Source: Fitzgerald Communications
"Ed Staiano" (Former President of "old" Iridium LLC)
"GSM" phones (mistyped GMS)
Burst Messages = SMS (Short Message Service)
Host: Andrew Belfour
December 12, 2000/9:00 a.m. CST
Moderator: Ladies and gentleman, thank you very much for standing by and welcome to the Iridium Satellite's conference call. At this time, all lines are in a listen only mode. Later there will be a question and answer session with instructions given at that time. As a reminder, this conference is being recorded.
I would now like to turn the call over to our host Mr. Andrew Belfour. Please go ahead.
A. Belfour: Thank you. Yes, hi, everybody. I just want to welcome you and would like to introduce Mr. Dan Colussy, who is the Chairman of Iridium Satellite LLC. Mr. Colussy will begin the call with a brief opening statement, and then we'll take your questions. Dan.
D. Colussy: Welcome, everybody. I'm pleased to have this opportunity to announce today that Iridium Satellite has completed the acquisition of the assets of Iridium LLC.
On October 26th, Iridium Satellite LLC submitted a bid to the U.S. Bankruptcy Court for the Southern District of New York, to purchase the Iridium assets. We did so after securing the support of the debtor, its banks and its creditors, as well as receiving Motorola's support and assistance. Boeing also agreed to serve as the contractor in charge of operating the system going forward.
On November 17th, the court approved the Iridium Satellite's LLC's bid of $25 million for the assets. Yesterday, we officially closed the deal and as of 6:30 this morning, we took ownership of the operating assets of Iridium LLC and its subsidiaries, including the satellite constellation, the terrestrial network, Iridium real property and very importantly, the intellectual property owned by Iridium LLC.
Iridium Satellite will begin service for the U.S. government immediately. By the end of the first quarter of 2001, we will launch the commercial satellite communication services to industrial and other government customers. We do not see this as a consumer service per se. The marketing strategy will be the focus on industrial clients whose operations require reliable communications to and from remote areas of the globe where terrestrial systems are simply not available. I want to emphasize that; it's organizations and people that need service to and from remote areas, so it's not a cell phone system.
The Iridium system has the unique ability to reach all of the world's remote areas, including air space, the oceans, and many underdeveloped parts of the world that currently have no communication systems. Specifically, we will pursue industrial segments, including aviation, maritime, oil and gas, mining, heavy construction, forestry, emergency services and the leisure market, which will be more consumer-oriented.
Iridium Satellite will begin service with both voice and data capabilities at 2.4 kilobits per second on the data. That will be dial-up service. We expect to offer, however, enhanced data at ten kilobits per second, with a direct Internet connection within six months of the service launch, and by the end of the year, we will have introduced a short burst messaging service [i.e. SMS], which will add to our data capability.
Iridium Satellite also plans to offer specialty equipment for aviation, marine and for other fixed ground applications, most of which, by the way, has already been designed and is available. Here I'm thinking of the AirSat system that was designed by Honeywell and is currently installed on 185 aircraft already, so that type of equipment has already been certified and available. The same is true for many marine applications and of course, ground applications, where if you're indoors and need an antennae on the roof, then we have various and sundry pieces of equipment for that as well.
With essentially no debt and with monthly operating charges of less than $7 million, we're confident that our pricing for all of our applications will be at or below other satellite offerings in the marketplace. As I mentioned earlier, we do have Boeing as our principal contractor.
They will not only operate the system, but they will maintain the satellite constellation and also, Motorola has agreed to continue to provide subscriber equipment. They're going to restart their production lines and we have a firm agreement with Motorola on that subject.
Our low cost structure means that we will not only offer very competitive service, but it also means that our break-even threshold for usage will be significantly lower than any other global mobile satellite services. In fact, it will be in the range, in terms of numbers of subscribers, close to what Iridium was able to have in place when the system was shut down, so we do have a relatively low break-even threshold.
The company also enjoys the strong backing of our investor group and we will launch the service from a very strong financial footing. We have solid capitalization, and this will take us through any kind of developmental period that we have to go through until we can reach the break-even point.
This morning I have on the line with me one of our major investors, Herb Wilkins. Herb is President of the Syncom Funds and he has joined us this morning and will be available for questions. Herb, did you want to add anything to what I've just said?
H. Wilkins: I really wanted to just state my strong feeling that this service, and the way the satellite's designed, offers an opportunity to serve niche markets, which, in the past, would not have gotten service. I am particularly interested in the ability of the Iridium system to deliver service to Third World countries, particularly those in Africa. We will undertake and initiate an action to bring aboard a number of the African countries through their PTT's, which we believe will allow for the development of Third World service, which will be a significant revenue-generating part of the Iridium business going forward. We're happy to be able to support that effort.
D. Colussy: Thanks, Herb. I think that gets through our short introductory comments. We would now like to take any questions any of the participants might have.
Moderator: One moment please, for our first question.
Our first question will come from the line of Rob Kaiser with the Chicago Tribune. Please go ahead.
R. Kaiser: Hi. Thank you. Can you tell me a little bit more about the investor group, and secondly, whether this deal would have been completed without the support from the Defense Department?
D. Colussy: In terms of our investor group--is it Ron or Rob?
R. Kaiser: Rob.
D. Colussy: Rob. We, like any private equity fund, are not going to disclose all of our investors, other than to say we are very strongly capitalized. Syncom, which Herb Wilkins represents, has kind of a special interest in this project. He and I joined up together originally, going back to our first interest in this project, so that's why I did introduce the Syncom Funds. But beyond that, we will not be getting into who our private equity investors are. What was the second part of your question?
R. Kaiser: About whether this deal would have been completed without the support from the Defense Department?
D. Colussy: Well we had a number of conditions that we ourselves had to satisfy as investors, to make sure that we had a viable operation. There's a whole laundry list of things that we had to achieve and that's why we've not been able to speak to this subject up until now, because we had to get all of these things in place. Certainly the contract with the Department of Defense was one of those elements.
R. Kaiser: Do you also have plans to, or when are you looking at launching new satellites?
D. Colussy: We're actually going to start service with the DOD tomorrow. They have been using the system throughout the bankruptcy. As you may know, they have their own gateway that they built and invested in, located out in Hawaii, which is dedicated strictly for DOD use. We now have the security module fully developed and tested and ready to go as well, so DOD will have a system that's up and running today, because of course the satellites are up there and they're functioning.
Our commercial service will start towards the end of the first quarter, because we do have to restart our North American gateway and we want to be very sure that everything is working properly before we resume commercial service. But DOD will begin, as I said, either today or tomorrow.
R. Kaiser: And do you expect to launch replacement satellites?
D. Colussy: Yes we do.
R. Kaiser: When will that start?
D. Colussy: We have very firm plans to do that. Part of our due diligence was to look at the life of the constellation, as you would obviously expect. All of the technical analysis we have been able to get done, both within Motorola and outside and so forth, would indicate that if we do replenish the spares, get a full complement of spares in each of the six orbits, that we will then have a seven-year life minimum. The system, as you know, has been underutilized.
Let me get back to answering the specific question you ask, and that's when we'll be launching. Let me say, first, there are eight spares in orbit now, in addition to the 66 usable satellites. There are eight there now. We'll be launching seven more in the next year or so. We have the first launch scheduled for next June, June of 2001. That will be a Delta 2 launch; we'll be putting five spare satellites into orbit. The following spring, roughly March of 2002, we'll be launching two more and in that case we'll be using the Russian rocket. So we will inject seven more spares into the system, so we'll have more than two spares in each orbit, and that will give us the life that we believe is there.
R. Kaiser: Will it be seven years?
D. Colussy: Yes. Seven years minimum. Some people will try to convince you there's more life. Traditionally, those of you in the business will know that satellite systems always last a lot longer than they're designed for, because basically they are over-designed. We have enough fuel on board these satellites to last 20 years for example, so there won't be a shortage of fuel. So that's our plan, is to look at a seven-year life, which given the additional spares we'll be putting up, that should be ample to assure that.
R. Kaiser: Let me ask one more question and I'll let somebody else get in.
D. Colussy: Surely, go ahead.
R. Kaiser: Give me a sense as to, obviously your market is going to be tied towards your industrial customers, but can give me a sense as to how large of a marketing budget you have and when you're going to start rolling that out?
D. Colussy: We'll be starting out, we have a pre-operating budget of course that we'll be launching and then we'll have a normal one that goes through the year. Our budget is sizable compared to our total cost structure, but it's not huge in an absolute sense, but we think it's going to be very adequate, because we'll be dedicating most of our promotions into these vertical markets and we'll be using media, specialized media, in these different markets, like aviation, oil and gas and so forth.
R. Kaiser: Can you give me a sense as to how large the campaign?
D. Colussy: Yes. We're spending a little bit less than $10 million for the first year, which given the size of our total expenditures, is quite sizable. We will not be doing any consumer advertising on TV or things of that nature.
We'll be doing very much specialized, directed ads and we'll be doing a lot of promotions of course with service providers, because we'll be working exclusively through service providers, which we've already put a network of those together and are in the process of already signing agreements with major service providers around the world.
Many of these service providers specialize in these different vertical markets that I've already discussed, so we've gotten very good response from them and they'll be our principal marketing arm, but we'll also have of course our own marketing department as well.
R. Kaiser: Thank you.
Moderator: The next question will come from the line of Paul Deikwitz with Satellite News. Please go ahead.
P. Deikwitz: Yes, thank you very much. I'll ask basically about three things. The first will be pricing. I wanted to get a sense, with your lower cost, whether you'll be able to offer much more competitive prices than some of the pricing before, that involved as much as $7 a minute, including, I guess, the tariffs from various countries? So after pricing, then if you could address the service providers a little bit more in depth, maybe if you could mention any names or mention any regions that you've got well served and how your strategy will differ from the one of your predecessor managers?
Then lastly, if you could talk a little bit further about the competitive framework. You mentioned being able to offer services as competitively, if not more competitively than the others. It's just a question of whether you can carve out the market niches you're talking about in light of some of the competition. So first if you can take pricing, then service providers, and then move onto competition that would be awesome.
D. Colussy: Okay, great. Pricing will be--of course we'll have some initial special offers on pricing, which will be directed at those people that already have Iridium phones that were users. When Iridium shut down we had about 63,000 subscribers. Our research and calls and so forth, have determined that we probably have somewhere in the 30,000's still out there that have phones that were very satisfied with the service. So we'll be directing our attention at them and we'll be offering them special promotional deals for the first year, which really won't apply across the board, just to get them back in. We're going to offer also to take their phones back free and upgrade the software, so that they will have the latest software including data capability on their phones. So that's one thing, so you can put that aside.
So you can envision there will be some pretty low prices there. I don't want to get into naming the exact prices but let's say those will be introductory rates, which will be quite low.
Then as we get looking at the different marketplaces, we will tailor the pricing, because some deals will be bulk deals, others will be normal minute by minute deals and they will tend to vary. But as I said earlier, I don't want to mention specific numbers right now, first of all, we haven't fully developed them all. But I did want to make the point that since we're operating at a total cost per month of $7 million, that includes all of our marketing cost, all of our administrative cost and all of the Boeing contractual cost, so it's our full up, we do have a fairly low break-even point and we'll be able to offer fares that are competitive. We'll have to meet the competition in the different markets that we are in.
The vertical markets that we're going after, a lot of them use specialized equipment, won't even use handsets for example. The aviation market being one. There's already special equipment for that and it will be true with some of the marine markets as well and certainly when we get into data, there will be some special data devices as well, in addition to using the handsets. So there's going to be a variety of pricing, but I can assure you that we'll be competitive.
Now overall, our strongest competitive force is not going to be pricing, and we're not going to be engaging in price wars per se, because our system is the only system available today that offers truly global coverage over both Poles, all of the oceans, all of the air space, and to every nook and cranny of the Earth. So we're going to take advantage of that very strong competitive differential that we have. The reason I mention that, in some parts of our service, we don't have true competition and will not have to get into a real pricing war so to speak.
So we're going to look at each and every circumstance. We've already been doing this by the way; it's not as though we're just going to begin it. We've been doing it now for quite some time. Assessing what we have to do in each marketplace and what I want to say is that we'll be competitive. But we'll be relying more on the fact that we have a better product, frankly, in terms of coverage, than any other single system. So when we're looking at these vertical markets, companies and governments that have a need for a truly global service, pricing is always important, but it gets less important when you deal in some of these markets. That's probably a longer answer than wanted, but.
P. Deikwitz: No, it's fine, but no ballpark on pricing? Even a range of $1 to $2?
D. Colussy: Well, we're going to be certainly at our wholesale prices. We'll be nowhere near what the rating was. Our wholesale prices will be certainly well under a dollar; well, well under a dollar. Now there are markups that go on that from service providers, as you know, but the retail pricing will be a function of what the service providers develop. But our wholesale pricing, which all of our pricing will include termination cost, so the customers will not have to worry about termination cost. We've decided that that's the best way for us to go. So whatever pricing we put forward will include those fees as well, so there will be no add-on fees.
P. Deikwitz: Have you given your service providers a ballpark or at least a feeling that said look, I don't want it higher than $1.50 or I don't want it higher than $2.00?
D. Colussy: It's going to be in that first range as far as we're concerned. There may be some exceptions to that, but certainly that would be the upper limit that we would be thinking of.
P. Deikwitz: Keep the prices under $1.50 a minute, no matter where in the world that call is made?
D. Colussy: Absolutely.
P. Deikwitz: Okay.
D. Colussy: Now as I say, there probably might be exceptions to that for specialized purposes, but to give you a ballpark, yes, I would say that.
P. Deikwitz: Okay, and on the service provider front how is that looking?
D. Colussy: So far we have seen a lot of enthusiasm. I think we have talked to every service provider. We have talked to the big ones like Stratus. We are, I believe, in the process of having discussion with several service providers. We've had meetings already with them; we have another big meeting planned next week as a matter of fact, where we will begin to focus.
We also have coverage overseas; we'll be covering the entire Southeast Asia area with a strong service provider there. We'll be covering the Middle East and Africa with a strong service provider. We will have a European service provider in the not too distant future. Then we also have a strong presence in Latin America. So those plans will be developed concurrently with our plans for North America, and those are already underway.
P. Deikwitz: Just to clarify, the Southeast Asia and the Mid East and Africa regions have definite service providers already lined up?
D. Colussy: Let's say we have investors in that area and we have service providers that are tied in.
P. Deikwitz: You're still working on Europe, Latin America and North America?
D. Colussy: Actually, Latin America is all settled. I shouldn't say all settled, that's an overstatement, but we have the core there and that's underway. We also, I might add, have a lot of government interest from these different parts of the world for services to the governments and that's going to be another one of our focuses. Not dissimilar to what the U.S. government has asked for. I think a number of governments have expressed an interest in a comparable type of offering.
P. Deikwitz: Dan, can we understand that that would mean that like the U.S. example that you cited, military and non-military users in these other governments?
D. Colussy: Yes, that's right.
P. Deikwitz: A little bit on the competitive framework. Clearly the competition is against other satellite service providers, but you also can't overlook that there are some businesses that have industrial uses that do have cellular capabilities with some GSM phones working in many parts of the world. How do you assess that competitive framework, not just against the satellite providers, but even some of the cell phone providers that are out there?
D. Colussy: Well, as I said earlier, our focus really has to be on those companies that really need service to remote areas, and when they're in areas that have good terrestrial service, I think they'll use their cell phones. Now we'll have some roaming capability. In fact, over time, I think we will have a pretty broad range of roaming, but we won't have that early on, because we have to get a lot of those agreements in place.
But if you start with the assumption, which we do, based on our discussions and our meetings with various companies, there is a need for remote communication services in areas where there's simply no type of cellular coverage or any other type of coverage. When you're in an area where there is good cellular service, you're probably better off using your cell phone. So I don't see us interfering with that too much, although, as I say, we will provide, over time, roaming services, but that's the niches that we're going after.
We're going to be a niche company. We don't have to be a huge company. We don't have to be what Iridium was originally proposed to be, with a million subscribers, far from it. Our plan would never call for us to even get close to that. We think we can make a very satisfactory return, with some reasonable probability of being able to support a follow-on system as well, with much more modest goals based on where we're starting from. So that's basically our philosophy of how we're going to go after that.
P. Deikwitz: Just one quick follow-up, based on your last point about reasonable probability of supporting a follow-up system. Do you plan for both a second generation satellite system and second generation, or next generation phones?
D. Colussy: Well I can't say we're planning. That would be an overstatement. I'm saying we don't have firm plans for that, but within the first three or four years, we believe we'll know enough about the marketplace at that point. Since Boeing is our partner on this, not an equity partner, but a participant in this, that we will then be able to focus in and understand what the next generation should be. Maybe we'll collaborate with somebody else, maybe we'll have the resources where we can do it ourselves. The second generation will be expensive, but of course not as expensive as the first one, because a lot of the infrastructure is already there.
So we anticipate that by year three, and perhaps by year four at the latest, we will then be in a position to be able to make that evaluation as to where we go. But looking at the plan we put together, which we don't feel is an aggressive plan, we believe the wherewithal will be there to achieve financing for a second generation if everything else comes together.
P. Deikwitz: Any idea how much that will cost?
D. Colussy: It will be in the billions. It won't be $5 billion, it won't be that much, because a lot of the infrastructure is already in place, and obviously it will depend on the type of system we come up with. You're right the subscriber equipment will no doubt have to be different, because you'll certainly be in broadband area by then. And it's possible that in those ensuing years that there would be a consolidation of systems that are currently being thought of and being in the early phase of designer development.
So we're obviously totally open on that, but believe that there is a good possibility that we could have a next follow-on generation, especially with the support of the Department of Defense. Because as you read any of their releases, they are very serious, and I think this is not a function of any administration, this has been going on for quite a while, where DOD is determined to get into commercial relationships with communication systems, so they do not have to put up these huge capital costs. It's stated in their own release when they announced our contract, that it was going to cost them $9 billion in several years to replace the current UHF system, whereas they can come in and utilize Iridium of course at a fraction of that. Granted, Iridium doesn't meet the full needs, it doesn't meet every single requirement, but it meets enough needs so that they can think totally differently about where they go from here.
Because it can take enough of the basic load that then they can approach their next generation, their next system on some kind of joint commercial/government basis. So I think it changes the landscape quite a bit for them and that would influence our decision as well.
One of Boeing's interests in this project from day one has been the learning process connected with seeing Iridium develop and having their input, their capability and their engineering and scientific design systems, I think is going to be a big plus for us.
P. Deikwitz: In one point of clarification, you mentioned that you need far fewer subscribers to break even than the original Iridium. I know you mentioned both the bulk buy as well as the permanent users. Do you have any ballpark figure that we can kind of point toward in the future to look to see if you're making the kind of progress you need to break even? Any idea of the number of subscribers you'll need, knowing you've got a mix between the per minute users as well as those who will be the bulk buyers?
D. Colussy: Right, and obviously that's a mix that's important as you've already stated. Let me just put it in a general way, that if we get in the vicinity of where Iridium was before it shut down, that we'll be in the break-even arena. So we're talking in that kind of a range.
P. Deikwitz: I think you said about 63,000?
D. Colussy: I'd rather not get into any more numbers and just leave it sort of general. But if you think that we don't have any debt service to speak of, and our total full-up cost is $7 million a month compared to what they were with the original Iridium when they had a huge debt, a $5 billion debt plus a large operating cost, you can see the tremendous change in the fundamentals of the company.
P. Deikwitz: Great. I appreciate your answers and I hope it's been beneficial to the other people listening.
D. Colussy: I'm sure it has.
Moderator: The next question will come from the line of Bill Gans with The Washington Times. Please go ahead.
B. Gans: Hi. How are you doing?
D. Colussy: Hi, Bill.
B. Gans: I wonder if you can talk about some of the 30,000 customers you guys contacted? You said you were in touch with them to see what they felt about the service. I guess first of all, were those government clients, and what is the government market like for you guys?
D. Colussy: Let me answer the first one first. We didn't actually contact 30,000. What I said was as best we could determine, there were 30,000 active users out there that still had phones. We actually contacted several hundred though, which would be a very good representative sample. We had a standard survey, a list that we went through with them and asked them their experience with the service, what they thought of it, would they come back and so forth---a physical list of question that you would probably draft up yourself.
We got an overwhelming positive response. There were some negatives in there here and there, but basically people said they would come back, they wanted the service, they needed the service, they hoped it was going to be a little better than it was initially, because there were a lot of technical problems with the service, as I think everybody knows, early on. But that encouraged us, because there was just a strong, positive, sense that people wanted the service, and a lot of them said they really needed it.
For example, from Alaska, I don't know the exact number of letters, but I would guess that we must have gotten perhaps 100 letters. I'm guessing on that, but it was a very large number, maybe even more, stating that they really wanted the Iridium service back, because up in places like Alaska, it's the only service that works. There were just a broad variety of customers that need it for their business mostly, for the different types of businesses they had where they were working in remote areas. So that's the type of feedback we had, which was very strong and very positive.
Now in terms of DOD, one of the first stops I made when I got interested in this project, was I visited there, because obviously they would be a potential user of the system and they had already invested a couple hundred million dollars in the gateway and the development of the secure module so there was a big cost there already. I found the actual same reaction, a very positive sense of the need for this system throughout the different services, for different reasons and different types of things. But I went away from a sense that DOD would be very interested in the service. At that point, there was no hint of this being thought of as deferring the investment in the UHF or anything like that. This was just the people that wanted the system because it was useful for their missions, whether it was in an airplane.
You know, there has been an Iridium system installed in an F16 that's still flying. The pilot of that F16 can, he doesn't have a handset, it's built into his control communications system. That plane has been tested at 1.6 mock [sic. mach], upside down and backwards, and it works. He presses one button and he can communicate with his space, he can receive a small amount of data that he needs. Of course that's just one tiny example of all the different uses on ships and on the ground and in the air.
So without getting overboard on it, let me say that we found very strong support from the troops, in the Pentagon they call them warriors, the people that actually want and need the system in the field. I think that emanated up to the top by the time we got in there and made a specific proposal.
B. Gans: Do you have a target for your government market, for the U.S. government market?
D. Colussy: Well we're starting out with $3 million a month; that's been publicized, so I can say that. That's unlimited use for up to 20,000 subscribers. When they get over 20,000, then they'll be added revenue for us.
B. Gans: Okay. Can you tell me about how big the new company is going to be and if you're going to recruit from the former list of employees, the list of people who used to work for Iridium?
D. Colussy: There will be no senior people from the former Iridium company at all. Of course all of the Motorola people that were working on the constellation and doing the engineering down in Arizona, as well as running the control center in Virginia, most of those people are transferring into Boeing. They'll be Boeing employees. There are somewhere between 170 and 200 of the people that will be doing all of the technical aspect of the constellation that will be under Boeing's supervision.
Also joining us will be the senior person at Motorola who was responsible for putting up the constellation and running it all during this period. His name is Danny Stamp. You probably don't know Danny, but he was the principal based down in Arizona that's been responsible for running the constellations. He was not Iridium; he was a Motorola employee. He'll be joining us to oversee the work with Boeing. So our total population of employees outside of the Boeing group will be about 60.
B. Gans: Okay.
D. Colussy: That will be administrative people and marketing people Obviously we'll have our own marketing group, even though we'll be working with service providers. We're working with all of the major service providers. For example, Stratus, we haven't resolved this yet, but I think Stratus, who is the largest service provider in the world, and do have global coverage, will be playing a very important role with us.
B. Gans: Was Mr. Staiano a part of your investor group?
D. Colussy; No, he is not. No, Ed gave me some very good advice early on in this process and he will not be any part of the investing group or part of the management. We will feel free and will want to go back to Iridium people from time to time and use them as advisors as things come up, because we do need a corporate memory and we'll be using some of them for that, but not as employees or investors.
D. Gans: One last thing. You had talked about the phones with some of the other reporters previous to me, and that there's going to be a new generation. Is there an attempt to get away from the sort of brick phone that everybody criticized for being too big and bulky?
D. Colussy: Well if you see the current 9505, which is going to be the phone that's going to be manufactured, that's the second generation phone, that will be our basic product line for the foreseeable future. There is a third generation phone, which Motorola actually got working, but it's nowhere near ready for putting on the market. We're going to put that aside for right now, because the 9505, the second generation, has all the data capabilities that I mentioned, plus it's a slightly smaller phone. It's still a pretty good-sized phone, but it's not anywhere near the original 9500.
That will be our basic product line for phones, for handsets. Most of the industrial users of this system, I found out, like the bulk. They don't like the small phones, because they want it to be a prominent piece of equipment that has an industrial look about it. So that will not be a problem. This is not a phone that somebody hangs on their belt necessarily or sticks it in their suitcase. This is a phone that has a very prominent use for wherever it is.
Now for aircraft, there probably will be phones put in the cockpit of the aircraft and just used as a regular handset. But most of the Iridium systems used on aircraft will have a little antenna on the roof, it's a ? antenna, maybe 6" long and only an inch or so high. So there won't be a typical handset on vessels, down to yachts, fishing boats, work boats, tugboats, the whole stream, all the way up to ocean liners and large cargo and bulk carriers.
Generally, those will have systems that I mentioned earlier. They'll have small antennas on the mast, and the Iridium antennas are quite small; they're not the big round antennas you have for example, from our side. They'll be run down into a central location and through a MXU, which is a multi-plexing device, so that you'll have at least four lines coming out of that. There will be docking stations, where the phones will actually be put in docking stations. Then there will be a portable handset that will be picked up and used. So the phone, per se, won't be used to talk into; it will be a portable handset. So as you go around and look at the different applications, the handset as we know it, that a lot of people complained about it, it won't have the same relevance, because it's in a different environment.
B. Gans: Okay, thank you very much.
D. Colussy: I'll show you one, by the way, when I see you.
B. Gans: Okay, all right. Thank you.
Moderator: The next question is from the line of Rob Weaver with AFP. Please go ahead.
R. Weaver: Yes, first a point of clarification. I wasn't clear from what you were saying. Did you have any other active users that were still using the service during the bankruptcy other than the DOD?
D. Colussy: Oh yes, yes. At the time that the North America gateway was shut down, which my memory is in August, we knew, we could count there were 7,000 users at that time.
R. Weaver: But at the present time?
D. Colussy: At the present time, there are people using the system today that we don't know about. You can use the system today. Some of the foreign gateways are still using it. You can talk on the system today, handset to handset, but if you want to plug into a terrestrial system, then you need the gateway. The military's been using it throughout this period, because they have their own gateway in Hawaii, which has continued to operate of course.
R. Weaver: Okay. You mentioned a little bit about the constellation. Can you talk about the condition of the satellites and are they all fully operational as well as the spares?
D. Colussy: Right now we have had one failure in 23 months and that's been de-orbited, out of the orbit. Beginning tomorrow, we will drift one of the spares up into that slot. That's been the only failure in 23 months and that's one that was identified quite a long time ago.
R. Weaver: So that would be 65 then?
D. Colussy: That's right. Soon there will be 66.
R. Weaver: Okay.
D. Colussy: Within a week it will be back to normal. We've been holding back on that until the deal was done, because Motorola wanted to make sure the deal was completed before we did the replacement. So there then will be seven spares in the six orbits. We'll then be launching an additional seven, so there will be 14 spares, and we'll have at least two in each orbit.
R. Weaver: Okay.
D. Colussy: That will give us the life expectancy that I mentioned earlier.
R. Weaver: Okay, one final question. Can you address the bid and the bankruptcy? This was a $5 billion system that you obtained for $25 million. That seems like a pretty good deal. Can you address why there wasn't anybody else out there and why was this bid, which is just a small fraction of the total cost, accepted?
D. Colussy: Well let me just say that first of all, I can't comment on why it was accepted or not, but let me just more thoroughly define what the bid was. The bid first was for 5% of equity in the new company, class B shares. Those were $6.5 million in cash. It was $18.5 billion in the form of a convertible note, which can be converted into class A equity. Then, importantly, we relieved the estate of $30 million cost, which it would have cost to de-orbit the system. So you can add that up; you can assign whatever value you want. It's more than $25 million for sure.
Now, why there weren't higher bids, I really can't comment on that. There were a lot of other interested people, but this was a bid that we carefully constructed. We had a strong business plan with it; we were able to show that we had the signed subscription agreements with investors. So we had the money, we had the business plan, we had the management team and so forth, and this was our bid. It was accepted first by the creditors and then they recommended it to the courts.
R. Weaver: So this gives you an advantage in avoiding all the capital costs of getting this system going?
D. Colussy: Oh, absolutely right. Of course that's why we're willing to take on the risk of doing this, because obviously we got a very good deal. This project is not without risk. There's never a business project that I've run across in my 45 years of managing companies where there wasn't risk. There's some risk here, but it's a risk that I think all of our investors and myself feel is well within the acceptable range and the rewards could be quite outstanding as well.
R. Weaver: Okay, thanks very much.
D. Colussy: I just would add one thing. There's one other thing that I think drove some of the investors, and certainly it did in the case of Herb Wilkins, who might want to comment on this. Despite everything I've said about the marketplace, there is a humanitarian role for Iridium, which has certainly not been overlooked by us or our investors, where this system can uniquely provide service to parts of the world, remote parts of the world, underdeveloped countries, where we can turn on a local system to them fairly simply and fairly cheaply. Herb, did you want to mention that if you're still on?
H. Wilkins: Dan, I dropped off, so I didn't hear all of the question.
D. Colussy: I just commented, Herb, that on top of all the other markets we talked about, that we felt, and you specifically have been in this from day one, felt that there's a very good opportunity in the underdeveloped areas to provide low cost communication services.
H. Wilkins: Absolutely. Right now there are very few countries in the Third World that have the infrastructure in place to support expanded consumer service. The Iridium system allows for the infrastructure to be supplanted in such a way that you can immediately install phones in most rural areas of the Third World, assuming there's financial support for the service.
D. Colussy: Herb, by financial support you mean there are organizations that want to develop this type of ? .
H. Wilkins: That will have the capacity to pay for the service, yes.
D. Colussy: World Bank?.
H. Wilkins: Service that would be affordable, reasonably priced, relative to the existing service or services that may be available.
D. Colussy: That's another piece of our total market here, which we really haven't quantified and haven't built that into our plan per se, because that one's a little bit more difficult to nail down. But it's certainly there and the infrastructure would largely be financed by a number of world organizations that are investing huge amounts of money in Third World development. So we think that's going to be another area where we would, in terms of Iridium, would end up selling them bulk minutes for use in these systems.
I might add, by the way, that we have other opportunities there as well, not necessarily with Third World countries, because we have many other gateways that some are still running, some have been shut down. But for example, just to name a few, which we have not put these in our plan, because they require further negotiations. But you have gateways in Russia, in China, in India, that are in some form of operation today. It's possible to provide software through the constellation, where these regions and countries can be offered a local service for using their own gateway. The calls go up to the constellation and back down to their gateway from the remote corners of those countries.
We've heard from the Russians; we had some preliminary talks with the Chinese, some with the Indians as well. There's certainly interest there. Now whether those proceed to something finite or not, I'm clearly not in the position to say. But I wanted to give those of you that are interested in Iridium some sense of that, because that could be in the long-term offering as well. Where, again, we would just be the wholesaler. We would just provide bulk minutes to those entities for use up and down within their own countries, using their own gateways, which would not be part of our system.
Our system, we'll have to start with just the North American gateway and because of the interconnection between the satellites, we don't need gateways all over the world. The next gateway we'll probably restore will be the European gateway located in Fucino, Italy and we've already had some preliminary discussions there. But the commercial gateway will start with North America, then with the European gateway added, and of course with the government gateway in Hawaii operative at all times. We have expansion capability beyond that with other gateways as well, but that gives you a flavor for that.
Moderator: For future questions, please limit your questions to one per participant. The next question will come from the line of Gregory Twockman with Mobile Satellite News. Please go ahead.
G. Twockman: Actually, my questions have been answered. I'll just wish you good luck and you can go onto the next question.
D. Colussy: Thanks, Greg.
Moderator: The next question then will come from the line of Bruce Branch with Communications Daily. Please go ahead.
B. Branch: Yes, I have one question. I'll trick you and I'll do one to Mr. Colussy and one to Mr. Wilkins. I think it's very important. Most of my questions have been answered, though.
Mr. Colussy, I was interested in if you could respond to reports that you guys had raised $80 million in equity on financing and you were trying to raise additional capital for your program?
D. Colussy: Yes, not commenting on specifics, our capitalization is well beyond that. There was one point when we did have that amount you mentioned, but our total capitalization is well above that. We already have other monies that want to come into our deal, so we're going to be well capitalized in terms of our needs.
B. Branch: And to Mr. Wilkins, I was told of your presence in this deal some time ago. The FCC is today holding a forum on minorities and women, how to get more involved in space. I was just wondering how you got involved in this deal, and where do you see your role in this deal? What is the impact you think you will have on the overall industry, especially to bringing this service to Third World, African countries?
H. Wilkins: Well, as you probably know, Syncom looks at and provides financing for telecommunications in under-served markets. We got involved in Iridium, because we saw the system as a system infrastructure for Third World countries that didn't exist presently and that could be expanded, providing, in addition to voice, data capabilities as well. We got in touch with Dan Colussy early on and actually decided that we should join forces to bring about a financing and the development of this company. That's the story of how we got involved. We see this as providing significant service in the Third World, and in other under-served markets as well.
B. Branch: Thank you very much.
Moderator: The final question will come from the line of Jim Wolf with Reuters. Please go ahead.
J. Wolf: Yes, gentleman, on the Third World possibilities, did you mean to suggest that you have some other interest here other than purely commercial in dealing with the Third World? Is this something that you will pitch to international organizations as a way to do humanitarian work and that you will price it accordingly, something like a break-even, no profit to you?
D. Colussy: Well, I don't think Herb or I or other investors have discussed any below profit type of service here. I think Herb has identified what he believes is a very substantial market, and we all do by the way, and I think it's a wonderful opportunity. There are large amounts of capital available today for projects in the underdeveloped world and that's what Herb and I both had mentioned that would be available.
In terms of Iridium, we are prepared to provide full technical assistance, help, whatever we can to stimulate that market, because it's going to accrue to us. We, in turn then, would provide the capacity to these local service entities, which would in some cases have their own mini gateways on the ground, depending on the size of the country and so forth. So we would be an active participant and would be supportive and have that as an important corporate goal.
Given our status and our very strong need to make this a viable entity, we're certainly not starting out in that capacity of looking at anything that wouldn't give us a proper return. We can sell bulk minutes cheaper. One thing Iridium has is a lot of minutes that are going to waste everyday. As we sit here talking, millions of minutes are going to waste, because they're not being used. We don't have a shortage of minutes for sure and we won't. In fact, our plan, our most optimistic plan that we could come up with, by year seven, we're using 50% of Iridium's capacity, so we have plenty to spare.
H. Wilkins: Just to add a side note, one of the things that we found in our due diligence was that the African continent developed for Iridium under the old operation, had the second highest minute usage of any area in the world. That, I think, confirms to us that there is a need for this kind of service in Africa.
J. Wolf: The second highest after which area, by the way?
D. Colussy: North America.
H. Wilkins: North America. Use for this area in North America was the highest and then Africa and then the Southeast Asia market.
D. Colussy: That's because a lot of people took their phones into Africa.
J. Wolf: I see. Herb, excuse me for calling you Herb. I didn't get your last name and I'm wondering where we can get some background on your Syncom Fund. Is there a Web page you can direct us to?
H. Wilkins: Right, my last name is Wilkins and Web page is SyncomFunds.com.
J. Wolf: Okay, and your title?
H. Wilkins: I'm President of Syncom Management.
J. Wolf: Okay. I'm sorry, Mr. Colussy, what's the best way to identify your background? Apart from having been President '78 to '80 of Pan American World Airways, can you give me any reference on the Pan Am Sat? The proper way to identify??
D. Colussy: I have no idea where that came from. I have had absolutely nothing to do with Pan Am Sat.
J. Wolf: Oh, well I'm very glad then that I double-checked.
D. Colussy: I just barely know about them. No, my background is that yes, I was President of Pan Am in the 70's. I was with Pan Am for ten years actually; I was President for three years. I was also Chairman and CEO of Canadian Pacific Airlines in Canada. Then for the last 13 to 14 years, I was in the Washington area as Chairman, President and CEO of a company called UNC, which was formerly known as United Nuclear Corporation. In that role, I converted UNC into an aviation support company, because I was basically an aviation person, and moved it out of the nuclear field and sold it to General Electric in November of '97 for about $725 million. I'm still in the business of looking at deals and so forth and that's how I came across Iridium.
So my background is general aviation aerospace. I did at one point own a small telecommunications company, so I have some knowledge of it and I've spent about six months now researching, spending full time working on Iridium and ? .
J. Wolf: Right, that leads me to one last thing. Was there any danger that this deal was not going to make it in time to avoid the de-orbiting that Motorola had planned to start this month?
D. Colussy: Well, it was touch and go more than once, because Motorola, understandably, by the way, I think I was always fairly sympathetic with their point, because they were dealing with a difficult problem. There were times that we were concerned, yes, that that would get done. But I think Motorola took a point of view that said that look, if this is in the national interest, when they understood DOD's interest in it, they became very patient. It was at their expense by the way, because Motorola has been keeping this system going at their cost, as have the creditors been shelling out money during this whole period.
So there was a lot of pressure to get the deal done, but it's a very complex deal, as I think everybody on this phone would understand and the different elements had to get into place. One thing we haven't talked about is insurance, because one of the main things that I had to do was get insurance coverage for the constellation, both for in orbit insurance as well as for the eventual de-orbit. These are not trivial matters and ?.
J. Wolf: Now didn't the Pentagon agree to indemnify originally Motorola, but eventually you and I guess Boeing, for any liability in excess of the three policies, $1.5 billion, one billion dollar and one billion dollar that were in place?
D. Colussy: Yes, that's right. But they won't indemnify us to that. They're only indemnifying Motorola on that front and in fact, Boeing has their own policies and ?.
J. Wolf: So the Pentagon is out of the picture on that question of indemnification now that you've taken over, now that this deal is closed?
D. Colussy: You correctly described it, except the indemnification is limited only to Motorola.
J. Wolf: Right, because Motorola has some continuing product liability perhaps?
D. Colussy: Yes. But we're picking up the cost of that as well, the insurance to cover that. That's a separate policy, which we're carrying as part of Iridium.
But we've covered every angle of insurance and Motorola's concern was realistic in that if they gave up the constellation and had no control of it and then had to de-orbit it later on, they obviously wouldn't have the technical capability to do it. That's why they had to have some coverage for that eventuality and that was part of the overall transaction that was worked out with the Department of Defense.
J. Wolf: Okay, good. Your company's headquartered now in Lansdowne, Virginia, is that correct?
D. Colussy: That's where our snoc is, we call it the snoc, it's the operating center. It's actually in Leesburg. Lansdowne is, I guess, a part of Leesburg, Virginia. That's where the main operating center of the company is. Our main other facility is down in Tempe.
J. Wolf: Now we had from the Pentagon an Arnold, Maryland address for you.
D. Colussy: No, that was an error.
J. Wolf: That's an error. So what is the best, most accurate way to report the headquarters of the company. Is it Lansdowne or is it Leesburg?
D. Colussy: No, it's actually Leesburg. We use the term Lansdowne, because that's where it's physically located but the address is in Leesburg, Virginia, right near Dulles. It's within ten or 15 minutes from Dulles airport.
J. Wolf: Okay, good. I hope you'll have us all over there sometime to see the operations.
D. Colussy: We will. Yes, it's an interesting visit, because it's where the entire constellation is managed. It's a typical control room and it's a very nice facility, which we own, as we do the one in Tempe.
J. Wolf: Right, very good. Well thank you very much.
D. Colussy: You're welcome.
Moderator: That does conclude the questions. Please continue.
D. Colussy: Did you say that finishes up the questions?
Moderator: Yes it does, sir.
D. Colussy: Okay, then, Andrew, are you still on?
A. Belfour: Yes. That pretty much wraps it up. Do you have, Ron, do you have the information for the replay?
Moderator: Yes we do, sir.
D. Colussy: Okay, if you could give out that information, please.
Moderator: Ladies and gentleman, this conference will be made available for replay beginning today at 1:30 p.m. EST and continuing through December 14th at midnight. To access AT&T playback service at any time, in the United States dial 1-800-475-6701, or internationally at 320-365-3844 and enter the access code 557837.
That does conclude the Iridium Satellite's conference call for this morning. Thank you very much for participating and for using AT&T Executive Teleconference Service. You may now disconnect.