Iridium Communications Inc.
Iridium Communications Inc. (Form: 10-Q, Received: 08/09/2010 16:09:55)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33963

 

 

Iridium Communications Inc.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   26-1344998
(State of incorporation)   (I.R.S. Employer Identification No.)

 

1750 Tysons Boulevard, Suite 1400, McLean, Virginia   22102
(Address of principal executive offices)   (Zip code)

703-287-7400

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of August 6, 2010 was 70,251,001.

 

 

 


Table of Contents

IRIDIUM COMMUNICATIONS INC.

TABLE OF CONTENTS

 

ITEM

No.

       PAGE
Part I. Financial Information   
1.  

Financial Statements

  
 

Iridium Communications Inc.:

  
 

Unaudited Condensed Consolidated Balance Sheets

   1
 

Unaudited Condensed Consolidated Statements of Operations

   2
 

Unaudited Condensed Consolidated Statements of Cash Flows

   3
 

Notes to Unaudited Condensed Consolidated Financial Statements

   4
 

Iridium Holdings LLC – Predecessor Company:

  
 

Unaudited Condensed Consolidated Statements of Income

   13
 

Unaudited Condensed Consolidated Statement of Cash Flows

   14
 

Notes to Unaudited Condensed Consolidated Financial Statements

   15
2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   19
3.  

Quantitative and Qualitative Disclosures About Market Risk

   32
4.  

Controls and Procedures

   32
Part II. Other Information   
1.  

Legal Proceedings

   32
1A.  

Risk Factors

   33
2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   36
3.  

Defaults Upon Senior Securities

   36
4.  

[Removed and Reserved]

   36
5.  

Other Information

   36
6.  

Exhibits

   36
 

Signatures

   37
 

EX-10.1

  
 

EX-31.1

  
 

EX-31.2

  
 

EX-32.1

  

 


Table of Contents

PART I.

Iridium Communications Inc.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

     June 30,
2010
    December 31,
2009
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 120,743      $ 147,178   

Accounts receivable, net of allowance for doubtful accounts of $0 and $1,462, respectively

     46,729        41,189   

Inventory

     10,493        25,656   

Deferred tax assets, net

     3,419        2,608   

Prepaid expenses and other current assets

     8,819        4,433   
                

Total current assets

     190,203        221,064   

Property and equipment, net

     414,655        401,666   

Restricted cash

     15,520        15,520   

Other assets

     28,454        1,127   

Intangible assets, net

     86,458        92,485   

Goodwill

     95,439        95,439   
                

Total assets

   $ 830,729      $ 827,301   
                

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 6,550      $ 7,865   

Accrued expenses and other current liabilities

     57,100        56,403   

Deferred revenue

     24,561        20,027   

Deferred acquisition consideration

     —          4,636   
                

Total current liabilities

     88,211        88,931   

Accrued satellite operations and maintenance expense, net of current portion

     13,260        15,300   

Deferred tax liabilities, net

     95,254        94,673   

Other long-term liabilities

     2,248        923   
                

Total liabilities

     198,973        199,827   

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $0.0001 par value, 2,000,000 shares authorized and none issued and outstanding

     —          —     

Common stock, $0.001 par value 300,000,000 shares authorized and 70,247,701 shares issued and outstanding

     70        70   

Additional paid-in capital

     672,558        670,116   

Accumulated deficit

     (40,851     (42,734

Accumulated other comprehensive (loss) income

     (21     22   
                

Total stockholders’ equity

     631,756        627,474   
                

Total liabilities and stockholders’ equity

   $ 830,729      $ 827,301   
                

See notes to the unaudited condensed consolidated financial statements

 

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Iridium Communications Inc.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010    2009  

Revenue:

         

Services:

         

Government

   $ 18,230      $ —        $ 37,243    $ —     

Commercial

     45,480        —          86,366      —     

Subscriber equipment

     20,264        —          42,107      —     
                               

Total revenue

     83,974        —          165,716      —     

Operating expenses:

         

Cost of subscriber equipment sales

     11,711        —          34,856      —     

Cost of services (exclusive of depreciation and amortization)

     19,021        —          39,382      —     

Research and development

     8,132        —          12,397      —     

Depreciation and amortization

     22,449        —          44,960      —     

Selling, general and administrative

     16,703        80        32,633      404   

Transaction costs

     —          248        —        387   
                               

Total operating expenses

     78,016        328        164,228      791   
                               

Operating profit (loss)

     5,958        (328     1,488      (791

Other income:

         

Interest income (expense), net

     228        298        334      821   

Other (expense) income, net

     (22     —          95      —     
                               

Total other income

     206        298        429      821   
                               

Earnings (loss) before income taxes

     6,164        (30     1,917      30   

Income tax expense (benefit)

     2,964        (13     34      14   
                               

Net income (loss)

   $ 3,200      $ (17   $ 1,883    $ 16   
                               

Weighted average shares outstanding – basic

     70,274        48,500        70,261      48,500   

Weighted average shares outstanding –diluted

     72,970        48,500        72,202      48,500   

Earnings (loss) per share – basic

   $ 0.05      $ (0.00   $ 0.03    $ 0.00   

Earnings (loss) per share– diluted

   $ 0.04      $ (0.00   $ 0.03    $ 0.00   

See notes to the unaudited condensed consolidated financial statements

 

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Iridium Communications Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

 

     Six Months Ended June 30,  
     2010     2009  

Cash flows from operating activities:

    

Net cash provided by (used in) operating activities

   $ 33,268      $ (920

Cash flows from investing activities:

    

Changes in investment in trust account

     —          909   

Capital expenditures

     (48,210     —     

Payment of deferred acquisition consideration

     (4,636     —     
                

Net cash (used in) provided by investing activities

     (52,846     909   

Cash flows from financing activities:

    

Payment of deferred financing fees

     (6,857     —     
                

Net cash used in investing activities

     (6,857  

Net decrease in cash and cash equivalents

     (26,435     (11

Cash and cash equivalents, beginning of period

     147,178        129   
                

Cash and cash equivalents, end of period

   $ 120,743      $ 118   
                

Supplemental cash flow information:

    

Income taxes paid

   $ 3,649      $ 340   

Supplemental disclosure of non-cash investing activities:

    

Property and equipment received but not yet paid for

   $ 2,811      $ —     

Leasehold improvement incentives

   $ 901      $ —     

Supplemental disclosure of non-cash financing activities:

    

Accrued financing fees

   $ 1,541      $ —     

Warrants subject to proposed business combination

   $ —        $ 1,828   

Accrued deferred offering costs

   $ —        $ 3,112   

See notes to unaudited condensed consolidated financial statements

 

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Iridium Communications Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2010

1. Organization and Basis of Presentation

Iridium Communications Inc. (the “Company”) offers voice and data communications services and products to businesses, U.S. and international government agencies and other customers on a global basis. The Company was initially formed as GHL Acquisition Corp., a special purpose acquisition company, as further described below. The Company acquired, directly and indirectly, all the outstanding equity of Iridium Holdings LLC (“Iridium Holdings” and, together with its direct and indirect subsidiaries, “Iridium”) in a transaction accounted for as a business combination on September 29, 2009 (the “Acquisition”). In accounting for the Acquisition, the Company was deemed the legal and accounting acquirer. On September 29, 2009, the Company changed its name to Iridium Communications Inc.

Iridium Holdings is considered the predecessor of the Company and, accordingly, its historical financial statements are separately presented herein as predecessor financial statements.

The Company was formed on November 2, 2007 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination. All activity from November 2, 2007 (inception) through February 21, 2008 related to the Company’s formation and initial public offering. From February 21, 2008 through September 29, 2009, the Company’s activities were limited to identifying prospective target businesses to acquire and with which to complete a business combination. On September 29, 2009, the Company consummated the Acquisition and, as a result, is no longer in the development stage.

Iridium Holdings was formed under the laws of Delaware in 2000 as a limited liability company pursuant to the Delaware Limited Liability Company Act. On December 11, 2000, Iridium acquired certain satellite communications assets from Iridium LLC, a non-affiliated debtor in possession, pursuant to an asset purchase agreement.

As a result of and subsequent to the Acquisition, the Company is a provider of mobile voice and data communications services via a constellation of low earth orbiting satellites. The Company holds various licenses and authorizations from the Federal Communications Commission (the “FCC”) and from foreign regulatory bodies that permit the Company to conduct its business, including the operation of its satellite constellation.

2. Significant Accounting Policies and Basis of Presentation

Principles of Consolidation and Basis of Presentation

The Company has prepared the unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. The accompanying unaudited condensed consolidated financial statements include the accounts of (i) the Company, (ii) its wholly owned subsidiaries, (iii) all less than wholly owned subsidiaries that the Company controls, and (iv) variable interest entities where the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated, and net income not attributable to the Company (when material) has been allocated to noncontrolling interests where applicable.

In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim unaudited condensed consolidated balance sheet. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. While the Company believes that the disclosures are adequate to make the information not misleading, these interim unaudited condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes (as amended) included in its current report on Form 8-K filed with the with the Securities and Exchange Commission (the “SEC”) on May 10, 2010.

Reclassifications

To be consistent with the current operating company, all amounts presented as professional fees and other operating expenses in periods prior to the Acquisition have been reclassified to selling, general and administrative expenses or transaction costs. These reclassifications had no effect on the Company’s net income (loss) for the three or six months ended June 30, 2009 or stockholders’ equity as of June 30, 2009.

 

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Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ materially from those estimates.

Financial Instruments

The unaudited condensed consolidated balance sheets include various financial instruments (primarily cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and other liabilities, and other obligations). Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:

 

   

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets;

 

   

Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

   

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Additional information regarding fair value is disclosed in Note 5.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and receivables. The majority of this cash is swept nightly into a money market fund invested in U.S. treasuries. The Company performs credit evaluations of its customers’ financial condition and records reserves to provide for estimated credit losses. While the Company maintains its cash and cash equivalents with financial institutions with high credit ratings, it often maintains those deposits in federally insured financial institutions in excess of federally insured (FDIC) limits. Accounts receivable are due from both domestic and international customers (see Note 4).

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The cash and cash equivalents balances at June 30, 2010 and December 31, 2009, consisted of cash deposited in institutional money market mutual funds and regular interest bearing and non-interest bearing depository accounts and certificates of deposits with commercial banks. Restricted cash of $15.5 million as of June 30, 2010 and December 31, 2009, relates primarily to collateral for a letter of credit for potential costs of de-orbiting the Company’s satellites. The $15.4 million letter of credit expired in the third quarter of 2010 and is no longer a requirement in the amended and restated long-term operations and maintenance agreement (“O&M Agreement”) the Company entered into with The Boeing Company (“Boeing”) in July 2010. Refer to Note 8 for more information.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and generally are subject to late fee penalties. Management develops its estimate of an allowance for uncollectible receivables based on the Company’s experience with specific customers, aging of outstanding invoices, its understanding of customers’ current economic circumstances and its own judgment as to the likelihood that the Company will ultimately receive payment. The Company writes off its accounts receivable when balances ultimately are deemed uncollectible.

Foreign Currencies

The functional currency of the Company’s foreign consolidated subsidiaries is their local currency, except for countries that are deemed to have “highly inflationary” economies, in which case the functional currency is deemed to be the reporting currency (or U.S. dollar). Assets and liabilities of its foreign subsidiaries are translated to U.S. dollars based on exchange rates at the end of the reporting period. Income and expense items are translated at the weighted average exchange rates prevailing during the reporting period. Translation adjustments are accumulated in a separate component of stockholders’ equity. Transaction gains or losses are classified as other income (expense), net in the accompanying unaudited condensed consolidated statements of operations.

Deferred Financing Costs

Costs incurred in connection with securing debt financing are deferred and are amortized as additional interest expense using the effective interest method over the term of the related debt.

 

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As of June 30, 2010, the Company had deferred (as other long-term assets in the accompanying unaudited condensed consolidated balance sheets) approximately $8.4 million of direct and incremental deferred financing costs associated with securing anticipated debt financing for Iridium NEXT. If the Company determines the anticipated debt financing will not be completed, the related deferred costs will be written-off at that time.

Inventory

Inventory consists primarily of finished goods, although the Company at times also maintains an inventory of raw materials from third-party manufacturers. The Company outsources manufacturing of subscriber equipment primarily to a third-party manufacturer and purchases accessories from third-party suppliers. The Company’s cost of inventory includes an allocation of overhead (including salaries and benefits of employees directly involved in bringing inventory to its existing condition, scrap, tooling and freight). Inventories are valued using the average cost method, and are carried at the lower of cost or market.

The Company has a manufacturing agreement with a supplier to manufacture subscriber equipment, which contains minimum monthly purchase requirements. The Company’s purchases have exceeded the monthly minimum requirement since inception. Pursuant to the agreement, the Company may be required to purchase excess materials if the materials are not used in production within the periods specified in the agreement. The supplier will then generally repurchase such materials from the Company at the same price paid by the Company, as required for the production of the devices. As of June 30, 2010 and December 31, 2009, the Company had $0.6 million and $1.0 million, respectively, of excess materials and the amounts were included in inventory on the accompanying unaudited condensed consolidated balance sheets.

Business Combinations

Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the Company records all assets acquired and liabilities assumed at their acquisition-date relative fair values. Since the Company estimates the fair value of the assets acquired and liabilities assumed, estimates may be revised through a measurement period, which is typically one year. The Company expenses all acquisition-related costs as incurred.

Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation at fair value. Accordingly, the Company expenses the estimated fair value of stock-based awards made in exchange for employee and consultant services over the requisite service period. Stock-based compensation cost related to stock options is determined at the grant date using the Black-Scholes option pricing model. The value of an award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period and is classified in the statement of operations in a manner consistent with the statement of operations’ classification of the employee’s salary and other compensation. Awards to consultants are classified in selling, general and administrative.

In the second quarter of 2010, the Company granted approximately 562,000 stock options to its employees. Employee stock options generally vest over a four-year period with 25% vesting after the first year of service and the remainder vesting ratably on a quarterly basis thereafter. Additionally, in the second quarter of 2010, the Company granted approximately 75,000 stock options to consultants. The consultant options vest over a two-year period with ratable quarterly vesting. The aggregate estimated fair value of the employee and consultant stock options based on the Black-Scholes option pricing model was approximately $4.0 million.

Property and Equipment

Property and equipment is carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives:

 

Satellite system    14 years
Terrestrial system    7 years
Equipment    3 – 5 years
Gateway system    5 years
Internally developed software and purchased software    3 – 7 years
Building    39 years
Leasehold improvements    shorter of useful life or remaining lease term

Repairs and maintenance costs are expensed as incurred.

Long-Lived Assets

The Company assesses its long-lived assets for impairment when indicators of impairment are present. Recoverability of assets is measured by comparing the carrying amounts of the assets to the future undiscounted cash flows expected to be generated by the assets. Any impairment loss would be measured as the excess of the assets’ carrying amount over their fair value. Fair value is based on market prices where available, an estimate of market value or various other valuation techniques.

 

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Goodwill and Other Intangible Assets

Goodwill

Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Impairment testing for goodwill is performed annually or more frequently if indicators of potential impairment exist. If the fair value of goodwill is less than the carrying amount of goodwill, an impairment loss is recognized.

Intangible Assets Not Subject to Amortization

A significant portion of the Company’s intangible assets are spectrum and regulatory authorizations and trade names which are indefinite-lived intangible assets. The Company reevaluates the useful life determination for these assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The Company tests its indefinite-lived intangible assets for potential impairment annually or more frequently if indicators of impairment exist. If the fair value of the indefinite-lived asset is less than the carrying amount, an impairment loss is recognized.

Intangible Assets Subject to Amortization

The Company’s intangible assets that do have finite lives (primarily customer relationships – government and commercial, core developed technology and software) are amortized over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indicators were present, the Company would test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the carrying amount (i.e., the asset is not recoverable), the Company would perform the next step, which is to determine the fair value of the asset and record an impairment loss, if any. The Company reevaluates the useful lives for these intangible assets each reporting period to determine whether events and circumstances warrant a revision in their remaining useful lives.

Comprehensive Income

The Company’s only component of other comprehensive (loss) income for all periods presented is the foreign currency translation adjustment related to consolidated subsidiaries. Comprehensive income is as follows:

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
     2010     2009     2010     2009
     (In thousands)

Net income (loss)

   $ 3,200      $ (17   $ 1,883      $ 16

Cumulative translation adjustments

     (12     —          (43     —  
                              

Comprehensive income (loss)

   $ 3,188      $ (17   $ 1,840      $ 16
                              

Asset Retirement Obligations

Liabilities arising from legal obligations associated with the retirement of long-lived assets are required to be measured at fair value and recorded as a liability. Upon initial recognition of a liability for retirement obligations, a company must record an asset, which is depreciated over the life of the asset to be retired.

Under certain circumstances, each of the U.S. government, Boeing and Motorola, Inc. (“Motorola”) has the right to require the de-orbit of the Company’s satellite constellation. In the event the Company was required to effect a mass de-orbit, the Company, pursuant to the amended and restated operations and maintenance agreement by and between Iridium Constellation LLC (“Iridium Constellation”) and Boeing, would be required to pay Boeing $16.4 million, plus an amount equivalent to the premium for de-orbit insurance coverage ($2.5 million as of June 30, 2010). The Company has concluded that each of the foregoing de-orbit rights meets the definition of an asset retirement obligation. However, the Company currently does not believe the U.S. government, Boeing or Motorola will exercise their respective de-orbit rights. As a result, the Company believes the likelihood of any future cash outflows associated with the mass de-orbit obligation is remote. Accordingly, the Company has not recorded an asset retirement obligation relating to the potential de-orbit rights in its unaudited condensed consolidated balance sheet as of June 30, 2010.

There are other circumstances in which the Company could be required, either by the U.S. government or for technical reasons, to de-orbit an individual satellite; however, the Company believes that such costs would not be significant relative to the costs associated with the ordinary operations of the satellite constellation.

 

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Revenue Recognition

The Company derives its revenue primarily as a wholesaler of satellite communications products and services. The primary types of revenue include (i) services revenue (access and usage-based airtime fees) and (ii) subscriber equipment revenue. Additionally, the Company generates revenue by providing engineering and support services to commercial and government customers.

Wholesaler of satellite communications products and services

Pursuant to wholesale agreements, the Company sells its products and services to service providers who, in turn, sell the products and services to other distributors or directly to the end-users. Generally, the Company recognizes revenue when services are performed or delivery has occurred, evidence of an arrangement exists, the fee is fixed or determinable, and collection is probable, as follows:

Contracts with multiple elements

At times, the Company sells subscriber equipment through multi-element contracts that bundle subscriber equipment with airtime services. When the Company sells subscriber equipment and airtime services in bundled arrangements that include guaranteed minimum orders and determines that it has separate units of accounting, the Company allocates the bundled contract price among the various contract deliverables based on each deliverable’s relative fair value. The Company determines vendor specific objective evidence of fair value by assessing sales prices of subscriber equipment and airtime services when they are sold to customers on a stand-alone basis.

Services revenue sold on a stand-alone basis

Services revenue is generated from the Company’s service providers through usage of its satellite system and through fixed monthly access fees per user charged to service providers. Revenue for usage is recognized when usage occurs. Revenue for fixed-per-user access fees is recognized ratably over the period in which the services are provided to the end-user. Revenue from prepaid services is recognized when usage occurs or, if not used, when the customer’s right to access the unused prepaid services expires. The Company does not offer refund privileges for unused prepaid services. Deferred prepaid services revenue and access fees are typically earned and recognized as income within one year of customer prepayment. Based on historical information for prepaid scratch card services that do not have an initial expiration date, the Company records breakage associated with prepaid scratch card account balances for which the likelihood of redemption is remote, which is generally determined after 36 months from issuance.

Subscriber equipment sold on a stand-alone basis

The Company recognizes subscriber equipment sales and the related costs when title to the equipment (and the risks and rewards of ownership) passes to the customer, typically upon shipment.

Services and subscriber equipment sold to the U.S. government

The Company provides airtime to U.S. government subscribers through (i) fixed monthly fees on a per user basis for unlimited voice services, (ii) fixed monthly fees per user for unlimited paging services, (iii) a tiered pricing plan (based on usage) per device for data services and (iv) fixed monthly fees on a per user basis for unlimited beyond line-of-sight push-to-talk voice services to user-defined groups. Revenue related to these services is recognized ratably over the periods in which the services are provided, and the related costs are expensed as incurred. The U.S. government purchases its equipment from distributors and not directly from the Company.

Government engineering and support services

The Company provides maintenance services to the U.S. government’s dedicated gateway in Hawaii. This revenue is recognized ratably over the periods in which the services are provided; the related costs are expensed as incurred.

Other government and commercial engineering and support services

The Company also provides certain engineering services to assist customers in developing new technologies for use on the Company’s satellite system. The revenue associated with these services is recorded when the services are rendered, typically on a percentage of completion method of accounting based on the Company’s estimate of total costs expected to complete the contract, and the related costs are expensed as incurred. Revenue on cost-plus-fixed-fee contracts is recognized to the extent of estimated costs incurred plus the applicable fees earned. The Company considers fixed fees under cost-plus-fixed-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract.

 

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Warranty Expense

The Company generally provides the first end-user purchaser of its products a warranty on subscriber equipment for one to two years from the date of purchase by such first end-user, depending on the product. A warranty accrual is made when it is estimable and probable that a loss has been incurred. A warranty reserve is maintained based on historical experience of warranty costs and expected occurrences of warranty claims on equipment. Costs associated with warranties are recorded as cost of subscriber equipment sales and include equipment replacements, repairs, freight and program administration.

 

     Six Months Ended
June 30, 2010
 
     (In thousands)  

Balance at beginning of the period

   $ (726

Provision

     (390

Utilization

     618   
        

Balance at end of the period

   $ (498
        

Research and Development

Research and development costs are charged as an expense in the period in which they are incurred.

Income Taxes

The Company accounts for income taxes using the asset and liability approach, which requires the recognition of tax benefits or expenses on the temporary differences between the financial reporting and tax bases of its assets and liabilities. For interim periods, the Company recognizes a provision (benefit) for income taxes based on an estimated annual effective tax rate expected for the entire year. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company also recognizes a tax benefit from uncertain tax positions only if it is “more likely than not” that the position is sustainable based on its technical merits. The Company’s policy is to recognize interest and penalties on uncertain tax positions as a component of income tax expense. The Company’s estimated annual effective tax rate differs from the statutory U.S. federal income tax rate of 35% due to state taxes and additional U.S. taxes on foreign corporations.

Earnings Per Share

The Company calculates basic earnings (loss) per share by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share takes into account the effect of potential dilutive common shares when the effect is dilutive. The effect of potential dilutive common shares, consisting of common stock issuable upon exercise of outstanding stock options and stock purchase warrants, is computed using the treasury stock method. The Company’s unvested restricted stock units contain non-forfeitable rights to dividends and therefore are considered to be participating securities in periods of net income; the calculation of basic and diluted earnings per share excludes net income attributable to the unvested restricted stock units from the numerator, excludes the impact of unvested restricted stock units from the denominator, and includes the impact of vested restricted stock units in the denominator. Refer to Note 7 for more information.

Accounting Developments

In June 2009, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on financial reporting by companies involved with variable interest entities. The new guidance requires a company to perform an analysis to determine whether the company’s variable interest or interests give it a controlling financial interest in a variable interest entity. Additionally, a company is required to assess whether it has implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. The new guidance also requires enhanced disclosures that provide more transparent information about a company’s involvement with a variable interest entity. The Company adopted the accounting guidance in the first quarter of 2010 with no material impact on its financial position or results of operations.

3. Commitments and Contingencies

Commitments

In June 2010, the Company executed a contingent primarily fixed price full scale development contract with Thales Alenia Space (“Thales”) for the design and manufacture of satellites for the Iridium NEXT constellation (the “FSD”) and entered into an authorization to proceed (“ATP”), which allowed Thales to commence work immediately on the development of satellites prior to satisfaction of the contingencies to the effectiveness of the FSD (namely the completion of the Company’s targeted financing). The FSD contemplates the launch of the first next-generation satellites during the first quarter of 2015. As of June 30, 2010, the Company has paid $39.7 million for work related to the ATP. Upon the effectiveness of the FSD, all amounts paid pursuant to the ATP will be credited against amounts due under the FSD. As of August 6, 2010, the Company and Thales entered into amendments to the ATP and the related FSD. Refer to Note 8 for more information.

 

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The Company entered into an agreement in March 2010 with a launch services provider to secure the terms and conditions associated with Iridium NEXT. As a result, the Company made a deposit of $19.0 million in the first quarter of 2010 which is fully refundable if financing is not secured on the FSD for the design and manufacture of the Iridium NEXT satellites with Thales. The $19.0 million deposit is recorded in other long term assets in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2010.

On July 21, 2010, the Company entered into certain agreements with Boeing. Refer to Note 8 for more information.

Contingencies

From time to time, in the normal course of business, the Company is party to various pending claims and lawsuits. Other than the Motorola action described below, the Company is not aware of any such actions that the Company would expect to have a material adverse impact on the Company’s business, financial results or financial condition.

On February 9, 2010, Motorola filed a complaint against Iridium Satellite LLC (“Iridium Satellite”) and Iridium Holdings to seek recovery of the commitment fee and the loan success fee under the Senior Subordinated Term Loan Agreement in an aggregate amount they allege is at least $24.7 million. The Company has accrued an amount related to this claim in the accompanying unaudited condensed consolidated balance sheets as of June 30, 2010 and December 31, 2009.

Indemnification Agreement

Iridium Satellite, Boeing, Motorola and the U.S. government entered into an indemnification agreement, effective December 5, 2000, which provides, among other things, that: (a) Iridium Satellite will maintain satellite liability insurance; (b) Boeing will maintain aviation and space liability insurance; and (c) Motorola will maintain aviation products – completed operations liability insurance.   Pursuant to the indemnification agreement, the U.S. government may, in its sole discretion, require the Company, Boeing or either of them to immediately de-orbit the Company’s satellites at no expense to the U.S. government upon the occurrence of certain enumerated events. However, as discussed in Note 2, management does not believe the U.S. government will exercise this right.

4. Segments, Significant Customers, Supplier and Service Providers and Geographic Information

The Company operates in one segment, providing global satellite communication services and products.

The Company acquires subscriber equipment primarily from one manufacturer and utilizes other sole source suppliers for certain component parts of its devices. Should events or circumstances prevent the manufacturer or the suppliers from producing the equipment or component parts, the Company’s business could be adversely affected until the Company is able to move production to other facilities of the manufacturer or secure a replacement manufacturer or secure an alternative supplier for such component parts.

A significant portion of the Company’s satellite operations and maintenance services is provided by Boeing. Should events or circumstances prevent Boeing from providing these services, the Company’s business could be adversely affected until the Company is able to assume operations and maintenance responsibilities or secure a replacement service provider.

Net property and equipment by geographic area, was as follows:

 

     June 30,
2010
   December 31,
2009
     (In thousands)

United States

   $ 76,017    $ 69,911

Satellites in orbit

     294,999      329,704

Satellite systems under construction

     39,917      —  

All others (1)

     3,722      2,051
             
   $ 414,655    $ 401,666
             

 

(1) All others primarily includes subscriber equipment in international waters.

Revenue by geographic area, was as follows:

 

     Three Months Ended
June 30, 2010
   Six Months Ended
June 30, 2010
     (In thousands)

United States

   $ 40,318    $ 80,709

Canada

     11,713      23,420

United Kingdom

     9,972      19,626

 

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     Three Months Ended
June 30, 2010
   Six Months Ended
June 30, 2010
     (In thousands)

Other countries (1)

     21,971      41,961
             
   $ 83,974    $ 165,716
             

 

(1) No one other country represented more than 10% of revenue.

Revenue is attributed to geographic area based on the billing address of the distributor. Service location and the billing address are often not the same. The Company’s distributors sell services directly or indirectly to end-users, who may be located or use the Company’s products and services elsewhere. The Company cannot provide the geographical distribution of end-users because it does not contract directly with them. The Company does not have significant foreign exchange risk on sales, as invoices are generally denominated in United States dollars.

5. Fair Value Measurements

Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value.

Financial Assets and Liabilities

Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash were recorded at fair value at June 30, 2010 and December 31, 2009. The inputs used in measuring the fair value of these instruments are considered to be Level 1 in accordance with the fair value hierarchy. The fair values are based on period-end statements supplied by the various banks and brokers that held the majority of the Company’s funds deposited in institutional money market mutual funds and regular interest bearing and non-interest bearing depository accounts and certificates of deposits with commercial banks.

Short-term Financial Instruments

The fair values of short-term financial instruments (primarily cash and cash equivalents, prepaid expenses, deposits and other current assets, accounts receivable, accounts payable, and accrued expenses and other current liabilities) approximate their carrying values because of their short-term nature.

6. Related Party Transaction

The Company has a $1.0 million receivable from a 5% beneficial owner. The receivable resulted from federal and state tax payments submitted by the Company for Baralonco N.V. on behalf of this beneficial owner for the period prior to the Company’s purchase of 100% of the Baralonco N.V. shares. As a result of this acquisition, Baralonco N.V. is now a wholly owned subsidiary of the Company.

7. Earnings (Loss) Per Share

The computations of basic and diluted earnings (loss) per share are set forth below:

 

     For the Three Months Ended June 30,  
     2010     2009  
     (In thousands, except per share amounts)  

Numerator:

    

Net income (loss)

   $ 3,200      $ (17

Net income (loss) allocated to participating securities

     (4     —     
                

Numerator for basic earnings (loss) per share

   $ 3,196      $ (17
                

Numerator for diluted earnings (loss) per share

   $ 3,196      $ (17
                

Denominator:

    

Denominator for basic earnings per share – Weighted average outstanding common shares

     70,274        48,500   

Dilutive effect of vested restricted stock units

     26        —     

Dilutive effect of warrants

     2,670        —     
                

Denominator for diluted earnings per share

     72,970        48,500   
                

Earnings (loss) per share — basic

   $ 0.05      $ (0.00

Earnings (loss) per share — diluted

   $ 0.04      $ (0.00

 

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Table of Contents
     For the Six Months Ended June 30,
     2010     2009
     (In thousands, except per share amounts)

Numerator:

    

Net income

   $ 1,883      $ 16

Net income allocated to participating securities

     (2     —  
              

Numerator for basic earnings per share

   $ 1,881      $ 16
              

Numerator for diluted earnings per share

   $ 1,881      $ 16
              

Denominator:

    

Denominator for basic earnings per share – Weighted average outstanding common shares

     70,261        48,500

Dilutive effect of vested restricted stock units

     39        —  

Dilutive effect of warrants

     1,902        —  
              

Denominator for diluted earnings per share

     72,202        48,500
              

Earnings per share — basic

   $ 0.03      $ 0.00

Earnings per share — diluted

   $ 0.03      $ 0.00

For the three and six months ended June 30, 2010, 14.4 million warrants and 3.1 million stock options were not included in the computation of diluted earnings per share as the effect would be anti-dilutive. Warrants issued by the Company in the initial public offering and private placement in 2008 and 2007, respectively, were contingently exercisable at the later of one year from the date of the applicable offering and the consummation of a business combination, provided, in each case, there was an effective registration statement covering the shares issuable upon exercise of the warrants. Because this contingency was not satisfied, the warrants were not exercisable as of June 30, 2009, and therefore 56.5 million shares of common stock underlying the warrants were excluded from the basic and diluted earnings per share calculation for the three and six months ended June 30, 2009.

8. Subsequent Events

On July 21, 2010, the Company’s indirect wholly owned subsidiary, Iridium Constellation, and Boeing, entered into the O&M Agreement, which amends and restates in its entirety and supersedes the operations and maintenance agreement previously in place between Iridium Constellation and Boeing. Under the O&M Agreement, Boeing operates and maintains the Company’s satellite constellation. The term of the O&M Agreement runs concurrently with the useful life of the constellation.

The amendment and restatement of the prior agreement does not materially change the obligations of Boeing, but provides for annual price reductions and other cost-saving opportunities and converts the fee for Boeing’s operations and maintenance services from a fixed-price fee to a time-and-materials fee with an annual limit on amounts paid.

In addition, on July 21, 2010, Iridium Satellite and Boeing entered into an agreement pursuant to which Boeing will operate and maintain Iridium NEXT (the “NEXT Support Services Agreement”), once it is deployed. Boeing will provide these services on a time-and-materials fee basis. The term of the NEXT Support Services Agreement runs concurrently with the useful life of the Iridium NEXT constellation. Iridium Satellite is entitled to terminate the agreement for convenience and without cause in 2019.

As of August 6, 2010, the Company and Thales entered into amendments to the ATP and the related FSD pursuant to which the Company paid approximately $37.2 million to Thales to mitigate the potential effect of currency fluctuations on the Euro-denominated portions of the ATP and the FSD. The ATP amendment also extended that agreement for an additional three months, increasing the Company’s total potential payments to Thales during the full term of the ATP to approximately $164.2 million (assuming an average Euro/U.S. dollar exchange rate of 1.29). As amended, the ATP will terminate at the time the Company finalizes the credit facility and satisfies the conditions for the first borrowing, or, if earlier, on December 1, 2010.

 

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Iridium Holdings LLC – Predecessor Company

Unaudited Condensed Consolidated Statements of Income

(In thousands, except per unit data)

 

     Three Months Ended
June 30, 2009
    Six Months Ended
June 30, 2009
 

Revenue:

    

Services:

    

Government

   $ 18,160      $ 36,628   

Commercial

     39,959        76,777   

Subscriber equipment

     24,586        45,089   
                

Total revenue

     82,705        158,494   

Operating expenses:

    

Cost of subscriber equipment sales

     11,601        22,917   

Cost of service (exclusive of depreciation and amortization)

     19,185        38,882   

Research and development

     1,175        13,269   

Depreciation and amortization

     3,574        7,249   

Selling, general and administrative

     13,232        27,171   

Transaction costs

     1,275        1,918   
                

Total operating expenses

     50,042        111,406   
                

Operating profit

     32,663        47,088   

Other (expense) income:

    

Interest (expense) income, net of capitalized interest of $110 and $191 for the three and six months ended June 30, 2009, respectively

     (4,465     (9,104

Other income (expense), net

     402        334   
                

Total other (expense) income

     (4,063     (8,770
                

Net income

   $ 28,600      $ 38,318   
                

Net income attributable to Class A Units

   $ 19,399      $ 25,991   

Weighted average Class A Units outstanding – basic

     1,084        1,084   

Weighted average Class A Units outstanding – diluted

     1,168        1,168   

Earnings per unit – basic

   $ 17.90      $ 23.98   

Earnings per unit – diluted

   $ 16.88      $ 22.79   

See notes to unaudited condensed consolidated financial statements

 

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Iridium Holdings LLC – Predecessor Company

Unaudited Condensed Consolidated Statement of Cash Flows

(In thousands)

 

     Six Months Ended
June 30, 2009
 

Operating activities

  

Net cash provided by operating activities

   $ 37,426   

Investing activities

  

Capital expenditures

     (4,784
        

Net cash used in investing activities

     (4,784

Financing activities

  

Repayments under credit facilities

     (16,977
        

Net cash used in financing activities

     (16,977

Net increase in cash and cash equivalents

     15,665   

Cash and cash equivalents, beginning of period

     24,810   
        

Cash and cash equivalents, end of period

   $ 40,475   
        

Supplementary cash flow information

  

Cash paid for interest

   $ 7,454   

Supplementary disclosure of non-cash investing activities

  

Property and equipment received but not paid for at period end

   $ 251   

See notes to unaudited condensed consolidated financial statements

 

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Table of Contents

Iridium Holdings LLC – Predecessor Company

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2009

1. Organization and Business

Organization

Iridium Holdings LLC (“Iridium Holdings” and, together with its direct and indirect subsidiaries, “Iridium”) was formed under the laws of Delaware in 2000 and was organized as a limited liability company pursuant to the Delaware Limited Liability Company Act. On December 11, 2000, Iridium Satellite LLC, a wholly owned subsidiary of Iridium Holdings, acquired certain satellite communication assets from Iridium LLC, a non-affiliated debtor in possession, pursuant to an asset purchase agreement.

Iridium is considered a predecessor entity to Iridium Communications Inc.

Business

Iridium is a provider of mobile voice and data communications services via satellite. Iridium holds various licenses and authorizations from the Federal Communications Commission (the “FCC”) and from foreign regulatory bodies that permit Iridium to conduct its business, including the operation of its satellite constellation. Iridium offers voice and data communications services and products to businesses, U.S. and international government agencies and other customers on a global basis.

2. Significant Accounting Policies and Basis of Presentation

Principles of Consolidation and Basis of Presentation

Iridium has prepared the unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. The accompanying unaudited condensed consolidated financial statements include the accounts of Iridium and its wholly owned and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated. Iridium has continued to follow the accounting policies disclosed in the consolidated financial statements included in its 2009 audited financial statements on Iridium Communications Inc.’s Form 10-K for the year ended December 31, 2009. In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments that Iridium considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. While Iridium believes that the disclosures are adequate to not make the information misleading, these interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in its 2009 audited financial statements on Iridium Communications Inc.’s current report on Form 8-K filed with the with the Securities and Exchange Commission (the “SEC”) on May 10, 2010.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires Iridium to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.

3. Commitments and Contingencies

Contingencies

From time to time, in the normal course of business, Iridium is party to various pending claims and lawsuits. Iridium is not aware of any such actions that Iridium would expect to have a material adverse impact on Iridium’s business, financial results or financial condition.

Iridium, a director, and a former officer were named as defendants in a lawsuit commenced in 2007 by a former member of Iridium’s Board of Directors (the “Plaintiff”). The lawsuit alleged, among other things, defamation and tortuous interference with the Plaintiff’s economic/business relationship with his principal, an investor in Iridium. These actions sought compensatory and other damages, and costs and expenses associated with the litigation. Iridium has settled this claim and has recorded the loss in the financial statements.

Iridium was named as a defendant in a lawsuit commenced in December 2008 by a vendor alleging copyright infringement by Iridium of certain software owned by the vendor. The lawsuit sought (i) actual damages and any infringer’s profits of Iridium attributable to

 

15


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the alleged infringement, (ii) punitive damages, (iii) statutory damages, including certain enhanced damages based on Iridium’s alleged willful conduct (as an alternative to the damages specified in (i) and (ii) above), (iv) a permanent injunction, and (v) costs and attorney’s fees under applicable law. Iridium settled this claim and recorded the loss in the financial statements.

4. Segments, Significant Customers, Supplier, and Service Providers and Geographic Information

Iridium operates in one segment, providing global satellite communication services and products.

Iridium derived approximately 22% and 23% of its total revenue during the three months ended June 30, 2009 and the six months ended June 30, 2009, respectively, from agencies of the U.S. government. Iridium’s two largest commercial customers accounted for approximately 22% of total revenue for both the three and six months ended June 30, 2009.

Iridium acquires subscriber equipment primarily from one manufacturer. Should events or circumstances prevent the manufacturer from producing the equipment, Iridium’s business could be adversely affected until Iridium is able to move production to other facilities of the manufacturer or secure a replacement manufacturer.

A significant portion of Iridium’s satellite operations and maintenance services are provided by Boeing. Should events or circumstances prevent Boeing from providing these services, Iridium’s business could be adversely affected until Iridium is able to assume operations and maintenance responsibilities or secure a replacement service provider.

Revenue by geographic area is as follows:

 

     Three Months Ended
June 30, 2009
   Six Months Ended
June 30, 2009
     (In thousands)

United States

   $ 38,445    $ 76,395

Canada

     12,340      22,244

United Kingdom

     8,953      14,701

Other countries (1)

     22,967      45,154
             
   $ 82,705    $ 158,494
             

 

(1) No one other country represented more than 10% of revenue.

Revenue is attributed to geographic area based on the billing address of the distributor. Service location and the billing address are often not the same. Iridium’s distributors sell services directly or indirectly to end-users, who may be located or use Iridium’s products and services elsewhere. Iridium cannot provide the geographical distribution of end-users because it does not contract directly with them. Iridium does not have significant foreign exchange risk on sales, as invoices are generally denominated in United States dollars.

5. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability that assumes an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchal disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets;

Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

At June 30, 2009, Iridium’s financial and non-financial assets and liabilities were measured using either Level 1 or Level 2 inputs.

Interest Rate Swaps

Iridium accounts for its interest rate swaps on the balance sheet at their respective fair values. As required by Iridium’s credit facilities, management executed four pay-fixed receive-variable interest rate swaps in 2006, two of which were still open at June 30, 2009 and mature within two years. Iridium hedged $86.0 million of variable interest rate debt as of June 30, 2009. The interest rate swaps were designated as cash flow hedges. The objective for holding these instruments was to manage variable interest rate risk related to Iridium’s $210.0 million credit facilities, by synthetically converting a portion of the variable rate risk to fixed rate interest rate risk. The swaps were structured so that Iridium would pay a fixed rate of interest and receive a variable interest payment, which, to the extent hedged, should offset the variable interest that was being paid on its debt.

 

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The principal market in which Iridium executes interest rate swap contracts is the retail market. For recognizing the most appropriate value the highest and best use of Iridium’s derivatives are measured using an in-exchange valuation premise that considers the assumptions that market participants would use in pricing the derivatives. Iridium has elected to use the income approach to value the derivatives, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted) assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the swap valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates, and credit default swap rates at commonly quoted intervals).

Mid-market pricing is used as a practical expedient for fair value measurements. Key inputs, including the cash rates for very short term, futures rates for up to two years and LIBOR swap rates beyond the derivative maturity are compared to provide spot rates at resets specified by each swap as well as to discount those future cash flows to present value at measurement date. Inputs are collected on the last market day of the period. The same rates used to compare the yield curve are used to discount the future cash flows. A credit default swap basis available at commonly quoted intervals are collected and applied to all cash flows when the swap is in an asset position pre-credit effect.

The variable interest rates on the swaps reset every quarter concurrent with the reset of the variable rate on the debt. The fixed rate will not change over the life of the swap. Each quarter-end, the swaps are measured against current interest rates to determine a fair market value. The fair market value is recorded on the balance sheet and the offset to the value, to the extent effective, is recorded in accumulated other comprehensive income. The effectiveness of the swaps in offsetting the gain or loss on the debt is assessed on a contract by contract basis quarterly, by regressing historical changes in the value of the swap against the historical change in value of the underlying debt. To establish a value for the underlying debt a “hypothetical” derivative is created with terms that match the debt (e.g., notional amount, reset rates and terms, maturity) and which had a zero fair value at designation.

Foreign Exchange Contracts

Iridium enters into foreign currency exchange contracts to mitigate foreign currency exposure on a product consulting service contract denominated in foreign currency. Given the variability of its purchase commitments and payment terms under the purchase contracts, Iridium has not elected hedge accounting for these foreign currency exchange contracts. Accordingly, the foreign exchange contracts are marked to market at each balance sheet date, with the changes in fair value being recognized as a current period gain or loss in the accompanying unaudited condensed consolidated statement of income. The inputs used in measuring the fair value of these instruments are considered to be Level 2 in the fair value hierarchy. The fair market values are based on quoted market values for similar contracts.

Derivative Instruments and Hedging Activities

The following table summarizes the effect of derivative instruments designated as cash flow hedges (interest rate swaps) on Iridium’s results of operations for the three and six months ended June 30, 2009:

For the Three Months Ended June 30, 2009

(In thousands)

 

Derivatives in ASC 815

Cash Flow Hedging

Relationships

  Amount of Gain or
(Loss) Recognized in
OCI on  Derivative
(Effective Portion)
    Location of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
  Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI into  Income
(Effective Portion)
    Location of Gain or
(Loss) Recognized in
Income on
Derivative
(Ineffective Portion)
  Amount of Gain or
(Loss) Recognized in
Income on  Derivative
(Ineffective Portion)
 

Accumulated other comprehensive loss

  $ (156   Interest Expense   $ (991   Interest Expense   $ (5
                           

Total

  $ (156     $ (991     $ (5
                           

For the Six Months Ended June 30, 2009

(In thousands)

 

Derivatives in ASC 815

Cash Flow Hedging

Relationships

  Amount of Gain or
(Loss) Recognized in
OCI on Derivative
(Effective Portion)
    Location of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
  Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
    Location of Gain or
(Loss) Recognized
in Income on
Derivative
(Ineffective Portion)
  Amount of Gain or
(Loss) Recognized in
Income on  Derivative
(Ineffective Portion)
 

Accumulated other comprehensive loss

  $ (79   Interest Expense   $ (1,789   Interest Expense   $ (7
                           

Total

  $ (79     $ (1,789     $ (7
                           

 

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The following table summarizes the effect of derivative instruments not designated as hedges (foreign exchange contracts) on Iridium’s results of operations for the three and six months ended June 30, 2009:

For the Three Months Ended June 30, 2009

(In thousands)

 

Derivatives Not Designated as

Hedging Instruments under

ASC 815

   Location of Gain or (Loss)
Recognized in Income on
Derivative
   Amount of Gain or (Loss)
Recognized in Income on
Derivative

Forward Contracts

   Other (expense) income    $ 367
         

Total

      $ 367
         

For the Six Months Ended June 30, 2009

(In thousands)

 

Derivatives Not Designated

as Hedging Instruments

under ASC 815

   Location of Gain or (Loss)
Recognized in Income on
Derivative
   Amount of Gain or (Loss)
Recognized in Income on
Derivative

Forward Contracts

   Other (expense) income    $ 303
         

Total

      $ 303
         

6. Earnings Per Unit

Basic earnings per unit is calculated by dividing net income attributable to Class A Unit holders by the weighted average of the Class A Units outstanding for the period. Net income attributable to Class A Unit holders gives effect to the net income allocable to Class B Unit holders as if such net income was distributed in the applicable period pursuant to the terms of the amended and restated limited liability company agreement between Iridium and its members (“LLC Agreement”). Diluted earnings per Class A Unit takes into account the conversion of the subordinated convertible note when such effect is dilutive.

 

     For the Three Months
Ended June 30, 2009
    For the Six Months
Ended June 30, 2009
 
     (In thousands, except per unit data)  

Numerator:

    

Net Income

   $ 28,600      $ 38,318   

Adjustments for Class B Units earnings participation

     (9,201     (12,327
                

Net income attributable to Class A Units, basic

     19,399        25,991   

Adjustment for interest on Note

     312        624   
                

Net income attributable to Class A Units, diluted

   $ 19,711      $ 26,615   
                

Denominator:

    

Weighted-average Class A Units outstanding, basic

     1,084        1,084   

Units from assumed conversion of Note

     84        84   
                

Weighted-average Class A Units outstanding, diluted

     1,168        1,168   
                

Earnings Per Unit:

    

Basic

   $ 17.90      $ 23.98   

Diluted

   $ 16.88      $ 22.79   

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion along with our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and our current report on Form 8-K filed on May 10, 2010 with the Securities and Exchange Commission, or the SEC, as well as our unaudited condensed consolidated financial statements and the unaudited condensed consolidated financial statements of Iridium Holdings LLC (our predecessor entity) included in this Form 10-Q.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development or otherwise are not statements of historical fact. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements. The important factors discussed under the caption “Risk Factors” in our 2009 Annual Report on Form 10-K and in this Form 10-Q, could cause actual results to differ materially from those indicated by forward-looking statements made herein. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Background

We were formed as GHL Acquisition Corp., a special purpose acquisition company, on November 2, 2007, for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination. We closed an initial public offering of our common stock on February 21, 2008. All of our activity from November 2, 2007 (inception) through February 21, 2008 related to our formation and initial public offering. From February 21, 2008 through September 29, 2009, our activities were limited to identifying prospective target businesses to acquire and complete a business combination, and we were considered to be in the development stage.

On September 29, 2009, we acquired, directly and indirectly, all the outstanding equity of Iridium Holdings LLC, or Iridium Holdings. We refer to this transaction as the Acquisition. Iridium Holdings, its subsidiary Iridium Satellite LLC, or Iridium Satellite, and Iridium’s Satellite’s subsidiary Iridium Constellation LLC, or Iridium Constellation, were formed under the laws of Delaware in 2000 and were organized as limited liability companies pursuant to the Delaware Limited Liability Company Act. We refer to Iridium Holdings, together with its direct and indirect subsidiaries, as Iridium. On December 11, 2000, Iridium acquired satellite communication assets from Iridium LLC, a non-affiliated debtor in possession, pursuant to an asset purchase agreement. Iridium and its affiliates held, and following the Acquisition we hold, various licenses and authorizations from the FCC and from foreign regulatory bodies that permit us to conduct our business, including the operation of our satellite constellation.

Pursuant to the terms of the Acquisition, we purchased all of the outstanding equity of Iridium Holdings. Total consideration included 29.4 million shares of our common stock and $102.6 million in cash, including payments totaling $25.5 million in cash we made in December 2009 and January 2010 to some of the former members of Iridium Holdings for tax benefits we received. Upon the closing of the Acquisition, we changed our name from GHL Acquisition Corp. to Iridium Communications Inc.

We accounted for our business combination with Iridium Holdings as a purchase business combination and recorded all assets acquired and liabilities assumed at their respective Acquisition-date fair values. We were deemed the legal and accounting acquirer and Iridium Holdings the legal and accounting acquiree. Iridium is considered our predecessor and, accordingly, its historical financial statements are deemed to be our predecessor financial statements. Iridium’s historical financial statements are included in this Form 10-Q but are presented separately from our financial statements.

Overview

Following the Acquisition, we are now engaged primarily in providing mobile voice and data communications services using a constellation of orbiting satellites. We are the second largest provider of satellite-based mobile voice and data communications services, and the only provider of mobile satellite communications services offering 100% global coverage. Our satellite network provides communications services to regions of the world where existing wireless or wireline networks do not exist or are impaired, including extremely remote or rural land areas, airways, open-ocean, the polar regions and regions where the telecommunications infrastructure has been affected by political conflicts or natural disasters.

 

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We offer voice and data communications services to businesses, the U.S. and foreign governments, non-governmental organizations and consumers using our constellation of in-orbit satellites and related ground infrastructure, including a primary commercial gateway. We utilize an interlinked, mesh architecture to route traffic across the satellite constellation using radio frequency crosslinks. This unique architecture minimizes the need for ground facilities to support the constellation, which facilitates the global reach of our services and allows us to offer services in countries and regions where we have no physical presence.

We sell our products and services to commercial end-users exclusively through a wholesale distribution network, encompassing approximately 65 service providers, 135 value-added resellers, or VARs, and 45 value-added manufacturers, who either sell directly to the end-user or indirectly through other service providers, VARs or dealers. These distributors often integrate our products and services with other complementary hardware and software and have developed a broad suite of applications for our products and services targeting specific vertical markets.

At June 30, 2010, we had approximately 383,000 billable subscribers worldwide, an increase of 55,000 or 16.8% from approximately 328,000 billable subscribers at June 30, 2009. We have a diverse customer base, including end-users in the following vertical markets: land-based handset; maritime; aviation; machine-to-machine, or M2M; and government.

We expect our future revenue growth rates will be somewhat lower than our historical rates primarily due to decreased subscriber equipment revenue growth and the difficulty in sustaining high growth rates as we increase in size. We expect a higher proportion of our future revenue will be derived from services, which historically has generated higher gross margin than subscriber equipment revenue.

Our business plan calls for the development of Iridium NEXT, our next-generation satellite constellation, the development of new product and service offerings, upgrades to our current services, hardware and software upgrades to maintain our ground infrastructure and upgrades to our business systems. We estimate the aggregate costs associated with the design, build and launch of Iridium NEXT and related infrastructure upgrades through early 2017 to be approximately $3 billion, assuming an average Euro/U.S. dollar exchange rate of 1.30. We expect to fund $1.8 billion of these costs from a COFACE-backed debt facility or other debt or equity financing, with the remainder to be funded from internally generated cash flows, including potential revenues from secondary payloads and warrant proceeds. There can be no assurance that our internally generated cash flows will meet our current expectations or that we will be able to finalize the COFACE-backed debt facility or obtain other sufficient external capital to fund Iridium NEXT and implement other elements of our business plan, due to increased costs, lower revenues or inability to obtain additional financing. Among other factors leading to this uncertainty, a portion of the warrants whose proceeds we expect to use to fund a portion of Iridium NEXT are currently “under water,” meaning they have an exercise price per share that is significantly higher than the current price at which our common stock is trading. In addition, none of the warrants are callable by us until such time as our stock trades for an extended period of time at a per share price greater than $14.25 for our $7.00 warrants or $18.00 for our $11.50 warrants. As of August 6, 2010, the closing price of our common stock was $10.22 per share. Unless our stock price increases significantly, we would not expect the under-water warrants to be exercised, and we will not be able to call any of the warrants. If we do not obtain such funds from internally generated cash flows, or from the net proceeds of future debt or equity financings, our ability to maintain our network, design, build and launch Iridium NEXT and related ground infrastructure, products and services, and pursue additional growth opportunities will be impaired.

The recent global economic crisis and related tightening of credit markets has also made it more difficult and expensive to raise capital. Our ability to obtain additional capital to finance Iridium NEXT and related ground infrastructure, products and services, and other capital requirements may be adversely impacted by the continuation of these market conditions. We are currently in the process of negotiating the terms of a $1.8 billion credit facility with a syndicate of international banks and other financial institutions, 95% of which we expect will be guaranteed by COFACE. This facility would be a key element of the funding necessary to design, build and launch Iridium NEXT. We cannot assure you that we will be successful in finalizing and closing this facility or that the terms of the facility will be reasonable. In addition, our ability to draw under the facility would be dependent on the satisfaction of various borrowing conditions from time to time, some of which will be outside of our control, including those relating to foreign currency exchange rates. If we do not succeed in finalizing the credit facility, or satisfying the conditions to borrow thereunder, we will need to find other sources of funds and there can be no assurance that we will have access to other sources of financing on reasonable terms, or at all. If we are unable to obtain sufficient financing on acceptable terms, we may not be able to fully implement our business plan as currently projected, if at all, which would significantly limit the development of our business and impair our ability to provide a commercially acceptable level of service.

The impact of recording the assets and liabilities we acquired from Iridium at fair value has resulted in a significant increase in the carrying value of our assets and liabilities. Because we estimated the fair value of the acquired assets and liabilities, we may revise

 

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those estimates if better information becomes available during the measurement period ending September 29, 2010, the first anniversary of the Acquisition. After the December 31, 2009 financial statements were issued, we received additional information related to a pre-Acquisition contingency and retrospectively adjusted the estimated fair value of the assets acquired and liabilities assumed in the Acquisition on September 29, 2009. This retrospective adjustment was reflected in a Form 8-K filed with the SEC on May 10, 2010. Consequently, when comparing our results of operations to that of our predecessor, Iridium, you should note the impact of the acquisition accounting on the carrying value of inventory, property and equipment, intangible assets and accruals, which was an increase of approximately $19.8 million, $348.2 million, $95.5 million and $29.0 million, respectively, compared to Iridium’s balance sheet as of September 29, 2009. Similarly, Iridium’s deferred revenue decreased by $7.4 million. As a result of the acquisition accounting, our cost of subscriber equipment sales increased in the first quarter of 2010 as compared to those costs and expenses of Iridium in prior periods and the decrease in the carrying value of deferred revenue is expected to result in a decrease in revenue through first quarter of 2011. In addition, the increase in accruals will result in a reduction in cost of services (exclusive of depreciation and amortization) during 2010. We also expect the increase in property and equipment and intangible assets will result in an increase to depreciation and amortization expense during 2010 and future periods.

Material Trends and Uncertainties

Iridium’s industry and customer base has historically grown as a result of:

 

 

demand for remote and reliable mobile communications services;

 

 

increased demand for communications services by the Department of Defense, or DoD, disaster and relief agencies and emergency first responders;

 

 

a broad and expanding wholesale distribution network with access to diverse and geographically dispersed niche markets;

 

 

a growing number of new products and services and related applications;

 

 

improved data transmission speeds for mobile satellite service offerings;

 

 

regulatory mandates requiring the use of mobile satellite services, particularly among maritime end-users;

 

 

a general reduction in prices of mobile satellite services equipment; and

 

 

geographic market expansion through the receipt of licenses in additional countries.

Nonetheless, as we continue the Iridium business, we face a number of challenges and uncertainties, including:

 

 

our ability to obtain capital and external funding to meet our future capital requirements on acceptable terms or at all, including, in particular, the funding for developing Iridium NEXT and related ground infrastructure, products and services;

 

 

our ability to maintain the health, capacity, control and level of service of our satellite network until and during the transition to Iridium NEXT;

 

 

changes in general economic, business and industry conditions;

 

 

our reliance on a single primary gateway and a primary satellite network operations center;

 

 

the competition from other mobile satellite service providers and, to a lesser extent, from the expansion of terrestrial based cellular phone systems and related pricing pressures;

 

 

our ability to maintain our relationship with U.S. government customers, particularly the DoD;

 

 

rapid and significant technological changes in the telecommunications industry;

 

 

reliance on our wholesale distribution network to market and sell our products, services and applications effectively;

 

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our ability to successfully resolve a dispute with Motorola, Inc., or Motorola, regarding fees they have alleged that we owe to them and to license the required intellectual property for Iridium NEXT; and

 

 

reliance on single source suppliers for some of the components required in the manufacture of our end-user subscriber equipment and related management of the global parts-supply shortage.

Comparison of Our Results of Operations for the Three and Six Months Ended June 30, 2010 and 2009

For the periods prior to the Acquisition, we did not have any business operations and we were considered to be in the development stage. All of our activities during the three and six months ended June 30, 2009 related to completing a business combination. Accordingly, we had no revenue during this period. For the three and six months ended June 30, 2010, we had $84.0 million and $165.7 million of revenue, respectively, which is entirely attributable to the operations after the Acquisition. See “ — Comparison of Our Results of Operations for the Three Months Ended June 30, 2010 and Iridium’s (Predecessor Company’s) Results of Operations for the Three Months Ended June 30, 2009” and “ — Comparison of Our Results of Operations for the Six Months Ended June 30, 2010 and Iridium’s (Predecessor Company’s) Results of Operations for the Six Months Ended June 30, 2009” for additional analysis.

Total operating expenses increased to $78.0 million and $164.2 million for the three and six months ended June 30, 2010, respectively, from $0.3 million and $0.8 million for the three and six months ended June 30, 2009, respectively. This increase was related to the operations after the Acquisition.

We had income tax provision of $2.9 million and approximately $34,000 for the three and six months ended June 30, 2010, respectively, compared to an income tax benefit of approximately $13,000 and an income tax provision of $14,000 for the three and six months ended June 30, 2009, respectively. Our estimated annual effective tax rate for 2010 is 43.7% compared to 45.0% in the equivalent period in 2009. Our estimated annual effective rate in 2010 differs from the statutory U.S. federal income tax rate of 35% due to state taxes and additional U.S. taxes on foreign corporations.

Comparison of Our Results of Operations for the Three Months Ended June 30, 2010 and Iridium’s (Predecessor Company’s) Results of Operations for the Three Months Ended June 30, 2009

For comparison purposes, we have included the following discussion of our operating results for the three months ended June 30, 2010 and those of Iridium for the three months ended June 30, 2009. This presentation is intended to facilitate the evaluation and understanding of the financial performance of our business on a quarter-to-quarter basis. Management believes this presentation is useful in providing the users of our financial information with an understanding of our results of operations because there were no material changes to the operations or customer relationships of Iridium as a result of the Acquisition and we had no material operating activities from the date of formation of GHL Acquisition Corp. until the Acquisition.

 

     Iridium Communications
Inc.
Three Months Ended
June 30, 2010
    Iridium
(Predecessor Company)
Three Months Ended
June 30, 2009
    % Change  
     (In thousands)        

Revenue:

      

Services:

      

Government

   $ 18,230      $ 18,160      0.4

Commercial

     45,480        39,959      13.8

Subscriber equipment

     20,264        24,586      (17.6 )% 
                  

Total revenue

     83,974        82,705      1.5

Operating expenses:

      

Cost of subscriber equipment sales

     11,711        11,601      0.9

Cost of services (exclusive of depreciation and amortization)

     19,021        19,185      (0.9 )% 

Research and development

     8,132        1,175      592.1

Depreciation and amortization

     22,449        3,574      528.1

Selling, general and administrative

     16,703        13,232      26.2

Transaction costs

     —          1,275      NM   
                  

Total operating expenses

     78,016        50,042      55.9
                  

Operating profit

     5,958        32,663      (81.8 )% 

Other income (expense):

      

Interest income (expense), net of capitalized interest

     228        (4,465   (105.1 )% 

Other income (expense), net

     (22     402      (105.5 )% 
                  

Total other income (expense)

     206        (4,063   (105.1 )% 
                  

Earnings before income taxes

     6,164        28,600      (78.4 )% 

Income tax provision

     2,964        —        NM   
                  

Net income

   $ 3,200      $ 28,600      (88.8 )% 
                  

NM = Not Meaningful

 

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Revenue

Total revenue increased by 1.5% to $84.0 million for the three months ended June 30, 2010 from $82.7 million for the three months ended June 30, 2009, due principally to growth in billable subscribers and increased sales of commercial services, partially offset by a decrease in sales of subscriber equipment. Billable subscribers at June 30, 2010 increased by approximately 16.8% from June 30, 2009 to approximately 383,000.

Government Services Revenue

Government services revenue increased by 0.4% to $18.2 million for the three months ended June 30, 2010 from $18.1 million for the three months ended June 30, 2009. Voice service revenue increased primarily due to billable subscriber growth and growth related to Netted Iridium, a service introduced in late 2009 that provides beyond line-of-sight push-to-talk capability for user-defined groups, partially offset by a decrease in engineering and support services contracts due to a lower level of effort on existing contracts in 2010 and contracts that were completed in 2009. The voice average revenue per unit, or ARPU, decreased by $2 to $149 for the three months ended June 30, 2010 due to a higher proportion of billable subscribers on lower tiered pricing plans. The M2M data ARPU decreased slightly by $1 to $22 for the three months ended June 30, 2010 due to a higher proportion of billable subscribers on lower tiered pricing plans. We expect total government revenue in 2010 to be in line with 2009. Also, future growth in voice and M2M data billable subscribers and revenue may be negatively affected by reductions in U.S. defense spending and troop levels, and a corresponding decrease in usage under our agreements with the U.S. government. This revenue accounts for a majority of our government services revenue and is subject to annual renewals.

 

     Government Services  
     Iridium Communications Inc.
Three Months Ended
June 30, 2010
   Iridium (Predecessor Company)
Three Months Ended
June 30, 2009
   Year over Year Change  
     (Revenue in millions and subscribers in thousands)  
     Revenue    Billable
Subscribers (1)
   ARPU (2)    Revenue    Billable
Subscribers (1)
   ARPU (2)    Revenue     Billable
Subscribers
   ARPU  

Voice

   $ 13.9    31.8    $ 149    $ 13.1    29.0    $ 151    $ 0.8      2.8    $ (2

M2M data

     0.3    5.7      22      0.2    2.9      23      0.1      2.8      (1

Engineering and support

     4.0    —           4.8    —           (0.8   —     
                                                     

Total

   $ 18.2    37.5       $ 18.1    31.9       $ 0.1      5.6   
                                                     

 

(1) Billable subscriber numbers shown are at the end of the respective period.
(2) ARPU is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period.

Commercial Services Revenue

Commercial services revenue increased by 13.8% to $45.5 million for the three months ended June 30, 2010 from $40.0 million for the three months ended June 30, 2009, due principally to growth in voice and M2M data billable subscribers, increased usage and increased revenue from growth related to Iridium OpenPort, our high-speed data maritime service, partially offset by a decrease in revenue from the impact of acquisition accounting in the second quarter of 2010. Voice ARPU decreased principally due to the impact of acquisition accounting, which was partially offset by an increase in ARPU from our Iridium OpenPort services. M2M data revenue growth was driven principally by an increase in the billable subscriber base and the recognition of revenue for services provided in prior periods for a customer that became current on its payments in the second quarter of 2010. M2M data ARPU increased by $4 to $25 for the three months ended June 30, 2010 primarily due to the recognition of revenue for services provided in prior periods for a customer that became current on its payments in the second quarter of 2010 and also a higher proportion of billable subscribers on our higher tiered pricing plans.

 

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     Commercial Services  
     Iridium Communications Inc.
Three Months Ended
June 30, 2010
   Iridium (Predecessor Company)
Three Months Ended
June 30, 2009
   Year over Year Change  
     (Revenue in millions and subscribers in thousands)  
     Revenue    Billable
Subscribers (1)
   ARPU (2)    Revenue    Billable
Subscribers (1)
   ARPU (2)    Revenue    Billable
Subscribers
   ARPU  

Voice

   $ 38.8    262.4    $ 51    $ 35.8    230.3    $ 53    $ 3.0    32.1    $ (2

M2M data

     6.0    83.4      25      4.0    66.3      21      2.0    17.1      4   

Other

     0.7    —           0.2    —           0.5    —     
                                            

Total

   $ 45.5    345.8       $ 40.0    296.6       $ 5.5    49.2   
                                            

 

(1) Billable subscriber numbers shown are at the end of the respective period.
(2) ARPU is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period.

Subscriber Equipment Revenue

Subscriber equipment revenue decreased by 17.6% to $20.3 million for the three months ended June 30, 2010 from $24.6 million for the three months ended June 30, 2009. The decreased subscriber equipment revenue was primarily due to decreased equipment unit prices to incent future growth in service revenue reflecting our belief that service revenues are a more stable, profitable and long-term source of income than equipment sales, and in anticipation of competitive pressure, and also due to lower volumes of handset sales. These variances were partially offset by increased sales volume in M2M data devices. Subscriber equipment revenue would have been greater except for our inability to fulfill customer orders as a result of a component parts shortage that we and other device manufacturers experienced during the second quarter. We expect to fulfill these delayed orders fully in the second half of 2010. We will continue to bias our equipment pricing in favor of measures we believe will incent subscriber growth and growth in recurring service revenues. Subscriber equipment sales to the U.S. government through a non-government distributor may be negatively affected by reductions in U.S. defense spending and troop levels, and a corresponding decrease in usage under our agreements with the U.S. government, which are subject to annual renewals.

Operating Expenses

Total operating expenses increased by 55.9% to $78.0 million for the three months ended June 30, 2010 from $50.0 million for the three months ended June 30, 2009. This increase was due primarily to increased depreciation and amortization, of which $19.2 million is related to acquisition accounting, increased selling, general and administrative expenses, and higher research and development expenses related to Iridium NEXT, slightly offset by transaction costs in the second quarter of 2009.

Cost of Subscriber Equipment Sales

Cost of subscriber equipment sales generally includes the direct costs of equipment sold, which are manufacturing costs, allocation of overhead, warranty costs and royalties paid for the subscriber equipment intellectual property.

Cost of subscriber equipment sales increased by 0.9% to $11.7 million for the three months ended June 30, 2010 from $11.6 million for the three months ended June 30, 2009, primarily due to increased volume in M2M data devices, partially offset by a decrease in handsets volume primarily due to the component part shortage discussed above in subscriber equipment revenue. Historically, cost of subscriber equipment sales has changed in line with changes in subscriber equipment revenue with the exception of the fourth quarter of 2009 and first quarter of 2010 due to the impact of acquisition accounting. However, for the quarter ended June 30, 2010, cost of subscriber equipment sales increased slightly even though subscriber equipment revenue decreased, due to a reduction in equipment pricing on our handsets in 2010 compared to the second quarter of 2009.

As a result, cost of subscriber equipment sales was 47.2% of subscriber equipment revenues in the three months ended June 30, 2009 and 57.8% in the three months ended June 30, 2010. We expect that in the remaining quarters in 2010, the cost of subscriber equipment sales will continue to represent a higher percentage of subscriber equipment revenue similar to the second quarter of 2010.

 

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Cost of Services (exclusive of depreciation and amortization)

Cost of services (exclusive of depreciation and amortization) generally includes the cost of network engineering and operations staff and subcontractors, software maintenance, product support services and cost of services for government engineering and support revenue.

Cost of services (exclusive of depreciation and amortization) decreased by 0.9% to $19.0 million for the three months ended June 30, 2010 from $19.2 million for the three months ended June 30, 2009, primarily due to decreased operations and maintenance expenses as a result of acquisition accounting, partially offset by increased expense related to new commercial engineering and support services work in the second quarter of 2010 and expenses associated with network-related telecommunications. We expect our cost of services (exclusive of depreciation and amortization) to be lower in the second half of 2010 as a result of the amendment and restatement of our long-term operations and maintenance agreement, or the O&M Agreement, with The Boeing Company, or Boeing, that we entered into in July 2010 (refer to Note 8 in “Notes to Unaudited Condensed Consolidated Financial Statements” for Iridium Communications Inc.)

Research and Development

Research and development expenses increased by 592.1% to $8.1 million for the three months ended June 30, 2010 from $1.2 million for the three months ended June 30, 2009, primarily as a result of a significant increase in expenses related to Iridium NEXT due to the achievement of milestone payments to potential prime contractors in the second quarter of 2010 and an increase in expenses for equipment upgrade projects, partially offset by decreased expense related to the completion of a new M2M data device and decreased spending on future gateway upgrade projects. In addition, 2009 benefited from a revision in estimate related to a prime contractor development effort bonus accrual for Iridium NEXT as the bonus was not earned.

Depreciation and Amortization

Depreciation and amortization expenses increased by 528.1% to $22.5 million for three months ended June 30, 2010 from $3.6 million for the three months ended June 30, 2009, primarily as a result of a $19.2 million additional depreciation and amortization due to increased asset values related to acquisition accounting. We expect depreciation and amortization expense in 2010 to continue to be at levels significantly higher than in 2009 primarily due to these higher asset values.

Selling, General and Administrative

Selling, general and administrative expenses generally include sales and marketing costs as well as legal, finance, information technology, facilities, billing and customer care expenses.

Selling, general and administrative expenses increased by 26.2% to $16.7 million for the three months ended June 30, 2010 from $13.2 million for the three months ended June 30, 2009 primarily due to an increase in employee related costs (primarily for stock-based compensation, salaries and severance), an increase in expenses related to our new corporate headquarters, and increased sales and marketing costs, partially offset by a reduction in bad debt expense.

Transaction Costs

Transaction costs related to the Acquisition were $1.2 million for the three months ended June 30, 2009. Transaction costs primarily include legal, accounting and consulting fees. There were no such costs for the three months ended June 30, 2010.

Other Income (Expense)

Interest Income (Expense), Net of Capitalized Interest

Interest income (expense), net of capitalized interest was $0.2 million for the three months ended June 30, 2010 and ($4.5) million for the three months ended June 30, 2009, primarily due to borrowing under Iridium credit facilities that were outstanding during the second quarter of 2009 and subsequently paid off immediately following the Acquisition. If we are successful in obtaining debt financing to support a portion of our development of Iridium NEXT, we expect that, after borrowings commence, our interest costs for subsequent quarters of 2010 could be significantly higher than the first half of 2010.

 

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Income Tax Provision

Prior to the completion of the Acquisition, Iridium was a limited liability company treated as a partnership for income tax purposes. Therefore, the members were subject to income taxation and Iridium did not have any income tax benefit or provision for the three months ended June 30, 2009. For the three months ended June 30, 2010, we are a corporation for U.S. income tax purposes and had an income tax provision of $2.9 million based on our estimated annual effective tax rate of 43.7% plus certain discrete items.

Our reserve for uncertain tax positions includes insignificant unrecognized tax benefits related to certain state tax exposures, which it is reasonably possible will be recognized within the next six months following June 30, 2010, as a result of the expiring statute of limitations.

Comparison of Our Results of Operations for the Six Months Ended June 30, 2010 and Iridium’s (Predecessor Company’s) Results of Operations for the Six Months Ended June 30, 2009

 

     Iridium Communications
Inc.
Six Months Ended
June 30, 2010
   Iridium
(Predecessor Company)
Six Months Ended
June 30, 2009
    % Change  
     (In thousands)        

Revenue:

       

Services:

       

Government

   $ 37,243    $ 36,628      1.7

Commercial

     86,366      76,777      12.5

Subscriber equipment

     42,107      45,089      (6.6 )% 
                 

Total revenue

     165,716      158,494      4.6

Operating expenses:

       

Cost of subscriber equipment sales

     34,856      22,917      52.1

Cost of services (exclusive of depreciation and amortization)

     39,382      38,882      1.3

Research and development

     12,397      13,269      (6.6 )% 

Depreciation and amortization

     44,960      7,249      520.2

Selling, general and administrative

     32,633      27,171      20.1

Transaction costs

     —        1,918      NM   
                 

Total operating expenses

     164,228      111,406      47.4
                 

Operating profit

     1,488      47,088      (96.8 )% 

Other income (expense):

       

Interest income (expense), net of capitalized interest

     334      (9,104   (103.7 )% 

Other income (expense), net

     95      334      (71.6 )% 
                 

Total other income (expense)

     429      (8,770   (104.9 )% 
                 

Earnings before income taxes

     1,917      38,318      (95.0 )% 

Income tax provision

     34      —        NM   
                 

Net income

   $ 1,883    $ 38,318      (95.1 )% 
                 

NM = Not Meaningful

Revenue

Total revenue increased by 4.6% to $165.7 million for the six months ended June 30, 2010 from $158.5 million for the six months ended June 30, 2009, due principally to growth in billable subscribers and increased sales of commercial and government services, partially offset by a decrease in subscriber equipment revenue. Billable subscribers at June 30, 2010 increased by approximately 16.8% from June 30, 2009 to approximately 383,000.

Government Services Revenue

Government services revenue increased by 1.7% to $37.2 million for the six months ended June 30, 2010 from $36.6 million for the six months ended June 30, 2009, due to voice billable subscriber growth, growth related to Netted Iridium, which was introduced in late 2009, and an increase in M2M data revenue driven primarily by billable subscriber growth, partially offset by a decrease in engineering and support services contracts due to a lower level of effort on existing contracts in 2010 and contracts that were completed in 2009. Voice ARPU decreased slightly by $1 to $149 for the six months ended June 30, 2010 due to a higher proportion of billable subscribers on lower tiered pricing plans. M2M data ARPU decreased by $2 to $20 for the six months ended June 30, 2010 due to a higher proportion of billable subscribers on lower tiered pricing plans. We expect total government revenue in 2010 to be in line with 2009. Also, future growth in voice and M2M data billable subscribers and revenue may be negatively affected by reductions in U.S. defense spending and troop levels, and a corresponding decrease in usage under our agreements with the U.S. government. This revenue accounts for a majority of our government services revenue and is subject to annual renewals.

 

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     Government Services  
     Iridium Communications Inc.
Six Months Ended
June 30, 2010
   Iridium (Predecessor Company)
Six Months Ended
June 30, 2009
   Year over Year Change  
     (Revenue in millions and subscribers in thousands)  
     Revenue    Billable
Subscribers (1)
   ARPU (2)    Revenue    Billable
Subscribers (1)
   ARPU (2)    Revenue     Billable
Subscribers
   ARPU  

Voice

   $ 27.3    31.8    $ 149    $ 26.3    29.0    $ 150    $ 1.0      2.8    $ (1

M2M data

     0.6    5.7      20      0.3    2.9      22      0.3      2.8      (2

Engineering and support

     9.3    —           10.0    —           (0.7   —     
                                             

Total

   $ 37.2    37.5       $ 36.6    31.9       $ 0.6      5.6   
                                             

 

(1) Billable subscriber numbers shown are at the end of the respective period.
(2) ARPU is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period.

Commercial Services Revenue

Commercial services revenue increased by 12.5% to $86.4 million for the six months ended June 30, 2010 from $76.8 million for the six months ended June 30, 2009, due principally to growth in voice and M2M data billable subscribers, increased usage and increased revenue from growth related to Iridium OpenPort, partially offset by a decrease in revenue from the impact of acquisition accounting. Voice ARPU decreased principally due to the impact of acquisition accounting. M2M data revenue growth was driven principally by an increase in the billable subscriber base. M2M data ARPU increased by $1 to $22 for the six months ended June 30, 2010 primarily due to a higher proportion of billable subscribers on our higher tiered pricing plans.

 

     Commercial Services  
     Iridium Communications Inc.
Six Months Ended
June 30, 2010
   Iridium (Predecessor Company)
Six Months Ended
June 30, 2009
   Year over Year Change  
     (Revenue in millions and subscribers in thousands)  
     Revenue    Billable
Subscribers (1)
   ARPU (2)    Revenue    Billable
Subscribers (1)
   ARPU (2)    Revenue    Billable
Subscribers
   ARPU  

Voice

   $ 75.4    262.4    $ 50    $ 68.7    230.3    $ 51    $ 6.7    32.1    $ (1

M2M data

     10.1    83.4      22      7.8    66.3      21      2.3    17.1      1   

Other

     0.9    —           0.3    —           0.6    —     
                                            

Total

   $ 86.4    345.8       $ 76.8    296.6       $ 9.6    49.2   
                                            

 

(1) Billable subscriber numbers shown are at the end of the respective period.
(2) ARPU is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period.

Subscriber Equipment Revenue

Subscriber equipment revenue decreased by 6.6% to $42.1 million for the six months ended June 30, 2010 from $45.1 million for the six months ended June 30, 2009. The decreased subscriber equipment revenue was primarily due to decreased equipment unit prices to incent future growth in service revenue reflecting our belief that service revenues are a more stable, profitable and long-term source of income than equipment sales, and in anticipation of competitive pressure, and also due to lower volumes of handset sales. These variances were partially offset by increased sales volume in Iridium OpenPort and M2M data devices. Subscriber equipment revenue would have been greater except for our inability to fulfill customer orders as a result of a component parts shortage that we and other device manufacturers experienced during the second quarter. We expect to fulfill these delayed orders fully in the second half of 2010. We will continue to bias our equipment pricing in favor of measures we believe will incent subscriber growth and growth in recurring service revenues. Subscriber equipment sales to the U.S. government through a non-government distributor may be negatively affected by reductions in U.S. defense spending and troop levels, and a corresponding decrease in usage under our agreements with the U.S. government, which are subject to annual renewals.

 

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Operating Expenses

Total operating expenses increased by 47.4% to $164.2 million for the six months ended June 30, 2010 from $111.4 million for the six months ended June 30, 2009. This increase was due primarily to increased depreciation and amortization, of which $38.3 million is related to acquisition accounting, increased selling, general and administrative expenses, and increased cost of subscriber equipment sales related to acquisition accounting, slightly offset by lower research and development expenses and transaction costs for the six months ended June 30, 2009.

Cost of Subscriber Equipment Sales

Cost of subscriber equipment sales increased by 52.1% to $34.8 million for the six months ended June 30, 2010 from $22.9 million for the six months ended June 30, 2009, primarily as a result of a $10.9 million increase related to higher inventory values as a result of acquisition accounting as well as increased volume in Iridium OpenPort and M2M data devices. We do not expect the cost of subscriber equipment sales to continue at this level as our higher valued inventory from acquisition accounting has been fully utilized. Historically, cost of subscriber equipment sales has changed in line with changes in subscriber equipment revenue with the exception of the fourth quarter of 2009 and the first quarter of 2010 due to the impact of acquisition accounting. However, for the six months ended June 30, 2010, cost of subscriber equipment sales increased slightly even though subscriber equipment revenue decreased, due to a reduction in equipment pricing on our handsets in 2010 compared to the six months ended June 30, 2009. We expect that in the remaining quarters in 2010, the cost of subscriber equipment sales will continue to represent a higher percentage of subscriber equipment revenue similar to the second quarter of 2010.

Cost of Services (exclusive of depreciation and amortization)

Cost of services (exclusive of depreciation and amortization) increased by 1.3% to $39.4 million for the six months ended June 30, 2010 from $38.9 million for the six months ended June 30, 2009, primarily due to increased costs related to certain projects and expenses associated with network-related telecommunications, partially offset by a decrease in operations and maintenance expenses as a result of acquisition accounting. We expect our cost of services (exclusive of depreciation and amortization) to be lower in the second half of 2010 as a result of the amendment and restatement of the O&M Agreement with Boeing that we entered into in July 2010 (refer to Note 8 in “Notes to Unaudited Condensed Consolidated Financial Statements” for Iridium Communications Inc.)

Research and Development

Research and development expenses decreased by 6.6% to $12.4 million for the six months ended June 30, 2010 from $13.3 million for the six months ended June 30, 2009, primarily as a result of a decrease in expenses related to the completion of a new M2M data device and lower spending on future gateway projects, partially offset by increased expenses related to Iridium NEXT due to the achievement of milestone payments to potential prime contractors in the second quarter of 2010, and an increase in equipment upgrade projects. In addition, 2009 benefited from a revision in estimate related to a prime contractor development effort bonus accrual for Iridium NEXT as the bonus was not earned.

Depreciation and Amortization

Depreciation and amortization expenses increased by 520.2% to $45.0 million for six months ended June 30, 2010 from $7.3 million for the six months ended June 30, 2009, primarily as a result of $38.3 million in additional depreciation and amortization due to increased asset values related to acquisition accounting. We expect depreciation and amortization expense in 2010 to continue to be at levels significantly higher than in 2009 primarily due to these higher asset values.

Selling, General and Administrative

Selling, general and administrative expenses increased by 20.1% to $32.6 million for the six months ended June 30, 2010 from $27.1 million for the six months ended June 30, 2009 primarily due to increased employee related costs (primarily for stock-based compensation, salaries and severance), increase in professional fees (consulting, accounting, legal and regulatory) related to becoming a public company and our geographic expansion, increased expenses related to our new corporate headquarters, and increased sales and marketing costs related to trade shows, partially offset by a reduction in bad debt expense.

Transaction Costs

Transaction costs related to the Acquisition were $1.9 million for the six months ended June 30, 2009. Transaction costs primarily include legal, accounting and consulting fees. There were no such costs for the six months ended June 30, 2010.

 

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Other Income (Expense)

Interest Income (Expense), Net of Capitalized Interest

Interest income (expense), net of capitalized interest was $0.3 million for the six months ended June 30, 2010 and ($9.1) million for the six months ended June 30, 2009, primarily due to borrowing under Iridium credit facilities that were outstanding during in the second quarter of 2009 and subsequently paid off immediately following the Acquisition. If we are successful in obtaining debt financing to support a portion of our development of Iridium NEXT, we expect that, after borrowings commence, our interest costs for subsequent quarters of 2010 could be significantly higher than the first half of 2010.

Income Tax Provision

Prior to the completion of the Acquisition, Iridium was a limited liability company treated as a partnership for income tax purposes. Therefore, the members were subject to income taxation and Iridium did not have any income tax benefit or provision for the six months ended June 30, 2009. For the six months ended June 30, 2010, we are a corporation for U.S. income tax purposes and had an income tax provision of approximately $34,000 based on our estimated annual effective tax rate of 43.7% plus certain discrete items.

Our reserve for uncertain tax positions includes insignificant unrecognized tax benefits related to certain state tax exposures, which it is reasonably possible will be recognized within the next six months following June 30, 2010, as a result of the expiring statute of limitations.

Liquidity and Capital Resources

Our principal sources of liquidity are existing cash and internally generated cash flows. Our principal liquidity requirements are to meet capital expenditure needs, including the development of Iridium NEXT, working capital and research and development.

We believe that our sources of liquidity will provide sufficient funds for us to meet our liquidity requirements for 2010, exclusive of requirements in connection with the continued development of Iridium NEXT. We have entered into two contracts with Thales Alenia Space France, or Thales, for the design, manufacture and deployment of Iridium NEXT. The first agreement, the authorization to proceed, or ATP, is a short-term agreement and the second agreement, the full scale development contract, or FSD, will become effective when and if we enter into financing for Iridium NEXT and are able to draw on such facility, which we refer to as the Financial Close. The FSD is currently denominated in U.S. dollars and Euros; however, on the date of the Financial Close, the fixed price Euro portion of the contract will be converted into dollars instead of Euros and therefore not subject to further currency risk. Such agreements will require substantial capital expenditures in 2010 and thereafter. In addition, we are currently negotiating the settlement of a significant claim with Motorola, which could be settled within the next twelve months.

We estimate the aggregate costs associated with the design, build and launch of Iridium NEXT and related infrastructure upgrades through early 2017 to be approximately $3 billion, assuming an average Euro/U.S. dollar exchange rate of 1.30. We expect to fund $1.8 billion of the costs associated with Iridium NEXT from a COFACE-backed debt facility or other debt or equity financing, with the remainder to be funded from internally generated cash flows, including potential revenues from secondary payloads hosted on our Iridium NEXT satellites, and the proceeds generated by the exercise of outstanding stock purchase warrants. There can be no assurance that our internally generated cash flows will meet our current expectations or that we will be able to finalize the COFACE-backed facility or obtain other sufficient external capital to fund Iridium NEXT and implement other elements of our business plan, due to increased costs, lower revenues or inability to obtain additional financing. Among other factors leading to this uncertainty, a portion of the warrants whose proceeds we expect to use to fund a portion of Iridium NEXT are currently “under water,” meaning they have an exercise price per share that, for certain of our warrants, is significantly higher than the current price at which our common stock is trading. In addition, none of the warrants are callable by us until such time as our stock trades for an extended period of time at a per share price greater than $14.25 for our $7.00 warrants, or $18.00 for our $11.50 warrants. As of August 6, 2010 the closing price of our common stock was $10.22 per share. Unless our stock price increases significantly, we would not expect the under-water warrants to be exercised, and we will not be able to call any of the warrants. If future internally generated cash flows, net proceeds of future debt or equity financings, and revenue from hosting secondary payloads are below expectations, or the cost of developing Iridium NEXT is higher than anticipated or warrant proceeds are not realized, we will require even more external funding than planned, and our ability to maintain our network, design, build and launch Iridium NEXT and related ground infrastructure, products and services, and pursue additional growth opportunities will be impaired. Our ability to obtain additional funding for Iridium NEXT may be adversely impacted by a number of factors, including the global economic crisis and related tightening of the credit markets. We cannot assure you that we will be able to obtain such additional liquidity on reasonable terms, or at all. If we are not able to secure such financing, we would need to delay some or all of the elements of our Iridium NEXT development. Our liquidity and our ability to fund our liquidity requirements is also dependent on our future financial performance, which is subject to general economic, financial, regulatory and other factors that are beyond our control.

 

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We are currently in the process of negotiating the terms of a $1.8 billion credit facility with a syndicate of international banks and other financial institutions, 95% of which we expect will be guaranteed by COFACE. This facility would be a key element of the funding necessary to design, build and launch Iridium NEXT. We cannot assure you that we will be successful in finalizing and closing this facility or that the terms of the facility will be reasonable. In addition, our ability to draw under the facility would be dependent on the satisfaction of various borrowing conditions from time to time, some of which will be outside of our control, including those related to foreign currency exchange rates. If we do not succeed in finalizing the credit facility we will need to find other sources of funds, and there can be no assurance that we will have access to other sources of financing on reasonable terms, or at all. If we are unable to obtain sufficient financing on acceptable terms, we may not be able to fully implement our business plan as currently projected, if at all, which would significantly limit the development of our business and impair our ability to provide a commercially acceptable level of service.

Pursuant to the ATP, we authorized Thales to commence preliminary work relating to the design of satellites and the associated ground system for Iridium NEXT even though we have not yet finalized the Iridium NEXT credit facility. We have paid Thales approximately $53.0 million for this work during the first three months of the agreement. As of August 6, 2010, we entered into amendments to the ATP and the related FSD pursuant to which we paid an additional approximately $37.2 million to Thales to mitigate the potential effect of currency fluctuations on the Euro-denominated portions of the ATP and the FSD. The ATP amendment also extended that agreement for an additional three months, increasing our total potential payments to Thales during the full term of the ATP to approximately $164.2 million (assuming an average Euro/U.S. dollar exchange rate of 1.29). As amended, the ATP will terminate at the time of the Financial Close, or, if earlier, on December 1, 2010.

Accordingly we may have made payments to Thales totaling as much as $164.2 million before we finalize and can draw under the credit facility. If we are able to finalize the credit facility and satisfy the borrowing conditions, we anticipate that we could draw under the facility to replenish approximately 85% of the funds we had used to make these interim payments. In the meantime, however, we are making these payments out of our cash on hand and cash flow from operations. If we experience delays in finalizing the credit agreement or satisfying the borrowing conditions, or if we are unable to do so, we could face potential liquidity issues until such time as we are able to borrow under the credit facility or to arrange an alternate source of funding, which we may not be able to do in a timely manner, or at all. In addition, even assuming we are successful in entering into the credit facility and beginning to make draws thereunder, we may experience overall liquidity levels lower than our historical liquidity levels. Inadequate liquidity could compromise our ability to pursue our business plans and growth opportunities, delay the ultimate deployment of Iridium NEXT and otherwise hurt our business and financial position.

Cash and Indebtedness

Our total cash and cash equivalents were $120.7 million at June 30, 2010 and we had $15.4 million payable due to Motorola at June 30, 2010.

Cash Flows

The following section highlights our cash flows for the six months ended June 30, 2010 and Iridium’s cash flows for the six months ended June 30, 2009:

Cash Flows

Cash Flows from Operating Activities

Net cash provided by our operating activities for the six months ended June 30, 2010 was $33.3 million, generated from net income of $1.8 million, adjustment of $47.3 million for depreciation and amortization and stock-based compensation, and a $15.8 million reduction in our working capital due to a launch services contract deposit, an increase in accounts receivable related to timing of collections and an increase in income tax receivable, partially offset by a decrease in inventory related to acquisition accounting, component parts shortage and inventory management.

Net cash provided by Iridium’s operating activities for the six months ended June 30, 2009 was $37.4 million, generated from net income of $38.3 million, adjustments of $10.0 million for depreciation and amortization and equity-based compensation, and a $10.8 million reduction in working capital due to reversal of accrued Iridium NEXT prime contractor fees, interest paid related to credit facilities, bonus incentive payments to employees and an increase in accounts receivable related to timing of collections, partially offset by a decrease in inventory related to inventory management.

 

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Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended June 30, 2010 was $52.8 million, which includes $4.6 million paid to some of the former members of Iridium Holdings for tax benefits we received as a result of the Acquisition and $48.2 million of capital expenditures to our prime contractor related to Iridium NEXT, our new corporate headquarters, and equipment and software for our satellite and network operations, gateway and corporate systems. As of June 30, 2010, we have paid $39.7 million to Thales for work related to the ATP.

Net cash used in Iridium’s investing activities for the six months ended June 30, 2009 was $4.8 million resulting from capital expenditures primarily related to equipment and software for Iridium’s satellite and network operations, gateway and corporate systems.

Cash Flows from Financing Activities

Net cash used in financing activities for the six months ended June 30, 2010 was $6.9 million resulting from deferred financing fees incurred in conjunction with obtaining debt financing for the design and manufacture of Iridium NEXT.

Net cash used in Iridium’s financing activities for the six months ended June 20, 2009 was $17.0 million resulting from repayments under credit facilities.

Off-Balance Sheet Arrangements

We do not currently have, nor have we or Iridium had in the last three years, any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Seasonality

Our results of operations have been subject to seasonal usage changes for commercial customers and our results will be affected by similar seasonality going forward. April through October are typically the peak months for commercial voice services revenue and related subscriber equipment sales. U.S. government revenue and commercial M2M revenue have been less subject to seasonal usage changes.

Accounting Developments

In October 2009, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force,” or ASU 2009-13. ASU 2009-13 amends existing accounting guidance for separating consideration in multiple-deliverable arrangements. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific evidence is not available, or the estimated selling price if neither vendor-specific evidence nor third-party evidence is available. ASU 2009-13 eliminates the residual method of allocation and requires that consideration be allocated at the inception of the arrangement to all deliverables using the “relative selling price method.” The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. ASU 2009-13 requires that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a stand-alone basis. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. We have not yet determined the impact of the adoption of ASU 2009-13 on our financial position or results of operations.

In April 2010, the FASB issued Accounting Standards Update 2010-17, “Revenue Recognition—Milestone Method (Topic 605) Milestone Method of Revenue Recognition, a consensus of the FASB Emerging Issues Task Force” or ASU 2010-17. ASU 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. For the milestone to be considered substantive, the considerations earned by achieving the milestone should meet all of the following criteria: (i) be commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone, (ii) relate solely to past performance, and (iii) be reasonable relative to all deliverables and payment terms in the arrangement. An individual milestone may not be

 

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bifurcated and an arrangement may include more than one milestone. Accordingly, an arrangement may contain both substantive and nonsubstantive milestones. ASU 2010-17 is effective prospectively for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010 (our fiscal year ending December 31, 2011), with earlier adoption permitted. We have not yet determined the impact of the adoption of ASU 2010-17 on our financial position or results of operations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe we do not face any material interest rate risk, foreign currency exchange risk, equity price risk or other market risk. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, receivables and payables. The majority of this cash is swept nightly into a money market fund invested in U.S. treasuries. We perform credit evaluations of our customers’ financial condition and records reserves to provide for estimated credit losses. Accounts receivable are due from both domestic and international customers. Accounts payable are owed to both domestic and international vendors. We maintain our cash and cash equivalents with financial institutions with high credit ratings. We maintain deposits in federally insured financial institutions in excess of federally insured (FDIC) limits.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this report. In evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

During the six months ended June 30, 2010, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Except as previously reported in our quarterly report on Form 10-Q for the quarter ended March 31, 2010, neither we nor any of our subsidiaries are currently subject to any material legal proceeding, nor, to our knowledge, is any material legal proceeding threatened against us or any of our subsidiaries.

 

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ITEM 1A. RISK FACTORS

The descriptions below include any material changes to and supersede the description of the risk factors affecting our business previously disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2009.

Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. In addition to the other information set forth in this quarterly report on Form 10-Q, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, or the Annual Report, as filed with the Securities and Exchange Commission on March 16, 2010. The descriptions below include any material changes to and supersede the description of the applicable risk factors affecting our business previously disclosed in our Annual Report.

We will need additional capital to design, build and launch Iridium NEXT and related ground infrastructure, products and services, and pursue additional growth opportunities. If we fail to obtain sufficient capital, we will not be able to successfully implement our business plan.

Our business plan calls for the development of Iridium NEXT, the development of new product and service offerings, upgrades to our current services, hardware and software upgrades to maintain our ground infrastructure and upgrades to our business systems. We estimate the aggregate costs associated with the design, build and launch of Iridium NEXT and related infrastructure upgrades through early 2017 to be approximately $3 billion, assuming an average Euro/U.S. dollar exchange rate of 1.30. While we expect to fund a substantial portion of these costs from internally generated cash flows, including potential revenues from secondary payloads and warrant proceeds, we expect that we will need to finance the remaining cost by raising additional debt or equity financing. However, there can be no assurance that our internally generated cash flows will meet our current expectations or that we will be able to obtain sufficient external capital to fund Iridium NEXT and implement other elements of our business plan, due to increased costs, lower revenues or inability to obtain additional financing. Among other factors leading to this uncertainty, some of the warrants whose proceeds we expect to use to fund a portion of Iridium NEXT are currently “under water,” meaning they have an exercise price per share that is significantly higher than the current price at which our common stock is trading. In addition, none of the warrants are callable by us until such time as our stock trades at a per share price greater than $14.25 for our $7.00 warrants, or $18.00 for our $11.50 warrants, for an extended period of time. As of August 6, 2010 the closing price of our common stock was $10.22 per share. Unless our stock price increases significantly, we would not expect the under-water warrants to be exercised, and we will not be able to call any of the warrants. If we do not obtain such funds from internally generated cash flows, or from the net proceeds of future debt or equity financings, our ability to maintain our network, design, build and launch Iridium NEXT and related ground infrastructure, products and services, and pursue additional growth opportunities will be impaired.

The recent global economic crisis and related tightening of credit markets has made it more difficult and expensive to raise capital. Our ability to obtain additional capital to finance Iridium NEXT and related ground infrastructure, products and services, and other capital requirements may be adversely impacted by the continuation of these market conditions. We are currently in the process of negotiating the terms of a $1.8 billion credit facility with a syndicate of international banks and other financial institutions, approximately 95% of which we expect will be guaranteed by COFACE, the French export credit agency. This facility would be a key element of the funding necessary to design, build and launch Iridium NEXT. We cannot assure you that we will be successful in finalizing and closing this facility or that the terms of the facility will be reasonable. In addition, our ability to draw under the facility would be dependent upon the satisfaction of various borrowing conditions from time to time, some of which will be outside of our control, including those relating to foreign currency exchange rates. If we do not succeed in finalizing the credit facility, we will need to find other sources of funds and there can be no assurance that we will have access to other sources of financing on reasonable terms, or at all. If we are unable to obtain sufficient financing

 

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on acceptable terms, we may not be able to fully implement our business plan as currently projected, if at all, which would significantly limit the development of our business and impair our ability to provide a commercially acceptable level of service.

The financing terms of Iridium NEXT may increase our expenses and restrict our ability to operate.

In the event that we are able to obtain financing, our future agreements governing our indebtedness may require us to carry in-orbit insurance which we do not currently have and may contain a number of significant restrictions and covenants that limit our ability to, among other things:

 

   

incur or guarantee additional indebtedness;

 

   

pay dividends or make distributions to our stockholders;

 

   

make investments, acquisitions or capital expenditures;

 

   

grant liens on our assets;

 

   

enter into transactions with our affiliates;

 

   

merge or consolidate with other entities or transfer all or substantially all of our assets; and

 

   

otherwise transfer or sell assets.

We may also be required to maintain compliance with specified financial covenants. Complying with these restrictive covenants may impair our ability to finance our operations or capital needs or to take advantage of other favorable business opportunities. Our ability to comply with these restrictive covenants will depend on our future performance, which may be affected by events beyond our control. If we violate any of these covenants and are unable to obtain waivers, we would be in default under the agreement and payment of the indebtedness could be accelerated. The acceleration of our indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-default or cross-acceleration provisions. If our indebtedness is accelerated, we may not be able to repay our indebtedness or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. In addition, complying with these covenants may cause us to take actions that are not favorable to holders of our securities and may make it more difficult for us to successfully execute our business plan and compete against companies who are not subject to such restrictions.

We have agreed to pay significant amounts for interim design work on Iridium NEXT and currency exchange rate risk mitigation pending the closing and availability of funds under the credit facility; if we are not able to expeditiously finalize and draw under the credit facility, we could experience pressure on our liquidity.

We have entered into the Authorization to Proceed, or ATP, with Thales Alenia Space France, or Thales, pursuant to which we authorized Thales to commence preliminary work relating to the design of satellites and the associated ground system for Iridium NEXT even though we have not yet finalized the Iridium NEXT credit facility. We have paid Thales approximately $53.0 million during the first three months of the agreement. As of August 6, 2010, we entered into amendments to the ATP and the related long-term Full Scale Development Agreement, or FSD with Thales, pursuant to which we paid an additional approximately $37.2 million to Thales to mitigate the potential effect of currency fluctuations on the Euro-denominated portions of the ATP and the FSD. The ATP amendment also extended that agreement for an additional three months, increasing our total potential payments to Thales during the full term of the ATP to approximately $164.2 million (assuming an average Euro/U.S. dollar exchange rate of 1.29). As amended, the ATP will terminate at the time we are able to draw under the credit facility to be used to finance Iridium NEXT, or, if earlier, on December 1, 2010.]

 

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Accordingly we may have made payments to Thales totaling as much as $164.2 million before we finalize and can draw under the credit facility. If we are able to finalize the credit facility and satisfy the borrowing conditions, we anticipate that we could draw under the facility to replenish approximately 85% of the funds we had used to make these interim payments. In the meantime, however, we are making these payments out of our cash on hand and cash flow from operations. If we experience delays in finalizing the credit agreement or satisfying the borrowing conditions, or if we are unable to do so, we could face potential liquidity issues until such time as we are able to borrow under the credit facility or to arrange an alternate source of funding, which we may not be able to do in a timely manner, or at all. In addition, even assuming we are successful in entering into the credit facility and beginning to make draws thereunder, we may experience overall liquidity levels lower than our historical liquidity levels. Inadequate liquidity could compromise our ability to pursue our business plans and growth opportunities, delay the ultimate deployment of Iridium NEXT and otherwise hurt our business and financial position.

We rely on a limited number of key vendors for timely supply of equipment and services.

Celestica is the manufacturer of all of our current devices, including our mobile handsets, L-Band transceivers and short burst data modems. Celestica may choose to terminate its business relationship with us when its current contractual obligations are completed in January 1, 2011, or at such earlier time as contemplated by our current agreement with Celestica. If Celestica terminates this relationship, we may not be able to find a replacement supplier. In addition, as our sole supplier, we are very dependent on Celestica’s performance. If our key vendors, including Celestica, have difficulty manufacturing or obtaining the necessary parts or material to manufacture our products, we could lose sales. In addition, we utilize other sole source suppliers for certain component parts of our devices. If such suppliers terminated their relationships with us or were otherwise unable to manufacture our component parts, these vendors would be unable to manufacture our products. Due to the recent global economic crisis, manufacturers and suppliers have been forced to implement cost-saving measures, including reductions in force and reductions in inventory. Consequently, such key manufacturers and suppliers may become capacity constrained, resulting in a shortage or interruption in supplies or an inability to meet increased demand. In addition, our manufacturers and suppliers could themselves experience a shortage of the parts or components that they use to manufacture equipment for us. If these manufacturers or suppliers fail to provide equipment or service to us on a timely basis or fail to meet our performance expectations, we may be unable to provide products or services to our customers in a competitive manner, which could in turn negatively impact our financial results. Although we may replace Celestica or other sole source suppliers with another supplier, there could be a substantial period of time in which our products are not available and any new relationship may involve a significantly different cost structure, development schedule and delivery times and we may encounter technical challenges in successfully replicating the manufacturing processes.

In addition, we depend on Boeing to provide operations and maintenance services with respect to our satellite network, including engineering, systems analysis and operations and maintenance services, from our technical support center in Chandler, Arizona and our satellite network operations center in Leesburg, Virginia. Boeing provides these services pursuant to an amended and restated operations and maintenance agreement, whose term is concurrent with the expected useful life of our current constellation. Technological competence is critical to our business and depends, to a significant degree, on the work of technically skilled employees, such as our Boeing contractors. If Boeing’s performance falls below expected levels or if Boeing has difficulties retaining the employees or contractors servicing our network, the operations of our satellite network could be compromised. In addition, if Boeing terminates its agreement with us, we may not be able to find a replacement provider on favorable terms or at all, which could

 

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impair the operations and performance of our network. Replacing Boeing as the operator of our satellite system could also trigger de-orbit rights held by the U.S. government, which, if exercised, would eliminate our ability to offer satellite communications services altogether.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

 

ITEM 4. [REMOVED AND RESERVED.]

 

ITEM 5. OTHER INFORMATION.

Not applicable.

 

ITEM 6. EXHIBITS

See the exhibit index.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

IRIDIUM COMMUNICATIONS INC.
By:  

/S/ THOMAS J. FITZPATRICK

  Thomas J. Fitzpatrick
  Chief Financial Officer

Date: August 9, 2010

 

37


Table of Contents

EXHIBIT INDEX

 

Exhibit

  

Description

  2.1    Transaction Agreement dated September 22, 2008, incorporated herein by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on September 25, 2008.
  2.2    Amendment to Transaction Agreement dated April 28, 2009, incorporated herein by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on April 28, 2009.
  3.1    Amended and Restated Certificate of Incorporation dated September 29, 2009, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC September 29, 2009.
  3.2    Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on September 29, 2009.
  4.1    Specimen Common Stock Certificate, incorporated herein by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-147722), filed with the SEC on February 4, 2008.
  4.2    Amended and Restated Warrant Agreement between the Registrant and American Stock Transfer & Trust Company, incorporated herein by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 26, 2008.
  4.3    Specimen Warrant Certificate for $7.00 Warrants, incorporated herein by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-147722), filed with the SEC on February 4, 2008.
  4.4    Warrant Agreement for $11.50 Warrants between the Registrant and American Stock Transfer & Trust Company, incorporated herein by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K, filed with the SEC on September 29, 2009.
  4.5    Specimen Warrant Certificate for $11.50 Warrants, incorporated herein by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K, filed with the SEC on September 29, 2009.
10.1*    Authorization to Proceed between Iridium Satellite LLC and Thales Alenia Space France, dated June 1, 2010.
31.1    Certification of Chief Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.
32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.

 

* Confidential treatment has been requested with respect to certain portions of this exhibit. A complete copy of the agreement, including the redacted portions, has been filed separately with the SEC.

 

38

Exhibit 10.1

AUTHORIZATION TO PROCEED

Between

IRIDIUM SATELLITE LLC

and

THALES ALENIA SPACE FRANCE

for the

IRIDIUM NEXT SYSTEM

PREAMBLE

This Authorization-To-Proceed (“ ATP ”) is entered into on this 1 st day of June, 2010 by and between Thales Alenia Space France, a company organized and existing under the laws of France, having its registered office at 26 avenue Jean François Champollion 31100 Toulouse – FRANCE (“ Contractor ”), and Iridium Satellite LLC, a limited liability company organized under the laws of Delaware, having an office at 1750 Tysons Boulevard, Suite 1400, McLean, VA 22102 - USA (“ Purchaser ”).

RECITALS

WHEREAS, Purchaser owns and operates a complete integrated satellite-based communication system known as Iridium Block 1;

WHEREAS, Purchaser desires to procure a next generation system including a space segment constellation of satellites fully interoperable/backward compatible with Iridium Block 1 (the “ NEXT System ”);

WHEREAS, the Parties have entered on the date hereof into a Full Scale Development Contract (the “ Contract ”, attached hereto as Annex 1) pursuant to which Contractor, upon the satisfaction of certain conditions, will furnish the space segment for the NEXT System, as well as certain Ground Deliverables, system engineering and integration, and Services, and ensure its interoperability/backward compatibility with Iridium Block 1;

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Iridium / Thales Alenia Space Confidential & Proprietary


WHEREAS, Contractor desires to furnish the space segment for the NEXT System, as well as certain Ground Deliverables, system engineering and integration, and Services, as defined in more detail in the Statement of Work, and ensure its interoperability/backward compatibility with Iridium Block 1, in accordance with the terms and conditions set forth herein or under the Contract;

WHEREAS, pending Financial Close (as such term is defined in the Contract), Purchaser desires immediate initiation of NEXT System work to be performed under the Contract to reduce schedule risk;

NOW, THEREFORE, in consideration of the payments to be made by Purchaser to Contractor under this ATP, and other valid consideration and the mutual covenants and agreements contained herein and intending to be legally bound, the Parties agree as follows;

 

1.

DEFINED TERMS

Capitalized terms used but not defined in this ATP shall have the meanings ascribed thereto in the Contract.

 

2.

ATP RELATIONSHIP TO CONTRACT & SCOPE OF WORK

The Parties agree that this ATP is limited to the scope of work, funding and term set forth herein. It is specifically acknowledged that this ATP does not contain all of the terms and conditions associated with the performance of the scope of work hereunder, which are set forth in the Contract and its Exhibits (as such Exhibits may be revised from time-to-time per mutual agreement of the Parties), including but not limited to:

 

   

The Statement of Work, Ref IR-SOW-001 dated May 21, 2010; and

 

   

The System Performance Specification, rev 5 RL15 dated May 26, 2010 (Ref 100327519B).

Contractor shall provide the necessary personnel, material, expertise, services, equipment and facilities to perform the scope of work provided for in this ATP and, in particular, the Milestones identified in Table 1 below (such Milestones, the “ ATP Milestones ”).

 

TABLE 1

ATP Milestone
Number

  

ATP Milestone Title

1   

[***...***]

2   

[***...***]

3   

[***...***]

4   

[***...***]

5   

[***...***]

6   

[***...***]

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Iridium / Thales Alenia Space Confidential & Proprietary

2


Contractor shall provide to Purchaser interim weekly status reports throughout the ATP Effective Period (as defined below) in accordance with the requirements of the Statement of Work, providing a status of the activities undertaken under the ATP by Contractor.

 

3.

ATP EFFECTIVITY & SCHEDULE

This ATP shall become effective (the date of effectiveness being the “ EDATP ”) following: (i) its execution by the Parties; and (ii) receipt by Contractor of the EDATP payment provided for in Article 4. Unless terminated earlier pursuant to Article 6.3, this ATP shall remain in force until the earlier to occur of: (i) Financial Close; and (ii) three (3) months following EDATP (the “ ATP Effective Period ”). The ATP Effective Period may be extended for an additional three (3) months by mutual written agreement of the Parties, it being understood that Contractor shall promptly agree to such extension if reasonably needed for achievement of Financial Close.

 

4.

PAYMENT

 

4.1

ATP Milestone Payments

With the exception of the first ATP Milestone payment, each subsequent ATP Milestone payment specified in this Article 4 shall become due and payable no later than [***…***] days after: (i) Contractor’s successful completion of the applicable ATP Milestone in accordance with the requirements of the ATP and the Contract; (ii) Contractor’s delivery of an invoice for payment including a certification in the form required by the Contract Payment Plan indicating that the ATP Milestone has been completed in accordance with the requirements of this Contract, including the Statement of Work, together with the necessary or appropriate supporting data and documentation as required hereunder, if any; and (iii) Purchaser’s execution of the acknowledgement included in Contractor’s invoice, which shall not be unreasonably delayed or withheld by Purchaser. If it is deemed that Purchaser has delayed or withheld execution of its acknowledgement without reasonable justification (as determined in good faith and on the basis of objective criteria, following prompt consultation between the Parties), Contractor may stop all Work under this ATP [***…***] days after delivery of a written notice to Purchaser.

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Iridium / Thales Alenia Space Confidential & Proprietary

3


Contractor shall not invoice any amount which when cumulated with other ATP Milestone payments previously made hereunder, exceeds the cumulative ATP Milestone payment amounts due and paid as of such date as reflected in this Article 4.

All Purchaser ATP Milestone payments shall be in both Euro and U.S. Dollars, as provided for below.

The ATP Milestone payment plan for the initial ATP [***…***] month period shall be as follows:

 

ATP Milestone
Number
  

Amount (in U.S. Dollar and
Euro Portions)

  

Anticipated ATP Milestone
Completion Date

1    [***…***]    [***…***]
2    [***…***]    [***…***]
3    [***…***]    [***…***]

If the ATP is extended for an additional three (3) month period, the corresponding ATP Milestone payment plan shall be as follows:

 

ATP Milestone
Number
  

Amount (in U.S. Dollar and
Euro Portions)

  

Anticipated ATP Milestone
Completion Date

4    [***…***]    [***…***]
5    [***…***]    [***…***]
6    [***…***]    [***…***]

 

4.2

Payment Relating to Licensed Technology

At Purchaser’s sole discretion, pursuant to a written notice provided to Contractor on or before [***…***], Purchaser shall have an option to have Contractor extend its rights to the Licensed Technology for the period commencing on [***…***] through [***…***]. Upon exercise of this option, Purchaser shall pay to Contractor an amount equal to [***…***] United States Dollars ($[***…***]).

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Iridium / Thales Alenia Space Confidential & Proprietary

4


4.3

Method of Payment

Payments of the ATP Milestones shall be made by Purchaser in both Euro and U.S. Dollars, as set forth above, by wire transfer to the following bank accounts:

For U.S. Dollar ATP Milestone payments:

 

Bank name:

Account name:

Bank address:

 

Swift Code:

Account number:

Routing number:

  

[***…***]

[***…***]

[***…***]

[***…***]

[***…***]

[***…***]

[***…***]

For Euro ATP Milestone payments

Bank name:

Account name:

Bank address:

 

 

Account number:

Swift Code:

IBAN number:

  

[***…***]

[***…***]

[***…***]

[***…***]

[***…***]

[***…***]

[***…***]

[***…***]

 

4.4

Stop Work and Termination

If Purchaser fails to timely pay any ATP Milestone Payment due and payable to Contractor under the ATP, Contractor shall be entitled to stop all Work under the ATP. If such outstanding ATP Milestone Payment is not made within [***…***] days after the date of stop Work, then Contractor shall be entitled to immediately terminate the ATP by written notice to Purchaser in accordance with the provisions of Article 6.3(B) herein.

 

5.

INTELLECTUAL PROPERTY

The Parties’ respective Intellectual Property rights and related indemnification rights and obligations shall be as provided for in Article 18 of the Contract, as if expressly incorporated in and made part of this ATP.

 

6.

EXPIRATION OR TERMINATION OF ATP

 

6.1

Expiration of ATP - Financial Close of Finance Facility

Upon the occurrence of Financial Close, all ATP Milestone payments made by Purchaser to Contractor under the ATP shall be credited to the Euro and U.S. Dollar portions of firm fixed price for the Work to be performed under the Contract on a Euro for Euro and U.S. Dollar for U.S. Dollar basis, and, all work performed under this ATP shall be transferred and allocated to the Contract and completed thereunder.

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Iridium / Thales Alenia Space Confidential & Proprietary

5


6.2

Expiration of ATP – No Financial Close of Finance Facility

If this ATP expires without occurrence of Financial Close, Contractor shall: (i) be entitled to keep all ATP Milestone payments received from Purchaser under the ATP; and (ii) promptly deliver to Purchaser all Work-in-Process and any Deliverable Items available as of the ATP termination date, and the Parties, unless otherwise provided for in the ATP, shall have no further obligations towards each other and shall not be entitled to claim any damages whatsoever to the other Party.

Purchaser’s aggregate liability under the ATP shall not exceed the sum of all ATP Milestone payments made thereunder as of its effective date of expiration (excluding any sums associated with the indemnity for Intellectual Property Rights infringement provided for under Article 5 above, for which the Purchaser shall remain liable).

 

6.3

Termination of ATP

 

  (A)

By Purchaser

Purchaser may terminate this ATP by issuance of a [***…***] day advance written notice to Contractor. After receipt of Purchaser’s notice, Contractor shall stop work accordingly under this ATP and (i) will be entitled to keep all ATP Milestone payments either received or invoiced, due and payable to Contractor under the ATP as of the effective date of termination; and (ii) promptly deliver to Purchaser all Work-in-Process and any Deliverable Items available as of the ATP termination date, and the Parties, unless otherwise provided for in the ATP, shall have no further obligations towards each other and shall not be entitled to claim any damages whatsoever to the other Party.

 

  (B)

By Contractor

Contractor may immediately terminate this ATP by issuance of written notice if any ATP Milestone payment due and owing hereunder is not paid within [***…***] days after such ATP Milestone was successfully completed and Contractor’s invoice was delivered to and acknowledged by Purchaser in accordance with the requirements of the ATP and the Contract. Upon such termination, Contractor will be entitled to keep all ATP Milestone payments received from Purchaser under the ATP; and (ii) promptly deliver to Purchaser all Work-in-Process and any Deliverable Items available as of the ATP termination date that have been paid for by Purchaser, and the Parties, unless otherwise provided for in the ATP, shall have no further obligations towards each other and shall not be entitled to claim any damages whatsoever to the other Party.

 

7.

INDEMNIFICATION

The Parties’ respective indemnification rights and obligations shall be as provided for in Article 19 of the Contract, as if expressly incorporated in and made part of this ATP.

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Iridium / Thales Alenia Space Confidential & Proprietary

6


8.

LIMITATION OF LIABILITY

Notwithstanding any other provisions of this ATP, under no circumstances shall either Party be liable to the other Party in contract, tort (including without limitation, negligence or breach of statutory duty) or otherwise, and whatever the cause, for any amounts representing:

 

  (i)

loss of profits, revenues, business, contracts or anticipated savings; or

 

  (ii)

special, indirect, consequential, exemplary or punitive damages of any nature whatsoever.

Additionally, with the exception of a Purchaser Intellectual Property Claim or Contractor Intellectual Property Claim provided for under Article 5 hereunder, under no circumstances shall either Party’s liability under or in connection with this ATP exceed the aggregate of: [***…***].

 

9.

FORCE MAJEURE

Any delay or failure in the performance of a Party’s obligations under this ATP resulting from a Force Majeure event shall be governed under the provisions of Article 16.1 of the Contract, as if expressly incorporated in and made part of this ATP, and the Parties agree and acknowledge that the provisions of Article 16.2 “ Termination for Excessive Force Majeure ” shall not apply to this ATP.

 

10.

GOVERNING LAW

This ATP shall be interpreted, construed and governed, and the rights of the Parties shall be determined, in all respects, according to the laws of the State of New York without reference to its conflicts of laws rules.

 

11.

DISPUTES

Any dispute or disagreement arising between the Parties in connection with any interpretation of any provision of the ATP, or the compliance or non-compliance therewith, or the validity or enforceability thereof, or any other dispute under any Article hereof which cannot be resolved by negotiation between the Parties within thirty (30) Days (or such longer period as may be mutually agreed) from the date that either Party informs the other in writing that such dispute or disagreement exists, shall be settled by arbitration administered by the American Arbitration Association (“ AAA ”) Commercial Arbitration Rules and the Supplementary Procedures for Large, Complex Disputes and the

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Iridium / Thales Alenia Space Confidential & Proprietary

7


International Commercial Arbitration Supplementary Procedures in effect on the date that such notice is given, except as otherwise specified herein. The Arbitration shall take place in Washington, D.C. and be conducted in the English language, provided that at the request and expense of the requesting Party, documents and testimony shall be translated into any language specified by the requesting Party.

Notwithstanding the terms of this Article 11, either Party may seek preliminary or temporary injunctive relief, including specific performance, or relief in and of arbitration at any time from a court of competent jurisdiction where immediate irreparable harm to that Party is threatened by the other Party’s acts or omissions; provided, however, that requests for permanent injunctive relief shall be arbitrated pursuant to this Article 11.

 

12.

ASSIGNMENT

 

12.1

General .

Except as provided for in this Article 12, this ATP may not be assigned, either in whole or in part, by either Party without the express written approval of the other Party, not to be unreasonably withheld or delayed.

 

12.2

By Purchaser

Purchaser may assign or transfer this ATP or all its rights, duties, or obligations hereunder without Contractor’s approval: (i) to an Affiliate, provided that such Affiliate has sufficient financial resources to fulfill Purchaser’s obligations under this ATP and subject to any export control regulations applicable to the work performed under this ATP; (ii) to any entity which, by way of merger, consolidation, or any similar transaction involving the acquisition of substantially all the stock, equity or the entire business assets of Purchaser relating to the subject matter of this ATP succeeds to the interests of Purchaser or in connection with obtaining financing for the payment of Contractor’s ATP Milestone invoices under any financing agreement; provided in either case the assignee, transferee, or successor to Purchaser has expressly assumed all the obligations of Purchaser and all terms and conditions applicable to Purchaser under this ATP; or (iii) to any designee or customer of Purchaser or any Affiliate thereof provided that Purchaser remains primarily liable to Contractor for any payment obligation hereunder.

 

12.3

By Contractor .

Contractor may assign or transfer this ATP or all of its rights, duties, or obligations hereunder to: (i) any Affiliate of Contractor that has equivalent or greater financial resources as Contractor; or (ii) any person or entity which, by way of merger, consolidation, or any similar transaction involving the acquisition of substantially all the stock, equity or the entire business assets of Contractor succeeds to the interests of Contractor and has expressly assumed all the obligations of Contractor and all terms and conditions applicable to Contractor under this ATP.

 

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12.4

Security Interests .

Purchaser, upon prior written notice to Contractor, may grant security interests in its rights hereunder to lenders that provide financing for the performance by such Party of its obligations under this ATP or for the subject matter hereof. In the event that either Party is sold to or merged into another entity, its responsibilities under this ATP shall not be altered and the successor organization shall be liable for performance of such Party’s obligations under this ATP. If requested by Purchaser, Contractor shall provide its written consent to such assignment (including the execution by Contractor of a direct agreement or consent and agreement in favor of the facility agent on behalf of Purchaser’s lenders and any financing parties, in a form reasonably satisfactory to such agent and Contractor, and customary for international structured financings) on terms and conditions as may be requested by Purchaser’s lenders subject to the provisions of Article 34 of the Contract.

 

13.

CONFIDENTIALITY

This ATP including the existence and contents hereof, shall deemed Iridium Proprietary Information and will be governed under the terms of the Non Disclosure Agreement dated July 15, 2007 signed between the Parties (the “ NDA ”), as amended, however the Parties shall be entitled to disclose the ATP, including the existence and contents hereof: (i) internally to employees who have a need to know and are subject to confidentiality obligations consistent with the NDA; (ii) to Subcontractors or Associate Contractors, but only to the extent necessary to enable such Subcontractor or Associate Contractor to perform a portion of the work under this ATP; (iii) attorneys, agents, consultants, financing entities, insurance brokers and underwriters involved in the Finance Facility; and (iv) in connection with any disclosure required by applicable law or regulation, including without limitation, disclosure required by the Securities and Exchange Commission or the Nasdaq Stock Market or any other securities exchange on which the securities of a Party or its Affiliate is then trading.

 

14.

NOTICES & AUTHORIZED REPRESENTATIVES

Each contractual or legal notice or correspondence required or permitted to be given or made under this ATP, and the designation of each Parties’ representatives authorized to sign contractual documents and to direct Work under this ATP, shall be conducted in accordance with the requirements of Article 29 of the Contract, as if expressly incorporated in and made part of this ATP.

 

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15.

ATTACHMENTS

The following are the attachments to this ATP:

Annex 1:                                Contract

 

16.

COMPLIANCE WITH LAWS & DIRECTIVES

Each Party shall, at its expense, perform its obligations under this ATP in accordance with all applicable laws, regulations, and policies of any federal, state, local, or foreign government and the conditions of all applicable federal, state, local, or foreign government approvals, permits, or licenses.

 

17.

REPRESENTATIONS

Each Party expressly restates, incorporates in and makes part of this ATP its respective representations provided for in Articles 14.1 (1) – (6) of the Contract.

 

18.

U.N. CONVENTION ON THE INTERNATIONAL SALES OF GOODS

The U.N. Convention on the International Sales of Goods shall not apply or otherwise have any legal effect with respect to this Contract.

 

19.

ENTIRE AGREEMENT & AMENDMENT

With the exception of the Contract, certain provisions of which are expressly incorporated in and made part of this ATP, this ATP constitutes the entire understanding and agreement between the Parties with respect to the subject matter hereof, and supersedes all prior or contemporaneous negotiations, understandings and agreements with respect to the subject matter hereof. The terms of this ATP may be modified only by an agreement in writing signed by the Parties.

 

20.

COUNTERPARTS

This ATP may be signed in any number of counterparts with the same effect as if the signature(s) on each counterpart were upon the same instrument. The Parties agree and acknowledge that the exchange of electronic signature(s) will be sufficient to bind each Party to its respective rights and obligations under this ATP.

 

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21.

SURVIVAL

Termination or expiration of this ATP for any reason shall not release either Party from any liabilities or obligations set forth in this ATP that remain to be performed or by their nature would be intended to be applicable following any such termination or expiration, as required under the following provisions of this ATP: Articles 4 (Payment), 5 (Intellectual Property), 6 (Expiration or Termination of ATP), 7 (Indemnity), 8 (Limitation of Liability), 10 (Governing Law), 11 (Disputes), 13 (Confidentiality), 14 (Notices & Authorized Representatives), 16 (Compliance with Laws & Directives), 17 (Representations), 18 (U.N. Convention on the International Sales of Goods), 19 (Entire Agreement & Amendment), 20 (Counterparts) and 21 (Survival).

 

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IN WITNESS WHEREOF, the Parties have executed this ATP by their duly authorized officers as of the date set forth in the Preamble.

 

IRIDIUM SATELLITE LLC

  

THALES ALENIA SPACE FRANCE

/s/ Matthew J. Desch

  

/s/ Reynald Seznec

Matthew J. Desch

  

Reynald Seznec

CEO

  

President & CEO

 

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Annex 1

FULL SCALE SYSTEM DEVELOPMENT CONTRACT

No. IS-10-021

Between

IRIDIUM SATELLITE LLC

And

THALES ALENIA SPACE FRANCE

for the

IRIDIUM NEXT SYSTEM

This Contract and the information contained herein is confidential and proprietary to Iridium Satellite LLC and its Affiliates and Thales Alenia Space France and shall not be published or disclosed to any third party except as permitted by the terms and conditions of this Contract.

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TABLE OF CONTENTS

 

     PAGE

ARTICLE 1. DEFINITIONS

   3

ARTICLE 2. SCOPE OF WORK

   14

ARTICLE 3. DELIVERABLE ITEMS AND DELIVERY SCHEDULE

   15

ARTICLE 4. PRICE

   19

ARTICLE 5. PAYMENTS

   22

ARTICLE 6. PURCHASER FURNISHED ITEMS

   25

ARTICLE 7. COMPLIANCE WITH LAWS AND DIRECTIVES

   27

ARTICLE 8. ACCESS TO WORK-IN-PROCESS

   29

ARTICLE 9. SATELLITE INSPECTION AND DELIVERY

   32

ARTICLE 10. ACCEPTANCE OF SATELLITE AND PERFORMANCE OF RELATED SERVICES

   35

ARTICLE 11. ACCEPTANCE OF DELIVERABLE ITEMS OTHER THAN THE SATELLITE

   40

ARTICLE 12. TRANSFER OF TITLE AND RISK OF LOSS

   43

ARTICLE 13. CORRECTIVE MEASURES IN THE SATELLITE(S)

   45

ARTICLE 14. REPRESENTATIONS AND WARRANTIES

   46

ARTICLE 15. CHANGES

   51

ARTICLE 16. FORCE MAJEURE

   52

ARTICLE 17. COOPERATION WITH ASSOCIATE CONTRACTORS

   55

ARTICLE 18. INTELLECTUAL PROPERTY RIGHTS AND INDEMNITY

   56

ARTICLE 19. INDEMINIFICATION

   62

ARTICLE 20. TERMINATION FOR CONVENIENCE

   64

ARTICLE 21. LIQUIDATED DAMAGES AND COST REIMBURSEMENTS

   66

ARTICLE 22. TERMINATION FOR DEFAULT

   70

ARTICLE 23. STOP WORK

   74

ARTICLE 24. DISPUTE RESOLUTION

   75

ARTICLE 25. INTER-PARTY WAIVER OF LIABILITY FOR A LAUNCH

   77

ARTICLE 26. LIMITATION OF LIABILITY

   79

ARTICLE 27. DISCLOSURE AND HANDLING OF PROPRIETARY INFORMATION

   81

ARTICLE 28. PUBLIC RELEASE OF INFORMATION

   83

 

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ARTICLE 29. NOTICES

   84

ARTICLE 30. INSURANCE

   86

ARTICLE 31. GROUND STORAGE

   88

ARTICLE 32. CONTRACTOR PERSONNEL

   91

ARTICLE 33. SUBCONTRACTS

   92

ARTICLE 34. LENDER REQUIREMENTS

   93

ARTICLE 35. OPTIONS

   94

ARTICLE 36. OPERATIONS AND MAINTENANCE CONTRACT

   94

ARTICLE 37. GENERAL

   95

ARTICLE 38. EFFECTIVE DATE OF CONTRACT

   100

 

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PREAMBLE

This Full Scale System Development Contract is signed as of the 1 st day of June 2010, by and between

Iridium Satellite LLC (“ Iridium ”), a limited liability company organized and existing under the laws of Delaware, having an office at 1750 Tysons Boulevard, Suite 1400, McLean, VA 22102 - USA (hereinafter referred to as “ Purchaser ”),

and

Thales Alenia Space France, a company organized and existing under the laws of France, having its registered office at 26, avenue Jean-François Champollion, 31100 Toulouse - France (hereafter referred to as “ Contractor ”), and Purchaser and Contractor are hereafter referred to collectively as the “ Parties ” or individually as a “ Party ”.

 

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RECITALS

WHEREAS, Purchaser owns and operates the complete integrated satellite-based communication system known as Iridium Block 1 (as defined herein); and

WHEREAS, Purchaser desires to procure a next generation system including a space segment constellation of satellites fully interoperable/backward compatible with Iridium Block 1; and

WHEREAS, Purchaser will offer an array of services, including high-bandwidth data, voice and short messaging services via the NEXT System, featuring an IP-based architecture; and

WHEREAS, Contractor desires to furnish the space segment for the NEXT System (as defined herein), as well as certain Ground Deliverables, system engineering and integration, and Services, as defined in more detail in the Statement of Work, and ensure its interoperability/backward compatibility with Iridium Block 1, in accordance with the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the Base Contract Price and other valid consideration and the mutual covenants and agreements contained herein and intending to be legally bound, the Parties agree as follows:

 

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ARTICLE 1. DEFINITIONS

Capitalized terms used and not otherwise defined herein shall have the following meanings:

 

1.1

Acceptance ” means as defined in

 

  A.

Article 10.2, with respect to a Satellite; and

 

  B.

Article 11, with respect to any Deliverable Item other than a Satellite.

 

1.2

Licensed Technology ” means the patents set forth on Exhibit H attached hereto,

 

1.3

Actual Costs ” shall mean either Contractor’s or Purchaser’s, as the case may be, direct and actual costs related to the Work as determined in accordance with accounting rules applicable to Contractor or Purchaser, as the case may be, including any indirect costs, but excluding any profit, margin, mark-up, or other fees.

 

1.4

Additional Delivered Documentation ” has the meaning set forth in Article 18.1.3.

 

1.5

Affiliate ” means, with respect to an entity, any other entity, directly or indirectly, Controlling or Controlled by or under common Control with such first named entity.

 

1.6

Anomaly ” means, with respect to a Satellite on-orbit, a known condition or occurrence that has or reasonably can be predicted to have an adverse impact on the performance, reliability or Operating Life of the Satellite or result in such Satellite failing to meet the requirements of this Contract, including the Statement of Work. An isolated (non-recurring) condition or occurrence that does not adversely impact or cannot be reasonably predicted to adversely impact the performance, reliability or Operating Life of a Satellite shall not be considered an Anomaly.

 

1.7

Authorization to Proceed ” or “ ATP ” means the agreement entered into by the Parties as of the date hereof authorizing Contractor to perform a certain portion of the Work prior to EDC.

 

1.8

Associate Contractor(s) ” means the contractor(s) designated by the Purchaser and notified to Contractor in writing from time to time associated with the development, delivery, operation and maintenance of the NEXT System.

 

1.9

ATP Balance ” has the meaning set forth in Article 4.3.

 

1.10

Audit Rights and Procedures ” means the Actual Costs audit rights and procedures described in Article 5.7.

 

1.11

Background Contractor IP ” means Intellectual Property, and all associated Intellectual Property Rights therein, owned or Controlled by Contractor prior to or after the EDC or developed by Contractor outside the scope of this Contract after the EDC and embodied in the Deliverable Items, including without limitation the Licensed Technology. Any Intellectual Property and all associated Intellectual Property Rights therein created under the MOA and identified in Exhibit G will be treated as provided under this Contract.

 

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1.12

Background Purchaser IP ” means Intellectual Property, and all associated Intellectual Property Rights therein, owned or Controlled by Purchaser and provided to Contractor pursuant to this Contract (before or after the EDC), including, but not limited to, the items listed in Exhibit G, the Intellectual Property and all associated Intellectual Property Rights related to or generated for the Iridium Block 1 and all documentation related to Iridium Block 1 provided to Contractor prior to or following EDC, and any derivatives, improvements or modifications made by Purchaser, Contractor or any other third party to the foregoing; provided, however, that Background Purchaser IP shall not include the Licensed Technology. Any Intellectual Property and all associated Intellectual Property Rights therein created under the MOA will be treated as Background Contractor IP subject to Exhibit G.

 

1.13

Base Contract Price ” has the meaning set forth in Article 4.2.3.

 

1.14

Business Day ” means any day other than a Saturday, Sunday or any other day on which national banks are authorized to be closed in Washington, D.C., New York or Paris.

 

1.15

Candidate Launch Vehicle ” means any of the launch vehicles, including variants thereof, as defined in Exhibit C, System Performance Specification.

 

1.16

Change Order ” has the meaning set forth in Article 15.1.

 

1.17

Constructive Total Loss ” means, with respect to any Satellite on or after Launch, a performance degradation that results in such Satellite losing more than [***…***]; but the Satellite is not a Total Loss. This definition shall be modified, with effect as of the date notified by the Purchaser to the Contractor, to reflect the definition included in Purchaser’s Launch and In-Orbit Insurance Policy applicable to such Satellite, if defined differently therein, such definition to be provided to the Contractor by Purchaser.

 

1.18

Contract ” means the terms and conditions (Preamble, Recitals and Articles) of this executed contract and its Exhibits, as set forth in Articles 2.1, the same as may be amended from time to time in accordance with the terms hereof.

 

1.19

Contract Line Item ” means such portion of the Work as set forth in the Statement of Work.

 

1.20

Contract Line Item Number ” or “ CLIN ” means the reference number used for each Contract Line Item as set forth in the Statement of Work.

 

1.21

Contractor Intellectual Property Claim ” has the meaning set forth in Article 18.8.1.

 

1.22

Control ” and its derivatives mean,

 

  A.

with respect to an entity, (i) the legal ownership, directly or indirectly, of fifty percent (50%) or more of the capital stock (or other ownership interest if not a corporation) of such entity ordinarily having voting rights, or (ii) the power to direct, directly or indirectly, the management policies of such entity, whether through the ownership of voting stock, by contract, or otherwise; and

 

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  B.

with respect to any Intellectual Property, or any Intellectual Property Rights therein, the possession of the ability to grant a license or sublicense as provided for herein by a Party or any of its Affiliates, as of the EDC or during the term of this Contract, without violating the terms of any agreement with any third party.

 

1.23

COTS Software ” means Software that: (a) is sold, leased, or licensed to the general public by a vendor which retains the intellectual property rights to such software; (b) is available to customers in multiple identical copies; and (c) is generally made available to customers without source code modification.

 

1.24

Defect ” means with respect to the Satellite or the Ground Deliverables, any deviation, discrepancy, non-conformance or failure to meet the applicable specifications of this Contract, including failures due to non-compliant materials or workmanship which affects adversely the operation or performance of a Satellite or Ground Deliverables. A deviation, discrepancy, non-conformance or failure to meet the applicable specifications of this Contract that does not adversely impact or cannot be reasonably predicted to adversely impact the performance, reliability or Operating Life of a Satellite shall not be considered a Defect.

 

1.25

Deliverable Data ” means the data and Documentation required to be delivered to Purchaser as specified in the Contract.

 

1.26

Deliverable Hardware ” means the Satellites and the Ground Deliverables to be delivered to Purchaser by Contractor, as set forth in this Contract.

 

1.27

Deliverable Item ” means any Deliverable Hardware, Software and Deliverable Data to be delivered by Contractor to Purchaser pursuant to the Contract.

 

1.28

Deliverables Schedule ” means the schedule for delivery of Deliverable Items and performance of Services as set forth in Exhibit A pursuant to the Contract.

 

1.29

Delivery ” has the meaning set forth in Article 3.3.

 

1.30

Developed Software ” means any Software developed by, or on behalf of, Contractor, which Software is included as part of the Work. All Software that is not COTS Software will be deemed to be Developed Software.

 

1.31

Dispute ” has the meaning set forth in Article 24.

 

1.32

Documentation ” means the documentation to be supplied by Contractor to Purchaser pursuant to this Contract.

 

1.33

EST ” has the meaning set forth in Article 4.2.1.

 

1.34

Effective Date of Contract ” or “ EDC ” has the meaning set forth in Article 38.

 

1.35

Exploit ” or “ Exploitation ” means, either to exercise “ NEXT System Exploit Rights ” or to exercise “ NEXT Successor Exploit Rights ”.

 

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1.36

Final Statement ” has the meaning set forth in Article 20.3.

 

1.37

Final System Acceptance ” or “ FSA ” has the meaning set forth in Article 10.4.

 

1.38

Financial Close ” means the point in time when all financial commitments under the Finance Facility have been secured from the various Financing Entities (including, as applicable, fulfillment of all conditions precedent to the first drawing under the Finance Facility), as notified to Contractor by the agent under the Finance Facility .

 

1.39

Finance Facility ” means the debt facility, including the French Coface-Supported Facility, arranged by Purchaser to finance all or part of the Base Contract Price.

 

1.40

Financing Entity(ies) ” means any entity (other than Contractor or parties related to Contractor), which has been specifically identified in a written notification to Contractor providing money to Purchaser to fund any portion of the Work.

 

1.41

Force Majeure ” has the meaning set forth in Article 16.1.

 

1.42

Foreground IP ” means all Intellectual Property, and all associated Intellectual Property Rights therein, owned or Controlled by Contractor and created by or on behalf of Contractor (before or after the EDC) in the course of Contractor’s performance of this Contract, including all parts of the Intellectual Property, and associated Intellectual Property Rights therein, embodied in the Deliverable Items and that are not Background Purchaser IP or Background Contractor IP. Any Intellectual Property and all associated Intellectual Property Rights therein, created under the MOA will be treated as Background Contractor IP subject to Exhibit G.

 

1.43

Foreground Contractor IP ” means such Foreground IP as set forth in Article 18.3.3.

 

1.44

Foreground Purchaser IP ” has the meaning set forth in Article 18.3.1.

 

1.45

Forward Point Quote ” had the meaning set forth in Article 4.2.2.

 

1.46

French Coface-Supported Facility ” means the syndicated export credit facility guaranteed by the Compagnie Francaise d’Assurance pour le Commerce Exterieur insurance policy to be issued in favor of the lending banks in an approximate amount of $1.8 billion United States dollars, and intended to finance all or part of the Base Contract Price.

 

1.47

Ground Deliverables ” means the Deliverable Items listed in Table 1-1 of the Statement of Work.

 

1.48

Initial System Acceptance ” or “ ISA ” has the meaning set forth in Article 10.3.

 

1.49

Intellectual Property ” means all designs, technical information, works of authorship, techniques, analyses, methods, concepts, formulae, layouts, software, inventions (whether or not patented or patentable), discoveries, improvements, processes, ideas, technical data and documentation, engineering, manufacturing and other drawings, specifications, performances, semiconductor topographies, business names, the style of presentation of goods and services

 

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and similar matter in which an Intellectual Property Right subsists, regardless of whether any of the foregoing has been reduced to writing or practice. For the avoidance of doubt, software (as referenced above) includes Software, technical data (as referenced above) includes Technical Data, and documentation (as referenced above) includes Documentation.

 

1.50

Intellectual Property Claim ” means a Contractor Intellectual Property Claim or a Purchaser Intellectual Property Claim.

 

1.51

Intellectual Property Right(s) ” means all common law and statutory proprietary rights with respect to Intellectual Property, including patents, patent applications, copyrights, industrial designs, trademarks and service marks, database rights, design rights (whether registered or not), trade secrets, mask work rights, data rights, moral rights, and similar rights existing from time to time under the intellectual property laws of the United States, any state or foreign jurisdiction, or international treaty regime, regardless of whether such rights exist as of the EDC or arise are acquired at any time during the term of this Contract. For the avoidance of doubt, no license or other rights to the Thales trademarks or trade names are granted under this Contract. For avoidance of doubt, Proprietary Information shall be considered to be trade secrets under this Contract in accordance with Article 27.

 

1.52

Interest Rate ” means the rate of interest of the one month USD LIBOR as computed and published daily by the British Bankers Association, available at http://www.bba.org.uk plus [***…***] Basis Points. If the one month USD LIBOR rate equals or exceeds [***…***] per annum, then the Interest Rate will be reduced to the one month USD LIBOR rate plus [***…***] Basis Points. In the event the British Banker’s Association does not publish such rate, the Parties shall reasonably determine a reputable alternate source from which to ascertain LIBOR.

 

1.53

Intentional Ignition ” means, with respect to a Satellite, the start of the ignition process of the Launch Vehicle for the purpose of Launch, which is the time at which the command signal is sent to the Launch Vehicle. This definition shall be modified, with effect as of the date of notice by Purchaser to Contractor, to reflect the definition of “ intentional ignition ” in the Launch Services Agreement applicable to the Launch of such Satellite.

 

1.54

Iridium Block 1 ” means the existing Iridium mobile satellite communications system comprised of a constellation of sixty-six (66) low-earth orbiting communications satellites, plus spares, system control segment, ground gateway segment, system test bed and associated equipment.

 

1.55

Key Personnel ” has the meaning set forth in Article 32.2.

 

1.56

Launch ” means, with respect to a Satellite, intentional ignition followed by lift-off. This definition shall be modified, with effect as of the date of notice by Purchaser to Contractor, to reflect the definition of “ launch ” in the Launch Services Agreement applicable to the Launch of such Satellite.

 

1.57

Launch and In-Orbit Insurance Policy ” has the meaning set forth in Article 30.2.

 

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1.58

Launch Segment Services ” means those services specified in this Contract, including the Statement of Work, to be provided by Contractor in support of Launch Services.

 

1.59

Launch Services ” means those services provided by a Launch Services Provider for the Launch of a Satellite Batch pursuant to a Launch Services Agreement.

 

1.60

Launch Services Agreement ” means a contract between Purchaser and a Launch Services Provider that provides Launch Services for a Satellite Batch.

 

1.61

Launch Services Provider ” means a provider of Launch Services responsible for the Launch of a Satellite Batch.

 

1.62

Launch Site ” means the location that will be used by a Launch Services Provider for purposes of Launching a Satellite Batch, as notified by Purchaser to Contractor in accordance with Article 3.3.2.

 

1.63

Launch Vehicle ” means a launch vehicle selected from the list of Candidate Launch Vehicles used to provide Launch Services for one or more Satellite Batches.

 

1.64

Long Term Storage ” has the meaning set forth in Article 31.1.2.

 

1.65

Major Subcontract ” has the meaning set forth in Article 33.1.

 

1.66

Major Subcontractor ” means a Subcontractor who is a party to a Major Subcontract.

 

1.67

Milestone ” means completion of a portion of the Work in accordance with the requirements of the Statement of Work, following which a payment is to be made in accordance with the Payment Plan.

 

1.68

Milestone Success Criteria ” means the criteria set forth in the Section 11 and Appendix B of Statement of Work providing for the Milestone acceptance requirements associated with the completion of a portion of the Work under this Contract, including the Delivery of any Deliverable Items or performance of relevant Services.

 

1.69

MOA ” means the Memorandum of Agreement, as amended, dated as of the 12th day of March 2008, by and between Iridium Satellite LLC and Contractor.

 

1.70

NEXT Space Segment and Space Vehicle Integration and Verification Plan ” means the NEXT Space Segment and Space Vehicle Integration and Verification Plan to be provided in accordance with this Contract, including the Statement of Work.

 

1.71

NEXT Successor System ” means any subsequent system(s) of global communications to be procured by Purchaser succeeding the NEXT System (i.e., one or more generations of successor systems to the NEXT System) for the purpose of continuing Purchaser’s business operations.

 

1.72

NEXT Successor System Exploit Rights ” means [***…***].

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

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1.73

NEXT System ” means a next generation system including a space segment constellation of low earth orbit satellites as well as certain Ground Deliverables, system engineering and integration, and Services, fully interoperable/backward compatible with Iridium Block 1, as defined in more detail in the Statement of Work.

 

1.74

NEXT System Exploit Rights ” means [***…***].

 

1.75

NEXT System Launch Campaign ” means the period of time (nominally [***…***] months in duration) beginning with the scheduled Launch date of the initial Satellite Batch (as set forth in Exhibit A) and ending upon Satellite Acceptance or Qualified Satellite Acceptance, as applicable, of the Satellites comprising the final Satellite Batch.

 

1.76

Notice of Non-Compliance ” has the meaning set forth in Article 9.1.6.

 

1.77

On-Orbit Satellite Acceptance ” or “ OSA ” means the on-orbit acceptance of any Satellite based on the process provided for in Article 10.2.

 

1.78

OSA Complete Date ” has the meaning set forth in Article 10.2.1.

 

1.79

On-Orbit Support Services ” means the Services to be performed by the Contractor as set forth in Section 9.2 of the Statement of Work.

 

1.80

Operating Life ” means, with respect to a Satellite, the operating life of any Satellite extending through the earlier of the date that such Satellite is de-orbited or is determined a Total Loss or Constructive Total Loss to the extent such Satellite is removed from service.

 

1.81

Options ” means any of the options that may be exercised by Purchaser under this Contract in accordance with Article 35.

 

1.82

Partial Loss ” means, with respect to any Satellite on or after Launch, a performance degradation that results in such Satellite failing to meet the System Performance Specification, but the Satellite is not a Constructive Total Loss or Total Loss. This definition shall be modified, with effect as of the date notified by the Purchaser to the Contractor, to reflect the definition included in Purchaser’s Launch and In-Orbit Insurance Policy applicable to such Satellite if defined differently therein, such definition to be provided to the Contractor by Purchaser.

 

1.83

Payment Plan ” shall be as attached in Exhibit D.

 

1.84

Payment Strip ” has the meaning set forth in Article 4.2.2.

 

1.85

Performance Specification ” means the applicable performance specification for the Satellite or other Deliverable Item under this Contract, as required by the Statement of Work, as such specification may be amended from time to time in accordance with the terms hereof.

 

1.86

Preamble ” means the preamble section of this Contract.

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

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1.87

Proprietary Information ” has the meaning set forth in Article 27.1.

 

1.88

Provisional Qualified Satellite Acceptance ” has the meaning set forth in Article 10.2.3.1 with respect to a Satellite.

 

1.89

Purchaser Furnished Items ” means all documentation, equipment, items and facilities to be furnished by the Purchaser or services to be performed by the Purchaser as set forth in the Statement of Work.

 

1.90

Purchaser’s Hedging Agent ” means Goldman Sachs International or an Affiliate thereof.

 

1.91

Purchaser Intellectual Property Claim ” has the meaning set forth in Article 18.8.2.

 

1.92

Purchaser IP ” means Background Purchaser IP and Foreground Purchaser IP.

 

1.93

Purchaser Personnel ” means any of Purchaser’s duly appointed consultants, advisors or representatives (including technical, regulatory, insurance/risk management and legal consultants, advisors) engaged in, without limitation, the review, monitoring or assessment of any portion of the Work performed or to be performed under this Contract and identified to the Contractor.

 

1.94

Qualified Satellite Acceptance ” or “ QSA ” means as defined in Article 10.2.3.2 with respect to a Satellite.

 

1.95

Recitals ” means the recitals section of this Contract.

 

1.96

Recovery Plan ” has the meaning set forth in Article 3.6.

 

1.97

Satellite ” or “ Space Vehicle ” means any communications satellite that is to be manufactured by Contractor and to be delivered to Purchaser pursuant to this Contract.

 

1.98

Satellite Batch ” means each grouping of Satellites to be delivered by the Contractor at the same time for integration on a Launch Vehicle dispenser as notified from time-to-time by the Purchaser to the Contractor in accordance with Article 3.3.

 

1.99

Satellite Pre-Shipment Review ” or “ SPSR ” has the meaning set forth in Article 9.1.

 

1.100

Secondary Payload ” or “ Secondary Payloads ” means the secondary payload to be accommodated on each Satellite, in accordance with Article 3.2 and Section 5.2.1 of the Statement of Work.

 

1.101

Secured Obligations ” means, collectively, all present and future obligations of the Contractor to or for the benefit of Purchaser under this Contract, as well as all amounts to which Purchaser may be entitled to be paid by the Contractor hereunder as a result of any breach of this Contract. All such obligations are “ Secured Obligations ”.

 

1.102

Services ” means the On-Orbit Support Services, Launch Segment Services, Training and all other services to be performed by the Contractor as set forth in this Contract.

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

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1.103

Shipping, Handling and Storage Plan ” means the CDRL 064 to be produced by the Contractor and incorporated into the Statement of Work.

 

1.104

Short Term Storage ” has the meaning set forth in Article 31.1.1.

 

1.105

Software ” means computer software programs and software systems, whether in source code and/or object code form as set forth in Exhibit G, (including firmware, files, databases, interfaces, documentation and other materials related thereto, and any third party Software sublicensed by Contractor hereunder) to be delivered under this Contract, as such Software is revised, upgraded, updated, corrected, modified, and enhanced from time to time and provided as set forth in the Contract. Unless otherwise specified, ‘Software’ means both Developed Software and COTS Software.

 

1.106

Spot Rate ” means the exchange rate expressed as the amount of U.S. Dollars per one Euro as reported by [***…***] on the scheduled Financial Close date, or such other page that may replace such page for the purpose of displaying such exchange rate, provided, however, that if such page is no longer published and no replacement page is designated, Purchaser and Contractor, in consultation with leading financial institutions, shall determine such affected rate in good faith and in a commercially reasonable manner.

 

1.107

Statement of Work ” or “ SOW ” means Exhibit B to this Contract.

 

1.108

Stop Work Order ” means a written order from Purchaser to Contractor requesting Contractor to cease, and cause Subcontractors (as applicable) to cease, performance of all or part of the Work for the period specified in such order, as such period may be extended in accordance with this Contract, as set forth in Article 23.

 

1.109

Storage ” shall mean, as applicable, either Short Term Storage or Long Term Storage, in accordance with the provisions of Article 31.1.1.

 

1.110

Storage Costs ” has the meaning set forth in Article 31.1.

 

1.111

Subcontract ” means a contract or purchase order awarded by Contractor to a Subcontractor or a contract or purchase order awarded by a Subcontractor at any tier for performance of any of the Work.

 

1.112

Subcontractor ” means any person or business entity that performs Work, directly or indirectly, on behalf of the Contractor.

 

1.113

System Performance Specification ” means Exhibit C to this Contract.

 

1.114

Task Order ” means written task orders issued pursuant to the terms of this Contract which describes the requirements, Deliverable Item(s), any changes to the Statement of Work or other requirements under this Contract, prices, and special terms and conditions as agreed to by the Parties.

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

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1.115

Terminated Ignition ” means that, following the time when the electronic signal is sent to command the opening of any first stage propellant valves, the first stage engines of a Launch Vehicle shut down for any reason before the hold down mechanism is released and the Launch pad is declared safe by the Launch Services Provider. This definition shall be modified to incorporate the definition of “ terminated ignition ” (or other similar term) from the Launch Service Agreement applicable to the Launch of the applicable Satellite.

 

1.116

Total Loss ” means with respect to a Satellite on or after Launch, the complete loss, destruction or failure of such Satellite. This definition shall be modified, with effect as of the date notified by the Purchaser to the Contractor, to reflect the definition included in Purchaser’s Launch and In-Orbit Insurance Policy applicable to such Satellite if defined differently therein, such definition to be provided to the Contractor by the Purchaser.

 

1.117

Training ” means the training Services to be performed by the Contractor in accordance with the terms of this Contract.

 

1.118

Transfer ” has the meaning set forth in Article 12.1.1.

 

1.119

Use ” means use, reproduction, preparation of derivative works of, modification, or distribution of Background Purchaser IP and Foreground Purchaser IP by Contractor, its Subcontractors and Affiliates solely for the performance by Contractor of its obligations under this Contract and Subcontracts, including designing, making, using, manufacturing and testing the Satellite(s) and other Deliverable Items.

 

1.120

Work ” means all design, development, construction, manufacturing, testing and delivery of Deliverable Items, to be furnished to Purchaser and Services to be performed under this Contract.

 

1.121

Work-in-Process ” means the following goods, services, and rights to be provided to Purchaser by Contractor under this Contract but in the case of goods only such goods as have been designated for use under this Contract under Contractor’s internal material resource planning system relating to: (a) the Satellites and any related components; (b) the Ground Deliverables; (c) all other Deliverable Items, including items purchased pursuant to exercised options set forth herein; (d) all parts, materials, inventories, and associated warranties; and (e) the rights in Intellectual Property as set forth in Article 18, and Proprietary Information as set forth in Article 27. The foregoing shall constitute Work-in-Process as the same shall be in the process of performance, manufacture, testing, integration, delivery or completion at any given point in time.

 

1.122

Interpretation:

In the Contract, unless the contrary intention appears:

 

  (a)

the singular includes the plural and vice versa and words importing a gender include other genders;

 

  (b)

other grammatical forms of defined words or expressions have corresponding meanings;

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

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  (c)

a reference to Article means an article of this Contract;

 

  (d)

a reference to Paragraph means a paragraph under any Article hereof or section in an Exhibit or Attachment;

 

  (e)

a reference to Attachments means any and all attachment(s) that are attached hereto or to any Exhibit and incorporated herein or therein, as may be amended from time to time in accordance with the terms hereof;

 

  (f)

a reference to Exhibit means the exhibit(s) identified in Article 2.1 and attached hereto and incorporated herein, as may be amended from time to time in accordance with the terms hereof;

 

  (g)

any terms capitalized but not defined herein shall have the definition ascribed thereto in the Statement of Work;

 

  (h)

a reference to a document or agreement, including the Contract and any Exhibits thereto, includes a reference to that document or agreement as assigned, amended, altered or replaced from time to time;

 

  (i)

a reference to a Party includes its executors, administrators, successors and permitted assigns and persons to whom it assigns the Contract in accordance with Article 37.1;

 

  (j)

a reference to day means any calendar day or any period of consecutive calendar days;

 

  (k)

words and expressions importing natural persons include partnerships, bodies corporate, associations, governments and governmental and local authorities and agencies;

 

  (l)

each Party shall perform its obligations under the Contract at all times in good faith and consistent with the implied covenant of good faith and fair dealing as interpreted by laws of the State of New York;

 

  (m)

the word “ including ” and words of similar import when used in this Contract shall mean “ including without limitation ,” unless otherwise specified; and

 

  (n)

headings in the Contract are for ease of reference only and do not affect the meaning of the Contract.

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

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ARTICLE 2. SCOPE OF WORK

 

2.1

Scope of Work

Contractor shall provide the necessary personnel, material, services and facilities to perform the Work in accordance with the provisions of this Contract, including the Exhibits listed below, as the same may be amended from time to time in accordance with the terms hereof, which are attached hereto or incorporated by reference and made a part hereof.

 

  1.

The Deliverables Schedule, attached as Exhibit A;

 

  2.

The Statement of Work or SOW, attached as Exhibit B;

 

  3.

The System Performance Specification, attached as Exhibit C;

 

  4.

The Payment Plan, attached as Exhibit D;

 

  5.

Criteria for Determining NEXT Satellite Qualified Acceptance, attached as Exhibit E;

 

  6.

Form of Contractor Satellite Pre-Shipment Review Completion Certificate, attached as Exhibit F;

 

  7.

Intellectual Property, attached as Exhibit G; and

 

  8.

Licensed Technology, attached as Exhibit H.

 

2.2

Order of Precedence

In case of any inconsistencies among the articles of this Contract and any of the Exhibits, the following order of precedence shall apply:

 

  1.

The Terms and Conditions of this Contract, and

 

  2.

The Exhibits to the Contract, in the order attached hereto.

 

2.3

NEXT Successor System Procurement

The Parties agree and acknowledge that Contractor, to the extent this Contract is not terminated in accordance with the provisions of Article 22.1, shall be included in Purchaser’s request for proposal process and evaluation of potential suppliers for the NEXT Successor System.

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

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ARTICLE 3. DELIVERABLE ITEMS AND DELIVERY SCHEDULE

 

3.1

Contractor shall furnish the Satellites for the NEXT System as well as certain Ground Deliverables, Systems Engineering and Integration Services and other Services, as defined in more detail in the Statement of Work.

 

3.2

Secondary Payload(s) Accommodation

 

  3.2.1

Contractor shall perform the Work to accommodate Secondary Payload(s) in accordance with the Statement of Work. [***…***].

 

  3.2.2

Purchaser shall, from time-to-time notify Contractor in writing of any Secondary Payload(s) to be integrated on the Satellite(s) that comply with the System Performance Specification and Secondary Payload Accommodation Requirements (as referred to in Exhibit C). Contractor’s obligation to integrate such Secondary Payload(s) shall be in accordance with the Statement of Work. Any Secondary Payload(s) that are not consistent with the System Performance Specification and/or Secondary Payload Accommodation Requirements (as referred to in Exhibit C) or that are otherwise directed by Purchaser following the time periods provided for in the Exhibit B may be subject to Article 15 [***…***].

 

3.3

Delivery

 

  3.3.1

Delivery of each Deliverable Item (except the Satellites) shall occur upon arrival, delivery or presentation of such Deliverable Item in accordance with corresponding dates and locations set forth in the Deliverables Schedule, after having successfully completed any required reviews and testing required under the terms of this Contract, including the Statement of Work.

In the case of a Satellite, Delivery shall occur upon delivery of the Satellite (or the Satellite Batch to which a Satellite pertains) to the Launch Site or upon placement in Storage.

Without prejudice to Contractor rights and remedies provided for under this Contract, time is of the essence with respect to all Deliverable Items.

 

  3.3.2

With respect to the initial Satellite Batch, [***…***] months prior to the commencement of the NEXT System Launch Campaign, Purchaser shall notify Contractor in writing of the scheduled Launch date, the Launch Services Provider, Launch Vehicle, Launch Site, and the quantity of Space Vehicles to be included in the initial Satellite Batch.

Notwithstanding the foregoing, Purchaser shall be entitled to modify its notification pursuant to this Article 3.3.2 at no increase to the Base Contract Price, including to designate a new scheduled Launch date, Launch Services Provider, Launch Vehicle, Launch Site, or quantity of Space Vehicles in the initial Satellite Batch, as long as Purchaser’s notification to Contractor is given [***…***] days prior to any scheduled shipment of the initial Satellite Batch and no later than [***…***] months prior to the newly designated Launch date for the initial Satellite Batch.

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

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For subsequent Satellite Batches, Purchaser shall designate or confirm to Contractor in writing the scheduled Launch Date, Launch Services Provider, Launch Vehicle, Launch Site and the quantity of Space Vehicles to be included in each Satellite Batch as follows:

 

  (a)

No later than [***…***] months prior to the then scheduled Launch Date if such Launch is performed for the first time by a Launch Services Provider and/or at a Launch Site; or

 

  (b)

No later than [***…***] months prior to the then-scheduled Launch Date if such Launch is a repeat Launch (consecutive or non-consecutive) by an existing Launch Services Provider and from the same Launch Site.

Any change of Launch Services Provider, Launch Vehicle or Launch Site notifications provided by the Purchaser to the Contractor outside the scope of this Article 3.3.2 shall be subject to the terms of a Change Order under Article 15.

The Parties agree and acknowledge that the NEXT System Launch Campaign dates set forth in the Deliverables Schedule as of EDC represent only an initial estimate of such dates and are subject to adjustment in accordance with the terms of this Contract, including, Articles 3.3.2, 3.4, 15,16, 23 and 31.

 

  3.3.3

During the Iridium NEXT System Launch Campaign period, and at Purchaser’s instruction, each Satellite of a Satellite Batch to be delivered in accordance with this Article 3.3 which has successfully completed the Satellite Pre-Shipment Review in accordance with the terms of this Contract, including the Statement of Work, shall be transported, along with associated ground support equipment, at Contractor’s risk and expense to the Launch Site selected for the Launch of the respective Satellite Batch or to Storage in accordance with Article 31, if so directed by Purchaser.

 

  3.3.4

The Ground Deliverables, including the ground Software, shall be transported, at Contractor’s risk and expense, Delivery Duty Unpaid (according to ICC Incoterms 2000) to the required destination as specified in the Deliverables Schedule.

 

3.4

NEXT System Launch Campaign

 

  3.4.1

Clearance Time Between Launches . Contractor shall be entitled to a [***…***] day clearance period following the completion of the Launch of a Satellite Batch and the commencement of the subsequent [***…***] day Satellite Batch launch campaign.

 

  3.4.2

Satellite Batch Delivery Delays . In the event that Delivery of any Satellite forming part of a Satellite Batch to the Launch Site is delayed during the NEXT System Launch Campaign, including any Launch postponements declared or requested by a Launch Services Provider, the relevant Satellite Batch will be placed in Short Term Storage (as defined in Article 31.1.1) until such time the Purchaser notifies Contractor to ship the Satellite Batch to the Launch Site.

 

  3.4.3

Launch Campaign Delays . In the event of any Launch delay or postponement during

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

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the NEXT System Launch Campaign, Contractor shall perform the Launch Segment Services for such Launch for a period including the nominal (scheduled) launch campaign duration and up to [***…***] additional days at no increase to the Base Contract Price. Following the expiration of such additional [***…***] day period, Contractor shall be entitled to reimbursement for [***…***].

 

  3.4.4

Extension of NEXT System Launch Campaign . If the NEXT System Launch Campaign extends beyond [***…***] months, Contractor shall be entitled to an adjustment of the relevant provisions of this Contract in accordance with Article 15.

 

3.5

Selection of Launch Vehicle and Cooperation with Launch Services Provider(s)

Purchaser will procure the Launch Services, including the dispenser required to deploy each Satellite Batch, pursuant to one or more Launch Services Agreements with one or more Launch Services Providers, to perform the launch mission for each Satellite Batch designated in accordance with Article 3.3 and the Purchaser shall cause each Launch Services Provider to comply with its respective obligations set forth in the Launch Interface Requirements Document (referred to in Exhibit B).

Contractor shall provide, as part of the Base Contract Price, the Launch Segment Services in accordance with this Contract, including the Statement of Work and other customary services to maintain compatibility of any Satellite Batch for Launch on a Candidate Launch Vehicle as set forth in the Statement of Work and the System Performance Specification.

Purchaser will also promptly notify Contractor in writing in the event of any changes in any launch schedule after Purchaser learns of such changes.

Contractor shall provide all necessary assistance to, and shall communicate and cooperate with, the Launch Services Provider(s) so as to ensure successful, on-time completion of the Work and integration of each Satellite Batch with the designated Launch Vehicle in accordance with the terms of this Contract. Beginning at EDC, Contractor will participate in quarterly (or such greater frequency as reported in advance by Purchaser from time-to-time) NEXT System Launch Campaign management meetings with the Purchaser and Launch Services Provider(s).

The Purchaser shall cause the Launch Services Provider(s), subject to applicable export control rules and requirements and consistent with the requirements and scope of the Launch Interface Requirements Document (referred to in Exhibit B), to provide necessary access to the Launch Site(s) and technical data and information from the Launch Services Provider(s), to the Contractor (and at Contractor’s reasonable request, any of the Contractor’s Subcontractors) in order to permit Contractor to perform its obligations under this Contract, and specifically, as provided for under this Article 3.5.

Contractor expressly acknowledges that it shall enter into a non-disclosure agreement with all Launch Services providers that provides reasonable and customary protection of such Launch Services Providers’ proprietary information (including technical data and information associated with the interface of the Launch Vehicle with the Satellites). At the request of Purchaser, Contractor shall provide to it a copy of such non-disclosure agreement.

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

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3.6

Avoidance and Mitigation of Delays – the Recovery Plan

Contractor shall notify Purchaser promptly by telephone and confirm in writing the occurrence of any event, circumstance or development that will, in Contractor’s reasonable knowledge or opinion, result in: (i) a Defect in the Work or any part thereof with the requirements of this Contract; or (ii) any delay in the Delivery of the Deliverable Items. Contractor shall use its reasonable efforts to avoid and/or mitigate the effect of such event, circumstance, or development.

Within [***…***] Business Days of any notification hereunder (or such other time period requested by Contractor and reasonably agreed to by Purchaser taking into account the severity of the event circumstance or development), Contractor shall provide written notice to Purchaser of any affected Work, as well as a proposed work-around (a “ Recovery Plan ”). The Recovery Plan shall: (a) set forth Contractor’s proposed actions to mitigate the effect of any such event, circumstance, or development and include a schedule for such mitigation; and (b) contain sufficient detail for Purchaser to be able to evaluate such plan.

Nothing in this Article 3.6 shall preclude the Purchaser from independently requesting, on a reasonable basis, that the Contractor confirm or deny in writing the occurrence or existence of any event, circumstance or development that will result in: (i) a Defect in the Work or any part thereof with the requirements of this Contract; or (ii) any delay in the Delivery of the Deliverable Items, providing the rationale for such request. In such case, the Contractor shall respond to Purchaser’s inquiry in accordance with the terms of this Article 3.6.

Within [***…***] Days of receipt of Contractor’s Recovery Plan, (or such other time period requested by Purchaser and reasonably agreed to by Contractor taking into account the severity of the event circumstance or development), Purchaser shall evaluate and respond to such Recovery Plan. If approved by Purchaser, Contractor shall immediately implement the Recovery Plan. If not approved by Purchaser, the Parties shall collaborate as to any necessary adjustments of the Recovery Plan. For the avoidance of doubt, the preparation and implementation by the Contractor of any Recovery Plan will not result in an increase of the Base Contract Price, unless otherwise agreed in writing by the Parties, and it being understood that Purchaser shall consider, but not be obligated to, approve any Recovery Plan submitted by Contractor.

 

3.7

Packing and Shipping

Packing and shipping for all Deliverable Items shall be in accordance with all applicable laws, rules, and regulations and meet the requirements of Contractor’s Shipping, Handling and Storage Plan.

 

3.8

Residual Items

[***…***].

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

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ARTICLE 4. PRICE

 

4.1

Base Contract Price

Prior to Financial Close, the total price for the Work to be performed under this Contract shall include firm fixed price Euro and U.S. Dollar portions as follows:

Firm fixed price Euro portion: € [***…***]

Firm fixed price U.S. Dollar portion: $ [***…***] *

* The firm fixed price U.S. Dollar portion includes an estimated price for the [***…***] Subcontract of [***…***] U.S. Dollars (US$ [***…***]). Such estimated price includes a fixed price component of [***…***] U.S. Dollars (US$ [***…***]) and a time and materials portion expected to be [***…***] U.S. Dollars (US$ [***…***]). If the price for this Subcontract is less or more than [***…***] U.S. Dollars (US$ [***…***]), the firm fixed price U.S. Dollar portion under this Contract shall be accordingly reduced or increased to reflect the final price of the [***…***] Subcontract. Contractor agrees and acknowledges that it shall endeavor on a reasonable efforts basis to negotiate a reduction of the [***…***] Subcontract price, including the fixed price and time and materials portions thereof.

 

4.2

Conversion of Euro Portion of Firm Fixed Price

The firm fixed price Euro portion of the Contract referenced in Article 4.1 shall be converted into U.S. Dollars as follows:

 

  4.2.1

Closing Date Notice . From time-to-time following the entry by the Purchaser into the Finance Facility or at the reasonable request of Contractor, Purchaser shall provide to Contractor periodic updates of the anticipated date of Financial Close. Purchaser shall notify Contractor by no later than [***…***] prior to the date of the anticipated day of Financial Close, of the scheduled date of the Financial Close.

 

  4.2.2

Foreign Exchange Rate Quotes . For the purpose of establishing the conversion rate:

 

  (a)

Satisfaction of Conditions Precedent

The Parties agree and acknowledge that the Euro to U.S. Dollar Spot Rate and Forward Point Quote exchange rates shall be fixed and the hedging transactions will be executed by Contractor once all conditions precedent to the Financial Close, except the present clause, have been satisfied or effectively waived.

Prior to the execution of the hedging transactions contemplated by this Article 4.2, Purchaser shall confirm to Contractor, and on a best efforts basis, seek for the Finance Facility agent to confirm to Contractor, that the Base Contract Price to be calculated pursuant to Article 4.2.3 based on the Spot Rate and Forward Points Quote rate satisfies any applicable condition precedent to the Financial Close (or that the applicable condition precedent has been effectively waived). If the foregoing confirmation from the Finance Facility agent is not obtained or otherwise available, then the Parties shall consult as to an alternate means to

 

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obtain a third party confirmation that the Spot Rate and Forward Points Quote rate, if executed as part of the hedging transactions, satisfies any applicable condition precedent to the Financial Close (or that the applicable condition precedent has been effectively waived). Notwithstanding the foregoing, if no alternate third party confirmation relating to satisfaction of the applicable condition precedent to the Finance Facility as contemplated in this Article 4.2.2(a) is obtained, then the execution of the hedging transactions shall be suspended until a reasonably acceptable alternative confirmation is obtained.

 

  (b)

[***…***]

 

  (c)

[***…***]

 

  4.2.3

Conversion Rate Calculation . Each Payment Strip shall be converted from a Euro denomination to a U.S. Dollar denomination by determining [***…***]. The Euro portion of the ATP Balance shall be converted to U.S. Dollars utilizing the Spot Rate. The total firm fixed price for the Work to be performed under this Contract (the “ Base Contract Price ”) as set forth in this Article 4.1 shall be [***…***]. The Parties shall promptly execute an amendment to this Contract reflecting the U.S. denominated Base Contract Price and applicable Milestone Payments.

 

4.3

Authorization to Proceed

Upon EDC, all Milestone payments made by Purchaser to Contractor under the ATP shall be credited to the Base Contract Price on a Euro for Euro and U.S. Dollar for U.S. Dollar basis, and the performance of the Work shall continue under the terms of this Contract. Following EDC, Purchaser and/or Contractor (as provided for in the definitive financing documents) shall promptly submit to the agent under the Finance Facility the first invoice for drawing thereunder, subject to the requirements, if any, applicable to the Contractor under the Finance Facility for payment of any corresponding Milestone(s), Contractor shall invoice Purchaser the difference, if any, between the aggregate amount of payments due at that date under the Payment Plan and the aggregate amount of payments received up through such date under the ATP (such amount being the “ ATP Balance ”), and the payment of Contractor’s invoice shall be made no later than the maximum date provided for in the definitive financing documents after submission of the invoice to the applicable agent under the Finance Facility. Purchaser shall provide to Contractor a copy of the executed definitive financing documents for the Finance Facility (as may be redacted and subject to the confidentiality terms thereof).

 

4.4

Fees and Other Expenses

The Base Contract Price stated above includes all fees, charges, expenses, costs, and other amounts payable by Purchaser for any portion of the Work provided for herein, including but not limited to the design, manufacture and testing of Deliverable Items, the delivery of Deliverable Data, performance of Services, Storage, packing and transport of the Satellites to the Launch Site, property and transit insurance and such other insurance as is required by Article 30, but does not include such amounts payable for Launch Services pursuant to a Launch Services Agreement, any Launch and In-Orbit Insurance Policy (the responsibility for which, as between Contractor and Purchaser, shall reside exclusively with Purchaser) or any

 

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applicable liquidated damages due from Contractor to Purchaser pursuant to Article 21. Under no circumstances will Purchaser be obligated to pay any fees, charges, expenses, costs or other amounts in connection with any portion of the Work other than the amounts set forth in Article 4.1, as adjusted in accordance with Articles 15, 16, 23 or 35.

 

4.5

Taxes

 

  4.5.1

Contractor Tax Responsibilities . [***…***].

 

  4.5.2

Purchaser Tax Responsibilities . [***…***].

 

  4.5.3

Cooperation . Each Party shall, on a reasonable efforts basis, cooperate in order to enable the other Party to effectively and timely comply with the provisions of this Article 4.5.

 

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ARTICLE 5. PAYMENTS

 

5.1

Payment Conditions

 

  5.1.1

General . Any payments due by Purchaser to Contractor under Article 4, shall be invoiced in accordance with the Payment Plan and this Article 5.1. Payments associated with any Options exercised by Purchaser shall be invoiced in accordance with the relevant payment plan or agreed Task Order for such Option(s) and this Article 5.1.

 

  5.1.2

Milestone Payments . Each Milestone payment specified in the Payment Plan shall become payable upon the later of: (i) Contractor’s successful completion of such Milestone in accordance with the Contract; (ii) Contractor’s delivery of an invoice for payment including a certification in the form required by the Payment Plan indicating that the Milestone has been completed in accordance with the requirements of this Contract, including the Milestone Success Criteria; (iii) Purchaser’s execution of the acknowledgement included in Contractor’s invoice, which shall not be unreasonably delayed or withheld. Contractor shall not invoice any amount which when cumulated with other Milestone payments previously made hereunder, exceeds the cumulative Milestone payment amounts due and paid as of such date as reflected in the Payment Plan.

 

5.2

Timing of Payments

All payments due from Purchaser upon the completion of a Milestone shall be paid no later than [***…***] days after the conditions in Article 5.1.2 have been achieved.

If the Contractor completes any Milestone provided for in the Payment Plan prior to its specified due date, Purchaser shall, at its sole discretion consider, but not be obligated to, render early payment for such Milestone.

Any payment due by Purchaser shall be deemed to have been made when the Contractor’s bank account has been credited of the amount of such payment.

If any payment would otherwise be due under this Contract on any Day that is not a Business Day, such payment shall be due on the succeeding Business Day.

 

5.3

Other Payments

Subject to Article 5.6, if applicable, any payments to be made pursuant to this Contract and not otherwise subject to Article 5.1 above shall be paid no later than [***…***] days after receipt of Contractor’s invoice completed in accordance with Article 5 therefor.

 

5.4

Interest for Late Payment

Except in the case of a payment disputed pursuant to Article 5.6, below, in the event that any payment due under this Contract is not made when due hereunder, without prejudice to the other rights and remedies of the Party entitled to such payment, such Party shall also be entitled to interest computed at the Interest Rate, compounded annually, on the unpaid balance thereof starting on the day after the due date until such payment is made.

 

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5.5

Payment Bank

 

  5.5.1

Payments to Contractor . All payments made to Contractor hereunder shall be in U.S. Dollars and shall be made by electronic funds transfer to the following account:

 

 

Bank Name:

  

[***...***]

 

Account Name:

  

[***...***]

 

Bank Address:

  

[***...***]

    

[***...***]

 

SWIFT Code:

  

[***...***]

 

Account Number:

  

[***...***]

 

Routing Number:

  

[***...***]

or such other account or accounts as Contractor may specify in writing to Purchaser.

 

  5.5.2

Payments to Purchaser . To the extent any payments are made to Purchaser hereunder, all such payments shall be in U.S. Dollars and shall be made by electronic funds transfer to the following account:

 

 

Bank Name:

  

[***...***]

 

Account Number:

  

[***...***]

 

ABA Number:

  

[***...***]

 

SWIFT Code:

  

[***...***]

 

Beneficiary:

  

Iridium Satellite LLC

or such other account or accounts as Purchaser may specify in writing to Contractor.

 

5.6

Disputed Amounts

In the event a Milestone has not been completed in accordance with the requirements of this Contract, including the Statement of Work, Purchaser shall so notify Contractor in writing within [***…***] days after the conditions in Article 5.1.2(i) and (ii) have been met, and within [***…***] days thereafter provide in reasonable detail the Contract requirements associated with the applicable Milestone that have not been met. Upon correction of the noted discrepancy or discrepancies and completion of the Milestone in accordance with the Contract requirements, payment shall be made as follows:

 

  (i)

if correction is made within the period of [***…***] days after the date of receipt by Purchaser of the invoice, then payment shall be made at the end of such [***…***] day period; or

 

  (ii)

if correction is not made within the period of [***…***] days after the date of receipt by Purchaser of the invoice, then Contractor shall re-submit the invoice and payment shall be made within [***…***] days after the date of receipt by Purchaser of the invoice.

 

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Failure to pay any amount subject to a reasonable good faith dispute shall not constitute a material breach under this Contract until resolved by the Parties.

 

5.7

Audit Rights and Procedures

Contractor shall keep complete, true and accurate books of account and records pursuant to its standard accounting system for the purpose of demonstrating the Actual Costs incurred in the performance of the Work. Contractor will keep such books and records at Contractor’s principal place of business for [***…***] following the end of the calendar quarter to which they pertain and make them available at all reasonable times for audit of any Actual Costs claimed by Contractor pursuant to [***…***] to be performed by a reputable and industry recognized independent certified public accounting firm designated by Purchaser and reasonably agreed by the Contractor. [***…***]. Contractor will pay Purchaser the full amount of any overpayment within [***…***] days after the date of receipt of an invoice from the Purchaser, together with interest computed at the Interest Rate, compounded annually, on the amount of overpayment starting on the day such payment was made by Purchaser to Contractor. The independent auditor will be directed to report reasons for its findings, and the independent auditor’s findings will be binding upon Purchaser and Contractor.

 

5.8

Invoices

Invoices hereunder shall be submitted by electronic mail with a copy to be sent by recognized express courier service to Purchaser (original plus one (1) copy) at the following address:

Iridium Satellite LLC

2030 East ASU Circle

Tempe, AZ 85284

Attention: [***…***]

Email: [***…***]

or to such other address as Purchaser may specify in writing to Contractor.

Individual contact names and email addresses will be provided under Article 29.1. Contractor may request status of payment by contacting Purchaser at the address indicated in this Article 5.8.

All invoices submitted pursuant to this Contract shall be rounded to the nearest U.S. Dollar.

 

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ARTICLE 6. PURCHASER FURNISHED ITEMS

 

6.1

Purchaser Furnished Items

To enable Contractor to perform the Work, in particular the Launch Segment Services and On-Orbit Support Services, Purchaser shall be responsible for timely making available to Contractor the Purchaser Furnished Items indicated in Section 10 of the Statement of Work. Such Purchaser Furnished Items shall be adequate for the required purposes and shall be made available free of charge for Contractor’s use during the period commencing on the dates established in the Statement of Work and continuing as defined in the Statement of Work. Purchaser and Contractor will conduct a meeting on the date established in the Statement of Work to confirm the availability of such Purchaser Furnished Items. The Parties agree and acknowledge that title and risk to all Purchaser Furnished Items shall be governed by the provisions of Article 12.3.

In addition, Purchaser shall timely provide to Contractor any available Iridium Block 1 documentation or information as defined in the Statement of Work.

 

6.2

Communications Authorizations

Purchaser shall be responsible, at its cost and expense, for preparing, coordinating and filing all applications, registrations, reports, licenses, permits and authorizations with the Federal Communications Commission if required to do so and with any other national governmental agencies having jurisdiction over Purchaser, for the construction, Launch and operation of the Satellites.

Contractor shall provide reasonable ancillary support for the preparation, coordination and filing of such applications, registrations, reports, licenses, permits and authorizations as set forth in the Statement of Work.

 

6.3

Radio Frequency Coordination

Purchaser shall be responsible for the submission of all filings required by the International Telecommunication Union (“ ITU ”) (or any successor agency thereto) and all radio frequency coordination associated with the NEXT System. Such filings shall be made in accordance with the Radio Regulations of the International Telecommunication Union (or any successor agency) and the laws and regulations of all domestic communications regulatory authorities having jurisdiction over Purchaser.

Contractor shall provide reasonable ancillary support in connection with Purchaser’s efforts for the preparation, submission, prosecution and maintenance of such ITU filings and radio frequency coordination efforts as set forth in the Statement of Work.

 

6.4

U.S. Government Encryption and Decryption Authorizations

For the avoidance of doubt, Contractor shall be responsible for all work and effort associated with applying for and obtaining any U.S. government licenses, approvals or certifications associated with encryption and decryption capabilities incorporated in the Deliverable Items,

 

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as set forth in the Statement of Work. Purchaser shall provide on a timely basis cooperation reasonably necessary in support of Contractor’s efforts to obtain any such licenses, approvals or certifications.

 

6.5

Late Delivery of / Non Conforming Purchaser Furnished Items

Section 10 of the Statement of Work sets forth a listing of Purchaser Furnished Items and the delivery date for such Purchaser Furnished Items. Any intermediate deliveries of Purchaser Furnished Items that may be agreed upon by the Parties shall be considered Purchaser Furnished Items.

The late delivery or unavailability of Purchaser Furnished Items, including, as a result of repair or replacement of non-conforming Purchaser Furnished Items as provided for below, individually or combined, shall be considered an event beyond the reasonable control of Contractor. In such case, Purchaser and Contractor shall discuss an equitable adjustment to the Deliverables Schedule and other materially affected terms of the Contract, provided that: (a) such late delivery or unavailability of Purchaser Furnished Items was not due to the fault of or caused by the Contractor; (b) Contractor promptly notifies Purchaser in writing of any applicable late delivery or unavailability of Purchaser Furnished Items and the expected impacts resulting therefrom; and (c) Contractor uses reasonable efforts to avoid and/or mitigate the effect of the late delivery or unavailability of Purchaser Furnished Items. Purchaser shall coordinate Contractor’s access to and use of Purchaser Furnished Items not physically delivered to the Contractor, and the Parties agree and acknowledge that scheduled maintenance or ordinary course repair of such Purchaser Furnished Items shall not be subject to the terms of this Article 6.5. Notwithstanding the foregoing, Purchaser shall, on a reasonable efforts basis, provide Contractor access to and use of the relevant portions of the Block 1 System Test Bed on a non-interference basis for periods of time to be agreed by the Parties.

In addition, Purchaser shall promptly notify Contractor in writing of any event which may delay or prevent the performance by Purchaser of any of its obligations under this Contract which may cause Contractor to be delayed, to incur additional costs, or both.

If, after Contractor’s receipt, the Purchaser Furnished Items are determined not to be in conformance with the requirements of the Contract, Purchaser shall, at its own expense, promptly repair or replace such defective or non conforming Purchaser Furnished Items to the extent such repair or replacement is practicable.

When Purchaser Furnished Items are to be used on a timeshare or mutual basis for both Purchaser’s and Contractor’s activities, Purchaser shall, on a reasonable efforts basis, coordinate and plan with the Contractor use of the relevant Purchaser Furnished Items.

 

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ARTICLE 7. COMPLIANCE WITH LAWS AND DIRECTIVES

 

7.1

General

Except where a Party has expressly agreed to perform the obligations of the other Party herein, each Party shall, at its expense, perform its obligations hereunder in accordance with all applicable laws, regulations, and policies of any federal, state, local, or foreign government and the conditions of all applicable federal, state, local, or foreign government approvals, permits, or licenses.

 

7.2

Compliance with Export Control Laws

Any obligation of a Party hereunder to provide any (i) Deliverable Item or Purchaser Furnished Items; (ii) other technical information, technical services or Training; or (iii) any access to facilities of the other Party and its personnel and/or its representatives, shall be subject to applicable governmental export control and security laws, regulations, policies and license conditions. Contractor shall use best efforts to implement this Contract in compliance with such laws, regulations, policies and license conditions. If and to the extent required by U.S. law, the Parties, the Subcontractors, Associate Contractors and Purchaser Personnel and their personnel and/or representatives shall enter into U.S. Government-approved agreement(s), including any Technical Assistance Agreement(s) (as defined in the U.S. International Traffic in Arms Regulations, 22 C.F.R. §120.16), separate from this Contract, governing the provision of Deliverable Items and other technical information, technical services, Training, or access to facilities in connection with this Contract. Either Party shall reasonably support the other Party in obtaining and maintaining necessary governmental approvals, permits and licenses. To the extent applicable, the relevant Party shall provide to the other Party copies of export license applications, approvals, agreements and any provisos or conditions related thereto.

 

7.3

Licenses and Other Approvals

Contractor shall, on a best efforts basis, obtain and maintain necessary applicable approvals, permits, and licenses as may be required by any government, foreign or domestic, for the performance of its obligations under this Contract, including but not limited to all authorizations required for the export of any Deliverable Item, or any part thereof.

Purchaser shall, on a best efforts basis, obtain on a timely basis and maintain necessary applicable approvals, permits, and licenses as may be required by any government, foreign or domestic, for the performance of its obligations under this Contract, including but not limited to all authorizations required for the import to the U.S. of any Ground Deliverables, delivery of the Secondary Payload and the Purchaser Furnished Items under this Contract.

 

7.4

Subcontractors

Contractor shall cause its Subcontractors to, on a best efforts basis, obtain and maintain any approvals, permits or licenses required for any Purchaser employee, Purchaser Personnel, or Associate Contractor (including, but not limited to, foreign subsidiaries and related entities of Purchaser involved with the procurement) to have access to Subcontractors facilities,

 

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hardware, Software, Deliverable Data, Training, other technical information or technical services in connection with the performance of this Contract, including U.S. export-controlled items or services.

Purchaser shall provide reasonable support to Contractor and its Subcontractors in obtaining and maintaining any necessary approvals, permits and licenses. Contractor shall review with Purchaser any application Subcontractor makes to any government department, agency or entity for any permit, license, agreement or approval that will be signed by Purchaser as may be required for performance of the Work, prior to submission of such application. Contractor shall provide Purchaser a minimum of [***…***] Business Days to review such application prior to submission to such governmental entity, and Contractor shall in good faith consider any comments and proposed revisions made by Purchaser for incorporation into such application. At Purchaser’s request, Contractor shall include Purchaser, any Purchaser Personnel or Associate Contractor(s) (and related entities involved with the procurement) as a named party in any application for approval of such U.S. export licenses, agreements and other approvals so as to permit Purchaser, any Purchaser Personnel or Associate Contractor(s) to be present during any discussion with or meetings where Purchaser’s foreign subsidiaries/related entities, or any “foreign person” Purchaser Personnel or Associate Contractor(s), may receive from, or discuss, with Subcontractor any U.S. export-controlled items and/or services. Contractor shall cause its Subcontractors, on a best efforts basis, to provide the parties to such U.S. export licenses and agreements copies of the export licenses and agreements, including any U.S. Government provisos related to same.

 

7.5

Compliance With Applicable Laws

NOTWITHSTANDING ANY PROVISION IN THIS CONTRACT, IN NO EVENT SHALL EITHER PARTY BE OBLIGATED UNDER THIS CONTRACT TO PROVIDE ACCESS TO THE OTHER PARTY’S FACILITIES OR SUBCONTRACTOR FACILITIES, PROVIDE ACCESS TO OR FURNISH HARDWARE, SOFTWARE, DELIVERABLE DATA OR OTHER TECHNICAL INFORMATION, OR PROVIDE TECHNICAL/DEFENSE SERVICES OR TRAINING, TO ANY PERSON EXCEPT IN COMPLIANCE WITH APPLICABLE EXPORT CONTROL LAWS, REGULATIONS, POLICIES AND LICENSE CONDITIONS.

 

7.6

No Unauthorized Exports or Retransfers

NEITHER PARTY SHALL RE-EXPORT OR RE-TRANSFER TO ANY THIRD PARTY ANY HARDWARE, SOFTWARE, DELIVERABLE DATA, OTHER TECHNICAL INFORMATION, TECHNICAL SERVICES, OR OTHER ITEMS FURNISHED HEREUNDER, EXCEPT AS EXPRESSLY AUTHORIZED BY THE U.S. GOVERNMENT IN ACCORDANCE WITH THE EXPORT LICENSES, AGREEMENTS AND OTHER APPROVALS REFERENCED IN THIS ARTICLE 7 OR AS OTHERWISE EXPRESSLY AUTHORIZED UNDER U.S. EXPORT CONTROL LAWS.

 

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ARTICLE 8. ACCESS TO WORK-IN-PROCESS

 

8.1

Work-in-Process at Contractor’s or Subcontractor’s Facility

Subject to Article 7, compliance with Contractor’s normal and customary safety and security regulations and practices (or, if applicable, those of a Subcontractor), which shall be provided in writing to Purchaser upon Purchaser’s request prior to any facility visit, and the protection of third party proprietary information, Purchaser’s employees and Purchaser Personnel involved in the regular review, monitoring and assessment of the technical portions of the Work shall be allowed access to all Work being performed at Contractor’s or any Subcontractor’s facility for the Satellites and other Deliverable Items, for the purpose of observing the progress of such Work in accordance with the requirements of this Contract, including the Statement of Work. Such access shall be upon reasonable prior written notice to Contractor and shall occur during normal working hours or at such other hours as Work is being performed at Contractor’s or any Subcontractor’s facility.

Purchaser’s employees and Purchaser Personnel involved in the regular review, monitoring and assessment of the technical portions of the Work will have access for evaluation, inspection, and use in connection with the planned operation of a Satellite or the NEXT System to: (i) Deliverable Data and technical data; (ii) Contractor and first tier Subcontractor Work-in-Process and technical and schedule data and documentation relevant to the Work; and (iii) meetings between the Contractor and any of its lower tier Subcontractors subject to prior written agreement between the Purchaser and Contractor on a case by case basis, such agreement not to be unreasonably withheld or delayed. All Purchaser’s employees and Purchaser Personnel who meet the requirements for access set forth in this Article shall be provided badges to agreed work areas while the Work is being performed, though such access may be restricted to relevant buildings and areas where the subject Work-in-Process resides. Contractor, on a reasonable efforts basis, shall obtain similar access to Work that is being performed at the facilities of Subcontractors subject to the conditions set forth in the first sentence of this Paragraph. For the avoidance of doubt, any communications between Purchaser’s employees) and any Subcontractor shall be conducted through Contractor.

Associate Contractors may have access to Contractor’s facilities subject to prior written agreement between the Purchaser and the Contractor on a case by case basis on the purpose and conditions of such access, which agreement shall not be unreasonably withheld or delayed.

 

8.2

Electronically-Generated Information

With regard to electronically generated information, Contractor will provide Purchaser with an electronic copy thereof and/or electronic access (via the internet or Purchaser e-mail) to information regarding program performance and documentation that will advise Purchaser, on a current basis, of program specific issues, decisions and problems. Contractor shall establish data links between its and Purchaser’s facilities such that Purchaser has remote electronic access to those project-related documents identified in the Statement of Work.

The Purchaser likewise will provide to Contractor with an electronic copy thereof and/or electronic access (via the internet or Contractor e-mail) to information to be exchanged pursuant to this Contract.

 

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8.3

Access to On-Site Facilities

For the purpose of monitoring the Work-in-Process being performed by Contractor hereunder, Contractor shall provide office facilities for up to [***…***] Purchaser employees or Purchaser Personnel involved in the regular review, monitoring and assessment of the technical portions of the Work resident at Contractor’s plant(s) through the On-Orbit Satellite Acceptance testing of the last Satellite to be delivered under this Contract, including any optional or replacement Satellites.

The office facilities to be provided shall include a reasonable amount of office space, office furniture, local telephone service, reasonable long-distance telephone usage, access to copy machines, facsimile machines, internet account and access, reasonable clerical support, and meeting rooms to the extent necessary to enable Purchaser’s employees and Purchaser Personnel involved in the regular review, monitoring and assessment of the technical portions of the Work to monitor the progress of Work under this Contract.

Contractor will obtain similar office facilities at the plants of Major Subcontractors for visits and meetings of Purchaser’s employees, Purchaser Personnel involved in the regular review, monitoring and assessment of the technical portions of the Work and Contractor to such plants in accordance with Section 3 of the Statement of Work.

 

8.4

Purchaser’s Employees Confidentiality Obligations

Purchaser shall notify Contractor in writing of the name, title or function, business relationship, employer, citizenship status and such other information as may be reasonably requested by Contractor with respect to each of its Purchaser’s employees and Purchaser Personnel and cause such Purchaser employees and Purchaser Personnel (except for attorneys and other professionals who are already bound by obligations of confidentiality) to execute a confidentiality agreement directly with Contractor in form and substance reasonably satisfactory to Contractor and containing terms substantially the same as those set forth in Article 27.

 

8.5

Interference with Operations

Purchaser shall exercise its rights under this Article 8 in a manner that does not unreasonably interfere with Contractor’s or its Subcontractors’ normal business operations or Contractor’s performance of its obligations under this Contract or any agreement between Contractor and its Subcontractors.

 

8.6

Purchaser Recommendations

The Contractor shall in good faith consider any recommendations of the Purchaser (through its authorized representative) as to any aspect of the Work to be performed hereunder, but for the avoidance of doubt, the Contractor will remain solely responsible for the performance of the Work in accordance with the requirements of this Contract, including the Statement of Work and the System Performance Specification, except where the Purchaser has executed a

 

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formal waiver in accordance with Article 9.1.4 that specifies the deviation from the System Performance Specification and the consequences and/or impact of such deviation, or a Change Order in accordance with Article 15.

 

8.7

Purchaser Inspection Not Acceptance

The inspection, examination, or observation by Purchaser with regard to any portion of Work produced under this Contract shall not constitute any Acceptance thereof, nor shall it relieve Contractor from fulfilling its contractual obligations hereunder.

 

8.8

Contractor Access to Secondary Payload(s)

In connection with Contractor’s obligation under this Contract to integrate the Secondary Payload(s) to the relevant Satellites, Contractor shall, subject to applicable governmental export control and security laws, regulations, policies and license conditions, have the right to handle, interface, integrate, test and validate its compatibility with the Satellite.

 

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ARTICLE 9. SATELLITE INSPECTION AND DELIVERY

Contractor shall perform the following tests and reviews:

 

9.1

Satellite Pre-Shipment Review (SPSR)

 

  9.1.1

Contractor to Conduct a Review of each Satellite Prior to Shipment . Contractor shall conduct a detailed and comprehensive review of each Satellite prior to Contractor’s shipment of the Satellite to the Launch Site or its entering into storage. This review shall be conducted in accordance with the terms of this Article 9 and the Statement of Work (a “ Satellite Pre-Shipment Review ” or “ SPSR ”).

 

  9.1.2

Time, Place and Notice of SPSR . The SPSR shall take place at Contractor’s facility or Subcontractor’s facility, at Contractor’s discretion. Contractor shall notify Purchaser in writing on or before [***…***] days prior to the date that the Satellite will be available for the SPSR, which shall be the scheduled date for commencement of such SPSR. If Purchaser cannot attend the SPSR on such initially scheduled date, Contractor shall reasonably accommodate Purchaser’s scheduling requirements by up to [***…***] Business Days, provided that Purchaser notifies Contractor [***…***] days in advance of its specific scheduling requirements.

 

  9.1.3

Conduct and Purpose of SPSR . The SPSR shall be conducted in accordance with the terms of this Article 9 and the Statement of Work. The purpose of the SPSR shall be to: (i) review test data and analyses for the Satellite; (ii) demonstrate to the Purchaser’s satisfaction that any Defects associated with design, workmanship and testing as contained in the Contractor’s standards and other standards which may have been approved by Purchaser, have been corrected; (iii) demonstrate to the Purchaser’s satisfaction that testing has been successfully completed in accordance with the NEXT Space Segment and Space Vehicle Integration and Verification Plan; (iv) determine whether the Satellite meets applicable System Performance Specification or the applicable Performance Specification requirements (except those that have been waived pursuant to Article 9.1.4 below) and is therefore ready for Delivery.

 

  9.1.4

Waivers and Deviations . Contractor shall submit to Purchaser, or Purchaser may propose to Contractor, any request for a waiver of, or deviation from, provision(s) of the System Performance Specification or the Performance Specification applicable to the Satellite or other Deliverable Item. Purchaser shall consider each such request in good faith in accordance with industry standard practices. A request for waiver or deviation shall be deemed granted only if it has been approved in writing by Purchaser. Each such waiver or deviation approved by Purchaser shall be deemed an amendment to the System Performance Specification or the applicable Performance Specification only with respect to such specified Satellite or Deliverable Item, permitting such waiver thereof, or deviation therefrom, effective on or after the date of such approval for such Satellite or Deliverable Item. In the event that Purchaser approves any waiver or deviation that has an impact or is reasonably expected to have a impact on the performance, reliability or Operating Life of a Satellite, Purchaser shall be entitled to an equitable reduction in the Base Contract Price with respect to such waiver to be negotiated in good faith by the Parties.

 

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  9.1.5

SPSR Inspection . Contractor shall permit a reasonable number of Purchaser employees or Purchaser Personnel to attend the SPSR pursuant to this Article 9; provided, however, that the provisions of Article 7 and Article 8 shall apply to any such Purchaser employee and Purchaser Personnel. At Purchaser’s request, the Contractor shall reasonably accommodate the participation of relevant Associate Contractor on a case by case basis subject to requirements of Article 7.

 

  9.1.6

SPSR Results . In the event that the SPSR demonstrates to the Purchaser’s satisfaction that the Milestone Success Criteria are met with respect to the relevant Satellite, Purchaser shall provide written confirmation to Contractor (within [***…***] Business Days after Purchaser receives written notice of completion of the SPSR from Contractor) of its concurrence with the results of the SPSR (it being expressly understood that such confirmation does not constitute a waiver of Purchaser’s right to compel correction of any Defects, or any of its other rights and remedies as provided for in this Contract), and the Satellite shall be deemed ready for shipment as part of a Satellite Batch to the Launch Site.

In the event that such SPSR discloses that the Milestone Success Criteria are not met with respect to the relevant Satellite, Purchaser shall provide written notification thereof (a “ Notice of Non-Compliance ”) to Contractor within [***…***] Business Days after Purchaser receives written notice of completion of the SPSR from Contractor, which written notification shall state each Defect Purchaser requires to be corrected or repaired (with reference to the specific provision of this Article 9.1.6, as well as the specific provision of the NEXT Space Segment and Space Vehicle Integration and Verification Plan, or the System Performance Specification, deemed not met). Contractor shall correct or repair each Defect with all deliberate speed and thereafter conduct additional testing and/or a “delta” SPSR to demonstrate to Purchaser’s satisfaction the Satellite meets the requirements of this Article 9.1.6, after which Purchaser within the applicable time frame specified above shall provide a Notice of Non-Compliance or confirmation (it being expressly understood that any such confirmation shall not constitute a waiver of Purchaser’s rights to compel correction of any Defects or any of its other rights and remedies as provided for in this Contract). Contractor shall be required to repeat the process described in this Article 9.1.6 until Purchaser provides Contractor with a confirmation pursuant to the requirements of this Article 9, unless otherwise agreed by the Parties. The Purchaser shall not unreasonably withhold or delay giving its notification hereunder.

Upon receipt of Purchaser’s confirmation in accordance with this Article 9, Contractor shall provide, with respect to each applicable Satellite, a certification to the Purchaser in accordance with the form attached as Exhibit F, SPSR Certification. Thereafter, Contractor shall transport such Satellite Batch (or Satellite thereof) in accordance with Contractor’s Shipping, Handling and Storage Plan to: (i) the Launch Site, and proceed to prepare the Satellite for Launch or (ii) Storage, as the case may be. [***…***]. Contractor shall not ship the Satellite to the Launch Site until all Defects are corrected, repaired or Contractor has received a Purchaser-approved waiver or deviation.

 

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  9.1.7

Inspection Costs Borne by Purchaser . All costs and expenses incurred by Purchaser and its agents in the exercise of its inspection rights under this Article 9, including travel and living expenses, shall be borne solely by Purchaser.

 

  9.1.8

Correction of Deficiencies after SPSR . If at any time following completion of SPSR of the Satellite and prior to Transfer, it is discovered that such Satellite has or may have a Defect or otherwise fails to meet the requirements of Article 9.1.6, as may be modified as of such time pursuant to Article 9.1.4, Contractor shall correct, within the shortest time possible given the type of Defect, such Defect prior to Transfer in accordance with the applicable terms of this Contract, including the Statement of Work, at its own expense, and Contractor shall, on a reasonable efforts basis, avoid and minimize delays associated with the correction of any such Defect.

 

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ARTICLE 10. ACCEPTANCE OF SATELLITE AND PERFORMANCE OF RELATED SERVICES

 

10.1

Launch Segment Services and On-Orbit Support Services

Upon arrival of each Satellite at the Launch Site, Contractor shall proceed with the provision of Launch Segment Services in accordance with the requirements of this Contract and the Statement of Work.

After Launch of each Satellite Batch by the Launch Services Provider(s), Contractor shall proceed with the provision of On-Orbit Support Services in accordance with the Statement of Work, except in case of Total Loss or Constructive Total Loss of a Satellite to the extent such Satellite is removed from service.

 

10.2

Satellite Acceptance

 

  10.2.1

On-Orbit Satellite Acceptance . Contractor shall be eligible to earn payments associated with the On-Orbit Satellite Acceptance Milestone Payment for Each Batch of Satellites for all the Satellites to be Delivered under this Contract in a maximum amount of [***…***] of the Base Contract Price, on a per Satellite basis, based on the Acceptance or Qualified Satellite Acceptance of each Satellite. Such Acceptance or Qualified Acceptance shall occur finally and irrevocably for all purposes hereunder upon the earlier to occur of:

 

  (a)

completion of the [***…***]; or

 

  (b)

completion of the [***…***]; or

 

  (c)

upon occurrence of a Total Loss or Constructive Total Loss of the Satellite on or after Launch (or the Satellite being reasonably determined to be a Total Loss or Constructive Total Loss).

 

  10.2.2

Performance of On-Orbit Satellite Acceptance . [***…***] days prior to the scheduled Launch of a Satellite Batch, Contractor shall notify Purchaser in writing of the On-Orbit Satellite Acceptance schedule with respect to the Satellites of the relevant Satellite Batch.

After each Satellite has been placed in its on-orbit test slot, Contractor shall perform the On-Orbit Satellite Acceptance in accordance with the requirements of this Contract, including Appendix F Part 1 and the NEXT On-Orbit Satellite Acceptance Plan, and conduct an OSA review with Purchaser within [***…***] Business Days of completing the On-Orbit Satellite Acceptance (with a summary OSA report being submitted at least [***…***] prior to conducting the OSA review), in accordance with the applicable provisions of this Contract, including Appendix F Part 1 and the NEXT On-Orbit Satellite Acceptance Plan. Upon the completion of the OSA review and resolution of any Defects or Anomalies to the Purchaser’s satisfaction, and provided that the requirements of Article 10.2 have been met, Purchaser shall be deemed to have accepted the OSA results.

 

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In case of Launch failure or if, after Launch, a Satellite is determined to be a Constructive Total Loss or Total Loss, or if a Partial Loss has occurred and, in either case, such loss is due to causes not attributable to Contractor (for avoidance of doubt, causes attributable to a Launch Services Provider or resulting from extraneous events such as space debris or micrometeorite impacts shall not be considered causes attributable to Contractor), the OSA shall be deemed to have occurred and the Contractor shall be paid the On-Orbit Satellite Acceptance Milestone of such Satellite within [***…***] days after the date of occurrence of such Total Loss or Constructive Total Loss.

 

  10.2.3

Provisional Qualified Satellite Acceptance and Qualified Satellite Acceptance .

 

  10.2.3.1

Provisional Qualified Satellite Acceptance .

 

      (a)

With respect to any Satellite that fails to comply with the Satellite Acceptance requirements and except for any Satellite that is a Total Loss or a Constructive Total Loss or if the provisions of this Article 10.2.3 otherwise apply, then:

 

  (i)

Subject to the Parties reasonable determination that a partial or complete restoration of the applicable Satellite systems, subsystems or the correction or partial correction of a Defect or Anomaly is possible or feasible, as evaluated from time to time following Launch and prior to Qualified Satellite Acceptance, Purchaser shall have the right to [***…***] periods, during which the Contractor shall, in accordance with Article 14.3.2, seek to correct the Anomaly or Defect identified on the Satellite. If Purchaser elects [***…***] of the pro-rata portion of the On-Orbit Satellite Acceptance Milestone applicable to such Satellite forming part of a Satellite Batch within [***…***] days thereafter. Subsequently, if Purchaser elects [***…***], Purchaser shall pay to Contractor an additional amount, that together with the foregoing [***…***] portion already paid, will comprise the lesser of: (i) [***…***]; or (ii) the amount calculated by multiplying the On-Orbit Satellite Acceptance Milestone for such Satellite by the performance value determined in accordance with Exhibit E, within [***…***] days thereafter; or

 

  (ii)

Alternatively, if Purchaser does not elect [***…***], then Contractor shall have the right, but not the obligation, to seek to correct the Anomaly or Defect identified on the Satellite for a period of up to [***…***] days after its Launch, however no portion of the On-Orbit Satellite Acceptance Milestone applicable to such Satellite forming part of a Satellite Batch shall be due or payable to Contractor at that time.

 

  (iii)

Provisional Qualified Satellite Acceptance of such Satellite shall occur upon: (x) the election of Purchaser to operate the Satellite

 

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on a temporary basis; or (y) Contractor’s election to seek to correct the Anomaly or Defect identified on the Satellite (in either case, “ Provisional Qualified Satellite Acceptance ”).

 

      (b)

If Contractor is able to correct the Defect or Anomaly identified on such Satellite within the first or second [***…***] period specified in Article 10.2.3.1(a) or otherwise within [***…***] days after its Launch so that the Satellite complies with the Satellite Acceptance requirements, then On-Orbit Satellite Acceptance of the Satellite shall be deemed to have occurred in accordance with Article 10.2.1 and the balance of the pro-rata portion of the On-Orbit Satellite Acceptance Milestone applicable to such Satellite forming part of a Satellite Batch shall be due and payable to the Contractor within [***…***] days thereafter.

 

      (c)

If at the conclusion of the first or second [***…***] period specified in Article 10.2.3.1(a), or otherwise within [***…***] days after its Launch, Contractor has not been able to correct the Defect or Anomaly identified on the Satellite, then Purchaser may still elect to proceed with Qualified Satellite Acceptance of such Satellite in accordance with Article 10.2.3.2.

 

      (d)

If at any time following Launch and prior to Provisional Qualified Satellite Acceptance or Qualified Satellite Acceptance with respect to any Satellite forming part of a Satellite Batch, Contractor identifies a material issue, Anomaly or Defect relating to the ability to safely operate such Satellite, Contractor shall immediately notify and collaborate with Purchaser as to any necessary or prudent actions that may be required to maintain the safe operation of, or the safety and integrity of, such Satellite within the Iridium Block 1 or the NEXT System.

 

  10.2.3.2

Qualified Satellite Acceptance .

If Provisional Satellite Qualified Acceptance for any Satellite has occurred pursuant to 10.2.3.1(a)(iii) or 10.2.3.1(c), then Purchaser shall pay to Contractor an amount calculated by multiplying the On-Orbit Satellite Acceptance Milestone for such Satellite by the performance value determined in accordance with Exhibit E.

If the amount to be paid by Purchaser pursuant to this Article 10.2.3.2 exceeds the amount paid by the Purchaser under Article 10.2.3.1(a)(i), then Purchaser shall pay to Contractor the difference between the amount due pursuant to this Article 10.2.3.2 and the amount paid under Article 10.2.3.1(a)(i). Alternatively, if the amount to be paid by Purchaser pursuant to this Article 10.2.3.2 is less than the amount paid by Purchaser under Article 10.2.3.1.(a)(i), Contractor shall reimburse to Purchaser the difference between the amount paid under Article 10.2.3.1(a)(i) and the amount due pursuant to this Article 10.2.3.2. The relevant payment due to either Purchaser or Contractor shall be rendered within thirty (30) days of such payment being due and invoiced by the appropriate Party.

 

  10.2.3.3

Purchaser Use of Satellite .

 

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Following a Provisional Qualified Satellite Acceptance, [***…***], shall be consistent with and will not unreasonably interfere with Contractor’s obligations to correct the Satellite Anomaly or Defect in accordance with Article 14.3.2, and Purchaser shall reasonably grant Contractor access to the relevant Satellite and related technical information, subject to applicable governmental approvals, permits and licenses, and necessary for the Contractor to fulfill its obligations under this Contract.

 

  10.2.4

Purchaser Remedy for Satellites to Fail OSA . In the event that any Satellite fails to comply with the Satellite Acceptance requirements and is not subject to a Qualified Satellite Acceptance for reasons attributable to Contractor within the applicable time period set forth in Article 10.2.3 (and not to exceed [***…***] days following its Launch), then the OSA shall be deemed not to have occurred and the Contractor shall not earn the relevant portion of the On-Orbit Satellite Acceptance Milestone with respect to such Satellite. If any Satellite fails to achieve Satellite Acceptance or Qualified Satellite Acceptance in accordance with the requirements of Article 10.2.3, and unless otherwise agreed to by Contractor, Purchaser shall not be entitled to use such Satellite for revenue-generating commercial operations and Contractor’s liability with respect to such Satellite shall be limited to supporting the safety and integrity of such Satellite within the Iridium Block 1 or the NEXT System until such time it is de-orbited in accordance with Article 10.2.5.

 

  10.2.5

Satellite De-Orbit . If any Satellite has failed to achieve Satellite Acceptance or Qualified Acceptance within [***…***] days following its Launch, Purchaser reserves the right to de-orbit such Satellite at its own risk and own expense, subject to applicable laws and regulations.

 

10.3

Initial System Acceptance

 

  10.3.1

The Initial System Acceptance shall be achieved when [***…***], meet the applicable requirements of Part II of Appendix F (including any waivers or deviations approved by Purchaser pursuant to Article 11.6). [***…***].

 

  10.3.2

If at the conclusion of the NEXT System Launch Campaign, [***…***] fails to meet the requirements of Part II of Appendix F (including any waivers or deviations approved by Purchaser pursuant to Article 11.6), for reasons not attributable to Contractor, then the Initial System Acceptance shall be deemed to have occurred.

 

  10.3.3

If the Initial System Acceptance is delayed beyond the contractual ISA date of the initial Satellite Batch for reasons not attributable to Contractor, including but not limited to a Launch Services failure, then Contractor shall be entitled to earn interest on the Initial System Acceptance Milestone amount computed at the Interest Rate, compounded annually, until such time Initial System Acceptance is achieved in accordance with the requirements of this Article 10.3.

 

  10.3.4

If for reasons attributable to the Contractor, [***…***] fails to meet the requirements of Part II of Appendix F (including any waivers or deviations approved by Purchaser pursuant to Article 11.6), then the Initial System Acceptance shall be achieved when the requirements of Part II of Appendix F (including any waivers or deviations approved by Purchaser pursuant to Article 11.6) are met [***…***].

 

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10.4

Final System Acceptance and Alternate Final System Acceptance

 

  10.4.1

Final System Acceptance . The Final System Acceptance shall be achieved when [***…***] meet the applicable requirements of Part II of Appendix F (including any waivers or deviations approved by Purchaser pursuant to Article 11.6). [***…***]. Upon the successful achievement of the Final System Acceptance in accordance with the terms of this Article 10.4.1 and applicable requirements of Part II of Appendix F (including any waivers or deviations approved by Purchaser pursuant to Article 11.6), Contractor shall be paid the Final System Acceptance Milestone.

 

  10.4.2

Alternate Final System Acceptance . If, following the conclusion of the Next System Launch Campaign plus [***…***] days: (i) [***…***] meet the applicable requirements of Part II of Appendix F (including any waivers or deviations approved by Purchaser pursuant to Article 11.6) for reasons not attributable to Contractor (in particular due to a Launch Services failure, Total Loss or Constructive Total Loss or the Delivery of any Satellites into Long Term Storage at the direction of the Purchaser); or (ii) Purchaser, Launch Services Provider or a third party and not Contractor, are directly responsible for the loss or unavailability of [***…***], then Final System Acceptance shall be deemed achieved. In such case, the Contractor shall be paid the Final System Acceptance Milestone.

The Parties agree and acknowledge that any deemed achievement of the Final System Acceptance Milestone shall apply only to this Contract and not to any definitive document under the Finance Facility.

 

10.5

Iridium Block 1 Interoperability Considerations

In case of any Satellite Defect or Anomaly detected during OSA, QSA, ISA or FSA, due solely to a discrepancy in the hardware crosslink interoperability between Iridium Block 1 operational satellites and on ground Iridium Block 1 test satellites that is not attributable to Contractor (as verified by telemetry or other objective criteria), then the responsibility of Contractor shall be limited to supporting the Purchaser in identifying the Satellite Defect or Anomaly root cause and any corrective measures, potential solutions or mitigation strategies. The implementation of any such corrective measures, potential solutions or mitigation strategies shall be deemed a Change Order in accordance with Article 15.

If, however, the Defect or Anomaly is solely due to a discrepancy of the software associated with satellite-to-satellite interoperability as loaded on the Iridium Block 1 operational satellites and the ground Iridium Block 1 test satellites that is not attributable to Contractor (as verified by telemetry or other objective criteria), then Purchaser shall be responsible to implement any corrective actions necessary to remedy such Defect or Anomaly in the Iridium Block 1 satellites, and Contractor shall remain responsible for demonstrating compliance of the Satellites with the applicable requirements of Part II of Appendix F.

 

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ARTICLE 11. ACCEPTANCE OF DELIVERABLE ITEMS

OTHER THAN THE SATELLITE

 

11.1

Ground Deliverables

 

  11.1.1

Testing and Inspection . With respect to each Deliverable Item consisting of Ground Deliverable(s), Contractor shall conduct an inspection and test of each such Deliverable Item in accordance with the requirements of this Contract, including the Statement of Work prior to and after Delivery of the relevant Ground Deliverable(s). For the avoidance of doubt, the Purchaser shall be entitled to attend any and all inspection and testing activities. If the tests establish to the Purchaser’s satisfaction that the Ground Deliverable(s) meet the Milestone Success Criteria, Contractor shall deliver the test results and provide a certification to Purchaser that the Ground Deliverable(s) meet such Milestone Success Criteria. Contractor shall perform an Acceptance inspection and test of each Ground Deliverable element within [***…***] Business Days after Contractor has notified Purchaser of Delivery. Based upon Contractor’s certification and the inspection and test results, and the results of any additional Purchaser Acceptance inspection and test results, Purchaser shall either accept the relevant Ground Deliverable(s) in writing (“ Acceptance ” with respect to any Ground Deliverable(s)) or notify Contractor in writing that the relevant Ground Deliverables have failed to meet the Milestone Success Criteria (including the specific Defects of such Ground Deliverable(s)), within [***…***] Business Days after Contractor has notified Purchaser of Delivery.

 

  11.1.2

Remedy or Correction of Defects . Upon receipt of a notice from Purchaser that any Ground Deliverable has failed to meet the requirements of the Contract including the Milestone Success Criteria as modified by any waivers or deviations approved by Purchaser pursuant to Article 11.6 (including the specific Defect of such Ground Deliverable), Contractor shall remedy the Defect(s), conduct additional testing as appropriate, and schedule another test of the applicable Ground Deliverable as appropriate in the presence of Purchaser or any Purchaser Employee or Purchaser Personnel involved in the regular review, monitoring and assessment of the technical portion of the Work. When such Defect(s) been remedied to comply to all applicable requirements of this Contract, including the Statement of Work, to Purchaser’s satisfaction, the relevant Ground Deliverable shall be Accepted by Purchaser in writing within [***…***] Business Days from the Acceptance re-inspection and/or re-test of the Ground Deliverables reasonably applicable. Contractor shall be required to repeat the process described in this Article 11.1 until the applicable Ground Deliverable shall have been Accepted by the Purchaser in writing pursuant to the criteria of this Article 11.1, unless otherwise agreed by the Parties. Contractor shall ensure that Acceptance of the Ground Deliverable is accomplished in accordance with the Delivery Schedule.

 

  11.1.3

Use of Non-Accepted Deliverable Items on an Interim Basis . Until such time that the Contractor resolves any Defects and completes Acceptance of a Ground Deliverable that meets the requirements of this Contract, including the Statement of Work, Purchaser shall be entitled to use any such Ground Deliverable, provided that the Defect can be corrected at Purchaser’s facility (or otherwise at the location the Ground

 

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Deliverable was delivered to) and Purchaser’s use of such Ground Deliverable is consistent with and will not unreasonably interfere with Contractor’s obligations to resolve any Defects.

 

11.2

Deliverable Data

For any Deliverable Data (including Deliverable Items of Software but excluding Software integrated into a Satellite, which is subject to Article 10.1) that requires Purchaser approval pursuant to the requirements of this Contract, including the Statement of Work, Purchaser shall, within [***…***] Business Days of Delivery, notify Contractor in writing that such Deliverable Data is either: (i) Accepted; or (ii) rejected as non-compliant with the requirements of this Contract, including the Statement of Work (including any waivers or deviations approved by Purchaser pursuant to Article 11.6), or otherwise identified by the Purchaser as Defective, in each case identifying each such Defect and providing additional notes or comments as reasonably necessary to describe the relevant Defect. If Purchaser notifies Contractor of any Defect pursuant to the foregoing, Contractor shall promptly correct any Defective aspect of such Deliverable Data identified in such notice from Purchaser, and re-submit the Deliverable Data to Purchaser for a subsequent inspection to verify that Contractor has corrected the previously-identified Defect or non-compliance and that the Deliverable Data complies with the requirements of the requirements of this Contract, including the Statement of Work. Contractor shall be required to repeat the process described in this Article 11.2 until such time as the relevant Deliverable Data has either been Accepted by Purchaser in writing, or has been deemed Accepted, in accordance with this Article 11.2, unless otherwise agreed by the Parties. For Deliverable Data that does not require Purchaser approval pursuant to the requirements of this Contract, including the Statement of Work, Acceptance of such Deliverable Data shall be deemed to have occurred upon Delivery and review by Purchaser to its satisfaction within [***…***] Business Days of Delivery, provided such Deliverable Data is not Defective and complies with the requirements of this Contract, including the Statement of Work (including any waivers or deviations approved by Purchaser pursuant to Article 11.6). Contractor shall use all reasonable efforts to incorporate and/or resolve Purchaser’s review comments.

 

11.3

Training

Training, or any part thereof, shall be performed by the Contractor for Purchaser’s employee in accordance with the requirements of the Contract. Acceptance of Training, or any part thereof, shall occur [***…***] Business Days after completion of such Training or part thereof unless within such time Purchaser provides a written notice to Contractor that the Training, or part thereof, does not meet the requirements of this Contract, including the Statement of Work, identifying each Defect and providing additional notes or comments as reasonably necessary to describe the relevant Defect. In the event that Purchaser does not Accept Training, or any part thereof, as set forth in this Paragraph, Contractor shall repeat the Training, or relevant part thereof after agreement with the Purchaser on the scope of Training to be repeated.

 

11.4

Services

Services shall be performed by Contractor in accordance with the requirements of this Contract.

 

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO A CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED [***...***]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Iridium / Thales Alenia Space Confidential & Proprietary

41


11.5

Purchaser’s Inspection Agents

Purchaser may, upon giving prior written notice to Contractor, cause any Purchaser consultant or agent designated by Purchaser to observe or conduct the Acceptance inspection pursuant to this Article 11 in whole or in part; provided, however, that the provisions of Article 7 and Article 8 shall apply to any such consultant or agent and such consultant or agent shall comply with Contractor’s normal and customary safety and security regulations provided to Purchaser in writing in advance of such inspection.

 

11.6

Waivers and Deviations

Waivers of or deviations from the requirements of this Contract, including the Statement of Work or System Performance Specification applicable to any Deliverable Item subject to the Acceptance inspection pursuant to this Article 11 shall be addressed as set forth in Article 9.1.4.

 

11.7

Inspection Costs Borne by Purchaser

All costs and expenses incurred by Purchaser or its consultants or agents in the performance of its inspection rights under this Article 11, including travel and living expenses, shall be borne solely by Purchaser.

 

11.8

Non-release of Warranty Obligations Upon Acceptance

In no event shall Contractor be released from any of its warranty obligations applicable to any Deliverable Item as a result of such Deliverable Item having been Accepted as set forth in this Article 11.

 

CONFIDENTIAL TREATMENT HAS BEEN RE