directors class 2 interests rank senior class 1 interests dividends distributions upon liquidation dissolution windingup parent llc agreement requires board directors extent legally available funds declare pay dividend sufficient assure nonu class 1 member receives amount least equal amount members u federal state local income tax liability resulting allocations parents taxable income member parents current source funds dividend distributions iridium required declare pay dividend parent amount required llc agreement however iridium restricted terms certain debt obligations declaring paying dividends excess required made parent llc agreement contains significant restrictions ability member transfer interests parent including limited conditions majority directors approve transfer ii transfer result member beneficially owning right beneficially 45 outstanding class 1 interests exchange rights iridium llc members concurrent initial public offering iwcl iridium llc executed interest exchange agreement conditionally permits holders class 1 interests iridium llc exchange interests subject restrictions transfer iridium llc limited liability agreement shares class common stock iwcl ratio one share class common stock iridium llc class 1 interest subject antidilution adjustments interest exchange agreement exchanges iridium llc class 1 interests permitted 90 days iridium achieved one full quarter positive earnings interest taxes depreciation amortization addition exchange shall take place unless approved pursuant authorization directors representing least 66 23 iridium llc board directors global ownership program parent conjunction iwcl commenced global ownership program designed offer aggregate 2500000 shares iwcls class b common stock purchase price 1333 per share certain governmental telecommunication administrations related entities part comprehensive program enhance market access improve competitive standing iridium system achieve appropriate regulatory approvals december 31 1997 1998 0 20625 shares respectively class b common stock issued program shares fair market value 692000 date issuance limitations liability members generally liable debts obligations liabilities parent equity transactions april 16 1997 llc agreement amended increase authorized number class 1 interests 3000000 225000000 may 9 1997 parent effected 75 1 subdivision class 1 membership interests whereby existing class 1 interest subdivided 75 class 1 interests interest per interest data appearing consolidated financial statements notes thereto retroactively adjusted subdivision may 9 1997 parent entered definitive agreement south pacific iridium holdings limited spi affiliate p bakrie communications corporation pursuant spi acquired parent 7500000 class 1 interests 1333 per interest transaction closed may 30 1997 40 total purchase price paid date remainder due may 1998 extended 1998 1999 includes interest 18 december 31 1997 1998 parent received aggregate 592 million 1049 million respectively spi satisfaction commitment includes interest 115 million june 13 1997 iwcl whollyowned subsidiary parent date consummated initial public offering 12000000 shares class common stock resulted proceeds approximately 225 million iwcl expenses offering paid parent pursuant 1997 subscription agreement parent iwcl proceeds used purchase 12000000 class 1 interests parent upon consummation offering outstanding shares iwcl held parent retired cancelled iwcl became member parent january 21 1999 iwcl commenced secondary offering 7500000 shares class common stock see note 12 4 property equipment property equipment december 31 1997 1998 consists following thousands 5 debt old guaranteed bank facility august 21 1996 parent entered 750 million credit agreement old guaranteed bank facility group banks led chase manhattan bank na barclays bank plc date parent entered guarantee agreement whereby motorola agreed guarantee entire 750 million commitment amount old motorola guarantee connection asset dropdown transaction parents obligations old guaranteed bank facility assigned iridium old guaranteed bank facility provided iridium could elect borrow amounts current shortterm eurodollar rate plus 14 current base rate generally higher federal funds rate established federal reserve bank new york plus 050 chase manhattan banks prime commercial lending rate iridium also paid commitment fee 110 1 unused portion 750 million credit facility interest rates old guaranteed bank facility ranged 563 850 1997 575 594 1996 july 21 1997 commitment bank lenders old guaranteed bank facility permanently reduced 750 million 655 million october 22 1997 commitment bank lenders old guaranteed bank facility permanently reduced 450 million december 31 1997 210000000 outstanding old guaranteed bank facility borrowings old guaranteed bank facility mature june 30 1999 may 11 1998 parent entered memorandum understanding motorola old motorola mou whereby motorola conditionally agreed would guarantee 350 million additional indebtedness including principal interest old guaranteed bank facility another credit facility identical terms provided borrowings additional indebtedness made prior february 28 1999 ii guarantee approximately 175 million additional indebtedness including principal interest old guaranteed bank facility credit agreement identical terms old guaranteed bank facility maturity discussed old motorola mou replaced new agreement old motorola guarantee parent required issue warrants motorola purchase 11250000 class 1 interests consideration guarantee motorola earned 82500 warrants year portion thereof 750 million guarantee outstanding warrants earned issued motorola quarterly basis warrant entitled motorola purchase 75 class 1 interests exercise price 000013 per interest subject antidilution adjustments warrants exercised five years date issuance expired ten years date issuance motorola earned 29836 64518 9472 warrants purchase class 1 interests accordance old motorola guarantee agreement years ended december 31 1996 1997 1998 respectively iridium recognized 25719000 55615000 8790000 expense accompanying consolidated statements operations reflect fair market value warrants earned motorola years ended december 31 1996 1997 1998 respectively discussed old motorola guarantee replaced new agreement new guaranteed bank facility december 23 1998 iridium replaced old guaranteed bank facility two new bank facilities consist 475 million term credit facility matures december 29 2000 275 million revolving credit facility matures december 31 2001 different partially overlapping syndicate lenders facilities guaranteed motorola provide iridium may elect borrow amounts current eurodollar rate plus 075 current base rate generally higher federal funds rate established federal reserve bank new york plus 050 chase manhattan banks prime commercial lending rate 1998 interest rates guaranteed bank facility ranged 5313 800 december 31 1998 iridium drawn aggregate approximately 625 million facilities approximately 470 million term facility approximately 155 million revolving facility old senior secured bank line credit 1997 iridium entered credit agreement chase securities inc chase manhattan bank barclays bank plc barclays capital investment banking division barclays bank plc syndicate lenders old secured lenders senior bank facility principal amount 1 billion old secured bank facility 250 million available borrowings prior commercial activation date old secured bank facility secured substantially iridiums assets old secured bank facility secured 243 million reserve capital call members parent parents membership interests iridium borrowings old secured bank facility mature september 30 1998 subject iridiums right extend maturity june 30 1999 could demonstrate july 1 1998 sufficient available committed financing budgeted project costs extended maturity december 31 1997 350000000 outstanding old secured bank facility 1998 maturity borrowings old secured bank facility extended december 31 1998 new senior secured bank line credit december 23 1998 iridium entered new secured facility new syndicate lenders 800 million facility provides iridium may elect borrow amounts current shortterm eurodollar rate plus 4 current base rate generally higher federal funds rate established federal reserve bank new york plus 050 chase manhattan banks prime commercial lending rate plus 275 facility secured assets old secured bank facility december 31 1998 iridium drawn 500 million principal matures december 29 2000 various additional covenants added agreement include meeting certain revenue subscriber levels additionally january 1999 iridium drew another 300 million connection facility motorola mou motorola arg conditional commitment motorola guarantee additional borrowings connection establishment secured bank facility guaranteed bank facilities motorola parent iridium entered motorola memorandum understanding mou amended restated old motorola mou motorola mou motorola agreed among things guarantee 750 million obligations guaranteed bank facilities ii consent agree amendment guaranteed bank facilities related guarantee agreement enter new bank credit facility guarantee agreement terms pricing together provide 350 million increase motorola guaranteed borrowings available thereunder iii permit iridium defer obligations pay aggregate 400 million payments om contract december 29 2000 iv guarantee 400 million additional borrowings bank credit facility terms pricing identical material respects guaranteed credit facilities condition additional guaranteed borrowings used exclusively make payments motorola deferred obligations om contract described iii v subordinate certain claims visavis iridium lenders secured bank facility vi consent amendment 275 million revolving credit facility component guaranteed bank facilities would extend maturity facility beyond maturity senior notes due july 15 2005 iridium agreed motorola mou compensate motorola providing guarantees deferral rights credit support collectively motorola exposure generally includes aggregate amount guaranteed permitted deferred motorola pursuant motorola agreement regarding guarantee arg motorola parent iridium also entered motorola arg amended restated old motorola arg payments motorola arg based amount duration motorola exposure due payable quarterly prior october 1 1999 iridium required pay motorola cash interest amount deferred annual interest rate 12 motorola exposure relating deferred amounts om contract motorola exposure relating guarantees borrowings bank credit facilities exists prior october 1 1999 iridium parent required compensate motorola cash interest equity including warrants purchase either class 1 interests certain conditions class common stock prior october 1 1999 motorolas compensation motorola exposure relating guaranteed bank facilities motorola guaranteed om bank facility available based terms series b senior notes high yield based compensation equals interest motorola exposure annual interest rate equal amount interest rate relevant bank facility less 13625 weighted average interest rate series b senior notes plus ii payment warrants purchase approximately 66758 class 1 interests shares class common stock per day per 100 million motorola exposure purchase price 2090 per interest share average daily warrant compensation payable holders senior notes october 1 1999 iridium parent required pay motorola equity compensation form warrants purchase class 1 interests purchase price 000013 per interest motorola exposure unless aggregate motorola exposure less equal 275 million case iridium may pay motorola high yield based compensation period unless motorola exposure less 275 million amount warrant compensation payable per dollar motorola exposure increases substantially motorola exposure increases addition iridium required compensate motorola warrants purchase class 1 interests price 000013 per interest motorola exposure resulting motorola making available part additional 350 million guaranteed borrowings discussed regardless motorola exposure incurred parent iridium also agreed motorola mou use best efforts reduce motorola exposure 275 million earliest possible date including obtaining bank credit agreements guaranteed motorola issuing debt equity securities certain conditions using revenues operations available reduce available borrowings credit facilities guaranteed motorola pay amounts deferred contracts motorola ii use best efforts obtain october 1 1999 motorola guaranteed om bank facility finance payment deferred amounts om contract iii outstanding excess 17 billion indebtedness borrowed money secured assets iridium b 162 billion aggregate principal amount senior notes iv make certain acquisitions without motorolas consent v provide motorola right addition motorolas rights representation based holdings class 1 interests appoint one additional director boards directors parent iridium time motorola exposure exceeds 275 million right appoint second additional director boards directors parent iridium time motorola exposure exceeds 750 million addition motorola agreed consent 350 million increase amount guaranteed borrowings available guaranteed bank facilities new credit facility terms pricing identical material respects ii extension maturity 275 million revolving credit facility component guaranteed bank facilities assurance lenders guaranteed credit facilities would agree amendments new credit facility would available motorolas obligation defer receipt 400 million payment om contract unconditional motorolas obligations motorola mou including without limitation obligation consent agree amendment guaranteed bank facilities related guarantee agreement enter new bank credit facility guarantee agreement material terms principal together provide 350 million increase motorola guaranteed borrowings available thereunder conditioned iridium complying terms motorola mou motorola arg om contract agreements motorola including iridiums payment obligations agreement notes payable july 16 1997 parent iwcl iridium capital corporation completed offering high yield offering 300000 units consisting 1000 principal amount 13 senior notes due 2005 series notes one iwcl warrant representing right purchase 52 shares class common stock iwcl ii 500 million aggregate principal amount 14 senior notes due 2005 series b series b notes concurrent asset dropdown transaction parents obligations series notes series b notes assigned iridium series notes series b notes guaranteed iridium roaming llc iridium ip llc iridium facilities corporation aggregate net proceeds received approximately 746 million interest series notes series b notes payable cash semiannually january 15th july 15th year commencing january 15 1998 notes redeemable option iridium whole part time july 15 2002 series notes series b notes mature july 15 2005 october 17 1997 parent iridium capital corporation completed offering 300 million principal amount 11 14 senior notes due 2005 series c series c notes concurrent asset dropdown transaction parents obligations series c notes assigned iridium series c notes guaranteed iridium roaming llc iridium ip llc iridium facilities corporation net proceeds received approximately 293 million interest series c notes payable cash semiannually january 15th july 15th year commencing january 15 1998 series c notes redeemable option iridium whole part time july 15 2002 series c notes mature july 15 2005 may 13 1998 iridium capital corporation completed offering 350 million principal amount 10 78 senior notes due 2005 series notes series notes guaranteed iridium roaming llc iridium ip llc iridium facilities corporation series notes substantially terms senior notes interest rate issue date net proceeds received approximately 342 million interest series notes payable cash semiannually january 15th july 15th year commencing july 15 1998 series notes redeemable option iridium whole part time july 15 2002 series notes mature july 15 2005 notes payable net discounts december 31 1997 1998 consist following thousands longterm debt due members parent 1996 parent sold units certain members affiliates unit consisting 1000 principal amount maturity 14 12 senior subordinated discount notes due 2006 notes one warrant purchase 1040775 class 1 interests parent aggregate proceeds approximately 238453000 concurrent asset dropdown transaction parents obligations notes assigned iridium notes unsecured subordinate senior debt iridium notes fully accrete aggregate face value 480150000 march 1 2001 mature march 1 2006 note accrues cash interest rate 14 12 per annum payable semiannually commencing september 1 2001 notes subject redemption option iridium time march 1 2001 warrants entitle holder purchase class interests exercise price 01 per interest exercisable march 1 2001 expire march 1 2006 parent recognized estimated fair market value warrants 31761000 addition members equity future principal payments future scheduled principal payments longterm debt follows thousands 6 income taxes inception july 29 1996 iridium inc subject us federal state local income taxes directly accordingly recognized provisions income taxes us federal state local jurisdictions subsequent merger iridium inc limited liability company parent longer subject us federal income tax directly however parent subject district columbia franchise taxes parents provision income taxes years ended december 31 1996 1997 1998 consists following thousands primary reconciling differences income tax expense amount tax benefit would expected result applying federal statutory rate 35 loss income taxes period january 1 1996 july 29 1996 date merger iridium inc iridium relate capitalization tax purposes certain startup expenditures state local taxes subsequent date merger iridium inc parent recognizes deferred taxes jurisdictions parent taxed directly resulting deferred tax asset capitalized startup expenditures depreciation 34599000 59660000 december 31 1997 1998 respectively 100 valuation allowance established assessing realizability deferred tax assets management considers whether likely portion deferred tax asset realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies implemented making assessment 7 transactions members management services agreement connection iwcl ipo parent iwcl entered management services agreement management services agreement amended restated connection asset dropdown transaction add iridium party pursuant management services agreement parent agreed supervise manage daytoday activities iridium among things parent responsible administering following functions iridium contract administration including space system contract tndc om contract treasury accounting legal tax insurance licenses permits securities law compliance parent similarly agreed supervise manage daytoday operations iwcl among things parent responsible administering following functions iwcl treasury accounting legal tax insurance licenses permits securities law compliance addition parent agreed advance funds iwcl event iwcl sufficient funds pay income similar taxes parent receive fees reimbursement iwcl services iwcl management services agreement however cost services provided iwcl date significant return services iridium agreed provide sufficient funds cost reimbursable basis parent enable parent manage business operations iridium iwcl including payments parents obligations employees consultants directors payments parents office space equipment sales general operating administrative expenses insurance obligations certain contracts support agreement support agreement motorola provides certain general administrative support parent subsidiaries cost reimbursable basis motorola provided payroll processing related benefits parent employees processed payments certain contractors providing support parent provided administrative support connection asset dropdown transaction parent assigned support agreement iridium amounts nature costs years ended december 31 1996 1997 1998 consist following thousands december 31 1997 1998 balance payable motorola support agreement 0 244000 respectively space system contract parent entered space system contract motorola design develop produce deliver space segment component iridium system connection asset dropdown transaction parent assigned space system contract iridium fixed priced contract motorola constructed space vehicles placed lowearth orbits constructed related ground segments contract price 345 billion subject certain adjustments years ended december 31 1996 1997 1998 836 million 577 million 574 million respectively incurred space system contract costs capitalized system construction accompanying consolidated balance sheets transferred property equipment underlying assets placed service december 31 1997 1998 balance payable motorola space system contract 0 55 million respectively remaining 55 million obligation space system contract expected paid 1999 terrestrial network development contract parent entered terrestrial network development contract tndc motorola original amount 160 million connection asset dropdown transaction parent assigned tndc iridium tndc motorola designing developing terrestrial gateway hardware software payments original contract tied completion milestones specified contract 1996 tndc amended obligate motorola provide additional services support tndc exchange additional 189 million 1997 1998 tndc amended obligate motorola provide additional services support bringing total contract price tndc 356 million certain parents members individual gateways obligation iridium parent amounts due motorola tndc years ended december 31 1997 1998 iridium incurred 74 million 174 million respectively tndc costs capitalized system construction accompanying consolidated balance sheets transferred property equipment underlying assets placed service december 31 1997 1998 balance payable motorola tndc 11 million 76 million respectively aggregate fixed determinable portion remaining obligations tndc assuming obligations settled cash 130 million 120 million expected paid 1999 remaining 10 million 2000 operations maintenance contract provide operations maintenance space segment upon completion space system contract parent entered operations maintenance contract om motorola connection asset dropdown transaction parent assigned om contract iridium contract obligates motorola period five years completion final milestone space system contract operate space system exert best efforts monitor upgrade replace hardware software space segment including individual space vehicles specified levels exchange specified monthly payments expected aggregate approximately 289 billion 1996 twoyear option agreement entered extension om contract motorola completion initial fiveyear term option exercised iridium obligated make monthly payments expected aggregate additional 134 billion contract commenced november 1998 iridium capitalized 46 million costs 1998 pertain hardware software components space segment extend useful life portion costs om associated daytoday operations 1998 504 million expensed incurred motorola mou motorola agreed permit iridium defer obligations aggregate 400 million payments due motorola om contract december 29 2000 december 31 1998 iridium deferred payment 86 million obligations om contract expects defer aggregate 400 million obligations prior september 1 1999 om parent required compensate motorola cash equity compensation remaining aggregate fixed determinable portion obligations om excluding vendor financing optional twoyear extension expected follows thousands gateway owners incentives parent agreed issue warrants purchase 300000 class 1 interests gateway owner whose specified gateway activities completed schedule warrants purchase 7500 class 1 interests 1 million cumulative iridium system service revenue generated within 15 months commercial activation event warrants purchase aggregate 9165000 class 1 interests issued gateway owners 1998 parent authorized issuance 33 million warrants gateways compliance schedule exercise price 00013 per interest warrants issued related service revenues december 31 1998 warrants terms identical issued motorola guarantee agreement see note 5 1998 parent expensed 37917000 connection warrants 8 employee benefits parent adopted comprehensive performance incentive retirement benefit package performance incentive program became effective 1993 various retirement plans became effective february 1 1994 incentive programs parent established short longterm incentive plans primarily based employee performance effective december 31 1995 parent terminated longterm incentive plan remaining liability longterm incentive plan approximately 1738000 1745000 december 31 1997 1998 respectively paid january 1999 plans parent incurred expenses approximately 1252000 3412000 5800000 years ended december 31 1996 1997 1998 respectively 401k employee retirement savings plan parent adopted 401k employee retirement savings plan 1994 covering employees 1997 parent made matching contributions qualified plan behalf participating employees 3 employees compensation 1998 accordance plan amendments parent made matching payments equal 50 employee contributions certain limits employee contributions plan vest immediately parents contributions vest ratably sevenyear period including service credit prior employment motorola plan parent incurred expenses approximately 288000 558000 1539000 years ended december 31 1996 1997 1998 respectively retirement plans employees parent covered noncontributory defined benefit retirement plan vesting plan benefits generally occurs five years benefits plan based years credited service including prior employment motorola age retirement average earnings last four years plan funded annually accordance employee retirement income security act 1974 parent adopted nonqualified defined benefit plans covering employees earnings excess maximum amounts may considered qualified plan net periodic pension cost recognized plans approximately 1925000 2420000 6847000 years ended december 31 1996 1997 1998 respectively years ended december 31 1997 1998 amounts provided cover taxes associated plan benefits 693000 1411000 respectively addition parent recorded additional minimum pension liability adjustment 90000 reduction adjustment 1170000 years ended december 31 1997 1998 respectively nonqualified plans additional minimum pension liability included increase decrease members equity summary defined benefit plans benefit obligations qualified nonqualified defined benefit plans total years ended december 31 1996 1997 1998 follows thousands plan assets qualified nonqualified defined benefit plans total years ended december 31 1996 1997 1998 follows thousands pension cost qualified nonqualified defined benefit plans total years ended december 31 1996 1997 1998 follows thousands following table describes funded status plans december 31 1997 1998 thousands actuarial calculations determined consulting actuaries option plan iridium llc parent established plan executive officers managers parent awarded options purchase class common stock option plan iwcl option plan covers 5625000 shares class common stock iwcl option plan also permits award stock appreciation rights connection grant options december 31 1997 1998 options covering 2004556 2673648 shares respectively class common stock iwcl granted date stock appreciation awards granted right exercise options vests pro rata period five years pursuant share issuance agreement iwcl agreed upon exercise options issue parent delivery exercising option holder number shares class common stock iwcl covered exercised options parent agreed simultaneously deliver iwcl like number class 1 interests subject antidilution adjustments exercise price option paid parent represent payment class common stock exercising option holder class 1 interests iwcl december 31 1997 1998 2625000 5625000 class 1 interests respectively reserved issuance iwcl connection option plan permitted statement 123 parent applies intrinsic value method accounting compensation cost plan accordingly compensation expense recognized options acquire class common stock iwcl granted exercise price equal exceeding fair market value date grant years ended december 31 1997 1998 parent recognized 152000 292000 respectively compensation expense options acquire class common stock iwcl granted exercise price fair market value date grant compensation cost determined accordance fair value method statement 123 parents net loss net loss per class 1 interest would increased pro forma amounts indicated thousands except per interest data years ended december 31 1997 1998 1997 1998 fair value options granted estimated dates grants using blackscholes option pricing model following weightedaverage assumptions dividend yield 00 expected volatility 45 1997 63 1998 riskfree interest rates 597 676 1997 414 546 1998 expected life five years effects compensation cost determined statement 123 net loss 1997 1998 may representative effects pro forma net income loss future periods weightedaverage contractual life options outstanding december 31 1997 1998 892 823 years respectively summary parents stock option activity related information years ended december 31 1997 1998 follows range exercise prices options outstanding december 31 1997 1998 follows 9 fair value financial instruments following table presents carrying amounts estimated fair values financial instruments december 31 1997 1998 thousands fair value longterm debt estimated based quoted market prices current rates offered similar debt carrying amounts due affiliates accounts payable accrued expenses approximate fair market value december 31 1997 1998 relatively short duration financial instruments 10 commitments operating leases parent leases office space equipment noncancelable operating lease agreements future minimum payments operating lease arrangements follows thousands rental expense operating leases years ended december 31 1996 1997 1998 approximately 1194000 7821000 10149000 respectively 11 quarterly financial information unaudited thousands except member interest data following summary results operations quarters 1996 following summary results operations quarters 1997 following summary results operations quarters 1998 12 subsequent event january 211999 iwcl issued 7500000 shares class common stock resulting net proceeds 242400000 pursuant 1997 subscription agreement iwcl iridium llc proceeds used purchase 7500000 class interests parent proceeds secondary offering used partially fund operations 1999 independent auditors report board directors member iridium operating llc subsidiaries audited accompanying consolidated balance sheets iridium operating llc subsidiaries whollyowned subsidiary iridium llc development stage limited liability company december 31 1997 1998 related consolidated statements loss members equity deficit cash flows years threeyear period ended december 31 1998 period june 14 1991 inception december 31 1998 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position iridium operating llc subsidiaries development stage limited liability company december 31 1997 1998 results operations cash flows years threeyear period ended december 31 1998 period june 14 1991 inception december 31 1998 conformity generally accepted accounting principles kpmg llp mclean virginia january 14 1999 iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company consolidated balance sheets thousands accompanying notes integral part consolidated financial statements iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company consolidated statements loss thousands accompanying notes integral part consolidated financial statements iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company consolidated statements members equity deficit thousands accompanying notes integral part consolidated financial statements iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements iridium operating llc whollyowned subsidiary iridium llc development stage limited liability company notes consolidated financial statements 1 organization business iridium operating llc iridium whollyowned subsidiary iridium llc parent completed effort develop commercialize global wireless system iridiumr communications system iridium system enables subscribers send receive telephone calls virtually anywhere world one phone one phone number one customer bill iridium commenced commercial phone service november 1 1998 commercial satellite paging service november 15 1998 iridium currently transitioning development stage limited liability company operating limited liability company iridium inc incorporated june 14 1991 iridium inc operated whollyowned subsidiary motorola inc motorola july 29 1993 july 29 1993 iridium inc closed first capital draw private placement shares common stock subscribed us foreign investors result three private placements equity five supplemental private placements certain additional equity investors proceeds received initial public offering common stock iridium world communications ltd iwcl see note 3 motorolas direct indirect class 1 membership interest class 1 interest parent reduced approximately 19 december 31 1998 considering unexercised warrants held motorola iridium system subject regulation federal communications commission fcc foreign administrations regulatory bodies january 31 1995 motorola obtained license fcc construct launch operate iridium system subject certain conditions july 29 1996 parent formed limited liability company terms conditions limited liability agreement llc agreement pursuant provisions delaware limited liability company act also july 29 1996 iridium inc merged parent surviving entity concurrent merger shares common stock iridium inc exchanged class 1 interests parent december 18 1997 parent entered asset dropdown transaction asset dropdown transaction iridium operating llc iridium whollyowned subsidiary parent pursuant asset dropdown transaction substantially assets liabilities parent transferred iridium including without limitation liabilities respect outstanding 13 senior notes due 2005 series 14 senior notes due 2005 series b 11 14 senior notes due 2005 series c collectively senior notes pursuant indentures relating senior notes iridium substituted parent released obligations indentures relating senior notes assets liabilities transferred iridium parents carrying value accordingly unless otherwise specified references within notes iridium relate action prior date asset dropdown transaction construed references parent predecessor iridium result asset dropdown transaction parents significant asset investment iridium december 22 1998 parent entered stock purchase agreement att wireless services inc atgi inc rogers cantel inc pursuant iridium agreed purchase outstanding capital stock claircom communications group inc provider inflight phone service commercial private aircraft estimated aggregate purchase price approximately 65 million closing purchase expected occur latter half 1999 subject regulatory approval certain conditions 2 significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts iridium whollyowned subsidiaries iridium capital corporation iridium roaming llc iridium ip llc iridium facilities corporation iridium canada facilities inc significant intercompany transactions eliminated accompanying consolidated financial statements present financial position results operations iridium prior periods asset dropdown transaction iridium occurred june 14 1991 inception development stage enterprise end 1998 iridium devoted entire efforts establishing commercializing iridium system accordingly iridiums principal activities related managing design construction development system preparing daytoday operations iridium commenced commercial activation november 1 1998 began transition development stage enterprise operating company management estimates preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting periods actual results could differ estimates cash equivalents iridium considers highly liquid investments original maturity three months less date purchase cash equivalents restricted cash 1997 restricted cash consisted first stage borrowing 1 billion secured credit facility syndicate lenders led chase securities inc barclays capital division barclays bank plc funds restricted subject iridium meeting specified milestones met january 1998 restriction lifted property equipment property equipment carried historical cost less accumulated depreciation amortization depreciation amortization calculated using straightline method following estimated useful lives costs constructing placing satellites service capitalized losses satellite failures iridium financial responsibility contractual arrangements motorola recognized currently motorola bears risk loss launch failures satellite failures satellite placed service system construction system construction includes costs incurred related construction space ground components iridium system depreciation expense recognized satellitebysatellite basis satellites placed service following delivery satellite mission orbit depreciation related ground control stations commenced placement service station portion interest costs incurred construction iridium system capitalized total interest costs 1998 amounted approximately 443308000 interest cost capitalized years ended december 31 1997 1998 approximately 163747000 170089000 respectively interest costs amounting 273219000 expensed incurred 1998 interest paid years ended december 31 1997 1998 approximately 30191000 186897000 respectively costs capitalized system construction transferred property equipment underlying assets placed service december 31 1998 costs associated system placed service iridium adopted statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed statement 121 statement 121 requires longlived assets held used reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable impairment loss recognized undiscounted net cash flows associated asset less assets carrying amount impairment losses measured excess carrying amount asset estimated fair market value adoption statement 121 material impact iridiums results operations years ended december 31 1997 1998 deferred financing costs incurred connection securing debt financing deferred amortized terms related debt manner approximates effective yield method costs future debt financing also deferred included noncurrent assets accompanying consolidated balance sheets total deferred financing costs net accumulated amortization approximately 113394000 96136000 december 31 1997 1998 respectively income taxes limited liability company single member iridium treated separate entity federal income tax purposes instead parent reports iridiums taxable income loss federal income tax return iridium inc subject federal state local income taxes directly result merger iridium inc parent became limited liability company limited liability company parent longer subject u federal income tax directly rather member parent subject us federal income taxation based ratable portion parents income loss however iridiums primary operations district columbia recognize limited liability status tax purposes accordingly iridium subject district columbia franchise taxes directly iridium recognizes provision income taxes asset liability method filed income tax returns separate basis asset liability method deferred tax assets deferred tax liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date revenues iridium recognizes revenue phone paging services provided revenue 1998 relates solely satellite phone usage revenue earned gateway owners whose subscribers utilize phone paging services gateway owners also members parent iridium executed 60day settlement agreement gateway owners purposes collecting earned revenues operations maintenance contract iridium recognizes obligations operations maintenance contract note 7 straightlined basis term contract costs incurred contract extend useful life space system capitalized costs expensed comprehensive income june 1997 financial accounting standards board issued statement 130 reporting comprehensive income statement 130 statement 130 establishes standards reporting display comprehensive income components consolidated financial statements amounts associated components comprehensive income relate iridiums adjustment minimum pension liability material reclassifications certain 1996 1997 amounts reclassified conform 1998 presentation 3 members equity sole member iridium parent holds outstanding membership interests iridium limited liability company agreement iridium provides members parent may manage iridium designated directors authority capacity members act behalf iridium parent generally liable debts obligations liabilities iridium parent entitled receive dividends declared iridium board directors discretion event parent required terms parents limited liability agreement declare pay dividend members iridium required declare pay dividend parent amount parent currently required declare pay dividend sufficient assure nonus class 1 member parent receives amount least equal amount members us federal state local income tax liability resulting allocations parents taxable income member iridium presently restricted terms certain debt obligations declaring paying dividends parent amounts excess required made parent 4 property equipment property equipment december 31 1997 1998 consists following thousands 5 debt old guaranteed bank facility august 21 1996 parent entered 750 million credit agreement old guaranteed bank facility group banks led chase manhattan bank na barclays bank plc date parent entered guarantee agreement whereby motorola agreed guarantee entire 750 million commitment amount old motorola guarantee connection asset dropdown transaction parents obligations old guaranteed bank facility assigned iridium old guaranteed bank facility provided iridium could elect borrow amounts current shortterm eurodollar rate plus 14 current base rate generally higher federal funds rate established federal reserve bank new york plus 050 chase manhattan banks prime commercial lending rate iridium also paid commitment fee 110 1 unused portion 750 million credit facility interest rates old guaranteed bank facility ranged 563 850 1997 575 594 1996 july 21 1997 commitment bank lenders old guaranteed bank facility permanently reduced 750 million 655 million october 22 1997 commitment bank lenders old guaranteed bank facility permanently reduced 450 million december 31 1997 210000000 outstanding old guaranteed bank facility borrowings old guaranteed bank facility mature june 30 1999 may 11 1998 parent entered memorandum understanding motorola old motorola mou whereby motorola conditionally agreed would guarantee 350 million additional indebtedness including principal interest old guaranteed bank facility another credit facility identical terms provided borrowings additional indebtedness made prior february 28 1999 ii guarantee approximately 175 million additional indebtedness including principal interest old guaranteed bank facility credit agreement identical terms old guaranteed bank facility maturity discussed old motorola mou replaced new agreement old motorola guarantee parent required issue warrants motorola purchase 11250000 class 1 interests consideration guarantee motorola earned 82500 warrants year portion thereof 750 million guarantee outstanding warrants earned issued motorola quarterly basis warrant entitled motorola purchase 75 class 1 interests exercise price 000013 per interest subject antidilution adjustments warrants exercised five years date issuance expired ten years date issuance motorola earned 29836 64518 9472 warrants purchase class 1 interests accordance old motorola guarantee agreement years ended december 31 1996 1997 1998 respectively iridium recognized 25719000 55615000 8790000 expense accompanying consolidated statements operations reflect fair market value warrants earned motorola years ended december 31 1996 1997 1998 respectively discussed old motorola guarantee replaced new agreement new guaranteed bank facility december 23 1998 iridium replaced old guaranteed bank facility two new bank facilities consist 475 million term credit facility matures december 29 2000 275 million revolving credit facility matures december 31 2001 different partially overlapping syndicate lenders facilities guaranteed motorola provide iridium may elect borrow amounts current eurodollar rate plus 075 current base rate generally higher federal funds rate established federal reserve bank new york plus 050 chase manhattan banks prime commercial lending rate 1998 interest rates guaranteed bank facility ranged 5313 800 december 31 1998 iridium drawn aggregate approximately 625 million facilities approximately 470 million term facility approximately 155 million revolving facility old senior secured bank line credit 1997 iridium entered credit agreement chase securities inc chase manhattan bank barclays bank plc barclays capital investment banking division barclays bank plc syndicate lenders old secured lenders senior bank facility principal amount 1 billion old secured bank facility 250 million available borrowings prior commercial activation date old secured bank facility secured substantially iridiums assets old secured bank facility secured 243 million reserve capital call members parent parents membership interests iridium borrowings old secured bank facility mature september 30 1998 subject iridiums right extend maturity june 30 1999 could demonstrate july 1 1998 sufficient available committed financing budgeted project costs extended maturity december 31 1997 350000000 outstanding old secured bank facility 1998 maturity borrowings old secured bank facility extended december 31 1998 new senior secured bank line credit december 23 1998 iridium entered new secured facility new syndicate lenders 800 million facility provides iridium may elect borrow amounts current shortterm eurodollar rate plus 4 current base rate generally higher federal funds rate established federal reserve bank new york plus 050 chase manhattan banks prime commercial lending rate plus 275 facility secured assets old secured bank facility december 31 1998 iridium drawn 500 million principal matures december 29 2000 various additional covenants added agreement include meeting certain revenue subscriber levels additionally january 1999 iridium drew another 300 million connection facility motorola mou motorola arg conditional commitment motorola guarantee additional borrowings connection establishment secured bank facility guaranteed bank facilities motorola parent iridium entered motorola memorandum understanding mou amended restated old motorola mou motorola mou motorola agreed among things guarantee 750 million obligations guaranteed bank facilities ii consent agree amendment guaranteed bank facilities related guarantee agreement enter new bank credit facility guarantee agreement terms pricing together provide 350 million increase motorola guaranteed borrowings available thereunder iii permit iridium defer obligations pay aggregate 400 million payments om contract december 29 2000 iv guarantee 400 million additional borrowings bank credit facility terms pricing identical material respects guaranteed credit facilities condition additional guaranteed borrowings used exclusively make payments motorola deferred obligations om contract described iii v subordinate certain claims visavis iridium lenders secured bank facility vi consent amendment 275 million revolving credit facility component guaranteed bank facilities would extend maturity facility beyond maturity senior notes due july 15 2005 iridium agreed motorola mou compensate motorola providing guarantees deferral rights credit support collectively motorola exposure generally includes aggregate amount guaranteed permitted deferred motorola pursuant motorola agreement regarding guarantee arg motorola parent iridium also entered motorola arg amended restated old motorola arg payments motorola arg based amount duration motorola exposure due payable quarterly prior october 1 1999 iridium required pay motorola cash interest amount deferred annual interest rate 12 motorola exposure relating deferred amounts om contract motorola exposure relating guarantees borrowings bank credit facilities exists prior october 1 1999 iridium parent required compensate motorola cash interest equity including warrants purchase either class 1 interests certain conditions class common stock prior october 1 1999 motorolas compensation motorola exposure relating guaranteed bank facilities motorola guaranteed om bank facility available based terms series b senior notes high yield based compensation equals interest motorola exposure annual interest rate equal amount interest rate relevant bank facility less 13625 weighted average interest rate series b senior notes plus ii payment warrants purchase approximately 66758 class 1 interests shares class common stock per day per 100 million motorola exposure purchase price 2090 per interest share average daily warrant compensation payable holders senior notes october 1 1999 iridium parent required pay motorola equity compensation form warrants purchase class 1 interests purchase price 000013 per interest motorola exposure unless aggregate motorola exposure less equal 275 million case iridium may pay motorola high yield based compensation period unless motorola exposure less 275 million amount warrant compensation payable per dollar motorola exposure increases substantially motorola exposure increases addition iridium required compensate motorola warrants purchase class 1 interests price 000013 per interest motorola exposure resulting motorola making available part additional 350 million guaranteed borrowings discussed regardless motorola exposure incurred parent iridium also agreed motorola mou use best efforts reduce motorola exposure 275 million earliest possible date including obtaining bank credit agreements guaranteed motorola issuing debt equity securities certain conditions using revenues operations available reduce available borrowings credit facilities guaranteed motorola pay amounts deferred contracts motorola ii use best efforts obtain october 1 1999 motorola guaranteed om bank facility finance payment deferred amounts om contract iii outstanding excess 17 billion indebtedness borrowed money secured assets iridium b 162 billion aggregate principal amount senior notes iv make certain acquisitions without motorolas consent v provide motorola right addition motorolas rights representation based holdings class 1 interests appoint one additional director boards directors parent iridium time motorola exposure exceeds 275 million right appoint second additional director boards directors parent iridium time motorola exposure exceeds 750 million addition motorola agreed consent 350 million increase amount guaranteed borrowings available guaranteed bank facilities new credit facility terms pricing identical material respects ii extension maturity 275 million revolving credit facility component guaranteed bank facilities assurance lenders guaranteed credit facilities would agree amendments new credit facility would available motorolas obligation defer receipt 400 million payment om contract unconditional motorolas obligations motorola mou including without limitation obligation consent agree amendment guaranteed bank facilities related guarantee agreement enter new bank credit facility guarantee agreement material terms principal together provide 350 million increase motorola guaranteed borrowings available thereunder conditioned iridium complying terms motorola mou motorola arg om contract agreements motorola including iridiums payment obligations agreement notes payable july 16 1997 parent iwcl iridium capital corporation completed offering high yield offering 300000 units consisting 1000 principal amount 13 senior notes due 2005 series notes one iwcl warrant representing right purchase 52 shares class common stock iwcl ii 500 million aggregate principal amount 14 senior notes due 2005 series b series b notes concurrent asset dropdown transaction parents obligations series notes series b notes assigned iridium series notes series b notes guaranteed iridium roaming llc iridium ip llc iridium facilities corporation aggregate net proceeds received approximately 746 million interest series notes series b notes payable cash semiannually january 15th july 15th year commencing january 15 1998 notes redeemable option iridium whole part time july 15 2002 series notes series b notes mature july 15 2005 october 17 1997 parent iridium capital corporation completed offering 300 million principal amount 11 14 senior notes due 2005 series c series c notes concurrent asset dropdown transaction parents obligations series c notes assigned iridium series c notes guaranteed iridium roaming llc iridium ip llc iridium facilities corporation net proceeds received approximately 293 million interest series c notes payable cash semiannually january 15th july 15th year commencing january 15 1998 series c notes redeemable option iridium whole part time july 15 2002 series c notes mature july 15 2005 may 13 1998 iridium capital corporation completed offering 350 million principal amount 10 78 senior notes due 2005 series notes series notes guaranteed iridium roaming llc iridium ip llc iridium facilities corporation series notes substantially terms senior notes interest rate issue date net proceeds received approximately 342 million interest series notes payable cash semiannually january 15th july 15th year commencing july 15 1998 series notes redeemable option iridium whole part time july 15 2002 series notes mature july 15 2005 notes payable net discounts december 31 1997 1998 consist following thousands longterm debt due members parent 1996 parent sold units certain members affiliates unit consisting 1000 principal amount maturity 14 12 senior subordinated discount notes due 2006 notes one warrant purchase 1040775 class 1 interests parent aggregate proceeds approximately 238453000 concurrent asset dropdown transaction parents obligations notes assigned iridium notes unsecured subordinate senior debt iridium notes fully accrete aggregate face value 480150000 march 1 2001 mature march 1 2006 note accrues cash interest rate 14 12 per annum payable semiannually commencing september 1 2001 notes subject redemption option iridium time march 1 2001 warrants entitle holder purchase class interests exercise price 01 per interest exercisable march 1 2001 expire march 1 2006 parent recognized estimated fair market value warrants 31761000 addition members equity future principal payments future scheduled principal payments longterm debt follows thousands 6 income taxes inception july 29 1996 iridium inc subject us federal state local income taxes directly accordingly recognized provisions income taxes us federal state local jurisdictions subsequent merger iridium inc limited liability company parent iridium longer subject us federal income tax directly however iridium subject district columbia franchise taxes iridiums provision income taxes years ended december 31 1995 1996 1997 consists following thousands primary reconciling differences income tax expense amount tax benefit would expected result applying federal statutory rate 35 loss income taxes period january 1 1996 july 29 1996 date merger iridium inc parent relate primarily capitalization tax purposes certain startup expenditures state local taxes subsequent date merger iridium inc parent deferred taxes recognized jurisdictions parent iridium taxed directly resulting deferred tax asset capitalized startup expenditures depreciation 34599000 59660000 december 31 1997 1998 respectively 100 valuation allowance established assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies implemented making assessment 7 transactions members parent management services agreement connection iwcl ipo parent iwcl entered management services agreement management services agreement amended restated connection asset dropdown transaction add iridium party pursuant management services agreement parent agreed supervise manage daytoday activities iridium among things parent responsible administering following functions iridium contract administration including space system contract tndc om contract treasury accounting legal tax insurance licenses permits securities law compliance parent similarly agreed supervise manage daytoday operations iwcl among things parent responsible administering following functions iwcl treasury accounting legal tax insurance licenses permits securities law compliance addition parent agreed advance funds iwcl event iwcl sufficient funds pay income similar taxes parent receive fees reimbursement iwcl services iwcl management services agreement however cost services provided iwcl date significant return services iridium agreed provide sufficient funds cost reimbursable basis parent enable parent manage business operations iridium iwcl including payments parents obligations employees consultants directors payments parents office space equipment sales general operating administrative expenses insurance obligation certain contracts support agreement support agreement motorola provides certain general administrative support parent iridium subsidiaries cost reimbursable basis motorola provided payroll processing related benefits parent employees processed payments certain contractors providing support parent iridium provided administrative support connection asset dropdown transaction parent assigned support agreement iridium amounts nature costs years ended december 31 1996 1997 1998 consist following thousands december 31 1997 1998 balance payable motorola support agreement approximately 0 244000 respectively space system contract parent entered space system contract motorola design develop produce deliver space segment component iridium system connection asset dropdown transaction parent assigned space system contract iridium fixed priced contract motorola constructed space vehicles placed lowearth orbits constructed related ground segments contract price 345 billion years ended december 31 1996 1997 1998 836 million 577 million 574 million respectively incurred space system contract costs capitalized system construction accompanying consolidated balance sheets transferred property equipment underlying assets placed service december 31 1997 1998 balance payable motorola space system contract 0 million 55 million respectively remaining 55 million remaining obligation space system contract expected paid 1999 terrestrial network development contract parent entered terrestrial network development contract tndc motorola original amount 160 million connection asset dropdown transaction parent assigned tndc iridium tndc motorola designing developing terrestrial gateway hardware software payments original contract tied completion milestones specified contract 1996 tndc amended obligate motorola provide additional services support tndc exchange additional 189 million 1997 1998 tndc amended obligate motorola provide additional services support bringing total contract price tndc 356 million certain parents members individual gateways obligation iridium parent amounts due motorola tndc years ended december 31 1997 1998 iridium incurred 74 million 174 million respectively tndc costs capitalized system construction accompanying consolidated balance sheets transferred property equipment underlying assets placed service december 31 1997 1998 balance payable motorola tndc 11 million 76 million respectively aggregate fixed determinable portion remaining obligations tndc assuming obligations settled cash 130 million 120 million expected paid 1999 remaining 10 million 2000 operations maintenance contract provide operations maintenance space segment upon completion space system contract parent entered operations maintenance contract om motorola connection asset dropdown transaction parent assigned om contract iridium contract obligates motorola period five years completion final milestone space system contract operate space system exert best efforts monitor upgrade replace hardware software space segment including individual space vehicles specified levels exchange specified monthly payments expected aggregate approximately 289 billion 1996 twoyear option agreement entered extension om contract motorola completion initial fiveyear term option exercised iridium obligated make monthly payments expected aggregate additional 134 billion contract commenced november 1998 iridium capitalized 46 million costs 1998 pertain hardware software components space segment extend useful life portion costs om associated daytoday operations 1998 504 million expensed incurred motorola mou motorola agreed permit iridium defer obligations aggregate 400 million payments due motorola om contract december 29 2000 december 31 1998 iridium deferred payment 86 million obligations om contract expects defer aggregate 400 million obligations prior september 1 1999 om iridium required compensate motorola cash equity compensation remaining aggregate fixed determinable portion obligations om excluding vendor financing optional twoyear extension expected follows thousands gateway owners incentives parent agreed issue warrants purchase 300000 class 1 interests gateway owner whose specified gateway activities completed schedule warrants purchase 7500 class 1 interests 1 million cumulative iridium system service revenue generated within 15 months commercial activation event warrants purchase aggregate 9165000 class 1 interests issued gateway owners 1998 parent authorized issuance 33 million warrants gateways compliance schedule exercise price 00013 per interest warrants issued related service revenues december 31 1998 warrants terms identical issued motorola guarantee agreement see note 5 1998 parent expensed 37917000 connection warrants 8 employee benefits parent adopted comprehensive performance incentive retirement benefit package terms management services agreement see note 7 iridium committed reimburse parent costs associated employee benefits except noncash compensation related employee stock options performance incentive program became effective 1993 various retirement plans became effective february 1 1994 incentive programs parent established short longterm incentive plans primarily based employee performance effective december 31 1995 parent terminated longterm incentive plan remaining liability longterm incentive plan approximately 1738000 1745000 december 31 1997 1998 respectively paid january 1999 plans parent incurred expenses approximately 1252000 3412000 5800000 years ended december 31 1996 1997 1998 respectively 401k employee retirement savings plan parent adopted 401k employee retirement savings plan 1994 covering employees 1997 parent made matching contributions qualified plan behalf participating employees 3 employees compensation 1998 accordance plan amendments parent made matching payments equal 50 employee contributions certain limits employee contributions plan vest immediately parents contributions vest ratably sevenyear period including service credit prior employment motorola plan parent incurred expenses approximately 288000 558000 1539000 years ended december 31 1996 1997 1998 respectively retirement plans employees parent covered noncontributory defined benefit retirement plan vesting plan benefits generally occurs five years benefits plan based years credited service including prior employment motorola age retirement average earnings last four years plan funded annually accordance employee retirement income security act 1974 parent adopted nonqualified defined benefit plans covering employees earnings excess maximum amounts may considered qualified plan net periodic pension cost recognized plans approximately 1925000 2420000 6847000 years ended december 31 1996 1997 1998 respectively years ended december 31 1997 1998 amounts provided cover taxes associated plan benefits 693000 1411000 respectively addition additional minimum pension liability adjustment 90000 reduction adjustment 1170000 recorded years ended december 31 1997 1998 respectively nonqualified plans additional minimum pension liability included increase decrease members equity summary defined benefit plans benefit obligations qualified nonqualified defined benefit plans total years ended december 31 1996 1997 1998 follows thousands plan assets qualified nonqualified defined benefit plans total years ended december 31 1996 1997 1998 follows thousands pension cost qualified nonqualified defined benefit plans total years ended december 31 1996 1997 1998 follows thousands following table describes funded status plans december 31 1997 1998 thousands actuarial calculations determined consulting actuaries 9 fair value financial instruments following table presents carrying amounts estimated fair values financial instruments december 31 1997 1998 thousands fair value longterm debt estimated based quoted market prices current rates offered similar debt carrying amounts due affiliates accounts payable accrued expenses approximate fair market value december 31 1997 1998 relatively short duration financial instruments 10 commitments operating leases parent leases office space equipment noncancelable operating lease agreements future minimum payments operating lease arrangements follows thousands rental expense operating leases years ended december 31 1996 1997 1998 approximately 1194000 7821000 10149000 respectively 11 iridium subsidiaries series notes series b notes series c notes series notes coissued iridium capital corporation capital fully unconditionally guaranteed jointly severally senior unsecured basis iridium roaming llc iridium ip llc iridium facilities corporation collectively guarantor subsidiaries together capital iridium subsidiaries iridium subsidiaries whollyowned subsidiary iridium canada facilities inc whollyowned foreign subsidiary iridium guaranteed series notes series b notes series c notes series notes operations 1998 inconsequential business iridium capital formed capitalized parent june 16 1997 subscribed capital 100 iridium roaming llc formed parent june 15 1997 iridium ip llc formed parent february 28 1997 connection asset dropdown transaction parents interest capital iridium roaming llc iridium ip llc transferred iridium facilities corporation formed iridium february 6 1998 iridium canada facilities inc formed iridium march 19 1998 following summarized financial information capital december 31 1998 period inception december 31 1998 full financial statements capital presented management believes material investors iridium recognized obligations relating series notes series b notes series c notes series notes iridium operations service obligations following summarized financial information guarantor subsidiaries december 31 1998 period inception guarantor subsidiaries december 31 1998 full financial statements guarantor subsidiaries presented management believes material investors 12 quarterly financial information unaudited thousands following summary results operations quarters 1996 following summary results operations quarters 1997 following summary results operations quarters 1998 independent auditors report board directors members iridium llc date january 14 1999 reported consolidated balance sheets iridium llc subsidiaries development stage limited liability company december 31 1997 1998 related consolidated statements loss members equity deficit cash flows years threeyear period ended december 31 1998 period june 14 1991 inception december 31 1998 contained annual report form 10k year 1998 connection audits aforementioned consolidated financial statements also audited related financial statement schedule listed item 14a2 annual report form 10k year 1998 financial statement schedule responsibility companys management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg llp mclean virginia january 14 1999 s1 schedule 1 iridium llc schedule 1 condensed financial information registrant thousands condensed balance sheets condensed statements loss condensed statements cash flows s2 note condensed financial statements registrant basis presentation accompanying condensed financial statements represent accounts iridium llc development stage limited liability company standalone basis substantially footnote disclosures omitted reference made audited consolidated financial statements footnotes iridium llc subsidiaries development stage limited liability company december 31 1997 1998 years threeyear period december 31 1998 period june 14 1991 inception december 31 1998 appear 1998 form 10k s3 signatures pursuant requirements section 13 15d securities exchange act 1934 registrants duly caused report signed behalf undersigned thereunto duly authorized iridium world communications ltd edward f staiano edward f staiano chairman chief executive officer date iridium llc robert w kinzie robert w kinzie chairman date iridium operating llc edward f staiano edward f staiano vice chairman chief executive officer date iridium capital corporation edward f staiano edward f staiano chairman chief executive officer date iridium roaming llc edward f staiano edward f staiano acting chief executive officer date iridium ip llc edward f staiano edward f staiano acting chief executive officer date iridium facilities corporation edward f staiano edward f staiano acting chief executive officer date pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated index exhibits filed herewith confidential treatment previously granted connection 1997 form s1 confidential treatment requested management compensation plan item 7 managements discussion analysis financial condition results operation iwcl member parent business iwcls sole assets class 1 interests parent interest warrants iwcls results operations reflect proportionate share results operations parent equity accounting basis iwcl operations related interest parent indirectly iridium accordingly managements discussion analysis addresses financial condition results operations parent iridium december 18 1997 pursuant asset dropdown transaction parent transferred substantially assets liabilities iridium currently parent significant operations management iridium accordingly discussion relates parent historical basis prior december 18 1997 iridium successor parent december 18 1997 forward unless otherwise specified references iridium relating action event prior date asset dropdown transaction construed references parent predecessor iridium capital roaming ip facilities wholly owned subsidiary iridium significant assets conduct significant operations iridium currently devoting entire efforts establishing commercializing iridium system iridiums current principal activities relate managing design construction development system preparing daytoday operations liquidity capital resources funding requirements iridium expects commence commercial operations september 23 1998 iridium currently estimates aggregate cash funding requirements commencement development june 1991 anticipated commencement commercial operations approximately 44 billion year end 1996 1997 iridium expended approximately 240 billion 55 approximately 342 billion 78 respectively 44 billion estimate iridium estimates aggregate cash funding requirements approximately 53 billion net assumed revenues following commencement commercial operations yearend 1999 last year iridium projects negative cash flow net increase yearend borrowings year end 1996 1997 iridium expended since inception approximately 240 billion 45 approximately 342 billion 65 respectively 53 billion estimate iridium raised sufficient funds meet expected precommercial operations project costs iridium expects require significant additional funding commencement commercial operations projections aggregate funding needs forward looking could vary perhaps substantially actual results due events outside control iridium including without limitation unforeseen construction systems integration regulatory delays launch failures lower anticipated customer demand respect development construction iridium system iridium motorola parties space system contract design development production delivery orbit space segment ii terrestrial network development contract design gateway hardware software iii operations maintenance contract provide daytoday management space segment deployment monitor upgrade replace hardware software space segment necessary maintain performance specifications substantially initial capital raised iridium used continue used make payments motorola space system contract lesser extent terrestrial network development contract space system contract provides fixed price 345 billion subject certain adjustments scheduled paid iridium motorola approximately fiveyear period completion milestones contract payments operations maintenance contract payable quarterly expected aggregate approximately 288 billion contracts initial fiveyear term assuming commencement commercial operations september 23 1998 excusable delays addition cost certain spare satellites completion contract payments increase year ranging quarterly payments 1294 million 1998 1574 million 2003 1714 million 2005 iridium exercises option extend operations maintenance contract additional two years payments due twoyear extension expected aggregate approximately 133 billion assuming commencement commercial operations september 23 1998 excusable delays terrestrial network development contract provides payments aggregating approximately 284 million result technological developments changes product mix iridium world services scheduling adjustments including implementation iridium world cellular services iridiums service offerings iridium anticipates amendments interpretations space system contract terrestrial network development contract operations maintenance contract agreements letters motorola may increase total costs contracts iridiums estimate cost anticipated amendments interpretations reflected iridiums estimates funding requirements assurance amendments interpretations affect price terms agreements manner reflected iridiums funding estimates february 1 1998 parent iridium incurred expenditures totaling 294 billion motorola space system contract respect completed milestones expenditures totaling 140 million terrestrial network development contract based estimates planned schedule iridiums expected future cash requirements year contracts december 31 1999 approximately follows millions iridium also require funds working capital business software development interest anticipated borrowings financing costs operating expenses time commencement commercial operations interest expense associated development construction iridium system increased significantly calendar year 1997 result substantial increase debt financing see sources funding iridium expects interest expense increase calendar year 1998 compared calendar years 1997 result financing plan prior receipt revenues commercial operations iridium expects service interest expense available cash borrowings approximately time commencement commercial operations approximately yearend 1999 last year iridium projects negative cash flow net increase yearend outstanding borrowings iridium expects service interest expense partly available cash bank facilities partly revenues operations commercialization iridium required make payments motorola operations maintenance contract december 31 1999 iridiums obligations related operations maintenance contract funds needed working capital expenditures debt service anticipated funded operations sources funding february 1 1998 iridium indirectly received 194 billion equity investments parent right receive approximately 49 million due south pacific iridium holdings limited pursuant terms definitive purchase agreement iridiums indebtedness borrowed money equaled approximately 20 billion including 11 billion aggregate principal amount senior notes defined approximately 285 million borrowings 450 million guaranteed bank facility defined approximately 350 million borrowings secured bank facility defined july 16 1997 iwcl parent capital consummated private offering 300000 units consisting 1000 principal amount 13 senior notes due 2005 series parent capital series notes b one warrant purchase 52 shares class common stock ii 500000000 aggregate principal amount 14 senior notes due 2005 series b parent capital series b notes aggregate net proceeds parent 746 million october 17 1997 parent capital consummated private offering 300000000 aggregate principal amount 1125 senior notes due 2005 series c parent capital series c notes together series notes series b notes senior notes aggregate net proceeds parent 293 million february 1 1998 iridium drawn 285 million 450 million unsecured borrowing facility syndicate banks guaranteed bank facility borrowings guaranteed bank facility guaranteed motorola guarantee portion proceeds senior notes used permanently reduce guaranteed bank facility 750 million 450 million depending market conditions iridium may make additional senior note offerings order reduce guaranteed bank facility purposes guaranteed bank facility matures june 30 1999 december 18 1997 pursuant asset dropdown transaction substantially assets liabilities parent transferred iridium including without limitation senior notes guaranteed bank facility parent released liabilities pursuant memorandum understanding dated july 11 1997 parent motorola modified apply iridium connection asset dropdown transaction motorola mou addition motorola guarantee motorola conditionally agreed guarantee 350 million additional indebtedness including principal interest guaranteed bank facility another credit facility identical terms motorola additional guarantee provided borrowings additional indebtedness made prior february 28 1999 pursuant motorola mou motorola agreed extend motorola guarantee including motorola additional guarantee committed july 15 2005 guaranteed bank facility extended iridium believes would able amend guaranteed bank facility increase amount extent motorola additional guarantee extend maturity july 15 2005 requests assurance however bank lenders agree increase amount guaranteed bank facility extend term guaranteed bank facility requested iridium identical credit facility would available iridium entered credit agreement chase securities inc chase manhattan bank barclays bank plc barclays capital investment banking division barclays bank plc syndicate lenders secured lenders senior bank facility principal amount 10 billion secured bank facility february 1 1998 iridium drawn 350 million secured bank facility availability secured bank facility subject significant conditions including technical conditions relating iridium system conditions relating regulatory approvals conditions relating financing sources 250 million secured bank facility available prior defined commercial activation date secured bank facility secured substantially iridiums assets secured bank facility secured reserve capital call defined parent membership interests iridium addition iridiums subsidiaries guaranteed iridiums obligations thereunder reserve capital call contractual commitment 17 parents investors purchase 18206550 class 1 interests 1333 per interest aggregate approximately 243 million borrowings secured bank facility mature september 30 1998 subject iridiums right extend maturity june 30 1999 iridium demonstrate july 1 1998 sufficient available committed funds budgeted project costs extended maturity assuming approximately 445 million borrowings guaranteed bank facility 715 million borrowings secured bank facility iridium expects sufficient cash meet anticipated funding requirements september 23 1998 date iridium expects commence commercial operations iridium expects seek senior secured bank financing order meet expected funding requirements least yearend 1999 last year iridium projects negative cash flow net increase year end borrowing additional financing may also need obtained issuance equity debt securities public private markets availability terms financing uncertain dependent part market conditions existing time proposed financing iridiums estimated funding requirements increase perhaps substantially event unexpected cost increases schedule delays additional equity financing pursued may raised either privately strategic financial investors additional public offerings depending market conditions iridium may make additional senior note offerings result iridiums outstanding debt expected incurrence significant additional indebtedness required meet capital requirements iridium substantial indebtedness debt instruments governing iridiums indebtedness likely contain restrictions among things incurrence indebtedness granting liens payment cash dividends iridiums ability meet debt service obligations due require generate significant cash flow operations necessary make additional borrowings refinance outstanding indebtedness assurance made iridium able generate sufficient cash flow meet debt service obligations able refinance indebtedness addition debt instruments governing future indebtedness likely contain restrictions among things incurrence indebtedness operations iridium development stage company generate revenues operations iridium system constructed deployed commercial operations commence currently anticipated september 1998 commencement development june 1991 yearend 1997 iridium expended approximately 342 billion development construction commercialization iridium system representing 78 iridiums estimate cash funding requirements anticipated commencement commercial operations september 23 1998 65 iridiums estimate cash funding requirements net assumed revenues following commencement commercial operations yearend 1999 last year iridium projects negative cash flow net increase yearend borrowings date iridiums source income interest income cash investment balances proceeds equity commitments parent amounted approximately 153 million july 29 1993 initial capital contribution date december 31 1997 period iridium recorded net loss approximately 413 million addition periods ended december 31 1991 1992 period january 1 1993 initial capital contribution date aggregate costs 148 million incurred motorola costs paid parent motorola pursuant reimbursement agreement development stage company iridium incurred losses since inception predecessor companies continue foreseeable future iridiums ability become profitable generate positive cash flow dependent successful timely commencement operation iridium system wide subscriber acceptance numerous factors capitalization costs payments iridium space system contract capitalized costs depreciated fiveyear estimated life satellites depreciation expense realized satellitebysatellite basis commencing delivery satellite mission orbit depreciation related ground control stations commences placement service station losses satellite failures iridium financial responsibility contractual arrangements motorola recognized currently motorola bears risk loss launch failures satellite failures satellite placed service iridium obtained satellite insurance policy cover certain costs associated loss satellite capitalized amounts space system contract terrestrial network development contract aggregated approximately 30 billion december 31 1997 addition costs incurred connection issuance parent class 1 interests reflected reduction parents additional paidin capital iridiums debt issuance costs deferred amortized term related indebtedness payment costs charges resulted significant negative operating cash flow certain interest costs also capitalized date commencement commercial operations portion payments made operations maintenance contract capitalized depreciated amount capitalized determined depending upon number replacement satellites put service costs operations maintenance contract capitalized expensed operating expenses period initial capital contribution date december 31 1997 marketing general administrative expenses approximately 420 million period prior initial capital contribution date total accumulated expenditures approximately 148 million incurred primarily reimburse motorola expenses associated operating iridium period incorporation 1991 initial capital contribution date iridium expects substantial increase future operating expenditures relating sales marketing costs associated commercialization interest expense iridium expects finance significant portion capital requirements borrowings result borrowings iridium significant interest costs interest costs capitalized iridium system construction depreciated thereafter resulted interest costs capitalized 1995 1996 1997 likely meaningful portion interest cost expensed 1998 interest cost expensed beginning 1999 portion interest expense paid cash including interest expense related iridiums 14 12 senior subordinated notes march 1 2001 noncash interest accrued accrual increase outstanding indebtedness iridiums parents consolidated balance sheets income taxes parent iridium reports income partnership united states federal income tax purposes accordingly expected directly subject u federal income tax iridium may however subject tax state local foreign jurisdictions portions income iwcl taxed directly year 2000 considerations next eighteen months companies using computer systems confronted fact many software application operation programs written past may properly recognize calendar dates beginning year 2000 issue could cause computers shut provide incorrect information year 2000 considerations expected materially affect iridiums internal operations may adversely affect iridiums suppliers gateway operators service providers roaming partners iridium begun ask suppliers gateway operators service providers roaming partners progress identifying addressing problems computer systems may face correctly processing date information year 2000 iridium expects substantially suppliers gateway operators service providers roaming partners effectively address year 2000 issue assurance failure persons address effectively issue adverse effect iridiums results operations new accounting pronouncement june 1997 financial accounting standards board issued statement 130 reporting comprehensive income statement 130 statement 130 establishes standards reporting display comprehensive income components consolidated financial statements parent required adopt provisions statement 130 year ending december 31 1998 earlier application permitted however upon adoption statement 130 parent required reclassify previously reported annual interim consolidated financial statements disclosure comprehensive income accordance provisions statement 130 impact manner presentation parents consolidated financial statements currently previously reported item 7a item 7 managements discussion analysis financial condition results operations iwcl member parent business iwcl operations related interests parent iwcls sole assets membership interests parent warrants acquire membership interests parent accordingly iwcls results operations reflect proportionate share results operations parent equity accounting basis business iridium constitutes substantially business parent accordingly managements discussion analysis section report focuses financial condition results operations iridium background transition development stage company operating company fourth quarter 1998 iridium began transition development stage company operating company result character operations factors affecting managements assessment financial condition changing iridiums operations shifting construction operation service provision principal considerations iridiums management evaluating iridiums financial condition shifted whether iridium would obtain financing favorable terms construction iridium system rollout commercial service whether iridium generate revenues obtain additional funding amounts sufficient satisfy funding requirements shift operations prior fourth quarter 1998 iridium devoted substantially operations efforts design construction development iridium system preparation commercial operation iridium system iridium expects operations efforts 1999 two three years thereafter focus operation iridium system provision global wireless telecommunications services attraction retention customers shift factors affecting financial condition prior yearend 1998 iridiums funding requirements principally driven cost construction deployment iridium system interest expense 1997 1998 development stage period iridium meaningful revenue accordingly relied outside funding iridium expects operational funding requirements 1999 two three years thereafter principally driven costs operating maintaining satellite constellation costs providing iridium services interest expense currently iridium generating sufficient funds operations satisfy operational cash needs accordingly continuing rely outside funding iridium expects funding requirements 1999 substantially exceed revenues deficiency reflected increase indebtedness yearend 1998 iridiums expectations future operations funding requirements forward looking statements report regarding iridiums future funding requirements funding sources 1999 thereafter estimates forward looking actual results likely differ may differ materially information expressed implied statements estimates based number assumptions including iridiums expectations ability generate revenues operations viewed light following facts iridium meaningful history operations revenues operational service provides direct comparison iridiums services ii availability additional sources funding iridium expects able use completely within iridiums control conditioned iridium satisfying certain conditions iii iridium faces many challenges risks many factors could cause forward looking statements inaccurate example described managements discussion analysis financial condition results operations recent developments waiver secured bank facility covenants subscriber levels revenues iridiums initial commercial operations significantly iridiums prior estimates result various factors including lack availability phones pagers shortage fullytrained service providers sales personnel lack effective marketing coordination among iridium gateways service providers see exhibit 99 report discussion factors could result iridiums forward looking statements proving inaccurate recent developments claircom acquisition december 22 1998 parent iridium aero acquisition sub inc aero delaware corporation whollyowned subsidiary parent entered stock purchase agreement pursuant aero agreed acquire outstanding capital stock claircom communications group inc delaware corporation provider inflight phone service commercial executive aircraft atgi inc delaware corporation whollyowned subsidiary att wireless services inc rogers cantel inc aero agreed acquire claircom shares estimated aggregate price approximately 65 million consisting approximately 256 million cash paid closing approximately 394 million notes claircom guaranteed parent issued sellers claircom shares immediately prior closing aggregate purchase price subject certain adjustments including working capital adjustments capital expenditures made benefit claircom prior closing claircom notes expected issued sellers term nine years pay interest rate 8 per annum require payments first two years following issuance interest accrued first twoyear period added principal amount notes claircom notes also contain certain restrictive covenants including restrictions dividends secured substantially assets claircom pledge claircom shares aero consummation acquisition claircom shares subject certain significant conditions secured bank facility guaranteed bank facilities december 23 1998 iridium closed three new bank credit facilities providing aggregate amount approximately 155 billion borrowings 800 million secured bank facility due december 29 2000 750 million collectively motorola guaranteed bank facilities includes 475 million term credit facility due december 29 2000 275 million revolving credit facility due december 31 2001 iridium used approximately 682 million funds available new bank facilities repay outstanding bank debt 410 million due mature december 31 1998 ii approximately 370 million funds make payments various contracts motorola secured bank facility secured among things substantially iridiums assets borrowings motorola guaranteed bank facilities guaranteed motorola pursuant motorola mou motorola arg described iridium required compensate motorola equity cash among things providing guarantees iridiums borrowings motorola guaranteed bank facilities iwcl offering january 27 1999 iwcl consummated public offering 7500000 shares class common stock applied net proceeds approximately 242 million purchase 7500000 class 1 interests parent contributed proceeds sale class 1 interests iridium waiver certain secured bank facility covenants iridiums secured bank facility contains various covenants including covenants require iridium satisfy certain minimum revenue subscriber levels various dates minimum subscriber revenue covenants include condition march 31 1999 iridium cumulative cash revenues least 4 million cumulative accrued revenues least 30 million least 27000 iridium world satellite service subscribers least 52000 total subscribers result various factors iridiums subscriber levels revenues initial commercial operations significantly prior estimates accordingly iridium requested received waiver compliance march 31 1999 revenue subscriber conditions lenders secured bank facility waiver conditioned iridiums compliance march 31 1999 minimum revenue subscriber levels may 31 1999 waiver affect constitute waiver term secured bank facility including minimum revenue subscriber conditions june 30 1999 september 30 1999 see liquidity capital resources sources funding description secured bank facility iridium believes slower expected subscriber rampup revenue generation primarily result problems initial distribution subscriber equipment shortage fullytrained service providers sales personnel lack effective marketing coordination among iridium gateways service providers initial rollout iridium world services kyocera experienced significant difficulties achieving iridiums quality control standards unable ship significant quantities phones early march 1999 ii substantial difficulties distributing phones pagers various markets around world iii although motorolas satellite phones pagers available production cellular cassettes dual mode satellitecellular phones accessories delayed iv iridium gateway operators difficulty identifying training service providers sales staffs iridium believes motorola kyocera addressed initial production distribution problems however iridium believes may take time effort appropriately address problems arisen connection marketing distribution iridium world services discussion factors adversely affected iridiums initial marketing distribution efforts initiatives iridium gateways service providers taking response see business target markets business marketing distribution revision subscriber revenue estimates request amendment secured bank facility initiatives iridium gateways undertaken address current marketing distribution difficulties may take time implement accordingly iridium process revising revenue subscriber estimates light initial marketing distribution difficulties iridium expects revision adversely affect prior expectations regarding revenues operations accordingly adversely affect prior expectation financial condition including ability meet minimum revenue subscriber covenants terms secured bank facility ii future sources funds revenues operations iii financing needs iridium intends request amendment secured bank facility modify minimum revenue subscriber level covenants terms reflect revised subscriber revenue estimates assurance lenders secured bank facility agree amendment failure obtain amendment would likely result default secured bank facility would material adverse effect iridium addition consideration agreeing amendment lenders secured bank facility may require iridium agree additional covenants provide additional compensation iridium also intends revise estimates funding requirements expectations available sources funds see liquidity capital resources liquidity capital resources funding requirements funding requirements yearend 1998 yearend 1998 iridiums funding requirements aggregated approximately 48 billion july 29 1993 inception date iridiums predecessor approximately 138 billion expended 1998 estimated funding requirements 1999 iridium expects aggregate cash needs 1999 approximately 165 billion iridium board approved cash budget 176 billion estimate includes iridiums estimate cash needs iridium system construction operation ii expected acquisition claircom iii working capital financing costs software development estimate iridiums approved cash budget may revised result iridiums revision revenue subscriber estimates iridium striving increase rampup demand services also striving decrease costs see recent developments waiver certain secured bank facility covenants discussion factors driving reevaluation estimated funding requirements 1999 iridium expects funding requirements operation iridium system two three year period following 1999 driven costs similar type expected 1999 iridium system construction operation respect development construction iridium system iridium motorola parties space system contract design development production delivery orbit space segment ii terrestrial network development contract design gateway hardware software iii operations maintenance om contract provide daytoday management space segment deployment monitor upgrade replace hardware software space segment necessary maintain performance specifications substantially initial capital raised iridium used continue used make payments motorola space system contract terrestrial network development contract om contract space system contract provided fixed price subject certain adjustments scheduled paid iridium motorola approximately fiveyear period completion milestones contract march 1 1999 iridium incurred approximately 3435 billion aggregate estimated cost space system contract iridium paid 519 million estimated amount 1998 march 8 1999 iridium paid 50 million estimated amount remaining 5 million expected paid 1999 march 1 1999 iridium incurred approximately 302 million 356 million aggregate estimated cost terrestrial network development contract iridium paid 97 million terrestrial network development contract 1998 iridium expects make 120 million payments terrestrial network development contract 1999 remaining 10 million 2000 iridium expects om contract source iridiums single significant funding requirements commercial operation iridium system om contract fiveyear term ending november 2003 extendable iridiums option additional two years payments om contract currently payable monthly expected aggregate approximately 289 billion initial fiveyear term contract iridium exercises option extend om contract additional two years payments due twoyear extension expected aggregate approximately 134 billion addition iridium obligated pay certain spare satellites upon completion contract monthly payments om contract increase year ranging payments 431 million 1998 526 million 2003 573 million 2005 extended iridiums historical expected future cash requirements year principal contracts december 31 2000 approximately follows millions 1 reflect deferrals payments due om contract motorola mou motorola agreed permit iridium defer obligations pay aggregate 400 million payments due motorola om contract december 29 2000 march 1 1999 iridium deferred payment approximately 220 million obligations om contract expects defer aggregate 400 million obligations prior september 1 1999 result technological developments changes iridiums product mix scheduling adjustments including implementation iridium world roaming services iridiums service offerings iridium anticipates may amendments interpretations terrestrial network development contract om contract agreements letters motorola may increase total costs contracts iridiums estimate cost anticipated amendments interpretations reflected iridiums estimates funding requirements assurance future amendments interpretations affect price terms agreements manner reflected iridiums funding estimates claircom acquisition expected acquisition claircom estimated aggregate purchase price approximately 65 million consisting approximately 256 million cash paid closing approximately 394 million notes claircom guaranteed parent issued sellers claircom shares immediately prior closing working capital financing costs software development iridium required continue require funds working capital business software development interest borrowings financing costs operating expenses iridium estimates december 31 1998 costs aggregated approximately 109 billion july 29 1993 inception date iridiums predecessor approximately 674 million incurred 1998 iridium estimates costs calendar year 1999 items aggregate approximately 915 million sources funding sources funds yearend 1998 december 31 1998 iridium expended approximately 48 billion july 29 1993 inception date iridiums predecessor december 31 1998 iridium funded aggregate expenditure approximately 500 million secured bank debt ii approximately 625 million bank debt guaranteed motorola iii approximately 138 billion proceeds issuance senior notes due 2005 iv approximately 239 million proceeds issuance senior subordinated notes due 2006 v approximately 195 billion issuance class 1 interests vi approximately 31 million issuance series class 2 interests vii approximately 86 million vendor financing estimated sources funds 1999 iridium estimates available 1999 aggregate sources external funding approximately 134 billion secured bank facility guaranteed bank facilities vendor financing proceeds equity offering additional motorola guaranteed borrowings iridium expects cash needs 1999 approximately 165 billion iridium board approved budget 176 billion extent iridiums revenues exceed actual difference 1999 cash needs 1999 available sources estimated difference approximately 310 million iridium need seek additional financing iridium process revising revenue subscriber estimates light initial marketing distribution difficulties intends seek amendment secured bank facility events likely adversely affect iridiums estimates future sources funds iridium expects need additional financing estimated sources funds 1999 two three years following 1999 iridium generally expects fund costs operating maintaining iridium system including om contract providing iridiums services working capital interest expense financing costs revenues operations required additional financing equity investments debt securities march 1 1999 iridium received approximately 219 billion issuance class 1 interests approximately 31 million issuance series class 2 interests march 1 1999 iridium received approximately 162 billion issuance debt securities including approximately 138 billion issuance senior notes due 2005 approximately 239 million issuance senior subordinated notes due 2006 secured bank facility march 1 1999 iridium drawn entire amount available 800 million secured bank facility borrowings secured bank facility mature december 29 2000 parties secured bank facility iridium chase securities inc barclays bank plc global arrangers chase manhattan bank administrative agent barclays bank plc documentation agent merrill lynch pierce fenner smith inc syndication agent syndicate lenders iridiums obligations secured bank facility secured pledges security interests substantially iridiums assets parents equity interest iridium reserve capital call commitment 17 parents strategic investors purchase 18206550 class 1 interests price 1333 per class 1 interest representing aggregate purchase price approximately 243 million secured bank facility contains various covenants one group covenants requires iridium satisfy certain minimum revenue subscriber levels including conditions march 31 1999 cumulative cash revenues least 4 million cumulative accrued revenues least 30 million least 27000 iridium world satellite service subscribers least 52000 total subscribers ii june 30 1999 cumulative cash revenues least 50 million cumulative accrued revenues least 150 million least 88000 iridium world satellite service subscribers least 213000 total subscribers iii september 30 1999 cumulative cash revenues least 220 million cumulative accrued revenues least 470 million least 173000 iridium world satellite service subscribers least 454000 total subscribers result various factors iridiums subscriber levels revenues initial commercial operations significantly prior estimates accordingly iridium requested received waiver compliance march 31 1999 revenue subscriber conditions lenders secured bank facility waiver conditioned iridiums compliance march 31 1999 minimum revenue subscriber levels may 31 1999 waiver affect constitute waiver term secured bank facility iridium intends seek amendment secured bank facility modify minimum revenue subscriber conditions terms reflect revision revenue subscriber estimates see recent developments waiver certain secured bank facility covenants revision subscriber revenue estimates request amendment secured bank facility covenants secured bank facility require iridium comply certain financial ratios various dates including maximum debt total invested capital maximum secured debt earnings maximum debt earnings minimum interest expense earnings secured bank facility also contains covenants related among things maintenance insurance maintenance regulatory authority offer iridium world satellite service minimum number countries permitted uses revenues operations borrowed funds proceeds issuance securities secured bank facility also restricts iridiums ability incur additional indebtedness make dividend payments merge consolidate sell certain assets addition secured bank facility requires mandatory prepayments event debt equity issuances cash flows exceed specified thresholds guaranteed bank facilities guaranteed bank facilities consist 475 million term credit facility matures december 29 2000 275 million revolving credit facility matures december 31 2001 different partially overlapping syndicate lenders march 1 1999 iridium drawn aggregate approximately 480 million facilities approximately 470 million term facility approximately 10 million revolving facility pursuant terms guaranteed bank facilities iridium cannot access aggregate approximately 745 million borrowings order ensure motorola 750 million guarantee covers additional obligations iridium lenders facilities guaranteed bank facilities covenants directly address minimum revenues subscriber levels borrowings guaranteed bank facilities guaranteed motorola pursuant motorola mou motorola arg described parent iridium required compensate motorola equity cash interest among things guaranteeing borrowings guaranteed bank facilities motorola vendor financing om bank facility guarantee motorola mou described motorola agreed permit iridium defer obligations pay aggregate 400 million payments due motorola om contract december 29 2000 march 1 1999 iridium deferred approximately 220 million obligations om contract expects defer aggregate 400 million obligations prior september 1 1999 iridium agreed memorandum understanding motorola parent mou use best efforts obtain motorola guaranteed om bank facility finance payment deferrals prior october 1 1999 motorola conditionally committed motorola mou guarantee 400 million borrowings motorola guaranteed om bank facility iridium intends finance payment 400 million deferred amounts motorola guaranteed om bank facility prior october 1 1999 however many factors including changes bank lending market iridiums ability generate revenues commercial operations could adversely affect iridiums ability obtain motorola guaranteed om bank facility addition motorolas commitment guarantee motorola guaranteed om bank facility subject certain conditions accordingly assurance iridium able obtain motorola guaranteed om bank facility otherwise refinance deferred obligations motorola om contract iridium required compensate motorola pursuant motorola arg iridiums deferral payments om contract motorolas guarantee motorola guaranteed om bank facility cash equity compensation including warrants purchase class 1 interests warrants purchase class common stock motorola mou conditional commitment motorola guarantee additional borrowings connection establishment secured bank facility guaranteed bank facilities motorola parent iridium entered motorola mou amended restated previous memorandum understanding motorola mou motorola agreed among things guarantee 750 million obligations guaranteed bank facilities ii consent agree amendment guaranteed bank facilities related guarantee agreement enter new bank credit facility guarantee agreement terms pricing together provide 350 million increase motorola guaranteed borrowings available thereunder iii permit iridium defer obligations pay aggregate 400 million payments om contract december 29 2000 iv guarantee 400 million additional borrowings bank credit facility terms pricing identical material respects guaranteed credit facilities condition additional guaranteed borrowings used exclusively make payments motorola deferred obligations om contract described iii v subordinate certain claims visavis iridium lenders secured bank facility vi consent amendment 275 million revolving credit facility component guaranteed bank facilities would extend maturity facility beyond maturity senior notes due july 15 2005 iridium agreed motorola mou compensate motorola providing guarantees deferral rights credit support collectively motorola exposure generally includes aggregate amount guaranteed permitted deferred motorola pursuant motorola arg described parent iridium also agreed motorola mou use best efforts reduce motorola exposure 275 million earliest possible date including obtaining bank credit agreements guaranteed motorola issuing debt equity securities certain conditions using revenues operations available reduce available borrowings credit facilities guaranteed motorola pay amounts deferred contracts motorola ii use best efforts obtain october 1 1999 motorola guaranteed om bank facility finance payment deferred amounts om contract iii outstanding excess 17 billion indebtedness borrowed money secured assets iridium b 162 billion aggregate principal amount senior notes iv make certain acquisitions without motorolas consent v provide motorola right addition motorolas rights representation based holdings class 1 interests appoint one additional director boards directors parent iridium time motorola exposure exceeds 275 million right appoint second additional director boards directors parent iridium time motorola exposure exceeds 750 million motorola exercised right six iridiums parents directors appointees motorola addition motorola agreed consent 350 million increase amount guaranteed borrowings available guaranteed bank facilities new credit facility terms pricing identical material respects ii extension maturity 275 million revolving credit facility component guaranteed bank facilities assurance lenders guaranteed credit facilities would agree amendments new credit facility would available motorolas obligation defer receipt 400 million payment om contract unconditional motorolas obligations motorola mou including without limitation obligation consent agree amendment guaranteed bank facilities related guarantee agreement enter new bank credit facility guarantee agreement material terms principal together provide 350 million increase motorola guaranteed borrowings available thereunder conditioned iridium complying terms motorola mou motorola arg om contract agreements motorola including iridiums payment obligations agreement motorola arg connection establishment secured bank facility guaranteed bank facilities motorola parent iridium also entered motorola agreement regarding guarantee arg amended restated previous agreement payments motorola arg based amount duration motorola exposure due payable quarterly prior october 1 1999 iridium required pay motorola cash interest amount deferred annual interest rate 12 motorola exposure relating deferred amounts om contract motorola exposure relating guarantees borrowings bank credit facilities exists prior october 1 1999 iridium parent required compensate motorola cash interest equity including warrants purchase either class 1 interests certain conditions class common stock prior october 1 1999 motorolas compensation motorola exposure relating guaranteed bank facilities motorola guaranteed om bank facility available based terms series b senior notes high yield based compensation equals interest motorola exposure annual interest rate equal amount interest rate relevant bank facility less 13625 weighted average interest rate series b senior notes plus ii payment warrants purchase approximately 66758 class 1 interests shares class common stock per day per 100 million motorola exposure purchase price 2090 per interest share average daily warrant compensation payable holders senior notes october 1 1999 iridium parent required pay motorola equity compensation form warrants purchase class 1 interests purchase price 000013 per interest motorola exposure unless aggregate motorola exposure less equal 275 million case iridium may pay motorola high yield based compensation period unless motorola exposure less 275 million amount warrant compensation payable per dollar motorola exposure increases substantially motorola exposure increases addition iridium required compensate motorola warrants purchase class 1 interests price 000013 per interest motorola exposure resulting motorola making available part additional 350 million guaranteed borrowings discussed regardless motorola exposure incurred date original motorola arg march 1 1999 providing guarantees iridiums bank credit facilities credit support motorola earned warrants purchase aggregate 7741346 class 1 interests price 00013 per interest aggregate ii 75692 class 1 interests price 2090 per interest amount equity compensation motorola earn future motorola arg depends upon amount future motorola exposure expected substantial could increase significantly variety reasons including iridium unable reduce motorola exposure 275 million less prior october 1 1999 iridium agreed motorola use best efforts reduce motorola exposure 275 million less soon possible iridiums ability repay replace borrowings guaranteed motorola pay finance without motorola guarantee deferrals amounts due motorola depends variety factors including iridiums ability generate revenues factors beyond iridiums control condition bank lending securities markets example iridium reduces motorola exposure 275 million period october 1 1999 december 31 2000 275 million motorola exposure approximately 15 months motorola would earn warrants purchase approximately 84000 class 1 interests shares class common stock purchase price 2090 per interest share plus cash interest however iridium draws amounts available 750 million guaranteed credit facilities defers payment aggregate 400 million om contract motorola exposure remains place full october 1 1999 december 31 2000 115 billion motorola exposure 15 months motorola would earn warrants purchase approximately 129 million class 1 interests purchase price 000013 per interest pursuant motorola arg operations iridium commenced commercial satellite phone service november 1 1998 commercial satellite paging service november 15 1998 prior november 1 1998 iridiums source income interest income cash investment balances proceeds equity debt commitments iridium interest income amounted approximately 233 million july 29 1993 inception date iridiums predecessor december 31 1998 period iridium recorded net loss approximately 166 billion december 31 1997 december 31 1998 iridiums aggregate net loss increased substantially 294 million 125 billion year ended december 31 1997 1998 respectively primarily result following increases year ended december 31 1998 compared corresponding period 1997 258 million sales general administrative expenses due increased activities associated commercial activation 433 million amortization depreciation expense due depreciation greater number satellites 273 million increased interest expense see capitalization costs operating expenses interest expense capitalization costs payments iridium space system contract capitalized satellite components space system contract depreciated fiveyear estimated life satellites depreciation expense realized satellitebysatellite basis commencing delivery satellite mission orbit depreciation related ground control stations commences placement service station seven year estimated life losses satellite failures iridium financial responsibility contractual arrangements motorola recognized currently motorola bears risk loss launch failures satellite failures satellite placed service iridium obtained satellite insurance policy cover certain costs associated loss satellite capitalized amounts space system contract terrestrial network development contract aggregated approximately 374 billion december 31 1998 addition costs incurred connection issuance iridium class 1 interests reflected reduction iridiums additional paidin capital iridiums debt issuance costs deferred amortized term related indebtedness payment costs charges resulted significant negative operating cash flow certain interest costs also capitalized date commencement commercial operations portion payments made om contract capitalized depreciated amount capitalized determined depending upon number replacement satellites put service costs om contract capitalized expensed incurred operating expenses period july 29 1993 inception date iridiums predecessor december 31 1998 total operating expenses approximately 140 billion 988 million amount incurred 1998 iridium expects substantial increase future operating expenses relating sales marketing depreciation costs associated commercialization interest expense iridium financed expects continue finance significant portion capital requirements borrowings result borrowings iridium expects significant interest costs interest costs capitalized iridium system construction depreciated resulted interest costs capitalized 1995 1996 1997 year ended december 31 1998 approximately 443 million interest cost incurred interest expensed year ended december 31 1998 approximately 273 million remaining approximately 170 million interest capitalized system construction iridium anticipates interest cost incurred 1999 expensed portion interest expense paid cash including interest expense related iridiums 14 12 senior subordinated notes march 1 2001 noncash interest accrued accrual increase outstanding indebtedness iridiums consolidated balance sheets income taxes iridium reports income partnership united states federal income tax purposes accordingly expected directly subject us federal income tax iridium may however subject tax state local foreign jurisdictions portions income iwcl directly subject us federal income tax portion income effectively connected us business iridium iwcl pays income tax bermuda law year 2000 readiness disclosure general iridiums year 2000 program y2k program addresses informationtechnology nonit problems may exist within iridium system including iridiums suppliers roaming partners service providers material distributors recently two digits used represent year dates recorded computer systems practice anticipate problem generated turn century dates entered 00 could understood computers mean 1900 instead 2000 date handling processes could result incorrect performance computer calculations functionality involving dates y2k program y2k program encompasses iridium space ground facilities well relevant operations iridiums material suppliers distributors addresses nonit systems y2k program divided five major phases awareness inventory risk assessment repair renovation verification validation implementation monitoring awareness phase intended ensure establishment y2k program awareness potential risks year 2000 issues phase involves communicating status progress y2k program within iridium third parties ongoing activity continue iridium proceeds phases iridium substantially completed critical tasks phase process communication however ongoing continue first quarter 2000 inventory risk assessment phase involves performance initial inventory iridium hardware software infrastructure well material vendors identify potential year 2000 issues determine action required mitigate risk iridium gateways iridium contacting third party roaming partners service providers determine year 2000 status systems well plans bring compliance process ongoing material items believed iridium significant impact business customer service financial legal perspective phase performed iridiums internal y2k team assessment iridium developed systems iridiums key suppliers completed results indicated fewer upgrades initially planned needed allowed iridium accelerate y2k program targeted completion july 1 1999 gateways still completing evaluation internally developed systems status analysis finalized however iridium every indication systems critical completion iridium call one iridium handset another iridium handset expected y2k ready july 1 1999 iridium also determined systems critical billing settlements expected y2k ready july 1 1999 repair replacement renovation phase intended ensure appropriate items identified final inventory risk assessment upgraded meet year 2000 compliance criteria may include software updates hardware upgrades development new processes new business practices training programs etc completion various elements phase tied corresponding elements within assessment phase iridium anticipates material repairs replacements renovations substantially complete mid1999 systems direct control iridium supplier iridium satellite ground systems motorola indicated products provide iridium y2k ready july 1 1999 remaining suppliers critical hardware software provided upgrades installed first second quarters 1999 verification validation phase ensures critical business processes systems infrastructure verified tested ensure year 2000 issues cause major disruption ongoing operation iridium business verification testing systems iridiums direct control performed iridiums internal y2k team support technicians certain principle suppliers systems upgrades installed iridium environments verified tested first second quarters 1999 finally implementation monitoring phase year 2000 upgrades installed iridiums operating systems necessary iridium llc plans critical systems installed operational july 1 1999 monitoring activity employed effort ensure unforeseen year 2000 critical items appropriately prioritized correction addition y2k program plan addresses implementation future upgrades new products services ensure new y2k problem introduced y2k ready systems state readiness completion inventory assessment iridium determined company well positioned ready year 2000 iridium business support systems developed y2k ready planned upgrades minimal application software typical upgrades include server software operating systems suppliers iridium satellite ground systems motorola completed assessment well y2k program upgrades testing phases provided completion date july 1 1999 costs total cost associated required modifications become year 2000 compliant expected material iridiums financial position results operations current estimated total cost iridium y2k program 2 million iridium estimates amount expended y2k program calendar year 1998 approximately 180000 expensed iridium gateway costs expected material majority systems provided gateways maintenance contracts current 2 million cost iridium includes costs existing maintenance contracts internal labor small consulting budget miscellaneous tasks iridium require large remediation effort y2k activities substantially absorbed within existing departmental cost structure estimate reflect y2k costs example iridium business support systems developed outset handle year 2000 issues cost capability separately identified supplier significant critical nonyear 2000 information technology projects iridiums direct control materially delayed impacted year 2000 initiatives risks potential risks iridium differentiated risks related iridium handset iridium handset services versus risks related iridium services dependent upon existing world telecom structure based results assessment iridium systems motorola provided space ground systems reasonably likely worst case scenario would impact iridium handset iridium handset service would power failure ground station location mitigate iridium gateways backup generators critical ground station locations additional contingency planning conducted evaluate implement rerouting procedures risk determined significant reasonably likely worst case scenario services depend upon transmission calls existing wireless landline network failure call completed due failure existing telecom network backup use iridium handset iridium handset call would mitigate risk addition gateway business owners working local network providers identify critical areas risk determined critical issue exists interconnection arrangement gateway determine rerouting appropriate y2k program expected significantly reduce iridiums level uncertainty year 2000 problem particular year 2000 compliance readiness iridiums material partners iridium believes completion y2k program scheduled potential significant interruptions normal operations reduced contingency plans based information developed inventory assessment iridium begun develop contingency plans critical systems processes plans include analysis requirement reroute calls due interruption power certain gateway ground stations backup restore processes secure critical data staffing monitor critical processes throughout transition manual processes critical operations appropriate reviewing information gathered inventory risk assessment phase prepare possibility certain information systems third party partners vendors year 2000 compliant iridium intends develop additional contingency plans appropriate plans may include establishment teams monitor correct disruptions utilization backup processes including data backup storage development manual workaround solutions readers cautioned discussion iridiums efforts expectations related year 2000 forward looking statements read conjunction exhibit 99 report item 7a item 7a quantitative qualitative disclosures market risk applicable item 8 item 7a quantitative qualitative disclosures market risk iridiums longterm debt includes fixed variable interest rate instruments fair market value iridiums fixed longterm debt sensitive changes interest rates iridium runs risk market rates decline required payments exceed based current market rates current policies iridium use interest rate derivative instruments manage exposure interest rate changes following table provides information iridiums significant financial instruments sensitive changes interest rates thousands item 8 item 8 financial statements supplementary data see index financial statements page item 9 item 8 financial statements supplementary data see index financial statements page item 9 