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, 2007

or

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

For the transition period from                    to                    

Commission File Number 000-52006

ICO GLOBAL COMMUNICATIONS
(HOLDINGS) LIMITED

(Exact name of registrant as specified in its charter)

 

Plaza America Tower I, 11700 Plaza America Drive, Suite 1010, Reston, Virginia 20190

(Address of principal executive offices including zip code)

(703) 964-1400

(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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x  No  o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

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

As of August 1, 2007, the registrant had 144,547,195 shares of Class A common stock and 53,660,000 shares of Class B common stock outstanding.

ICO GLOBAL COMMUNICATIONS (HOLDINGS) LIMITED
FORM 10-Q
For the three and six months ended June 30, 2007
INDEX

			Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets		3
	Condensed Consolidated Statements of Operations		4
	Condensed Consolidated Statements of Comprehensive Income (Loss)		5
	Condensed Consolidated Statements of Cash Flows		6
	Notes to Condensed Consolidated Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
Item 4T.	Controls and Procedures		28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		30
Item 1A.	Risk Factors		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		30
Item 4.	Submission of Matters to a Vote of Security Holders		31
Item 5.	Other Information		31
Item 6.	Exhibits		31
Signatures			33
Certifications

 

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PART I—FINANCIAL INFORMATION

Item 1.                          Financial Statements

ICO Global Communications (Holdings) Limited
(A Development Stage Enterprise)

Condensed Consolidated Balance Sheets

(In thousands, except share data, unaudited)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

ICO Global Communications (Holdings) Limited

(A Development Stage Enterprise)

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data, unaudited)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

ICO Global Communications (Holdings) Limited
(A Development Stage Enterprise)

Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands, unaudited)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

ICO Global Communications (Holdings) Limited

(A Development Stage Enterprise)

Condensed Consolidated Statements of Cash Flows

(in thousands, except share data, unaudited)

 

(continued)

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ICO Global Communications (Holdings) Limited

(A Development Stage Enterprise)

Condensed Consolidated Statements of Cash Flows (Continued)

(in thousands, except share data, unaudited)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ICO Global Communications (Holdings) Limited
(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements
(unaudited)

1.                 Organization and Business

ICO Global Communications (Holdings) Limited (“ICO”), along with its subsidiaries (collectively referred to as the “Company”), is a next-generation mobile satellite service (“MSS”) operator. Through its majority owned subsidiary, ICO North America, Inc. (“ICO North America”), ICO is authorized by the Federal Communications Commission (“FCC”) to offer ubiquitous MSS throughout the United States using a geosynchronous earth orbit (“GEO”) satellite. ICO is also permitted to operate a medium earth orbit (“MEO”) satellite system globally outside the United States.

ICO was incorporated in the State of Delaware in 2000 to purchase the assets and assume certain liabilities of ICO Global Communications (Holdings) Limited (“Old ICO”), a Bermuda corporation, on its emergence from Chapter 11 bankruptcy. Following the purchase of assets and assumption of certain liabilities of Old ICO, the Company established a new management team who oversaw further construction of the MEO satellites and ground systems and developed the technical plan for the MEO system. While the Company has several MEO satellites in different stages of completion, and it has successfully launched one MEO satellite, it has significantly curtailed further construction of its MEO satellite system due to disagreements with the manufacturer and launch manager of its MEO satellites as well as regulatory uncertainties surrounding its MEO satellite system.

ICO North America is currently developing an advanced hybrid mobile satellite service/ancillary terrestrial component system (the “MSS/ATC System”), using a GEO satellite, to provide wireless voice, data, video, and/or Internet service throughout the United States on mobile and portable devices. In 2007, ICO North America has also begun to design and develop its Mobile Interactive Media (“MIM”) services for use on its MSS/ATC System and plans to conduct an alpha trial of its MIM services in 2008.

2.                 Development Stage Enterprise

The Company is a development stage enterprise as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7, Accounting and Reporting by Development Stage Enterprises (“SFAS 7”), and will continue to be so until it commences commercial operations. The development stage is from February 9, 2000 (inception) through June 30, 2007.

As the Company is not currently generating revenue from operations, there is no assurance that the Company will be able to obtain the funding necessary to complete the construction of the MSS/ATC System, fund its future working capital requirements, or achieve positive cash flow from operations. In addition, the Company operates in a heavily regulated industry, and its rights to offer its planned services are tied to meeting significant milestones or otherwise satisfying its regulators. If the Company fails to meet a milestone and is unable to obtain a waiver or extension, the Company could lose its MSS authorization, and a loss of its MSS authorization would be an event of default under the indenture governing the Company’s $650 million aggregate principal amount of convertible notes due in August 2009 (the “7.5% Notes”) (see Note 5). In the event that the Company is not able to realize its assets in the ordinary course of business, and is forced to realize the assets by divestment, there is no assurance that the carrying value of the assets could be recovered.

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3.                 Summary of Significant Accounting Policies

Interim Financial Statements—The financial information included in the accompanying condensed consolidated financial statements is unaudited and includes all adjustments, consisting of normal recurring adjustments and accruals, considered necessary for a fair presentation. Certain information and footnote disclosures have been condensed or omitted. The financial information as of December 31, 2006, is derived from the Company’s audited consolidated financial statements and notes, included in Item 8 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the U.S. Securities and Exchange Commission on April 2, 2007 (“Form 10-K”). The financial information included in this Form 10-Q should be read in conjunction with management’s discussion and analysis of financial condition and results of operations and the financial statements and notes included in the Company’s Form 10-K. Operating results and cash flows for the interim period presented are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2007 or any other interim period.

Restatement of Prior Period Information—During the financial closing process for the year ended December 31, 2006, management determined that a cumulative translation adjustment of $4.4 million, which related to certain subsidiaries substantially liquidated in 2004, had been recorded incorrectly as a component of other income (expense) during the first quarter of 2006. At December 31, 2006, upon the Company’s application of Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, this amount was included as a component of the Company’s adjustment to its beginning deficit accumulated during the development stage as of January 1, 2006. The financial statements for the six months ended June 30, 2006 have been restated to reflect the effect of this adjustment.

Use of Estimates—The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are used when accounting for depreciation, taxes, contingencies, asset useful lives and valuation of stock compensation awards, among others. Actual results could differ from those estimates. Estimates are evaluated on an ongoing basis.

Cash and Cash Equivalents—Cash and cash equivalents is defined as short-term highly liquid investments with original maturities from the date of purchase of 90 days or less. Cash and cash equivalents is comprised of the following (in thousands):

 

Restricted Cash—As of June 30, 2007 and December 31, 2006, the Company had restricted cash of $825,000 related to a bond which is held pursuant to conditions of the Company’s FCC authorization to operate in the MSS spectrum.

Available-for-Sale Investments—The Company’s investments are primarily held in commercial paper, corporate bonds and notes and U.S. government and agency securities, and are classified as available-for-sale and are reported at fair value based upon quoted market prices. Investments generally mature or are sold within six months from the purchase date and are classified as current assets in the condensed consolidated balance sheets. Realized gains and losses on investments are determined using the specific identification method and are included in interest income in the condensed consolidated

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statements of operations. The Company includes any unrealized gains or losses on investments, net of tax, in stockholders’ deficiency in assets as a component of accumulated other comprehensive income (loss). The Company does not hold any derivative financial instruments in its investment portfolio.

Restricted Investments—The Company’s restricted investments consist of U.S. Treasury securities held as collateral for future interest payments related to the 7.5% Notes. The maturity dates of these investments correspond with interest payment dates as specified in the 7.5% Notes. These investments are classified as held-to-maturity and are reported at amortized cost. As of June 30, 2007 and December 31, 2006, all of the Company’s restricted investments mature in 2007 and are classified as current assets in the condensed consolidated balance sheets. Gross unrealized losses on restricted investments at June 30, 2007 and December 31, 2006 were $15,000 and $178,000, respectively.

Satellite System Under Construction—Satellite system under construction represents payments made and accrued for third-party construction and engineering costs incurred in the design, manufacture, test and launch of the MSS/ATC System. Satellite system under construction will be classified as property in service when placed into service and will be depreciated using the straight-line method based on an anticipated useful life of 10 to 15 years. Only the costs of constructing successfully deployed satellites will be transferred to property in service. Losses resulting from any unsuccessful launches or satellite failures will be recognized as those events occur, and insurance proceeds, if any, related to such losses will be recorded when their realization becomes determinable.

Capitalized Interest—The Company capitalizes interest costs associated with the construction of the MSS/ATC System. Interest capitalized to satellite system under construction for the three and six months ended June 30, 2007 and 2006 was $6.6 million and $13.4 million and $3.8 million and $6 million, respectively.

Debt Issuance Costs—Costs incurred in connection with the issuance of the 7.5% Notes have been capitalized and are included in debt issuance costs in the condensed consolidated balance sheets. These costs are being amortized using the effective interest method from issuance in August 2005 through maturity in August 2009. Amortization of debt issuance costs is included in interest expense in the condensed consolidated statements of operations. Amortization of debt issuance costs for the three and six months ended June 30, 2007 and 2006 was $1.8 million and $3.5 million and $1.6 million and $3.3 million, respectively.

Other Assets—Other assets represents payments made to acquire first priority rights to use a desired orbital slot for the Company’s GEO satellite. The Company currently intends to utilize such slot when it deploys its first GEO satellite to be used in the MSS/ATC System. The Company expects to amortize such costs over the estimated useful life of its GEO satellite, currently anticipated to be 10 to 15 years.

Research and Development Costs—Research and development costs, consisting of third-party engineering, consulting and development costs associated with technology being considered for use in the MSS/ATC System, are expensed as incurred. The Company reviews each of its research and development projects to determine if technological feasibility has been achieved, at which point, future development costs associated with that project are capitalized.

Contract Settlements—The Company’s policy with respect to a contract in dispute is to continue to record operating expenses and liabilities according to its contractual obligation until such contract is terminated. Upon termination, and prior to settlement, the Company continues to accrue estimated late payment fees and interest expense, as applicable. Upon reaching settlement, whereby the other party’s claims are legally released, the Company will extinguish its recorded liability, resulting in the recognition of a gain or loss on contract settlement.

Foreign Currency Translation and Foreign Currency Transactions—The reporting currency for the Company’s operations is U.S. dollars. The Company translates the activities of its foreign subsidiaries with

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functional currencies other than the U.S. dollar during the period at the average exchange rate prevailing during the period. Assets and liabilities denominated in foreign currencies are restated at the exchange rates prevailing at the balance sheet date. Translation adjustments resulting from these processes are recognized as a component of accumulated other comprehensive income (loss). The Company recognizes applicable cumulative translation adjustments as a component of operating income (loss) in the period in which a subsidiary is substantially liquidated. During the period, there were no gains or losses resulting from the liquidation of subsidiaries.

Gains and losses on foreign currency transactions are recognized as a component of other income (expense) in the condensed consolidated statements of operations in the period in which they occur. For the three and six months ended June 30, 2007 and 2006, gains on intercompany foreign currency transactions of $1 million and $788,000 and losses on intercompany foreign currency transactions of $2.2 million and gains on intercompany foreign currency transactions of $3.7 million, respectively, have been excluded from net loss and reported as a component of accumulated other comprehensive income (loss).

Accumulated Other Comprehensive Income (Loss)—The Company’s accumulated other comprehensive income (loss) consists of unrealized gains and losses on available-for-sale investments, net of tax, and cumulative translation adjustments. Accumulated other comprehensive income as of June 30, 2007 consisted of cumulative translation adjustments of $6.3 million. Accumulated other comprehensive income as of December 31, 2006 consisted of cumulative translation adjustments of $6.3 million, less unrealized losses on available-for-sale investments of $18,000.

Earnings (Loss) Per Share—Basic earnings (loss) per share is calculated based on the weighted average number of shares that were outstanding during the period. Diluted earnings (loss) per share is calculated by dividing income or loss allocable to common shareholders by the weighted average common shares outstanding plus potential dilutive common stock. Potential dilutive common stock includes unvested restricted stock, stock options and warrants, the dilutive effect of which is calculated using the treasury stock method. Prior to satisfaction of all conditions of vesting, unvested restricted stock is considered contingently issuable consistent with SFAS No. 128, Earnings Per Share, and is excluded from weighted average common shares outstanding.

The following table sets forth the computation of basic and diluted loss per share (in thousands, except share and per share data):

(1)          The effect of certain stock options and warrants was anti-dilutive, and they were not included in the calculation of diluted loss per share. Anti-dilutive stock options and warrants totaled 13,756,933 and 60,033,075 as of June 30, 2007 and 2006, respectively.

(2)          Financial results for the six months ended June 30, 2006 have been restated to reflect the effect of a $4.4 million cumulative translation adjustment incorrectly recorded as a component of other income (expense) during the first quarter of 2006. Net loss has been restated from $35 million to $30.6 million, and basic and diluted loss per share has been restated from a loss of $0.18 per share to a loss of $0.16 per share.

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New Accounting Pronouncements—In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized an increase of approximately $9.2 million in its liability for uncertain tax positions, which was accounted for as an adjustment to its deficit accumulated during the development stage as of January 1, 2007. The total amount of reserves for income taxes as of June 30, 2007 and January 1, 2007 was $9.5 million and $9.2 million, respectively. If the reversal of these reserves were recognized, the entire amount would impact the Company’s effective tax rate.

The Company’s policy is to recognize interest and/or penalties related to unrecognized tax benefits as income tax expense. The Company recorded $3.8 million of interest related to its adoption of FIN 48 and has recorded this amount as an adjustment to its January 1, 2007 beginning deficit accumulated during the development stage. For the three and six months ended June 30, 2007, the Company recorded interest of $170,000 and $340,000, respectively, related to its reserves for income taxes and has included this amount in income tax expense on its condensed consolidated statements of operations.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is generally no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2000. In mid-2005 the Internal Revenue Service (“IRS”) commenced an audit of the Company’s 2003 U.S. federal income tax return. The Company’s 2003 return reflected a gain of more than $300 million recognized on the sale of securities on the maturity of a variable forward contract. The gain was offset by losses related to the abandonment of elements of the Company’s MEO satellite system. The IRS examination is focused on the deductibility of the losses claimed related to the MEO satellite system and the timing of the gain recognized with respect to the sale of securities under the variable forward contract. As of June 30, 2007 the IRS had proposed no adjustments with respect to the Company’s tax reporting for 2003 or earlier years; however, the IRS has not yet completed its examination. The Company believes its tax reporting for 2003 is proper and that it is more likely than not its current tax position will be sustained; however, if the IRS were to propose and sustain a position that either disallows part or all of its MEO asset abandonment deductions for 2003, or results in the taxation of the gain related to the variable forward contract in a year prior to 2003, the Company will incur a tax liability ranging from $12 million to $131 million (including interest but excluding penalty). The Company expects these issues will be resolved by the end of 2008 and does not expect there to be a material change in its tax position over the next twelve months.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of this statement to have a material impact on its financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The

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Company does not expect the adoption of this statement to have a material impact on its financial position, results of operations or cash flows.

4.                 Satellite Access Node (“SAN”) Agreements and Contract Settlements

As part of the ground infrastructure for its MEO satellite system, the Company established SAN sites in eleven countries throughout the world. Prior to 2000, the Company entered into noncancellable agreements with certain vendors (“SAN Operators”) that own and operate the Company’s SAN sites. All of the agreements provide for varying levels of support required to operate the SAN sites (“SAN Operating Agreements”). Additionally, certain of the agreements require the repayment of certain up-front infrastructure costs incurred on the Company’s behalf (“SAN Infrastructure Agreements”) that represent capital leases payable with initial interest rates ranging from 8.5% to 20.0%.

In 2003, the Company determined that it needed only some, not all, of the SAN sites to economically deploy the MEO satellite system. Additionally, the Company’s Board of Directors decided that the Company would no longer provide funding to its subsidiaries to pay SAN Operators, with the exception of its U.S. SAN Operator, unless the Company received additional funding or the contracts with such operators were restructured to obtain a substantial cost savings. In December 2004, the Company’s Board of Directors decided to significantly curtail further construction on its MEO satellite system, which further increased the likelihood that the SAN sites would not be utilized in a timely fashion in the contemplated MEO satellite system. As a result of the Company’s decisions, eight of the ten SAN Operators terminated their agreements with the Company from 2004 to 2006 and discontinued providing the requisite level of services. The Company accrues operating expenses until the related agreement is terminated and the SAN Operator has ceased providing services. Certain of the terminated agreements were settled in exchange for a nominal level of consideration, including cash and the transfer of certain SAN assets. Certain of the terminated agreements have not been settled and remain outstanding.

Subsequent to the date of termination, the Company has continued to accrue estimated late payment fees, if applicable, and the interest expense on the capital leases in effect pursuant to the SAN Infrastructure Agreements. Upon reaching settlement with the SAN Operator where the SAN Operator’s claims are legally released, the Company has written off the liability, resulting in the recognition of a gain on contract settlement.

The following represents a summary of transactional activity with the various SAN Operators (in thousands):

 

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The total SAN liability is comprised of the following amounts which are included in the following line items of the condensed consolidated balance sheets (in thousands):

 

In January 2007, an indirect subsidiary of the Company, ICO Global Communications Holding BV, reached a resolution regarding a dispute concerning past payments for a SAN located in Usingen, Germany, and entered into a settlement agreement pursuant to which it agreed to pay the SAN Operator an agreed-upon amount over the next two years. The Company made its first payment under this settlement agreement in January 2007 and the remaining balance is included in accrued expenses in the Company’s condensed consolidated balance sheet.

5.                 Convertible Long Term Debt

In August 2005, ICO North America completed the sale of $650 million aggregate principal amount of convertible notes to Qualified Institutional Buyers pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Rule 144A thereunder. The net proceeds from the sale of the 7.5% Notes are being used to develop the MSS/ATC System and to fund operating expenses.

The 7.5% Notes mature in August 2009 and bear interest at a rate of 7.5% per year, payable semi-annually in arrears in cash on February 15 and August 15. Subject to certain exceptions, for the period from August 16, 2007 through August 15, 2009, ICO North America has the option of paying accrued interest due with additional notes in lieu of cash at an increased interest rate of 8.5% per annum. ICO North America’s GEO satellite and its associated systems must be certified as operational by August 15, 2008 or the coupon increases by 150 basis points for every 30 days, until certification is achieved, up to a maximum of 13.5% per annum.

The 7.5% Notes are convertible, at the option of the holder, into ICO North America’s Class A common stock at a conversion price of $4.25 per share, subject to adjustment pursuant to the indenture. Additionally, the 7.5% Notes will automatically convert into shares of ICO North America’s Class A common stock upon a qualifying private offering or sale, a qualifying public offering of ICO North America’s common stock or upon written consent of holders owning two-thirds of the 7.5% Notes. The 7.5% Notes contain an embedded beneficial conversion feature contingent upon the occurrence of certain future events, including the issuance of ICO North America Class A common stock or the issuance of options or warrants to purchase ICO North America Class A common stock. The fair value of the embedded conversion feature will be measured at the time such events occur. Holders of the 7.5% Notes also have the right of first offer on any equity securities of ICO North America subject to certain exemptions and conditions.

The 7.5% Notes contain covenants, including, but not limited to, restrictions on ICO North America’s future indebtedness and the payment of dividends. In addition, all of ICO North America’s stock is pledged and all of its existing and future assets are held as collateral for the 7.5% Notes. As of March 31, 2007, ICO North America is in compliance with all of the covenants.

The 7.5% Notes are carried at cost on the condensed consolidated balance sheets. The aggregate fair value of the 7.5% Notes as of June 30, 2007 and December 31, 2006 is approximately $676 million and $721.5 million, respectively.

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6.                 Commitments and Contingencies

Purchase Commitments—The Company has an agreement with Space Systems/Loral, Inc. (“Loral”) to design, develop, manufacture, test and deliver one GEO satellite and to develop, test and implement certain ground-based systems related to the operation of the satellite. The satellite is expected to be delivered by November 30, 2007. The Company also retains an option through December 31, 2008 to purchase one additional GEO satellite.

The Company has an agreement with Lockheed Martin Commercial Launch Services, Inc. (“Lockheed”) for the provision of a launch service for its GEO satellite. In February 2007, the Company selected, in coordination with Lockheed, its launch slot as November 2007. In August 2007, the Company was informed by Lockheed that its launch slot would be postponed approximately six weeks: from November 1, 2007—November 30, 2007 to December 15, 2007—January 15, 2008. In addition, Lockheed expects that the range date for the launch will be January 7 or January 8, 2008. The Company has purchased launch risk protection insurance from Lockheed, providing for a payment to the Company in the event of a launch failure due to the launch vehicle. The Company also retains an option to require Lockheed to provide a replacement launch in the event that the Company determines that the initial launch resulted in a satellite failure within the first six months after launch.

The Company has an agreement with Hughes Network Systems, LLC (“HNS”) to provide gateway equipment and services for the Company’s MSS/ATC System, including the design, manufacture, test and delivery of the radio frequency subsystem, the gateway system controller, the gateway control network and the gateway system interconnections. The gateway is located at the HNS facility in North Las Vegas, Nevada and is expected to be completed in the third quarter of 2007. The Company retains an option to purchase a diverse site radio frequency terminal along with an associated diverse site facility.

On May 1, 2007, the Company entered into an agreement with HNS to develop user equipment and a GMR satellite gateway for use in the Company’s alpha trial of its MIM services. This agreement may be terminated for any reason by the Company for its convenience or upon default by HNS under certain circumstances. In the case of termination for convenience, the Company’s liabilities approximate the total amounts paid or payable by the Company at the time of termination. Under the termination for default, HNS is required to refund to the Company all payments made by the Company.

On June 22, 2007, the Company entered into an agreement with Lucent Technologies, Inc. (“Alcatel-Lucent”) to provide certain architecture and technical design services to develop and manufacture equipment, including repeaters, satellite headend and gateway core equipment. In addition, Alcatel-Lucent is responsible for the delivery, installation and testing of the Company’s MIM services, based on DVB-SH technology. This agreement may be terminated for any reason by the Company for its convenience or upon default by Alcatel-Lucent under certain circumstances. In the case of termination for convenience, the Company’s liabilities approximate the total amounts paid or payable by the Company at the time of termination. Under the termination for default, the Company shall remain liable for payment of previously accepted milestones and otherwise have no further payment obligations to Alcatel-Lucent under the agreement.

As of June 30, 2007, the Company had contractual obligations of approximately $119.4 million related to the contracts described above as well as other secondary agreements related to the development of its MSS/ATC System. Approximately $93.2 million of this amount is payable based on the achievement of certain construction, delivery and deployment milestones related to the development of the MSS/ATC System and the completion of certain agreed-upon services associated with the Company’s alpha trial of its MIM services. Additional payments of $23.3 million, including interest, related to in-orbit satellite performance incentives associated with the Company’s GEO satellite, are payable over 15 years from 2007 through 2022. The Company also has purchase commitments of approximately $2.9 million related to its MEO satellite system.

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Lease and Operating Commitments—The Company has entered into agreements with ten SAN Operators that own and operate substantially all of the Company’s MEO SAN sites. Such agreements require the repayment of certain up-front capital asset costs incurred by each SAN Operator in establishing the initial infrastructure for the SAN, as well as payments for ongoing operations and related expenses incurred at each SAN site. The Company continues to have lease and operating commitments under some of these agreements (see Note 4).

The Company leases office space and office equipment under noncancellable rental agreements accounted for as operating leases. Rent expense is included in general and administrative expense in the Company’s condensed consolidated statements of operations. Total rent expense under operating leases for the three and six months ended June 30, 2007 and 2006 was approximately $160,000 and $317,000 and $71,000 and $223,000, respectively.

Internal Revenue Service Audit—For U.S. federal income tax purposes, the Company realized a gain of more than $300 million on the disposition of certain securities in 2003. This gain was offset by losses incurred in connection with the Company’s MEO satellite system. The Company is currently being audited for the tax year 2003 by the Internal Revenue Service. The audit involves both the recognition of the losses in connection with the impairment of the Company’s MEO assets and the timing of the gain on the disposition of the relevant securities, which were sold through a variable forward contract. While the Company believes it properly treated and reported all items of gain and loss, it is possible that the Company could have a tax liability ranging from approximately $12 million to $131 million, not including any penalties that may be imposed. As the Company believes its tax reporting for 2003 is proper, and that it is more likely than not its current tax position will be sustained, no amount has been recorded in the Company’s condensed consolidated financial statements.

Boeing Litigation—In response to the Company’s demand for arbitration, in August 2004 Boeing Satellite Systems International, Inc. (“BSSI”) filed an action in the Superior Court of the State of California, in and for the County of Los Angeles, seeking a judicial declaration that the Company had terminated its contractual agreements with BSSI, and thereby extinguished all of the Company’s rights and claims against BSSI arising out of or relating to the development, construction and launch of the Company’s MEO satellites. In response, the Company filed a cross-complaint seeking damages from BSSI for breach of the parties’ agreements and for other wrongful, tortuous conduct. Subsequently, the Company also filed a cross-complaint against The Boeing Company, BSSI’s corporate parent, alleging wrongful, tortuous conduct that also damaged the Company. BSSI filed a cross complaint against the Company seeking unspecified monetary relief. On August 24, 2006, the court denied BSSI’s motions for summary judgment and summary adjudication; on December 1, 2006, the court denied BSSI’s motion to dismiss the Company’s trade secret claim; and on May 9, 2007, the court denied BSSI’s motion to dismiss the Company’s duress and fraud claims. A trial date has been set for March 2008. The Company believes that its claims are meritorious and is vigorously pursuing a prompt resolution. Through June 30, 2007, the Company has expensed approximately $11.1 million in pursuing this litigation and expects it will continue to incur substantial costs through the ultimate resolution which is uncertain.

Ellipso, Inc.—In December 2006, Ellipso, Inc. (“Ellipso”) filed an action in the Superior Court of the District of Columbia seeking damages in excess of $100 million from the Company and its subsidiary, ICO Global Limited, for breach of contract, breach of warranty and fraud. The Company recently filed an answer to Ellipso’s complaint as well as a number of counterclaims. The Company believes that Ellipso’s claims are without merit. The Company intends to vigorously defend itself against Ellipso. Management currently believes that this lawsuit will not have a material adverse effect on the Company’s financial condition or results of operations; however, the outcome is uncertain.

Other—In the opinion of management, except for those matters described above and in Note 4, to the extent so described, litigation, contingent liabilities and claims against the Company in the normal course

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of business are not expected to involve any judgments or settlements that would be material to the Company’s financial condition, results of operations or cash flows.

7.                 Share-Based Payment

The Company records stock-based compensation in accordance with SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), using the modified prospective transition method, which requires measurement of all share-based payment awards made to employees, directors, contractors and consultants, based on the estimated fair value on the date of grant and recognition of compensation cost over the service period for awards expected to vest.

The Company records stock-based compensation on stock options and restricted stock awards issued to employees, directors, contractors and consultants. The fair value of restricted stock awards is determined based on the number of shares granted and the quoted market price of the Company’s common stock on the date of grant. The fair value of stock options is estimated on the date of grant using the Black-Scholes option-pricing model (“Black-Scholes”) based on the single option award approach. Fair value is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair value of share-based payment awards as determined by Black-Scholes is affected by the Company’s stock price as well as other assumptions. These assumptions include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. SFAS 123(R) requires forfeitures to be estimated at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Stock-based compensation is included in general and administrative expenses in the Company’s condensed consolidated statements of operations. For the three and six months ended June 30, 2007 and 2006, stock-based compensation recognized under SFAS 123(R) was $1.5 million and $2.8 million and $1.8 million and $3.5 million, respectively.

Stock Options—The Company’s stock option activity for the six months ended June 30, 2007 is summarized as follows:

 

During the first quarter of 2007, the Company elected to cancel 555,000 stock options whose fair market value on the date of grant exceeded the exercise price of the respective option, and regrant stock options with identical terms of the cancelled stock options. This decision was made based upon the disadvantageous tax treatment that such option holders would otherwise be subject to under Section 409A of the Internal Revenue Code for option grants whose fair market value on the date of grant exceeded the exercise price of those options. Stock options granted during the six months ended June 30, 2007, as disclosed above, include the regranted stock options.

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The weighted average grant date fair value of stock options granted during the six months ended June 30, 2007 was $2.33 per share and the total fair value of these stock options was $3.9 million. The weighted average grant date fair value of stock options granted during the six months ended June 30, 2007 was estimated using Black-Scholes with the following assumptions:

 

For the three and six months ended June 30, 2007 and 2006, the Company recognized stock-based compensation expense of $1.4 million and $2.7 million and $1.1 million and $2.2 million, respectively, related to stock option issuances.

Restricted Stock Awards—In November 2005, the Company granted 1,600,000 shares of restricted Class A common stock to Eagle River Satellite Holdings, LLC and certain employees and board members. Of these shares, 1,000,000 were granted to Eagle River Satellite Holdings, LLC and treated as a stock dividend. The remaining 600,000 shares, granted pursuant to the Company’s Amended and Restated 2000 Stock Incentive Plan, had a grant date fair value of $2.4 million and are being charged to expense over the respective vesting period. Restricted stock awards of 1,500,000 shares vested on October 12, 2006. The remaining restricted stock awards of 100,000 shares vest in two equal installments, on July 14, 2007 and 2008. For the three and six months ended June 30, 2007 and 2006, the Company recognized compensation expense of $49,000 and $98,000 and $614,000 and $1.2 million, respectively, related to its restricted stock awards.

8.                 Related Party Transactions

Eagle River—Eagle River Satellite Holdings, LLC and Eagle River, Inc. (collectively “Eagle River”), is the Company’s controlling shareholder with an economic interest of approximately 33% and a voting interest of approximately 68%.

The Company has an agreement with Eagle River, Inc. to provide advisory services to the Company. This agreement has an annual fee of $500,000 and is payable in quarterly installments in stock or cash, at the Company’s option. To date, the Company has elected to make all payments in Class A common stock and has issued 158,086 shares as consideration. As of June 30, 2007, the Company owed Eagle River, Inc. approximately $42,000 pursuant to the advisory services agreement, which is included in accrued expenses in the condensed consolidated balance sheets.

The Company also has a month-to-month agreement with Eagle River, Inc. to provide office space and administrative support to the Company. Total payments made to Eagle River, Inc. under this agreement for the three and six months ended June 30, 2007 and 2006 were $16,000 and $31,000 and $17,000 and $27,000, respectively.

Davis Wright Tremaine—A principal of Eagle River, who is also a board member of the Company, is the spouse of a partner at the law firm Davis Wright Tremaine which provides the Company with ongoing legal services. Total payments made to Davis Wright Tremaine for the three and six months ended June 30, 2007 and 2006 were $135,000 and $165,000 and $526,000 and $899,000 respectively.

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