sv1za
As filed with
the Securities and Exchange Commission on November 29,
2010
Registration
No. 333-169723
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 3
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RigNet, Inc.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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4899
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76-0677208
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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1880 S. Dairy Ashford,
Suite 300
Houston, Texas
77077-4760
Telephone:
281-674-0100
(Address, Including
Zip Code, and Telephone Number, Including Area Code, of
Registrants Principal Executive Offices)
William D. Sutton
General Counsel
RigNet, Inc.
1880 S. Dairy Ashford, Suite 300
Houston, Texas
77077-4760
Telephone:
281-674-0100
(Name, Address,
Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
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Brian P. Fenske
Fulbright & Jaworski L.L.P.
Fulbright Tower
1301 McKinney, Suite 5100
Houston, Texas 77010
(713) 651-5557
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Jeffrey D. Karpf
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, New York 10006
(212) 225-2000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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CALCULATION OF
REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Offering Price per
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Aggregate Offering
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Registration
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Securities to be Registered
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Registered(1)
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Share
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Price
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Fee(2)
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Common Stock, $0.001 par value per share
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5,750,000
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$16.00
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$92,000,000
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$6,560
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(1)
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Includes shares that the
underwriters have the option to purchase to cover
over-allotments, if any.
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(2)
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Calculated pursuant to
rule 457(a) under the Securities Act of 1933, as amended.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We and the selling stockholders may not sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and we and the selling
stockholders are not soliciting offers to buy these securities
in any jurisdiction where the offer or sale is not permitted.
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Subject to Completion. Dated
November 29, 2010.
RigNet, Inc.
5,000,000 Shares
Common Stock
This is the initial public offering of RigNet, Inc. We are
offering 3,333,334 shares of our common stock. Selling
stockholders are offering an additional 1,666,666 shares of
our common stock. We will not receive any proceeds from the sale
of shares by the selling stockholders. We anticipate that the
initial public offering price will be between $14.00 and $16.00
per share. We have applied to have our common stock listed on
The NASDAQ Global Market under the symbol RNET.
Investing in our common stock involves risks. See Risk
Factors beginning on page 15.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds to RigNet, before expenses
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$
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$
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Proceeds to selling stockholders, before expenses
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$
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$
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We have granted the underwriters the right to purchase up to
500,000 additional shares of common stock to cover
over-allotments, and our selling stockholders have granted the
underwriters the right to purchase up to 250,000 additional
shares of common stock to cover over-allotments.
The underwriters expect to deliver the shares against payment in
New York, New York on or
about ,
2010.
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Deutsche
Bank Securities |
Jefferies & Company |
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Oppenheimer &
Co. |
Simmons & Company |
International
Prospectus
dated ,
2010.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information that
you should consider in making your investment decision. Before
investing in our common stock, you should carefully read this
entire prospectus, including our consolidated financial
statements and the related notes and the information set forth
under the headings Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, in each case included
elsewhere in this prospectus. Unless otherwise indicated, all
information regarding share amounts and prices have been
adjusted to reflect the
four-to-one
reverse stock split which became effective on November 24,
2010.
Overview
We are a leading data network infrastructure provider serving
the remote communications needs of the oil and gas industry.
Through a controlled and managed Internet Protocol/Multiprotocol
Label Switching, or IP/MPLS, global network, we deliver voice,
data, video and other value-added services such as real-time
management services, under a multi-tenant model. These turnkey
solutions simplify the management of communications services,
freeing our customers to focus attention on their core drilling
and production operations. Our customers use our secure
communications and private extranet to manage information flows
and execute mission-critical operations primarily in remote
areas where conventional telecommunications infrastructure is
either unavailable or unreliable. We offer our clients what is
often the sole means of communications with their remote
operations, including offshore and land-based drilling rigs,
offshore production facilities, energy support vessels and
support offices. To ensure the maximum reliability demanded by
our customers, we deliver our services through our IP/MPLS
global network, tuned and optimized for remote communications
with satellite endpoints, that serves oil and gas customers in
both North America and internationally. As of September 30,
2010, we were operating as the primary provider of remote
communications and collaborative applications to over 375
customers in over 800 physical locations in approximately 30
countries on six continents.
The emergence of highly sophisticated processing and
visualization systems has allowed oil and gas companies to make
decisions based on reliable and secure real-time information
carried by our network from anywhere in the world to their home
offices. We supply our customers with solutions to enable
broadband data, voice and video communications with quality,
reliability, security and scalability that is superior to
conventional switched transport networks. We do not own
satellites or earth stations/teleports and procure bandwidth and
equipment from third parties on behalf of our customers on a
provider-neutral basis. Key aspects of our services include:
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managed solutions offered at a per rig, per day subscription
rate primarily through customer agreements with terms that
typically range from one month to three years, with some
customer agreement terms as long as five years;
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enhanced
end-to-end
IP/MPLS global network to ensure significantly greater network
reliability, faster trouble shooting and service restoration
time and quality of service for various forms of data traffic;
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enhanced
end-to-end
IP/MPLS network allows new components to be plugged into our
network and be immediately available for use
(plug-and-play);
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a network designed to accommodate multiple customer groups
resident at a site, including rig owners, drillers, operators,
service companies and
pay-per-use
individuals;
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value-added services, such as WiFi hotspots, Internet kiosks and
video conferencing, benefiting the multiple customer groups
resident at a site;
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proactive network monitoring and management through a network
operations center that actively manages network reliability at
all times and serves as an in-bound call center for trouble
shooting, 24 hours per day, 365 days per year;
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engineering and design services to determine the appropriate
product and service solution for each customer;
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installation of
on-site
equipment designed to perform in extreme and harsh environments
with minimal maintenance; and
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maintenance and support through locally-deployed engineering and
service support teams and warehoused spare equipment inventories.
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Our business operations are divided into three reportable
segments: eastern hemisphere, western hemisphere and
U.S. land.
Eastern
Hemisphere
Our eastern hemisphere segment services are performed out of our
Norway, Qatar, United Kingdom and Singapore based offices for
customers and rig sites located on the eastern side of the
Atlantic Ocean primarily off the coasts of the U.K., Norway and
West Africa, around the Indian Ocean in Qatar, Saudi Arabia and
India, around the Pacific Ocean near Australia, and within the
South China Sea. As of September 30, 2010, this segment was
serving approximately 138 jackup, semi-submersible and drillship
rigs and approximately 110 other sites, which include production
facilities, energy support vessels, land rigs, and related
remote support offices and supply bases.
For the year ended December 31, 2009, our eastern
hemisphere segment produced revenues of $60.9 million,
representing 75.3% of our total revenue, Adjusted EBITDA of
$32.0 million, compared to our total Adjusted EBITDA of
$29.1 million and net income of $24.7 million,
compared to our total net loss of $19.6 million. Adjusted
EBITDA is not a financial measure under U.S. generally
accepted accounting principles, or GAAP, and is included in this
prospectus to provide investors with a supplemental measure of
our operating performance. See Summary Consolidated
Financial Data below for our description of Adjusted
EBITDA and reconciliation from net income, the most directly
comparable GAAP financial measure. See the notes to our
consolidated financial statements included elsewhere in this
prospectus for more segment financial information.
Western
Hemisphere
Our western hemisphere segment services are performed out of our
United States and Brazil based offices for customers and rig
sites located on the western side of the Atlantic Ocean
primarily off the coasts of the United States, Mexico and
Brazil, and within the Gulf of Mexico, but excluding land rigs
and other land-based sites in North America. As of
September 30, 2010, this segment was serving approximately
87 jackup, semi-submersible and drillship rigs and approximately
143 other sites, which include production facilities, energy
support vessels and related remote support offices and supply
bases.
For the year ended December 31, 2009, our western
hemisphere segment produced revenues of $11.2 million,
representing 13.9% of our total revenue, Adjusted EBITDA of
$4.6 million, compared to our total Adjusted EBITDA of
$29.1 million, and net income of $2.2 million,
compared to our total net loss of $19.6 million.
U.S.
Land
Our U.S. land segment provides remote communications
services for drilling rigs and production facilities located
onshore in North America. Our U.S. land segment services
are performed out of our Louisiana based office for customers
and rig sites located in the
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continental United States. As of September 30, 2010, this
segment was serving approximately 384 onshore drilling rigs and
other remote sites. Our product suite consists of broadband
voice, data and Internet access services along with rig location
communications such as wired and wireless intercoms and two-way
radios. This segment leverages the same network infrastructure
and network operations center used in our western hemisphere
segment. We provide installation and service support from nine
service centers and equipment depots located in key oil and gas
producing areas around the continental United States.
For the year ended December 31, 2009, our U.S. land
segment produced revenues of $9.9 million, representing
12.2% of our total revenue, Adjusted EBITDA of
$2.0 million, compared to our total Adjusted EBITDA of
$29.1 million, and net loss of $4.5 million, compared
to our total net loss of $19.6 million.
Our Market
Opportunity
Oil and gas companies operate their remote locations through
global always-on networks driving demand for
communications services and managed services solutions that can
operate reliably in increasingly remote areas under harsh
environmental conditions.
Oil and gas companies with geographically dispersed operations
are particularly motivated to use secure and highly reliable
broadband networks due to several factors:
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oil and gas companies rely on secure real-time data collection
and transfer methods for the safe and efficient coordination of
remote operations;
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long-term growth of global demand for crude oil and natural gas
and increases in commodity prices are expected to improve the
outlook for new rig construction and dormant rig reactivation;
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technological advances in drilling techniques, driven by
declining production from existing oil and gas fields and strong
hydrocarbon demand, have enabled increased exploitation of
offshore deepwater reserves and development of unconventional
reserves (e.g. shales and tight sands) and require real time
data access to optimize performance; and
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transmission of increased data volumes and real-time data
management and access to key decision makers enable customers to
maximize operational results, safety and financial performance.
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Competitive
Strengths
Our mission is to continue to establish ourselves as the leading
data network infrastructure provider within the oil and gas
industry. We seek to maximize our growth and profitability
through focused capital investments that enhance our competitive
strengths. We believe that our competitive strengths include the
following:
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mission-critical services delivered by a trusted provider with
deep industry expertise and multi-national operations;
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operational leverage and multiple paths to growth supported by a
plug-and-play
IP/MPLS global platform;
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scalable systems using standardized equipment that leverages our
global infrastructure;
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flexible, provider-neutral technology platform;
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high-quality customer support with full time monitoring and
regional service centers; and
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long-term relationships with leading companies in the oil and
gas industry.
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Growth
Strategy
We increased revenues from $29.2 million in 2006 to
$89.9 million in 2008, substantially through the successful
execution of our business plan. Our revenues in 2009 were
$80.9 million, despite challenging industry conditions in
2009 driven by the global economic downturn.
To serve our customers and grow our business, we intend to
pursue aggressively the following strategies:
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expand our share of growing onshore and offshore drilling rig
markets;
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increase secondary customer penetration;
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commercialize additional value-added products and services;
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extend our presence into adjacent upstream energy segments and
other remote communications segments; and
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selectively pursue strategic acquisitions.
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Risks Associated
with Our Business
Our business is subject to numerous risks, including those
described in the section entitled Risk Factors
immediately following this prospectus summary. These risks
represent challenges to the implementation of our strategy and
the success of our business and the occurrence of any of these
risks could harm our business, financial condition and results
of operations. These risks include the following:
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The recent oil spill from the Macondo well in the Gulf of Mexico
has led to the United States governments imposition of
moratoria on drilling offshore the United States in waters
greater than 500 feet and delays in the approval of applications
to drill in both deepwater and shallow water areas, which may
reduce the need for our services in the United States Gulf of
Mexico, and we cannot assure you that these rigs will be
redeployed to other locations where we provide services.
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The recent oil spill in the Gulf of Mexico has led to tighter
safety requirements and other restrictions on offshore drilling
in the Gulf of Mexico and this oil spill and other similar
spills that may occur may lead to other restrictions or
regulations on offshore drilling in the Gulf of Mexico or in
other areas around the world, which may reduce drilling and thus
the need for our services in those areas.
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We rely on third parties to provide satellite capacity for our
services and are subject to service interruptions, capacity
restraints or other failures by the third party satellite and
other communications providers we utilize.
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We are subject to the volatility of the global oil and gas
industry and our business is likely to fluctuate with the level
of global activity for oil and natural gas exploration,
development and production.
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We may face difficulties in obtaining regulatory approvals for
our provision of telecommunication services, and we may face
changes in regulation in the future.
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We have identified a material weakness, a significant deficiency
and other deficiencies in our internal controls for the year
ended December 31, 2009 and a significant deficiency and
other deficiencies in our internal controls for the year ended
December 31, 2008 that, if not properly remediated, could
result in material misstatements in our financial statements in
future periods and impair our ability to comply with the
accounting and reporting requirements applicable to public
companies.
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Principal
Stockholders
Immediately after the completion of this offering, the following
groups of stockholders will own the percentages of our
outstanding voting power set forth in the table below.
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Assuming No Exercise
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Assuming Full Exercise
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of Over-Allotment Option (1)
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of Over-Allotment Option (1)
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Funds Affiliated with
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Altira Group LLC
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15.3
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%
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14.4
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%
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Sanders Morris Harris Group, Inc.
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13.8
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%
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12.9
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%
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Cubera Secondary (GP) AS
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26.5
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%
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24.9
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%
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Our Directors and Executive Officers as a group (2)
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1.8
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%
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1.7
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%
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Our Other Existing Stockholders
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7.3
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%
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6.9
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%
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Public Investors in this Offering
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35.3
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%
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39.2
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%
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(1)
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Excludes common stock subject to
options and warrants, including those that are currently
exercisable or exercisable within 60 days of
September 30, 2010. For beneficial ownership calculations
that include such options and warrants, see Principal and
Selling Stockholders included elsewhere in this prospectus.
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(2)
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Excludes ownership of outstanding
voting power of any funds affiliated with Altira Group LLC,
Sanders Morris Harris Group, Inc., and Cubera Secondary (GP) AS.
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We are currently controlled by Altira Group LLC, or Altira,
Sanders Morris Harris Group, Inc., or Sanders Morris, and Cubera
Secondary (GP) AS, or Cubera. As of September 30, 2010,
Altira owned 24.5% of our outstanding voting power, Sanders
Morris owned 22.5% and Cubera owned 39.0%. In connection with
the conversion of all of our outstanding shares of preferred
stock and accrued and unpaid dividends on our series B and
series C preferred stock and the payment of the major event
preference for our outstanding preferred stock: Altira will
receive approximately 1,419,814 shares of our common stock,
or a value of approximately $21.3 million, based on the
assumed initial public offering price of $15.00 per share, which
is the midpoint of the range included on the cover page of this
prospectus; Sanders Morris will receive approximately
1,253,578 shares of our common stock, or a value of
approximately $18.8 million, based on the assumed initial
public offering price of $15.00 per share, which is the
midpoint of the range included on the cover page of this
prospectus; and Cubera will receive approximately
2,449,121 shares of our common stock, or a value of
approximately $36.7 million, based on the assumed initial
public offering price of $15.00 per share, which is the
midpoint of the range included on the cover page of this
prospectus. There will be no shares of preferred stock
outstanding upon completion of this offering. See Related
Party Transactions Principal Stockholders and
Risk Factors Risks Related to this
Offering Some of our stockholders could together
exert control over our Company after completion of this
offering for additional information.
Corporate
Information
RigNet, Inc. was incorporated in Delaware on July 6, 2004.
Our predecessor began operations in 2000 as RigNet Inc., a Texas
corporation. In July 2004, our predecessor merged into us,
RigNet, Inc., a Delaware corporation. Our principal executive
offices are located at 1880 S. Dairy Ashford,
Suite 300, Houston, Texas
77077-4760
and our telephone number is +1
(281) 674-0100.
Our corporate website address is www.rig.net. We do not
incorporate the information contained on, or accessible through,
our corporate website into this prospectus, and you should not
consider it part of this prospectus.
For convenience in this prospectus, RigNet, the
Company, we, us and
our refer to RigNet, Inc., a Delaware corporation
and its subsidiaries, taken as a whole, unless otherwise noted.
5
THE
OFFERING
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Common stock offered by RigNet |
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3,333,334 shares |
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Common stock offered by the selling stockholders |
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1,666,666 shares |
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Total common stock offered |
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5,000,000 shares |
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Total common stock to be outstanding after this offering |
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14,183,042 shares |
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Use of proceeds |
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We intend to use the net proceeds from this offering as follows: |
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$400,000 of the proceeds will be used to pay an IPO
success bonus to some of our key employees, including some of
our named executive officers, upon completion of this offering.
For more information about this bonus, see Use of
Proceeds and Executive Compensation.
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The remaining proceeds will be used for working
capital and other general corporate purposes, which may include
the acquisition of other businesses, products or technologies.
We do not, however, have agreements or commitments for any
specific acquisitions at this time.
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We will not receive any proceeds from the sale of shares of our
common stock by the selling stockholders. See Use of
Proceeds. |
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Risk factors |
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See Risk Factors for a discussion of factors that
you should consider carefully before deciding whether to
purchase shares of our common stock. |
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Proposed NASDAQ symbol |
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RNET |
The number of shares of our common stock to be outstanding after
this offering is based on the number of shares outstanding as of
September 30, 2010. Such number of shares excludes:
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2,599,809 shares of our common stock issuable upon the
exercise of options and warrants (other than warrants issued to
Escalate Capital I, L.P.) outstanding as of September 30,
2010 with a weighted average exercise price of $5.08 per
share; and
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3,000,000 shares of our common stock reserved for future
issuance under our 2010 Omnibus Incentive Plan.
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Unless otherwise indicated, the information in this prospectus
reflects and assumes:
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the conversion, which will occur immediately prior to the
closing of the offering, of all of our outstanding shares of
preferred stock and accrued and unpaid dividends on our
series B and series C preferred stock into an
aggregate of 3,973,738 shares of our
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common stock, plus approximately
625 additional shares of our common stock for each day
after September 30, 2010, before this offering is
completed, for the daily accrual of unpaid dividends on our
series B and series C preferred stock;
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the issuance of 1,326,252 shares of our common stock, plus
an additional 200 shares of our common stock for each day
after September 30, 2010, before this offering is
completed, for the daily accrual of unpaid dividends on our
series B and series C preferred stock, based on the
assumed initial public offering price of $15.00 per share, which
is the midpoint of the range included on the cover page of this
prospectus, to pay our preferred stockholders the major event
preference, which will occur immediately prior to the closing of
the offering;
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the exercise by Escalate Capital I, L.P. on a cashless
basis immediately prior to the closing of the offering of all of
the outstanding warrants it holds, which we refer to as the
Escalate Warrants, for an aggregate of 231,090 shares of
our common stock, plus an additional 27 shares of our
common stock for each day after September 30, 2010, before
this offering is completed, for the daily accrual of the
anti-dilution adjustment;
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the four-to-one reverse stock split of our common stock on
November 24, 2010;
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the filing of our post-offering certificate of incorporation and
adoption of our post-offering bylaws immediately prior to the
closing of the offering; and
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no exercise by the underwriters of their option to purchase up
to an additional 500,000 shares of our common stock from us
and 250,000 shares of our common stock from the selling
shareholders to cover over-allotments.
|
7
SUMMARY
CONSOLIDATED FINANCIAL DATA
The following table sets forth a summary of our consolidated
statements of income (loss) and comprehensive income (loss),
balance sheets and other data for the periods indicated. The
summary consolidated statements of income (loss) and
comprehensive income (loss) data for the years ended
December 31, 2007, 2008 and 2009 have been derived from our
audited consolidated financial statements included elsewhere in
this prospectus. The summary consolidated statements of loss and
comprehensive loss data for the nine months ended
September 30, 2009 and 2010 and the summary consolidated
balance sheet data as of September 30, 2010 have been
derived from our unaudited consolidated financial statements
included elsewhere in this prospectus. You should read this
information together with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements contained elsewhere in
this prospectus.
Unaudited pro forma net income (loss) per share attributable to
RigNet, Inc. common stockholders and unaudited pro forma
weighted-average shares outstanding reflect:
|
|
|
|
|
the conversion of all outstanding shares of our convertible
preferred stock and accrued and unpaid dividends on our
series B and series C preferred stock into shares of
our common stock, which will occur immediately prior to the
closing of this offering;
|
|
|
|
|
|
the issuance of 1,326,252 shares of our common stock, plus
an additional 200 shares of our common stock for each day
after September 30, 2010, before this offering is
completed, for the daily accrual of unpaid dividends on our
series B and series C preferred stock, based on the assumed
initial public offering price of $15.00 per share, which is the
midpoint of the range included on the cover page of this
prospectus, to pay our preferred stockholders the major event
preference, which will occur immediately prior to the closing of
the offering; and
|
|
|
|
|
|
the exercise immediately prior to the closing of the offering of
the Escalate Warrants on a cashless basis for an aggregate of
231,090 shares of our common stock, plus an additional 27
shares of our common stock for each day after September 30,
2010, before this offering is completed, for the daily accrual
of the anti-dilution adjustment.
|
We have presented the summary balance sheet data as of
September 30, 2010:
|
|
|
|
|
on a pro forma basis to give effect to (i) the conversion of all
outstanding shares of our convertible preferred stock and
accrued and unpaid dividends on our series B and
series C preferred stock into an aggregate of
3,973,738 shares of our common stock, plus approximately
625 additional shares of our common stock for each day
after September 30, 2010, before this offering is
completed, for the daily accrual of unpaid dividends on our
series B and series C preferred stock, (ii) the issuance of
1,326,252 shares of our common stock, plus an additional
200 shares of our common stock for each day after
September 30, 2010, before this offering is completed, for
the daily accrual of unpaid dividends on our series B and series
C preferred stock, based on the assumed initial public offering
price of $15.00 per share, which is the midpoint of the range
included on the cover page of this prospectus, to pay our
preferred stockholders the major event preference, and
(iii) the exercise of the Escalate Warrants on a cashless
basis for an aggregate of 231,090 shares of our common
stock, plus an additional 27 shares of our common stock for
each day after September 30, 2010, before this offering is
completed, for the daily accrual of the anti-dilution
adjustment, each of which will occur immediately prior to the
closing of this offering; and
|
|
|
|
|
|
on a pro forma as adjusted basis to give further effect to our
sale of 3,333,334 shares of common stock in this offering
at an assumed initial public offering price of $15.00 per share,
which is the midpoint of the range set forth on the cover page
of this prospectus,
|
8
|
|
|
|
|
after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
|
Each $1.00 increase or decrease in the assumed initial public
offering price of $15.00 per share, which is the midpoint of the
range set forth on the cover page of this prospectus, would
increase or decrease the number of shares of our common stock
outstanding upon the closing of this offering by approximately
83,045 shares, the pro forma net income (loss) per share
attributable to RigNet, Inc. common stockholders for the nine
months ended September 30, 2010 of approximately: Basic
$0.01 and Diluted remains unchanged, and the pro forma weighted
average shares outstanding for the nine months ended
September 30, 2010 of approximately: Basic 83 and Diluted
872, assuming that the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same.
Each $1.00 increase or decrease in the assumed initial public
offering price of $15.00 per share, which is the midpoint of the
range set forth on the cover page of this prospectus, would
increase or decrease each of cash and cash equivalents, total
assets and total RigNet, Inc. stockholders equity
(deficit) on a pro forma as adjusted basis by approximately
$3.1 million, assuming that the number of shares offered by
us, as set forth on the cover page of this prospectus, remains
the same, after deducting the estimated underwriting discounts
and commissions and estimated expenses payable by us. The pro
forma as adjusted information presented in the summary balance
sheets data is illustrative only and will change based on the
actual initial public offering price and other terms of this
offering determined at pricing.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands, except per share data)
|
|
|
Consolidated Statements of Income (Loss) and Comprehensive
Income (Loss) Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
67,164
|
|
|
$
|
89,909
|
|
|
$
|
80,936
|
|
|
$
|
60,871
|
|
|
$
|
68,604
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
29,747
|
|
|
|
39,294
|
|
|
|
35,165
|
|
|
|
26,200
|
|
|
|
31,242
|
|
Depreciation and amortization
|
|
|
9,451
|
|
|
|
10,519
|
|
|
|
12,554
|
|
|
|
9,596
|
|
|
|
11,349
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
2,898
|
|
|
|
2,898
|
|
|
|
|
|
Selling and marketing
|
|
|
2,405
|
|
|
|
2,605
|
|
|
|
2,187
|
|
|
|
1,559
|
|
|
|
1,576
|
|
General and administrative
|
|
|
20,338
|
|
|
|
21,277
|
|
|
|
16,444
|
|
|
|
11,213
|
|
|
|
15,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
61,941
|
|
|
|
73,695
|
|
|
|
69,248
|
|
|
|
51,466
|
|
|
|
60,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,223
|
|
|
|
16,214
|
|
|
|
11,688
|
|
|
|
9,405
|
|
|
|
8,579
|
|
Interest expense
|
|
|
(5,497
|
)
|
|
|
(2,464
|
)
|
|
|
(5,146
|
)
|
|
|
(4,638
|
)
|
|
|
(1,174
|
)
|
Other income (expense), net
|
|
|
(63
|
)
|
|
|
27
|
|
|
|
304
|
|
|
|
186
|
|
|
|
(645
|
)
|
Change in fair value of preferred stock derivatives
|
|
|
(1,156
|
)
|
|
|
2,461
|
|
|
|
(21,009
|
)
|
|
|
(13,865
|
)
|
|
|
(12,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1,493
|
)
|
|
|
16,238
|
|
|
|
(14,163
|
)
|
|
|
(8,912
|
)
|
|
|
(5,624
|
)
|
Income tax expense
|
|
|
(628
|
)
|
|
|
(5,882
|
)
|
|
|
(5,457
|
)
|
|
|
(3,863
|
)
|
|
|
(4,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,121
|
)
|
|
|
10,356
|
|
|
|
(19,620
|
)
|
|
|
(12,775
|
)
|
|
|
(10,577
|
)
|
Less: Net income (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable, non-controlling interest
|
|
|
167
|
|
|
|
235
|
|
|
|
292
|
|
|
|
230
|
|
|
|
211
|
|
Redeemable, non-controlling interest
|
|
|
971
|
|
|
|
1,715
|
|
|
|
10
|
|
|
|
15
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to RigNet, Inc. stockholders
|
|
$
|
(3,259
|
)
|
|
$
|
8,406
|
|
|
$
|
(19,922
|
)
|
|
$
|
(13,020
|
)
|
|
$
|
(10,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to RigNet, Inc. common
stockholders
|
|
$
|
(3,931
|
)
|
|
$
|
(4,190
|
)
|
|
$
|
(22,118
|
)
|
|
$
|
(14,610
|
)
|
|
$
|
(13,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RigNet, Inc. common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.74
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(4.16
|
)
|
|
$
|
(2.75
|
)
|
|
$
|
(2.50
|
)
|
Diluted
|
|
$
|
(0.74
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(4.16
|
)
|
|
$
|
(2.75
|
)
|
|
$
|
(2.50
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,279
|
|
|
|
5,301
|
|
|
|
5,312
|
|
|
|
5,310
|
|
|
|
5,318
|
|
Diluted
|
|
|
5,279
|
|
|
|
5,301
|
|
|
|
5,312
|
|
|
|
5,310
|
|
|
|
5,318
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (non-GAAP measure)
|
|
$
|
17,536
|
|
|
$
|
30,409
|
|
|
$
|
29,093
|
|
|
$
|
22,751
|
|
|
$
|
21,311
|
|
Net cash provided by operating activities
|
|
|
5,352
|
|
|
|
19,655
|
|
|
|
26,189
|
|
|
|
22,644
|
|
|
|
14,812
|
|
Net cash used by investing activities
|
|
|
(7,204
|
)
|
|
|
(9,363
|
)
|
|
|
(19,305
|
)
|
|
|
(16,279
|
)
|
|
|
(9,586
|
)
|
Net cash provided (used) by financing activities
|
|
|
5,871
|
|
|
|
(1,669
|
)
|
|
|
(10,774
|
)
|
|
|
(9,106
|
)
|
|
|
(1,466
|
)
|
Pro forma as adjusted net income attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RigNet, Inc. common stockholders (1)
|
|
|
|
|
|
|
|
|
|
$
|
3,074
|
|
|
|
|
|
|
$
|
1,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands, except per share data)
|
|
|
Pro forma as adjusted net income per share attributable to
RigNet, Inc. common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.22
|
|
|
|
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.20
|
|
|
|
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
14,156
|
|
|
|
|
|
|
|
14,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
15,712
|
|
|
|
|
|
|
|
15,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Pro forma net income includes the
elimination of change in preferred stock derivative, assuming
the conversion of preferred shares occurred as of the first day
of the pro forma period, and an adjustment for interest expense
and its related income tax effect, assuming that on a pro forma
basis proceeds from the offering would have been used instead of
the Company making additional borrowings on its term loan during
the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
(in thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,514
|
|
|
$
|
14,514
|
|
|
$
|
59,514
|
|
Restricted cashcurrent portion
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
2,500
|
|
Restricted cashlong-term portion
|
|
|
7,500
|
|
|
|
7,500
|
|
|
|
7,500
|
|
Total assets
|
|
|
93,179
|
|
|
|
93,179
|
|
|
|
138,179
|
|
Current maturities of long-term debt
|
|
|
8,644
|
|
|
|
8,644
|
|
|
|
8,644
|
|
Long-term debt
|
|
|
24,529
|
|
|
|
24,529
|
|
|
|
24,529
|
|
Preferred stock derivatives
|
|
|
44,447
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
18,146
|
|
|
|
|
|
|
|
|
|
Total RigNet, Inc. stockholders equity (deficit)
|
|
|
(29,711
|
)
|
|
|
32,882
|
|
|
|
77,882
|
|
Adjusted
EBITDA
We define Adjusted EBITDA as net income (loss) plus net interest
expense, income tax expense (benefit), depreciation and
amortization, impairment of goodwill, (gain) loss on sale of
property and equipment, change in fair value of derivatives,
stock-based compensation expense and initial public offering
costs and related bonuses. Adjusted EBITDA is a financial
measure that is not calculated in accordance with generally
accepted accounting principles, or GAAP. The table below
provides a reconciliation of this non-GAAP financial measure to
net income (loss), the most directly comparable financial
measure calculated and presented in accordance with GAAP.
Adjusted EBITDA should not be considered as an alternative to
net income (loss), operating income (loss) or any other measure
of financial performance calculated and presented in accordance
with GAAP. Our Adjusted EBITDA may not be comparable to
similarly titled measures of other companies because other
companies may not calculate Adjusted EBITDA or similarly titled
measures in the same manner as we do. We prepare Adjusted EBITDA
to eliminate the impact of items that we do not consider
indicative of our core operating performance. We encourage you
to evaluate these adjustments and the reasons we consider them
appropriate.
11
We believe Adjusted EBITDA is useful to investors in evaluating
our operating performance for the following reasons:
|
|
|
|
|
securities analysts use Adjusted EBITDA as a supplemental
measure to evaluate the overall operating performance of
companies, and we anticipate that our investor and analyst
presentations after we are public will include Adjusted
EBITDA; and
|
|
|
|
by comparing our Adjusted EBITDA in different periods, our
investors can evaluate our operating results without the
additional variations caused by items that we do not consider
indicative of our core operating performance and which are not
necessarily comparable from year to year.
|
Our management uses Adjusted EBITDA:
|
|
|
|
|
to indicate profit contribution and cash flow availability for
growth
and/or debt
retirement;
|
|
|
|
for planning purposes, including the preparation of our annual
operating budget and as a key element of annual incentive
programs;
|
|
|
|
to allocate resources to enhance the financial performance of
our business; and
|
|
|
|
in communications with our board of directors concerning our
financial performance.
|
Although Adjusted EBITDA is frequently used by investors and
securities analysts in their evaluations of companies, Adjusted
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our
results of operations as reported under GAAP. Some of these
limitations are:
|
|
|
|
|
Adjusted EBITDA does not reflect our cash expenditures or future
requirements for capital expenditures or other contractual
commitments;
|
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
|
Adjusted EBITDA does not reflect interest expense;
|
|
|
|
Adjusted EBITDA does not reflect cash requirements for income
taxes;
|
|
|
|
Adjusted EBITDA does not reflect a non-cash component of
employee compensation;
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated or amortized will often have to be
replaced in the future, and Adjusted EBITDA does not reflect any
cash requirements for these replacements; and
|
|
|
|
other companies in our industry may calculate Adjusted EBITDA or
similarly titled measures differently than we do, limiting its
usefulness as a comparative measure.
|
12
The following table presents a reconciliation of net income
(loss) to Adjusted EBITDA for each of the periods presented. Net
income (loss) is the most comparable GAAP measure to Adjusted
EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Reconciliation of Net Income (Loss) to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,121
|
)
|
|
$
|
10,356
|
|
|
$
|
(19,620
|
)
|
|
$
|
(12,775
|
)
|
|
$
|
(10,577
|
)
|
Interest expense
|
|
|
5,497
|
|
|
|
2,464
|
|
|
|
5,146
|
|
|
|
4,638
|
|
|
|
1,174
|
|
Depreciation and amortization
|
|
|
9,451
|
|
|
|
10,519
|
|
|
|
12,554
|
|
|
|
9,596
|
|
|
|
11,349
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
2,898
|
|
|
|
2,898
|
|
|
|
|
|
(Gain) loss on sale of property and equipment
|
|
|
(27
|
)
|
|
|
(92
|
)
|
|
|
111
|
|
|
|
91
|
|
|
|
320
|
|
Change in fair value of preferred stock derivatives
|
|
|
1,156
|
|
|
|
(2,461
|
)
|
|
|
21,009
|
|
|
|
13,865
|
|
|
|
12,384
|
|
Stock-based compensation
|
|
|
169
|
|
|
|
231
|
|
|
|
277
|
|
|
|
203
|
|
|
|
334
|
|
Initial public offering costs
|
|
|
2,783
|
|
|
|
3,510
|
|
|
|
1,261
|
|
|
|
372
|
|
|
|
1,374
|
|
Income tax expense
|
|
|
628
|
|
|
|
5,882
|
|
|
|
5,457
|
|
|
|
3,863
|
|
|
|
4,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (non-GAAP measure)
|
|
$
|
17,536
|
|
|
$
|
30,409
|
|
|
$
|
29,093
|
|
|
$
|
22,751
|
|
|
$
|
21,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On pages 2, 3 and 65 of this prospectus, we provide Adjusted
EBITDA for the year ended December 31, 2009 for our
reportable segments. The following table presents a
reconciliation of net income (loss) to Adjusted EBITDA for our
reportable segments for the year ended December 31, 2009.
Net income (loss) is the most comparable GAAP measure to
Adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
Eastern
|
|
|
Western
|
|
|
|
|
|
Corporate and
|
|
|
Consolidated
|
|
|
|
Hemisphere
|
|
|
Hemisphere
|
|
|
U.S. Land
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Net Income (Loss) to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
24,711
|
|
|
$
|
2,205
|
|
|
$
|
(4,532
|
)
|
|
$
|
(42,004
|
)
|
|
$
|
(19,620
|
)
|
Interest expense
|
|
|
345
|
|
|
|
|
|
|
|
455
|
|
|
|
4,346
|
|
|
|
5,146
|
|
Depreciation and amortization
|
|
|
6,894
|
|
|
|
2,428
|
|
|
|
3,204
|
|
|
|
28
|
|
|
|
12,554
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
2,898
|
|
|
|
|
|
|
|
2,898
|
|
Loss on sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
111
|
|
Change in fair value of preferred stock derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,009
|
|
|
|
21,009
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277
|
|
|
|
277
|
|
Initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,261
|
|
|
|
1,261
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,457
|
|
|
|
5,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (non-GAAP measure)
|
|
$
|
31,950
|
|
|
$
|
4,633
|
|
|
$
|
2,025
|
|
|
$
|
(9,515
|
)
|
|
$
|
29,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Management
EBITDA
For 2009, our variable pay compensation, in the form of an
annual cash bonus, was based on the achievement of certain
financial targets, including Management EBITDA (a non-GAAP
measure), which our bonus plan defines as earnings before
interest, taxes, depreciation and amortization. Although similar
to Adjusted EBITDA, Management EBITDA differs in that it
excludes other income (expense) and normalizes actual foreign
currency exchange rates to what was included in the budgeted
Management EBITDA so that the executives neither benefit nor are
harmed by exchange rate changes or other income (expense) items
out of their control. In addition, Management EBITDA may also be
similarly adjusted for other items outside of their control to
more closely compare to budgeted Management EBITDA, such as post
acquisition re-organization costs, impairment of goodwill, gain
on sale of assets, other (income) expense, changes in the fair
value of derivatives, stock-based compensation expense and
initial public offering costs. See Executive
Compensation Compensation Discussion and
Analysis Determining the Amount of Each Element of
Compensation Variable Pay.
14
RISK
FACTORS
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks described below
before deciding to invest in our common stock. Our business,
prospects, financial condition or operating results could be
materially adversely affected by any of these risks, as well as
other risks not currently known to us or that we currently
consider immaterial. The trading price of our common stock could
decline due to any of these risks, and you may lose all or part
of your investment. In assessing the risks described below, you
should also refer to the other information contained in this
prospectus, including our consolidated financial statements and
the related notes, before deciding to purchase any of our common
stock.
Risks Related to
Our Business
The recent oil
spill from the Macondo well in the Gulf of Mexico has led to the
U.S. governments imposition of moratoria on deepwater
drilling offshore the United States and delays in the
approval of applications to drill in both deepwater and shallow
water areas of the Gulf of Mexico which may reduce the need for
our services in the Gulf of Mexico.
The recent oil spill from the Macondo well in the Gulf of Mexico
caused what may be one of the worst environmental disasters in
United States history. As a result of the oil spill and the
inability to stop the oil spill quickly, the United States
Department of the Interior implemented a six-month moratorium on
certain drilling activities in water depths greater than
500 feet offshore the United States. On July 12, 2010,
the United States Department of the Interior issued a revised
moratorium on drilling in the Gulf of Mexico, which was lifted
on October 12, 2010. Since the Macondo oil spill, the
United States government has implemented additional safety and
certification requirements applicable to drilling activities in
the Gulf of Mexico, imposed additional requirements with respect
to development and production activities in the Gulf of Mexico
and has delayed the approval of applications to drill in both
deepwater and shallow water areas. For the year ended
December 31, 2009, 6.8% of our revenue was generated from
drilling in the areas of the Gulf of Mexico affected by the
slowdown in the issuance of drilling permits and moratoria and
during the nine months ended September 30, 2010, 9.4% of
our revenue was generated from drilling in these areas of the
Gulf of Mexico. At this time we cannot predict what actions may
be taken by our customers or the United States government in
response to the Macondo well incident. We cannot assure you that
the rigs that we are servicing in the Gulf of Mexico will
continue servicing the Gulf of Mexico or be redeployed to other
locations where we can provide our services or that we will
continue to receive service revenue related to those rigs.
Prolonged delays, moratoria or suspensions of drilling activity
in the Gulf of Mexico and associated new regulatory, legislative
or permitting requirements in the United States or elsewhere
could materially harm our business, financial condition and
results of operations.
The recent oil
spill in the Gulf of Mexico and other similar spills that may
occur may lead to other restrictions or additional regulations
on drilling in the Gulf of Mexico, offshore the United States or
in other areas around the world, which may reduce the need for
our services in those areas.
We do not yet know the extent to which the oil spill in the Gulf
of Mexico and other similar spills that may occur may cause the
United States or other countries to restrict or further regulate
offshore drilling. For example, new safety requirements were
imposed for United States offshore drilling that include
requirements for offshore drillers to provide third party safety
certifications and certifications by their chief executive
officers. In addition, there have been discussions concerning
increasing the liability limits under existing regulations for
companies working in the offshore drilling industry for damaging
oil spills. The new safety requirements, possible increased
liability and any other new governmental regulations relating
15
to drilling, exploration and production activities offshore the
United States may reduce drilling and the need for our services
offshore the United States. If the United States or other
countries where we operate enact stricter restrictions on
offshore drilling or further regulate offshore drilling, our
business, financial condition and results of operations could be
materially harmed.
Any loss of a
rig on which our equipment is located will likely lead to a
complete loss of our equipment on that rig and a loss of the
revenue related to that rig.
At the commencement of a new service contract for a rig, we
generally install approximately $100,000 to $400,000 worth of
equipment on each offshore drilling rig. If a rig were to sink
or incur substantial damage for any reason, we would most likely
lose all of our equipment. We do not insure for such losses as
we believe the cost of such insurance outweighs the risk of
potential loss. In addition to the loss of the equipment, we
would likely lose the revenue related to that rig under the
terms of most of our existing contracts. Also, we may be
committed to paying the costs to secure satellite bandwidth for
that rig under agreements with third party satellite
communication providers even after the rig is no longer in
service. For example, on May 13, 2010, Petro Marines
Aban Pearl semi-submersible drilling rig sank offshore
Venezuela causing a $0.3 million loss of our equipment and
a $2.9 million loss of future revenue to us through 2013
assuming completion of our contract with Petro Marine. Losses of
rigs can occur as a result of catastrophic events such as
hurricanes, fire or sinking. Recent industry events include two
reported drilling rig losses, including the Transocean
Horizon, which was not being serviced by us, and the Aban
Pearl. Such catastrophic events can occur without notice,
but have historically been infrequent.
Many of our
contracts with customers may be terminated by our customers on
short notice without penalty, which could harm our business,
financial condition and results of operations.
Customers can usually switch service providers without incurring
significant expense relative to the annual cost of the service,
and our agreements generally provide that in the event of
prolonged loss of service or for other good reasons, our
customers may terminate service without penalty. In addition,
many of our customer agreements can be terminated by our
customers for no reason and upon short notice. Terms of customer
agreements typically vary with a range of one month to three
years, with some customer agreement terms as long as five years,
and work orders placed under such agreements may have shorter
terms than the relevant customer agreement. As a result, we may
not be able to retain our customers through the end of the terms
specified in the customer agreements. If we are not able to
retain our customers, we would not receive expected revenues and
may continue to incur costs, such as costs to secure satellite
bandwidth for such customers under agreements with third party
satellite communication services providers which may not be as
easily or as quickly terminated without penalty, resulting in
harm to our business, financial condition and results of
operations. The loss of a drilling contractor customer site can
limit or eliminate our ability to provide services to other
customers on the affected drilling rigs.
A significant
portion of our revenue is derived from two customers and the
loss of either of these customers would materially harm our
business, financial condition and results of
operations.
We receive a significant part of our revenue from a relatively
small number of large customers. For the year ended
December 31, 2009, our two largest customers, Noble
Corporation and Ensco plc, represented approximately 10.9% and
7.3% of our consolidated revenue. For the nine months ended
September 30, 2010, Noble Corporation and Ensco plc
represented approximately 10.4% and 6.6% of our consolidated
revenue. If either of these two customers
16
terminates or significantly reduces its business with us, our
business, financial condition and results of operations would be
materially harmed.
Our future
performance depends on renewing existing contracts and receiving
new contract awards.
Our future performance depends on if and when we will receive
new contract awards and whether customers will renew existing
contracts. Events outside our control, such as general market
conditions and competition, often affect contract awards. If an
expected contract award is delayed or not received, we would not
receive expected revenues and might possibly incur costs that
could harm our business, financial condition and results of
operations.
Our industry
is highly competitive and if we do not compete successfully, our
business, financial condition and results of operations will be
harmed.
The telecommunications industry is generally highly competitive,
and we expect both product and pricing competition to persist
and intensify. Increased competition could cause reduced
revenue, price reductions, reduced gross margins and loss of
market share. Our industry is characterized by competitive
pressures to provide enhanced functionality for the same or
lower price with each new generation of technology. As the
prices of our products decrease, we will need to sell more
products
and/or
reduce the
per-unit
costs to improve or maintain our results of operations. Our
competitors include CapRock Communications, Inc., which was
recently acquired by Harris Corporation, Schlumberger Ltds
Global Connectivity Services division, which Harris Corporation
recently announced the entry into a definitive agreement to
acquire, and the Stratos Broadband Division of Inmarsat plc.
Some of our competitors have longer operating histories,
substantially greater financial and other resources for
developing new solutions as well as for recruiting and retaining
qualified personnel. Their greater financial resources may also
make them better able to withstand downturns in the market,
expand into new areas more aggressively or operate in developing
markets without immediate financial returns. In addition, in
certain markets outside of the United States, we face
competition from local competitors that provide their services
at a lower price due to lower overhead costs, including lower
costs of complying with applicable government regulations, and
due to their willingness to provide services for a lower profit
margin. Strong competition and significant investments by
competitors to develop new and better solutions may make it
difficult for us to maintain our customer base, force us to
reduce our prices or increase our costs to develop new solutions.
Furthermore, competition may emerge from companies that we have
previously not perceived as competitors or consolidation of our
industry may cause existing competitors to become bigger and
stronger with more resources, market awareness and market share.
As we expand into new markets and geographic regions we may
experience increased competition from some of our competitors
that have prior experience or other business in these markets or
geographic regions. In addition, some of our customers may
decide to insource some of the communications services and
managed services solutions that we provide, in particular our
terrestrial communication services (e.g., terrestrial
line-of-sight
transport, microwave, WiMax), which do not require the same
level of maintenance and support as our other services. Our
success will depend on our ability to adapt to these competitive
forces, to adapt to technological advances, to develop more
advanced products more rapidly and less expensively than our
competitors, to continue to develop an international sales
network, and to educate potential customers about the benefits
of using our solutions rather than our competitors
products and services or insourced solutions. Our failure to
successfully respond to these competitive challenges could harm
our business, financial condition and results of operations.
17
Service
interruptions or other failures by third party satellite and
other communications providers we utilize could harm our
business and reputation and result in loss of customers and
revenue.
A significant part of our operations depends on third party
providers delivering reliable communications connections and
networks, which is beyond our control. These communications
connections include broadband satellite communications, subsea
fiber, microwave and Worldwide Interoperability for Microwave
Access, or WiMax, terrestrial landlines and long-distance
telephony. We also co-locate our communications and networking
equipment in teleport facilities and data centers that are
operated by third parties. Failure or saturation of such
connection points, networks and third-party facilities may lead
to customers experiencing interruptions when using our
communication services. Although we do not typically depend on
only one provider, interruptions in such connections could
impair our ability to provide communication services to our
customers. To provide customers with guaranteed levels of
service, we must protect our network infrastructure, equipment
and customer files against damage from human error, natural
disasters, unexpected equipment failure, power loss or
telecommunications failures and sabotage or other intentional
acts of vandalism. Even if we take precautions, the occurrence
of a natural disaster, equipment failure or other unanticipated
problems could result in interruption in the services we provide
to customers. Any of these occurrences could harm our business,
financial condition and results of operations.
For many of our customers, we lease satellite transponder
capacity from fixed satellite service providers in order to send
and receive data communications to and from our very small
aperture terminal, or VSAT, based networks. Satellites are
subject to in-orbit risks including malfunctions, commonly
referred to as anomalies, and collisions with meteoroids,
decommissioned spacecraft or other space debris. Anomalies occur
as a result of various factors, such as satellite manufacturing
errors, problems with the power systems or control systems of
the satellites and general failures resulting from operating
satellites in the harsh space environment.
Our contracts for satellite transponder capacity often do not
obligate the service provider to provide an alternative should a
problem arise with a satellite. We may not be able to obtain
backup capacity at similar prices, or at all in some markets. In
addition, an increased frequency of anomalies could impact
market acceptance of our services. Any failure on our part to
perform our VSAT service contracts or provide satellite
broadband access as a result of satellite failures could result
in: (i) loss of revenue despite continued obligations under
our leasing arrangements; (ii) possible cancellation of
customer contracts; (iii) incurrence of additional expenses
to reposition customer antennas to alternative satellites or
otherwise find alternate service; and (iv) damage to our
reputation, which could negatively affect our ability to retain
existing customers or to gain new business. Under most of our
contracts with satellite service providers, our satellite
service providers do not indemnify us for such loss or damage to
our business resulting from satellite failures.
We rely on
third parties to provide satellite capacity for our services and
any capacity constraints could harm our business, financial
condition and results of operations.
We compete for satellite capacity with a number of commercial
entities, such as broadcasting companies, and governmental
entities, such as the military. In certain markets, the
availability and pricing of capacity could be subject to
competitive pressure, such as during renewals, and there is no
guarantee that we will be able to secure the capacity needed to
conduct our operations at current rates or levels going forward.
This could harm our business, financial condition and results of
operations. In certain markets, the availability of bandwidth
may be restricted by the local government when needed to support
its military, and in the event of such an action, there is no
guarantee that we will be able to secure the capacity
18
needed to conduct our operations, which could have a material
adverse effect on our business, financial condition and results
of operations.
We could incur
costs and suffer damage to our reputation and business if any of
the third party products we provide fail or are
defective.
Our business relies on third-party products to provide our
end-to-end
managed solutions for customers. These products fall into three
basic areas: core communications equipment such as satellite
modems and antennas; IP networking equipment such as routers,
switches, servers and access points; and customer-facing end
devices such as IP phones. We may be subject to claims
concerning these products by virtue of our involvement in
marketing or providing access to them, even if we do not
manufacture or directly provide these products. Our agreements
with third-party suppliers do not always indemnify us against
such liabilities or the indemnification provided is not always
adequate. It is also possible that if any products provided
directly by us are negligently provided to customers, third
parties could make claims against us. Investigating and
defending any of these types of claims is expensive, even if the
claims do not result in liability. If any potential claims do
result in liability, we could be required to pay damages or
other penalties, which could harm our business, financial
condition and results of operations.
We are subject
to the volatility of the global oil and gas industry and our
business is likely to fluctuate with the level of global
activity for oil and natural gas exploration, development and
production.
Our business depends on the oil and natural gas industry and
particularly on the level of activity for oil and natural gas
exploration, development and production. Demand for our remote
communication services and collaborative applications depends on
our customers willingness to make operating and capital
expenditures to explore, develop and produce oil and natural gas
in the regions in which we operate or can operate. Our business
will suffer if these expenditures decline. Our customers
willingness to explore, develop and produce oil and natural gas
depends largely upon prevailing market conditions that are
influenced by numerous factors over which we have no control,
including:
|
|
|
|
|
the supply and demand for oil and natural gas;
|
|
|
|
oil and natural gas prices and expectations about future prices;
|
|
|
|
the expected rate of decline in production;
|
|
|
|
the discovery rate of new oil and gas reserves;
|
|
|
|
the ability of the Organization of Petroleum Exporting
Countries, or OPEC, to influence and maintain production levels
and pricing;
|
|
|
|
the level of production in non-OPEC countries;
|
|
|
|
the worldwide political and military environment, including
uncertainty or instability resulting from an escalation or
additional outbreak of armed hostilities or other crises in oil
or natural gas producing areas of the Middle East and other
crude oil and natural gas producing regions or further acts of
terrorism in the United States, or elsewhere;
|
|
|
|
the impact of changing regulations and environmental and safety
rules and policies following oil spills and other pollution by
the oil and gas industry;
|
|
|
|
advances in exploration, development and production technology;
|
|
|
|
the global economic environment;
|
19
|
|
|
|
|
the political and legislative framework governing the activities
of oil and natural gas companies; and
|
|
|
|
the price and availability of alternative fuels.
|
The level of activity in the oil and natural gas exploration and
production industry has historically been volatile and cyclical.
Although we believe our customers will be dependent upon
real-time voice and data communication services to optimize
their oil and gas production and development in an environment
with lower energy prices, a prolonged significant reduction in
the price of oil and natural gas will likely affect oil and
natural gas production levels and therefore affect demand for
the communication services we provide. In addition, a prolonged
significant reduction in the price of oil and natural gas could
make it more difficult for us to collect outstanding account
receivables from our customers. A material decline in oil and
natural gas prices or oil and natural gas exploration,
development or production activity levels could harm our
business, financial condition and results of operations.
An increase in
the size of our U.S. land segment relative to our other segments
could decrease our margins and increase the volatility of our
operating results.
Our U.S. land segment is characterized by higher rate
competition and shorter term contracts than our western
hemisphere or eastern hemisphere segments. In addition, the
number of operating U.S. land drilling rigs is more cyclical and
volatile than the number of operating offshore drilling rigs in
our western hemisphere or eastern hemisphere segments. Drilling
rig counts, and accordingly, demand for our service, and thus
our revenue, can change in as little as three months for our
U.S. land operations in response to oil and gas prices. Thus if
the size of our U.S. land segment increases relative to the size
of our western hemisphere and eastern hemisphere segments, our
overall margins may decrease and the volatility of our operating
results may increase.
Bad weather in
the Gulf of Mexico or other areas where we operate could harm
our business, financial condition and results of
operations.
Certain areas in and near the Gulf of Mexico and other areas in
which our clients operate experience unfavorable weather
conditions, including hurricanes and other extreme weather
conditions, on a relatively frequent basis. A major storm or
threat of a major storm in these areas can harm our business.
Our clients drilling rigs, production platforms and other
vessels in these areas are susceptible to damage
and/or total
loss by these storms, which may cause them to no longer need our
communication services. Our equipment on these rigs, platforms
or vessels could be damaged causing us to have service
interruptions and lose business. Even the threat of a very large
storm will sometimes cause our clients to limit activities in an
area and thus harm our business.
Our networks
and those of our third-party service providers may be vulnerable
to security risks and any unauthorized access to our
clients data or systems could harm our business, financial
condition and results of operations.
We expect the secure transmission of confidential information
over public networks to continue to be a critical element of our
operations. Our networks and those of our third-party service
providers and our customers may be vulnerable to unauthorized
access, computer viruses and other security problems. Persons
who circumvent security measures could wrongfully obtain or use
information on the network or cause interruptions, delays or
malfunctions in our operations, any of which could harm our
business, financial condition and results of operations. We may
be required to expend significant resources to protect against
the threat of security breaches or to alleviate problems,
including reputational harm and litigation, caused by any
breaches. In addition, our customer contracts, in general, do
not contain provisions
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which would protect us against liability to third-parties with
whom our customers conduct business. Although we have
implemented and intend to continue to implement
industry-standard security measures, these measures may prove to
be inadequate and result in system failures and delays that
could lower system availability and have a material adverse
effect on our business, financial condition and results of
operations.
We depend on a
limited number of suppliers to provide key portions of our
equipment and the loss of any of these key suppliers could
materially harm our ability to service our clients and could
result in loss of customers and harm our reputation, business,
financial condition and results of operations
revenue.
We currently rely upon and expect to continue to rely upon a
limited number of third-party suppliers to supply the equipment
required to provide our services, such as the equipment we
install on offshore drilling rigs in order to provide remote
communication services. Although this equipment is commercially
available from more than one supplier, there are a limited
number of suppliers of such equipment and price and quality vary
among suppliers. If the suppliers enter into competition with
us, or if our competitors enter into exclusive or restrictive
arrangements with our suppliers, the availability and pricing of
the equipment that we purchase could be materially adversely
affected. In addition, we like to use a small group of suppliers
and standardized equipment as much as possible so that we are
installing generally the same equipment and we can maintain
smaller quantities of replacement parts and equipment in our
warehouses. If we have to change suppliers for any reason, we
will incur additional costs due to the lack of uniformity and
need to warehouse a broader array of replacement parts and
equipment.
If we fail to
upgrade our information technology systems effectively, we may
not be able to accurately report our financial results or
prevent fraud.
As part of our efforts to continue improving our internal
control over financial reporting, we plan to continue to upgrade
our existing financial information technology systems in order
to automate several controls that are currently being performed
manually. We may experience difficulties in transitioning to
these upgraded systems, including loss of data and decreases in
productivity, as personnel become familiar with these new
systems. In addition, our management information systems will
require modification and refinement as we grow and as our
business needs change, which could prolong any difficulties we
experience with systems transitions, and we may not always
employ the most effective systems for our purposes. We must also
integrate these systems with our international operations so
that the data produced can be utilized around the world. If we
experience difficulties in implementing new or upgraded
information systems or experience significant system failures,
or if we are unable to successfully modify our management
information systems or respond to changes in our business needs,
we may not be able to effectively manage our business and we may
fail to meet our reporting obligations. In addition, as a result
of the automation of these manual processes, the data produced
may cause us to question the accuracy of previously reported
financial results.
If we fail to
manage our growth effectively, our business may
suffer.
We have experienced rapid growth in our business in recent
periods, which has strained our managerial, operational,
financial and other resources. We plan to continue to grow our
business and anticipate that continued growth of our operations
will be required to satisfy increasing customer demand and avail
ourselves of new market opportunities. The expanding scope and
geographic breadth of our business and growth in the number of
our employees, customers and locations will continue to place a
significant strain on our management team, information
technology systems and other resources and may distract key
personnel from other key operations. To properly manage our
growth, we may need to hire and retain personnel, upgrade our
existing operational, management and financial reporting
systems, and improve our
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business processes and controls and implement those processes
and controls in all of our geographic locations. Failure to
effectively manage our growth in a cost-effective manner could
result in declines in service quality and customer satisfaction,
increased costs or disruption of our operations. Our rapid
growth also makes it difficult for us to adequately predict the
investments we will need to make in the future to effectively
manage our world-wide operations.
Geographic
expansion may reduce our operating margins.
When we expand into a new geographic area, we incur set up costs
for new personnel, office facilities, travel, inventory and
related expenses in advance of securing new customer contracts.
In addition, we may price our services more aggressively as we
seek to obtain market share in the new region. As a result, our
results of operations may decline while we are pursuing such
geographic expansion.
The loss of
key personnel or the failure to attract and retain highly
qualified personnel could compromise our ability to effectively
manage our business and pursue our growth
strategy.
Our future performance depends on the continued service of our
key technical, development, sales, services and management
personnel. In particular, we are heavily dependent on the
following three key employees: Mark B. Slaughter, our Chief
Executive Officer and President, who has been critical to
establishing our strategy and executing on our business model
over the past four years; Morten Hansen, our Vice President of
Global Engineering, who is the technical architect of our global
network and who is responsible for our global networks
reliability, performance and security and the evaluation of
technological developments and their impact on our business; and
Lars Eliassen, our Vice President & General Manager of
Europe, Middle East and Africa, who has knowledge across many
aspects of our Company, including sales, marketing and
operations and who is critical to maintaining some of our key
customer relationships. The loss of key employees could result
in significant disruptions to our business, and the integration
of replacement personnel could be costly and time consuming,
could cause additional disruptions to our business, and could be
unsuccessful. We do not carry key person life insurance covering
any of our employees.
Our future success also depends on our continued ability to
attract and retain highly qualified technical, development,
sales, services and management personnel, including personnel in
all of the various regions of the world in which we operate. The
current increase in the activity level in the oil and gas
industry and the limited supply of skilled labor has made the
competition to retain and recruit qualified personnel intense. A
significant increase in the wages paid by competing employers
could reduce our skilled labor force, increase the wages that we
must pay to motivate, retain or recruit skilled employees or
both.
In addition, wage inflation and the cost of retaining our key
personnel in the face of competition for such personnel may
increase our costs faster than we can offset these costs with
increased prices or increased sales volume.
If we infringe
or if third parties assert that we infringe third party
intellectual property rights we could incur significant costs
and incur significant harm to our business.
Third parties may assert infringement or other intellectual
property claims against us, which could result in substantial
damages if it is ultimately determined that our services
infringe a third partys proprietary rights. Even if claims
are without merit, defending a lawsuit takes significant time,
may be expensive and may divert managements attention from
our other business concerns.
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Most of our
contracts are on a fixed price basis and if our costs increase,
we may not be able to recover these cost
increases.
Most of our contracts provide for a fixed price per month for
our services. If our costs increase to provide those services,
such as the cost to secure bandwidth or personnel costs, we may
not be able to offset some or all of our increased costs by
increasing the rates we charge our customers, which could have a
material adverse effect on our business, financial condition and
results of operations.
Many of our
contracts are governed by
non-U.S.
law, which may make them more difficult or expensive to enforce
than contracts governed by United States law.
Many of our customer contracts are governed by
non-U.S. law,
which may create both legal and practical difficulties in case
of a dispute or conflict. We operate in regions where the
ability to protect contractual and other legal rights may be
limited compared to regions with better-established legal
systems. In addition, having to pursue litigation in a
non-U.S. country
may be more difficult or expensive than pursuing litigation in
the United States.
Our industry
is characterized by rapid technological change, and if we fail
to keep up with these changes or if access to telecommunications
in remote locations becomes easier or less expensive, our
business, financial condition and results of operations will be
harmed.
The telecommunications industry is characterized by rapid
changes in technology, new evolving standards, emerging
competition and frequent new product and service introductions.
As an example of technological change, in August 2010, Inmarsat
plc announced a major commitment to a new constellation of
satellites using the Ka frequency band, compared to our use of
the Ku-band and C-band satellite space segment today. When this
Ka-band
service is available a few years from now, we will have to adapt
to its use, which might impair our business if other providers
are more successful in using the
Ka-band to
meet customer needs than we are. Our future business prospects
largely depend on our ability to meet changing customer
preferences, to anticipate and respond to technological changes
and to develop competitive products. If telecommunications to
remote locations becomes more readily accessible or less
expensive than our services, our business will suffer. New
disruptive technologies could make our VSAT-based networks or
other services obsolete or less competitive than they are today,
requiring us to reduce the prices that we are able to charge for
our services. We may not be able to successfully respond to new
technological developments and challenges or identify and
respond to new market opportunities, services or products
offered by competitors. In addition, our efforts to respond to
technological innovations and competition may require
significant capital investments and resources. Furthermore, we
may not have the necessary resources to respond to new
technological changes and innovations and emerging competition.
Failure to keep up with future technological changes could harm
our business, financial condition and results of operations.
Many of our
potential clients are resistant to new solutions and
technologies which may limit our growth.
Although there is a strong focus on technology development
within the oil industry, some of the companies in the upstream
oil and gas industry are relatively conservative and risk
adverse with respect to adopting new solutions and technologies.
Some drilling contractors, oil and gas companies and oilfield
service companies may choose not to adopt new solutions and
technology, such as our remote communications and collaboration
applications solutions, which may limit our growth potential.
The market for IP/MPLS based communication services is in a
relatively early stage, and some oil and gas companies may
choose not to adopt our IP/MPLS based communications technology.
This may in turn limit our growth.
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Regulatory and
Political Risks
We may face
difficulties in obtaining regulatory approvals for our provision
of telecommunication services, and we may face changes in
regulation, each of which could adversely affect our
operations.
In a number of countries where we operate, the provision of
telecommunication services is highly regulated. In such
countries, we are required to obtain approvals from national and
local authorities in connection with most of the services that
we provide. In many jurisdictions, we must maintain such
approvals through compliance with license conditions or payment
of annual regulatory fees.
Many of our customers utilize our services on mobile vessels or
drilling platforms that can enter into new countries on short
notice. If we do not already have a license to provide our
service in that country, we may be required to obtain a license
or other regulatory approval on short notice, which may not be
feasible in some countries. Failure to comply with such
regulatory requirements could subject us to various sanctions
including fines, penalties, arrests or criminal charges, loss of
authorizations and the denial of applications for new
authorizations or for the renewal of existing authorizations or
cause us to delay or terminate our service to such vessel or
platform until such license or regulatory approval can be
obtained.
In some areas of international waters, it is ambiguous as to
which countrys regulations apply, if any, and thus
difficult and costly for us to determine which licenses or other
regulatory approvals we should obtain. In such areas, we could
be subject to various penalties or sanctions if we fail to
comply with the applicable countrys regulations.
Future changes to the regulations under which we operate could
make it difficult for us to obtain or maintain authorizations,
increase our costs or make it easier or less expensive for our
competitors to compete with us.
Changes in the
regulatory framework under which we operate could adversely
affect our business prospects or results of
operations.
Our domestic services are currently provided on a private
carrier basis and are therefore subject to light regulation by
the Federal Communications Commission, or FCC, and other
federal, state and local agencies. As a private carrier, we may
not market and provide telecommunications service to the general
public or otherwise hold our services out
indifferently to the public as a common carrier. As
a private carrier, we are not entitled to certain rights
afforded to or subject to certain obligations imposed on common
carriers.
Our international operations are regulated by various
non-U.S. governments
and international bodies. These regulatory regimes frequently
require that we maintain licenses for our operations and conduct
our operations in accordance with prescribed standards. The
adoption of new laws or regulations, changes to the existing
regulatory framework, new interpretations of the laws that apply
to our operations, or the loss of, or a material limitation on,
any of our material licenses could materially harm our business,
results of operations and financial condition.
Changes to the
FCCs USF Regime or state universal service fund regimes or
findings that we have not complied with USF requirements or
state universal service fund regimes may adversely affect our
financial condition.
A proceeding pending before the FCC has the potential to
significantly alter our Universal Service Fund, or USF,
contribution obligations. The FCC is considering changing the
basis upon which USF contributions are determined from a revenue
percentage measurement, as well as increasing the breadth of the
USF contribution base to include certain services now exempt
from contribution. Adoption of these proposals could have a
material adverse effect on
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our costs, our ability to separately list USF contributions on
end-user bills, and our ability to collect these fees from our
customers. We are unable to predict the timing or outcome of
this proceeding.
We cannot predict the application and impact of changes to the
federal or state universal service fund contribution
requirements on the communications industry generally and on
certain of our business activities in particular. We are
currently reassessing the nature and extent of our federal and
state universal service fund obligations. If the FCC or any
state determines that we have incorrectly calculated or failed
to remit any required universal service fund contribution, we
could be subject to the assessment and collection of past due
remittances as well as interest and penalties thereon. Changes
in the federal or state universal service fund requirements or
findings that we have not met our obligations could materially
increase our universal service fund contributions and have a
material adverse effect on our business, financial condition and
results of operations.
We may be
subject to a variety of federal and state regulatory actions
that may affect our ability to operate.
Federal and state telecommunications regulators have the right
to sanction a service provider or to revoke licenses if a
service provider violates applicable laws or regulations. If any
regulatory agency were to conclude that we were providing
telecommunications services without the appropriate authority or
are otherwise not in compliance with applicable regulations, the
agency could initiate enforcement actions, which could result
in, among other things, revocation of authority, the imposition
of fines, a requirement to disgorge revenues, or refusal to
grant regulatory authority necessary for the future provision of
services.
Our operations
in Qatar have historically benefited from restrictions on
telecommunication services that have kept many of our
competitors from providing their services in Qatar, but the
recent easing of these restrictions may increase competition and
our business, financial condition and results of operations may
be harmed.
Qatar, like many countries in which we operate, has strict
regulations on telecommunication services. Historically, we have
complied with those regulations and are able to operate there,
but many of our competitors were unable to obtain the necessary
approvals and licenses to provide their services in Qatar. Qatar
is currently in the process of easing the restrictions and has
granted three new VSAT licenses to telecommunications providers,
including us, and renewed the two existing VSAT licenses. We
anticipate that, as a result of these new licenses, we may face
increased competition in the future and our business may be
harmed as a result of the increased competition.
Our business
operations in countries outside the United States are subject to
a number of United States federal laws and regulations,
including restrictions imposed by the Foreign Corrupt Practices
Act as well as trade sanctions administered by the Office of
Foreign Assets Control of the United States Department of
Treasury and the United States Department of Commerce, which
could adversely affect our operations if violated.
We must comply with all applicable export control laws and
regulations of the United States and other countries. We cannot
provide services to certain countries subject to United States
trade sanctions administered by the Office of Foreign Asset
Control of the United States Department of the Treasury or the
United States Department of Commerce unless we first obtain the
necessary authorizations. In addition, we are subject to the
Foreign Corrupt Practices Act, that, generally, prohibits bribes
or unreasonable gifts to
non-U.S. governments
or officials. Violations of these laws or regulations could
result in significant additional sanctions including fines, more
onerous compliance requirements, more extensive debarments from
export
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privileges or loss of authorizations needed to conduct aspects
of our international business. In certain countries, we engage
third party agents or intermediaries to act on our behalf in
dealings with government officials, such as customs agents, and
if these third party agents or intermediaries violate applicable
laws, their actions may result in penalties or sanctions being
assessed against us.
Our
international operations are subject to additional or different
risks than our United States operations, which may harm our
business and financial results.
We operate in approximately 30 countries around the world,
including countries in Asia, the Middle East, Africa, Latin
America and Europe and intend to continue to expand the number
of countries in which we operate. There are many risks inherent
in conducting business internationally that are in addition to
or different than those affecting our United States operations,
including:
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sometimes vague and confusing regulatory requirements that can
be subject to unexpected changes or interpretations;
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import and export restrictions;
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tariffs and other trade barriers;
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difficulty in staffing and managing geographically dispersed
operations and culturally diverse work forces and increased
travel, infrastructure and legal compliance costs associated
with multiple international locations;
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differences in employment laws and practices among different
countries, including restrictions on terminating employees;
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differing technology standards;
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fluctuations in currency exchange rates;
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imposition of currency exchange controls;
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potential political and economic instability in some regions;
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legal and cultural differences in the conduct of business;
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less due process and sometimes arbitrary application of laws and
sanctions, including criminal charges and arrests;
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difficulties in raising awareness of applicable United States
laws to our agents and third party intermediaries;
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potentially adverse tax consequences;
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difficulties in enforcing contracts and collecting receivables;
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difficulties and expense of maintaining international sales
distribution channels; and
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difficulties in maintaining and protecting our intellectual
property.
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Operating internationally exposes our business to increased
regulatory and political risks in some
non-U.S. jurisdictions
where we operate. In addition to changes in laws and
regulations, changes in governments or changes in governmental
policies in these jurisdictions may alter current interpretation
of laws and regulations affecting our business. We also face
increased risk of incidents such as war or other international
conflict and nationalization, and possible expropriation of our
assets. If a
non-U.S. country
were to nationalize our industry or expropriate our assets, we
could lose not only our investment in the assets that we have in
that country, but also all of our contracts and business in that
country.
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Many of the countries in which we operate have legal systems
that are less developed and less predictable than legal systems
in Western Europe or the United States. It may be difficult for
us to obtain effective legal redress in the courts of some
jurisdictions, whether in respect of a breach of law or
regulation, or in an ownership dispute because of: (i) a
high degree of discretion on the part of governmental
authorities, which results in less predictability; (ii) a
lack of judicial or administrative guidance on interpreting
applicable rules and regulations; (iii) inconsistencies or
conflicts between or within various laws, regulations, decrees,
orders and resolutions; (iv) the relative inexperience of
the judiciary and courts in such matters or (v) a
predisposition in favor of local claimants against
United States companies. In certain jurisdictions, the
commitment of local business people, government officials and
agencies and the judicial system to abide by legal requirements
and negotiated agreements may be unreliable. In particular,
agreements may be susceptible to revision or cancellation and
legal redress may be uncertain or time-consuming. Actions of
governmental authorities or officers may adversely affect joint
ventures, licenses, license applications or other legal
arrangements, and such arrangements in these jurisdictions may
not be effective or enforced.
The authorities in the countries where we operate may introduce
additional regulations for the oil and gas and communications
industries with respect to, but not limited to, various laws
governing prospecting, development, production, taxes, price
controls, export controls, currency remittance, expropriation of
property, foreign investment, maintenance of claims,
environmental legislation, land use, land claims of local
people, water use, labor standards, occupational health network
access and other matters. New rules and regulations may be
enacted or existing rules and regulations may be applied or
interpreted in a manner which could limit our ability to provide
our services. Amendments to current laws and regulations
governing operations and activities in the oil and gas industry
and telecommunications industry could harm our operations and
financial results.
Compliance with and changes in tax laws or adverse positions
taken by taxing authorities could be costly and could affect our
operating results. Compliance related tax issues could also
limit our ability to do business in certain countries. Changes
in tax laws or tax rates, the resolution of tax assessments or
audits by various taxing authorities, disagreements with taxing
authorities over our tax positions and the ability to fully
utilize our tax loss carry-forwards and tax credits could have a
significant financial impact on our future operations and the
way we conduct, or if we conduct, business in the affected
countries.
Financial
Risks
Our term loan
agreement places financial restrictions and operating
restrictions on our business, which may limit our flexibility to
respond to opportunities and may harm our business, financial
condition and results of operations.
The operating and financial restrictions and covenants in our
term loan agreement restricts and any future financing
agreements could restrict our ability to finance future
operations or capital needs or to engage, expand or pursue our
business activities. For example, our term loan agreement
restricts our ability to:
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dispose of property;
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enter into a merger, consolidate or acquire capital in other
entities;
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incur additional indebtedness;
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incur liens on the property secured by the term loan agreement;
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make certain investments;
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enter into transactions with affiliates;
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pay dividends;
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commit to make capital expenditures not in the ordinary course
of business; and
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enter into sales and lease back transactions.
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These limitations are subject to a number of important
qualifications and exceptions. Our term loan agreement also
requires us to maintain specified financial ratios. Our
compliance with these provisions may materially adversely affect
our ability to react to changes in market conditions, take
advantage of business opportunities we believe to be desirable,
obtain future financing, fund needed capital expenditures,
finance acquisitions, equipment purchases and development
expenditures, or withstand a future downturn in our business.
Our ability to comply with the covenants and restrictions
contained in our term loan agreement may be affected by events
beyond our control. If market or other economic conditions
deteriorate, our ability to comply with these covenants may be
impaired. If we violate any of the restrictions, covenants,
ratios or tests in our term loan agreement, a significant
portion of our indebtedness may become immediately due and
payable, and our lenders commitment to make further loans
to us may terminate. We might not have, or be able to obtain,
sufficient funds to make these accelerated payments. Even if we
could obtain alternative financing, that financing may not be on
terms that are favorable or acceptable to us. If we are unable
to repay amounts borrowed, the holders of the debt could
initiate a bankruptcy proceeding or liquidation proceeding
against the collateral. In addition, our obligations under our
term loan agreement are secured by substantially all of our
assets and if we are unable to repay our indebtedness under our
term loan agreement, the lenders could seek to foreclose on our
assets.
We may need to
raise additional funds to pursue our growth strategy or continue
our operations, and if we are unable to do so, our growth may be
impaired.
We plan to pursue a growth strategy. We have made significant
investments to grow our business. Additional investments will be
required to pursue further growth and to respond to
technological innovations and competition. There is no guarantee
that we will be able to obtain additional financing or financing
on favorable terms. If financing is not available on
satisfactory terms, or at all, we may be unable to expand our
business or to develop new business at the rate desired and our
business, financial condition and results of operations may be
harmed.
Changes in
effective tax rates or adverse outcomes resulting from
examination of our income or other tax returns could adversely
affect our operating results and financial
condition.
Our future effective tax rates could be subject to volatility or
adversely affected by a number of factors, including:
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earnings being lower than anticipated in countries where we have
lower statutory rates and higher than anticipated earnings in
countries where we have higher statutory rates;
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changes in the valuation of our deferred tax assets;
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repatriation of cash; or
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expiration or non-utilization of net operating losses or credits.
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We conduct our worldwide operations through various
subsidiaries. Tax laws and regulations are highly complex and
subject to interpretation. Consequently, we are subject to
changing tax laws, treaties and regulations in and between
countries in which we operate, including treaties between the
United States and other nations. Our income tax expense is based
upon our interpretation of the tax laws in effect in various
countries at the time that the
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expense was incurred. A change in these tax laws, treaties or
regulations, including those in and involving the United States,
or in the interpretation thereof, could result in a materially
higher tax expense or a higher effective tax rate on our
worldwide earnings.
In addition, we are subject to the continuous examination of our
income tax returns by the Internal Revenue Service and other tax
authorities. We regularly assess the likelihood of adverse
outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes. Outcomes from these
continuous examinations could have a material adverse effect on
our financial condition, results of operations or cash flows.
Our 2008 United States federal income tax return is currently
under audit by the United States Internal Revenue Service.
We are subject
to fluctuations in currency exchange rates and limitations on
the expatriation or conversion of currencies, which may result
in significant financial charges, increased costs of operations
or decreased demand for our products and services.
During the year ended December 31, 2009, 22.8% of our
revenues were earned in
non-U.S. currencies,
while a significant portion of our capital and operating
expenditures and all of our outstanding debt, was priced in
U.S. dollars. In addition, we report our results of
operations in U.S. dollars. Accordingly, fluctuations in
exchange rates relative to the U.S. dollar could have a
material adverse effect on our earnings or the value of our
assets.
Any depreciation of local currencies in the countries in which
we conduct business may result in increased costs to us for
imported equipment and may, at the same time, decrease demand
for our products and services in the affected markets. If our
operating companies distribute dividends in local currencies in
the future, the amount of cash we receive will also be affected
by fluctuations in exchange rates. In addition, some of the
countries in which we have operations do or may restrict the
expatriation or conversion of currency.
We have not implemented any hedging strategies to mitigate risks
related to the impact of fluctuations in exchange rates. Even if
we were to implement hedging strategies, not every exposure can
be hedged, and, where hedges are put in place based on expected
non-U.S. exchange
exposure, they are based on forecasts which may vary or which
may later prove to have been inaccurate. Failure to hedge
successfully or anticipate currency risks accurately could harm
our business, financial condition and results of operations.
Risks Related to
This Offering
Some of our
stockholders could together exert control over our Company after
completion of this offering.
As of September 30, 2010, funds affiliated with Altira
owned in the aggregate shares representing approximately 24.5%
of our outstanding voting power. A managing member of the
general partner of Altira, Dirk McDermott, currently serves on
our board of directors. After the completion of this offering,
funds affiliated with Altira will own in the aggregate shares
representing approximately 15.3% of our outstanding voting
power, or approximately 14.4% if the underwriters exercise their
over-allotment option in full. As of September 30, 2010,
funds associated with Sanders Morris owned in the aggregate
shares representing approximately 22.5% of our outstanding
voting power. One managing member of the general partner of
Sanders Morris, Charles L. Davis, currently serves on our board
of directors. After the completion of this offering, funds
affiliated with Sanders Morris will own in the aggregate shares
representing approximately 13.8% of our outstanding voting
power, or approximately 12.9% if the underwriters exercise their
over-allotment option in full. Additionally, as of
September 30, 2010, funds associated with Cubera owned in
the aggregate shares representing approximately 39.0% of our
outstanding voting power. One managing member of the general
partner of Cubera, Ørjan Svanevik, currently serves on our
board of directors. After completion of this
29
offering, affiliates of Cubera will own in the aggregate shares
representing approximately 26.5% of our outstanding voting
power, or approximately 24.9% if the underwriters exercise their
over-allotment option in full. As a result, these stockholders
could together control all matters presented to our stockholders
for approval, including election and removal of our directors
and change of control transactions. The interests of these
stockholders may not always coincide with the interests of the
other holders of our common stock.
As a public
company, we will incur additional cost and face increased
demands on our management and key employees.
We have never operated as a public company. As a public company,
we will incur significant legal, accounting and other expenses,
as well as Board of Director related expenses, that we did not
incur as a private company. In addition, the Sarbanes-Oxley Act
of 2002, as well as rules implemented by the Securities and
Exchange Commission, or the SEC, and The NASDAQ Global Market,
or the NASDAQ, impose various requirements on public companies.
Our management and other personnel will devote substantial
amounts of time to these requirements, and we will hire
additional people and increase the salaries of others to
compensate them for the additional duties that they will have to
perform. We expect these requirements to significantly increase
our legal and financial compliance costs and to make some
activities more time-consuming and costly. In addition, we will
incur additional costs associated with our public company
reporting requirements. These rules and regulations also make it
more difficult and more expensive for us to obtain director and
officer liability insurance. We cannot predict or estimate the
amount of additional costs we may incur or the timing of such
costs. If our profitability is harmed by these additional costs,
it could have a negative effect on the trading price of our
common stock.
We have
identified a material weakness, a significant deficiency and
other deficiencies in our internal controls for the year ended
December 31, 2009 and a significant deficiency and other
deficiencies in our internal controls for the year ended
December 31, 2008 that, if not properly remediated, could
result in material misstatements in our financial statements in
future periods and impair our ability to comply with the
accounting and reporting requirements applicable to public
companies.
In relation to our consolidated financial statements for the
year ended December 31, 2009, we identified a material
weakness, a significant deficiency and other deficiencies in our
internal controls over financial reporting. We identified a
material weakness in our internal controls over our financial
close and reporting cycle, a significant deficiency in our
internal controls over our property and equipment records and
accounting, and deficiencies in our internal controls relating
to our accounting for revenue, expenditure, payroll, income
taxes, as well as general computer controls.
A deficiency in internal control over financial
reporting exists when the design or operation of a control does
not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect and
correct misstatements on a timely basis. A deficiency in design
exists when (a) a control necessary to meet the control
objective is missing, or (b) an existing control is not
properly designed so that, even if the control operates as
designed, the control objective would not be met. A deficiency
in operation exists when (a) a properly designed control
does not operate as designed, or (b) the person performing
the control does not possess the necessary authority or
competence to perform the control effectively.
A material weakness is a deficiency, or combination
of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material
misstatement of the entitys financial statements will not
be prevented, or detected and corrected on a timely basis.
30
A significant deficiency is a deficiency, or
combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet
important enough to merit attention by those charged with
governance.
In relation to our consolidated financial statements for the
year ended December 31, 2008, we identified a significant
deficiency in our internal controls over our year end financial
reporting process and other deficiencies relating to our control
environment, general corporate controls and business cycle
controls.
Our independent registered public accounting firms audit
for the years ended December 31, 2007, 2008 and 2009
included consideration of internal control over financial
reporting as a basis for designing their audit procedures, but
not for the purpose of expressing an opinion on the
effectiveness of our internal controls over financial reporting.
If such an evaluation had been performed or when we are required
to perform such an evaluation, additional material weaknesses,
significant deficiencies and other deficiencies may have been or
may be identified. Ensuring that we have adequate internal
financial and accounting controls and procedures in place to
help produce accurate financial statements on a timely basis is
a costly and time-consuming effort that needs to be evaluated
frequently. We will incur increased costs and demands upon
management as a result of complying with the laws and
regulations affecting public companies relating to internal
controls, which could harm our business, financial condition and
results of operations.
Because of the deficiencies identified, there is heightened risk
that a material misstatement of our annual or quarterly
financial statements relating to the periods that these
deficiencies existed was not prevented or detected. We have
taken steps to remediate these deficiencies, including hiring
additional accounting and finance personnel, upgrading our
accounting system and engaging consultants. Although we believe
we have started the process to remediate these deficiencies, we
cannot be certain that our efforts will be successful or that
similar deficiencies will not recur. See Managements
Discussion and Analysis of Financial Condition and Results of
OperationsInternal Control over Financial Reporting
for a discussion of our remediation efforts.
Our internal growth plans will also put additional strains on
our internal controls if we do not augment our resources and
adapt our procedures in response to this growth. As a public
company, we will be required to comply with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 regarding
internal controls beginning with our fiscal year ending
December 31, 2011. In the event that we have not adequately
remedied these deficiencies, and if we fail to maintain proper
and effective internal controls in future periods, we could
become subject to potential review by the NASDAQ, the SEC or
other regulatory authorities, which could require additional
financial and management resources, could result in our
delisting by the NASDAQ, could compromise our ability to run our
business effectively and could cause investors to lose
confidence in our financial reporting.
If securities
analysts do not publish research or reports about our business
or if they publish negative evaluations of our stock, the price
of our stock could decline.
The trading market for our common stock depends in part on the
research and reports that industry or financial analysts publish
about us or our business. We do not currently have and may never
obtain research coverage by industry or financial analysts. If
no or few analysts commence coverage of us, the trading price of
our stock would likely decrease. Even if we do obtain analyst
coverage, if one or more of the analysts covering our business
downgrade their evaluations of or recommendations regarding our
stock, or if one or more of the analysts cease providing
research coverage on our stock, the price of our stock could
decline.
31
We will retain
broad discretion in using the net proceeds from this offering
and may spend a substantial portion in ways with which you do
not agree.
Our management will retain broad discretion to allocate the net
proceeds of this offering. The net proceeds may be applied in
ways with which you and other investors in the offering may not
agree, or which do not increase the value of your investment. We
intend to use $0.4 million to pay an IPO success bonus to
some of our key employees, including some of our named executive
officers. We anticipate that we will use the remainder of the
net proceeds for working capital and other general corporate
purposes, which may include the acquisition of other businesses,
products or technologies. We have not allocated these remaining
net proceeds for any specific purpose. Our management might not
be able to yield a significant return, if any, on any investment
of these net proceeds.
We do not know
whether a market will develop for our common stock or what the
market price of our common stock will be and as a result, it may
be difficult for you to sell your common stock.
Before this offering, there was no public trading market for our
common stock. If a market for our common stock does not develop
or is not sustained, it may be difficult for you to sell your
shares of our common stock at an attractive price or at all. We
cannot predict the prices at which our common stock will trade.
The initial public offering price for our common stock will be
determined through negotiations with the underwriters and may
not bear any relationship to the market price at which the
common stock will trade after this offering or to any other
established criteria regarding our value. It is possible that in
one or more future periods our results of operations may be
below the expectations of public market analysts and investors
and, as a result of these and other factors, the price of our
common stock may fall.
Sales of
outstanding shares of our common stock into the market in the
future could cause the market price of our common stock to drop
significantly, even if our business is doing well.
If our existing stockholders sell or indicate an intention to
sell substantial amounts of our common stock in the public
market, the trading price of our common stock could decline
substantially. After this offering, approximately
14.2 million shares of our common stock will be outstanding
if the underwriters do not exercise their over-allotment option.
Of these shares, 5.0 million shares of our common stock
sold in this offering will be freely tradable, without
restriction, in the public market and more than 98.0% of the
remaining outstanding shares are subject to
180-day
contractual
lock-up
agreements with our underwriters. Deutsche Bank Securities Inc.
may, in its discretion, permit our directors, officers,
employees and current stockholders who are subject to these
contractual
lock-ups to
sell shares prior to the expiration of the
lock-up
agreements. These
lock-ups are
subject to extension for up to an additional 34 days under
some circumstances. See Shares Eligible for Future
SaleLock-Up
Agreements.
After the
lock-up
agreements pertaining to this offering expire, up to an
additional approximately 9.1 million shares will be
eligible for sale in the public market, approximately
8.2 million of which are held by directors and executive
officers and our other affiliates and will be subject to volume
limitations under Rule 144 under the Securities Act of
1933, or the Securities Act. In addition, the approximately
4.3 million shares underlying options that are either
subject to the terms of our equity compensation plans or
reserved for future issuance under our equity compensation plans
and warrants will become eligible for sale in the public market
to the extent permitted by the provisions of various option
agreements, warrants and Rules 144 and 701 under the
Securities Act. For additional information, see
Shares Eligible for Future Sale.
32
You will
experience immediate and substantial dilution in your
investment.
The offering price of the common stock is substantially higher
than the net tangible book value per share of our common stock,
which on a pro forma basis was $10.49 per share of common stock
as of September 30, 2010. As a result, you will experience
immediate and substantial dilution in pro forma net tangible
book value when you buy common stock in this offering. This
means that you will pay a higher price per share than the amount
of our total tangible assets, less our total liabilities,
divided by the number of shares of common stock outstanding.
Holders of our common stock will experience further dilution if:
the underwriters over-allotment option to purchase
additional common stock from us pursuant to this offering is
exercised; options or other rights to purchase our common stock
that are outstanding or that we may issue in the future are
exercised or converted; or we issue additional shares of our
common stock at prices lower than our net tangible book value at
such time.
Provisions in
our organizational documents and in the Delaware General
Corporation Law may prevent takeover attempts that could be
beneficial to our stockholders.
Provisions in our post-offering certificate of incorporation and
post-offering bylaws and in the Delaware General Corporation
Law, may make it difficult and expensive for a third-party to
pursue a takeover attempt we oppose even if a change in control
of our Company would be beneficial to the interests of our
stockholders. Any provision of our post-offering certificate of
incorporation or post-offering bylaws or Delaware law that has
the effect of delaying or deterring a change in control could
limit the opportunity for our stockholders to receive a premium
for their shares of our common stock, and could also affect the
price that some investors are willing to pay for our common
stock. In our post-offering certificate of incorporation, our
board of directors will have the authority to issue up to
10,000,000 shares of preferred stock in one or more series
and to fix the powers, preferences and rights of each series
without stockholder approval. The ability to issue preferred
stock could discourage unsolicited acquisition proposals or make
it more difficult for a third party to gain control of our
Company, or otherwise could adversely affect the market price of
our common stock. Further, as a Delaware corporation, we are
subject to Section 203 of the Delaware General Corporation
Law. This section generally prohibits us from engaging in
mergers and other business combinations with stockholders that
beneficially own 15% or more of our voting shares, or with their
affiliates, unless our directors or stockholders approve the
business combination in the prescribed manner. However, because
funds affiliated with Altira, Sanders Morris and Cubera acquired
their shares prior to this offering, Section 203 is
currently inapplicable to any business combination or
transaction with them or their affiliates. Our post-offering
bylaws require that any stockholder proposals or nominations for
election to our board of directors must meet specific advance
notice requirements and procedures, which make it more difficult
for our stockholders to make proposals or director nominations.
We do not plan
to pay dividends on our common stock and consequently, the only
opportunity to achieve a return on an investment in our common
stock is if the price of our common stock
appreciates.
We do not plan to declare dividends on our common stock for the
foreseeable future and do not plan to pay dividends on our
common stock. In addition, our term loan agreement limits our
ability to pay dividends on our common stock. The only
opportunity to achieve a positive return on an investment in our
common stock for the foreseeable future may be if the market
price of our common stock appreciates.
33
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and Our
Company, contains forward-looking statements. We may, in
some cases, use words such as project,
believe, anticipate, plan,
expect, estimate, intend,
should, would, could,
potentially, will, or may,
or other words that convey uncertainty of future events or
outcomes to identify these forward-looking statements.
Forward-looking statements in this prospectus include statements
about:
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potential impact of the recent rig explosion in the Gulf of
Mexico and resulting oil spill;
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competition and competitive factors in the markets in which we
operate;
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demand for our products and services;
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the advantages of our services compared to others;
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changes in customer preferences and our ability to adapt our
product and services offerings;
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our ability to develop and maintain positive relationships with
our customers;
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our ability to retain and hire necessary employees and
appropriately staff our marketing, sales and distribution
efforts;
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our spending of the proceeds from this offering;
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our cash needs and expectations regarding cash flow from
operations;
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our ability to manage and grow our business and execute our
business strategy;
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our financial performance; and
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the costs associated with being a public company.
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Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
There are a number of important factors that could cause actual
results to differ materially from the results anticipated by
these forward-looking statements, which apply only as of the
date of this prospectus. These important factors include those
that we discuss in this prospectus under the caption Risk
Factors and elsewhere. You should read these factors and
the other cautionary statements made in this prospectus as being
applicable to all related forward-looking statements wherever
they appear in this prospectus. If one or more of these factors
materialize, or if any underlying assumptions prove incorrect,
our actual results, performance or achievements may vary
materially from any future results, performance or achievements
expressed or implied by these forward-looking statements. We
undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future
events or otherwise, except as required by law.
MARKET, INDUSTRY
AND OTHER DATA
Unless otherwise indicated, information contained in this
prospectus concerning our industry and the markets in which we
operate, including our general expectations and market position,
market opportunity and market size, is based on information from
various sources, on assumptions that we have made that are based
on that information and other similar sources and on our
knowledge of the markets for our services. That information
involves a number of assumptions and limitations, and you are
cautioned not to give undue weight to such estimates. We have
not independently verified any third party information and
cannot assure you of its accuracy or completeness. While we
believe the market position, market
34
opportunity and market size information included in this
prospectus is generally reliable, such information is inherently
imprecise. In addition, projections, assumptions and estimates
of our future performance and the future performance of the
industry in which we operate is necessarily subject to a high
degree of uncertainty and risk due to a variety of factors,
including those described in Risk Factors and
elsewhere in this prospectus. These and other factors could
cause results to differ materially from those expressed in the
estimates made by the independent parties and by us.
INVESTORS OUTSIDE
THE UNITED STATES
For investors outside the United States: we have not, the
selling stockholders have not and the underwriters have not done
anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action
for that purpose is required, other than in the
United States. Persons outside the United States who come
into possession of this prospectus must inform themselves about,
and observe any restrictions relating to, the offering of the
shares of common stock and the distribution of this prospectus
outside of the United States.
35
USE OF
PROCEEDS
We estimate that the net proceeds we will receive from this
offering will be approximately $45.0 million (or
approximately $52.0 million if the underwriters exercise
their option to purchase additional shares of common stock in
full), based on the assumed initial public offering price of
$15.00 per share, which is the midpoint of the range included on
the cover page of this prospectus, and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us. We will not receive any
proceeds from the sale of shares of common stock by the selling
stockholders. A $1.00 increase or decrease in the assumed
initial public offering price of $15.00 per share would increase
or decrease the net proceeds we receive from this offering by
approximately $3.1 million, assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same, and after deducting the estimated
underwriter discounts and commissions and estimated offering
expenses payable by us.
We expect to use $400,000 of the proceeds to pay an IPO success
bonus to some of our key employees, including some of our named
executive officers, upon completion of this offering. See
Executive CompensationIPO Success Bonus for
more information concerning this bonus.
We expect to use the remainder of the net proceeds for working
capital and other general corporate purposes, which may include
the expansion of our current business through acquisitions or
investments in other complementary businesses, products or
technologies. We have no agreements or commitments with respect
to any acquisitions at this time. We will have broad discretion
in the way we use the net proceeds.
Pending use of the net proceeds from this offering described
above, we intend to invest the net proceeds in short- and
intermediate-term interest-bearing obligations, investment-grade
instruments, certificates of deposit or direct or guaranteed
obligations of the United States government.
The primary purposes of this offering are to raise additional
capital, create a public market for our common stock, allow us
easier and quicker access to the public markets should we need
more capital in the future, increase the profile and prestige of
our Company with existing and possible future customers, vendors
and strategic partners, and make our stock more valuable and
attractive to our employees and potential employees for
compensation purposes.
DIVIDEND
POLICY
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain all available funds and any
future earnings to support the operation of and to finance the
growth and development of our business. Accordingly, we do not
anticipate paying any cash dividends in the foreseeable future.
Any future determination to declare cash dividends will be made
at the discretion of our board of directors, subject to
compliance with certain covenants under our credit facility,
which restricts or limits our ability to pay dividends, and will
depend on our financial condition, operating results, capital
requirements, general business conditions and other factors that
our board of directors may deem relevant.
36
CAPITALIZATION
The following table sets forth our cash and cash equivalents,
our current maturities of long-term debt and our capitalization
as of September 30, 2010 on:
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a pro forma basis after giving effect to (i) the conversion of
all outstanding shares of our preferred stock and accrued and
unpaid dividends on our series B and series C
preferred stock into an aggregate of 3,973,738 shares of
our common stock, plus approximately 625 additional shares
of our common stock for each day after September 30, 2010,
before this offering is completed, for the daily accrual of
unpaid dividends on our series B and series C preferred stock,
(ii) the issuance of 1,326,252 shares of our common stock,
plus an additional 200 shares of our common stock for each
day after September 30, 2010, before this offering is
completed, for the daily accrual of unpaid dividends on our
series B and series C preferred stock, based on the
assumed initial public offering price of $15.00 per share, which
is the midpoint of the range included on the cover page of this
prospectus, to pay our preferred stockholders the major event
preference, and (iii) the exercise of the Escalate Warrants
on a cashless basis for an aggregate of 231,090 shares of
our common stock, plus an additional 27 shares of our
common stock for each day after September 30, 2010, before
this offering is completed, for the daily accrual of the
anti-dilution adjustment, each of which will occur immediately
prior to the closing of this offering; and
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a pro forma as adjusted basis to give further effect to
(i) our filing of our post-offering certificate of
incorporation, which authorizes 10,000,000 shares of
non-designated preferred stock, does not authorize series A
preferred stock, series B preferred stock and series C
preferred stock and increases the number of shares of authorized
common stock to 190,000,000, and (ii) the sale by us of
3,333,334 shares of common stock in this offering at an
assumed initial public offering price of $15.00 per share, the
midpoint of the range set forth on the cover page of this
prospectus, and our receipt of the estimated net proceeds from
that sale after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
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You should read the following table in conjunction with the
sections titled Selected Consolidated Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
financial statements and related notes included elsewhere in
this prospectus.
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As of September 30, 2010
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Pro Forma As
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Actual
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Pro Forma
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Adjusted
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(in thousands, except share and
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per share data)
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Cash and cash equivalents
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$
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14,514
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$
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14,514
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$
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59,514
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Restricted cash (1)
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10,000
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10,000
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10,000
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Current maturities of long-term debt
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8,644
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8,644
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8,644
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Long-term debt
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24,529
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24,529
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24,529
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Preferred stock derivatives
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44,447
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Series A Preferred Stock, $0.001 par value; 2,790,000,
2,790,000 and zero shares authorized actual, pro forma, and pro
forma as adjusted, 2,750,000, zero and zero issued and
outstanding actual, pro forma, and pro forma as adjusted
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2,750
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37
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As of September 30, 2010
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Pro Forma As
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Actual
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Pro Forma
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Adjusted
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(in thousands, except share and
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per share data)
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Series B Preferred Stock, $0.001 par value; 3,127,608,
3,127,608 and zero shares authorized actual, pro forma, and pro
forma as adjusted, 3,127,608, zero and zero issued and
outstanding actual, pro forma, and pro forma as adjusted
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5,876
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Series C Preferred Stock, $0.001 par value;
10,000,000, 10,000,000 and zero shares authorized actual, pro
forma, and pro forma as adjusted; 8,003,286, zero and zero
shares, issued and outstanding actual, pro forma, and pro forma
as adjusted
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9,520
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Preferred Stock, $0.001 par value; zero, zero and
10,000,000 shares authorized actual, pro forma, and pro
forma as adjusted; zero, zero, and zero shares issued and
outstanding actual, pro forma, and pro forma as adjusted
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Stockholders equity (deficit)
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Common stock, $0.001 par value; 52,000,000, 52,000,000 and
190,000,000 shares authorized actual, pro forma, and pro
forma as adjusted; 5,318,628, 10,849,708 and
14,183,042 shares issued and outstanding actual, pro forma,
and pro forma as adjusted
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5
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11
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14
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Additional paid-in capital
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7,380
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69,967
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|
|
114,964
|
|
Accumulated deficit
|
|
|
(37,660
|
)
|
|
|
(37,660
|
)
|
|
|
(37,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
483
|
|
|
|
483
|
|
|
|
483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total RigNet, Inc. stockholders equity (deficit)
|
|
|
(29,792
|
)
|
|
|
32,801
|
|
|
|
77,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable, non-controlling interest
|
|
|
81
|
|
|
|
81
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
66,055
|
|
|
$
|
66,055
|
|
|
$
|
111,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents restricted cash to
satisfy credit facility requirements, of which $7.5 million
was non-current.
|
Each $1.00 increase or decrease in the assumed initial public
offering price of $15.00 per share, the midpoint of the range
set forth on the cover page of this prospectus, would increase
or decrease the amount of cash and cash equivalents, additional
paid-in capital, total RigNet, Inc. stockholders equity
(deficit) and total capitalization by approximately
$3.1 million, assuming the number of shares offered by us,
as set forth on the cover page of this prospectus, remains the
same, and after deducting the estimated underwriting discounts
and commissions and estimated expenses payable by us.
Each $1.00 increase or decrease in the assumed initial public
offering price of $15.00 per share, which is the midpoint of the
range set forth on the cover page of this prospectus, would
increase or decrease the number of shares of our common stock
outstanding upon the closing of this offering by approximately
83,045 shares, assuming that the number of shares offered
by us, as set forth on the cover page of this prospectus,
remains the same.
38
This table excludes the following shares:
|
|
|
|
|
2,599,809 shares of our common stock issuable upon the
exercise of options and warrants (other than the Escalate
Warrants) outstanding as of September 30, 2010 with a
weighted average exercise price of $5.08 per share;
|
|
|
|
3,000,000 shares of our common stock reserved for future
issuance under our 2010 Omnibus Incentive Plan;
|
39
DILUTION
If you invest in our common stock, your interest will be diluted
immediately to the extent of the difference between the initial
public offering price per share of our common stock in this
offering and the pro forma as adjusted net tangible book value
per share of our common stock after this offering.
Our net tangible book value as of September 30, 2010 was
$19.0 million, or $3.57 per share of common stock. Net
tangible book value per share represents the amount of our total
tangible assets less total liabilities, divided by the number of
shares of our common stock outstanding. On a pro forma basis,
after giving effect to (i) the conversion immediately prior
to this offering of all outstanding shares of our preferred
stock and accrued and unpaid dividends on our series B and
series C preferred stock into an aggregate of
3,973,738 shares of our common stock, plus approximately
625 additional shares of our common stock for each day
after September 30, 2010, before this offering is
completed, for the daily accrual of unpaid dividends on our
series B and series C preferred stock, (ii) the
issuance of 1,326,252 shares of our common stock, plus an
additional 200 shares of our common stock for each day
after September 30, 2010, before this offering is
completed, for the daily accrual of unpaid dividends on our
series B and series C preferred stock, based on the
assumed initial public offering price of $15.00 per share,
which is the midpoint of the range included on the cover page of
this prospectus, to pay our preferred stockholders the major
event preference, and (iii) the exercise of the Escalate
Warrants on a cashless basis for an aggregate of
231,090 shares of our common stock, plus an additional
27 shares of our common stock for each day after
September 30, 2010, before this offering is completed, for
the daily accrual of the anti-dilution adjustment, our net
tangible book value as of September 30, 2010 was
$19.0 million, or $1.75 per share of common stock.
After giving further effect to our issuance and sale of
3,333,334 shares of common stock in this offering, less the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us, based upon an assumed initial
public offering price of $15.00 per share, the midpoint of
the range set forth on the cover page of this prospectus, our
pro forma as adjusted net tangible book value as of
September 30, 2010 would have been $64.0 million, or
$4.51 per share of common stock. This represents an
immediate increase in net tangible book value per share of
$2.76 to existing stockholders and an immediate dilution of
$10.49 per share to new investors. Dilution per share to
new investors is determined by subtracting pro forma as adjusted
net tangible book value per share after this offering from the
initial public offering price per share paid by a new investor.
The following table illustrates the per share dilution:
|
|
|
|
|
|
|
|
|
Initial public offering price per share of common stock
|
|
|
|
|
|
$
|
15.00
|
|
Actual net tangible book value per share as of
September 30, 2010
|
|
$
|
3.57
|
|
|
|
|
|
Decrease per share attributable to conversion of preferred
stock, payment of major event preference and exercise of
Escalate Warrants
|
|
|
(1.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share as of
September 30, 2010
|
|
|
1.75
|
|
|
|
|
|
Increase per share attributable to new investors
|
|
|
2.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
|
|
|
|
4.51
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
10.49
|
|
|
|
|
|
|
|
|
|
|
If the underwriters exercise their option to purchase additional
shares of our common stock from us in full in this offering, the
pro forma as adjusted net tangible book value per share after
the offering would be $4.83 per share, the increase in pro
forma as adjusted net tangible book value per share to existing
stockholders would be $0.32 per share and the dilution to new
investors purchasing shares in this offering would be
$10.17 per share.
40
A $1.00 increase or decrease in the assumed initial public
offering price of $15.00 per share, which is the midpoint of the
range set forth on the cover page of this prospectus, would
increase or decrease our pro forma as adjusted net tangible book
value as of September 30, 2010 by approximately
$4.7 million, would increase or decrease the pro forma as
adjusted net tangible book value per share after this offering
by $0.35 per share and would increase or decrease the dilution
in pro forma as adjusted net tangible book value per share to
new investors in this offering by $0.35 per share, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
The following table summarizes, as of September 30, 2010,
on the pro forma as adjusted basis described above, the number
of shares of our common stock purchased from us, the total
consideration paid to us, and the average price per share paid
to us by existing stockholders and to be paid by new investors
purchasing shares of our common stock in this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per Share
|
|
|
Existing stockholders
|
|
|
10,849,708
|
|
|
|
76.5
|
%
|
|
$
|
38,648,308
|
|
|
|
43.6
|
%
|
|
$
|
3.57
|
|
New investors
|
|
|
3,333,334
|
|
|
|
23.5
|
|
|
|
50,000,010
|
|
|
|
56.4
|
|
|
|
15.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,183,042
|
|
|
|
100
|
%
|
|
$
|
88,648,318
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price of $15.00 per share, which is the midpoint of the
range set forth on the cover page of this prospectus, would
increase or decrease total consideration paid to us by investors
participating in this offering by approximately
$3.1 million, assuming the number of shares offered by us,
as set forth on the cover page of this prospectus, remains the
same and after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us
and would also increase or decrease the number of shares of our
common stock outstanding upon completion of this offering by
approximately 83,045 as a result of the resulting increase or
decrease in the number of shares issued to pay the major event
preference.
The sale of 1,666,666 shares of our common stock to be sold
by the selling stockholders in this offering will reduce the
number of shares held by existing stockholders to
9,183,042 shares, or 64.7% of the total shares outstanding,
and will increase the number of shares held by investors
participating in this offering to 5,000,000 shares, or
35.3% of the total shares outstanding. In addition, if the
underwriters exercise their over-allotment option in full, the
number of shares held by existing stockholders will be further
reduced to 8,933,042 shares, or 60.8% of the total shares
outstanding, and the number of shares held by investors
participating in this offering will be further increased to
5,750,000 shares, or 39.2% of the total shares outstanding.
As of September 30, 2010, there were options and warrants
(other than the Escalate Warrants) outstanding to purchase a
total of 2,599,809 shares of common stock at a weighted
average exercise price of $5.08 per share. The above discussion
and table assumes no exercise of options and warrants (other
than the Escalate Warrants) outstanding as of September 30,
2010 or of any later issued options and warrants. If all of
these options and warrants (other than the Escalate Warrants)
were exercised, our existing stockholders, including the holders
of these options and warrants (other than the Escalate
Warrants), would own 70.2% of the total number of shares of
common stock outstanding upon the closing of this offering and
our new investors would own 29.8% of the total number of shares
of our common stock upon the closing of this offering if the
underwriters do not exercise their over-allotment option. If the
underwriters exercise their over-allotment option in full, the
existing stockholders would own 66.7% of the total number of
shares of our common stock outstanding upon the closing of this
offering and our new investors would own 33.3% of the total
number of shares of our common stock upon the closing of this
offering.
41
SELECTED
CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated
statements of income (loss) and comprehensive income (loss),
balance sheet and other data for the periods indicated. The
selected consolidated statements of income (loss) and
comprehensive income (loss) data for the years ended
December 31, 2007, 2008 and 2009, and the consolidated
balance sheet data as of December 31, 2008 and 2009 have
been derived from our audited consolidated financial statements
included elsewhere in this prospectus. The selected consolidated
financial data as of December 31, 2007 have been derived
from our audited financial statements that are not included in
this prospectus. The selected consolidated financial data as of
and for the years ended December 31, 2005 and 2006, have
been derived from our unaudited consolidated financial
statements that are not included in this prospectus. Our
unaudited consolidated financial statements as of
September 30, 2010 and for the nine months ended
September 30, 2009 and 2010 have been prepared on the same
basis as our annual consolidated financial statements and
include all adjustments, which include only normal recurring
adjustments, necessary in the opinion of management for the fair
presentation of this data in all material respects. Our selected
consolidated financial data as of September 30, 2010 and
for the nine months ended September 30, 2009 and 2010 have
been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. This
information should be read in conjunction with
Capitalization, Managements Discussion
and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements
contained elsewhere in this prospectus. Our historical results
for any prior period are not necessarily indicative of results
to be expected in any future period.
Unaudited pro forma net income (loss) per share attributable to
RigNet, Inc. common stockholders and unaudited pro forma
weighted average shares outstanding reflect conversion of all
outstanding convertible preferred stock and accrued and unpaid
dividends on our series B and series C preferred stock
into shares of our common stock and the payment of the major
event preference to our preferred stockholders in shares of our
common stock, each of which will occur immediately prior to the
closing of this offering.
Each $1.00 increase or decrease in the assumed initial public
offering price of $15.00 per share, which is the midpoint
of the range set forth on the cover page of this prospectus,
would increase or decrease the number of shares of our common
stock outstanding upon the closing of this offering by
approximately 83,045 shares, the pro forma net income
(loss) per share attributable to RigNet, Inc. common
stockholders for the nine months ended September 30, 2010
of approximately: Basic $0.01 and Diluted remains unchanged, and
the pro forma weighted average shares outstanding for the nine
months ended September 30, 2010 of approximately: Basic 83
and Diluted 872 assuming that the number of shares offered by
us, as set forth on the cover page of this prospectus, remains
the same.
During 2006, the Company acquired 100% of OilCamp AS, or
OilCamp, as well as a 75.0% controlling interest in LandTel
Communications LLC, or LandTel, which established a 25.0%
redeemable, non-controlling interest. The Company subsequently
acquired the remaining non-controlling interest in LandTel with
purchases made in December 2008 (10.7%), February 2009 (7.3%)
and August 2010 (7.0%). As a result, the comparability of the
financial data disclosed in the following table may be affected.
We have never declared or paid any cash dividends.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands, except per share data)
|
|
|
Consolidated Statements of Income (Loss) and Comprehensive
Income (Loss) Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
13,282
|
|
|
$
|
29,214
|
|
|
$
|
67,164
|
|
|
$
|
89,909
|
|
|
$
|
80,936
|
|
|
$
|
60,871
|
|
|
$
|
68,604
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
5,200
|
|
|
|
16,290
|
|
|
|
29,747
|
|
|
|
39,294
|
|
|
|
35,165
|
|
|
|
26,200
|
|
|
|
31,242
|
|
Depreciation and amortization
|
|
|
2,237
|
|
|
|
5,863
|
|
|
|
9,451
|
|
|
|
10,519
|
|
|
|
12,554
|
|
|
|
9,596
|
|
|
|
11,349
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,898
|
|
|
|
2,898
|
|
|
|
|
|
Selling and marketing
|
|
|
1,875
|
|
|
|
4,123
|
|
|
|
2,405
|
|
|
|
2,605
|
|
|
|
2,187
|
|
|
|
1,559
|
|
|
|
1,576
|
|
General and administrative
|
|
|
4,938
|
|
|
|
9,540
|
|
|
|
20,338
|
|
|
|
21,277
|
|
|
|
16,444
|
|
|
|
11,213
|
|
|
|
15,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
14,250
|
|
|
|
35,816
|
|
|
|
61,941
|
|
|
|
73,695
|
|
|
|
69,248
|
|
|
|
51,466
|
|
|
|
60,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(968
|
)
|
|
|
(6,602
|
)
|
|
|
5,223
|
|
|
|
16,214
|
|
|
|
11,688
|
|
|
|
9,405
|
|
|
|
8,579
|
|
Interest expense
|
|
|
(230
|
)
|
|
|
(1,401
|
)
|
|
|
(5,497
|
)
|
|
|
(2,464
|
)
|
|
|
(5,146
|
)
|
|
|
(4,638
|
)
|
|
|
(1,174
|
)
|
Other income (expense), net
|
|
|
(78
|
)
|
|
|
26
|
|
|
|
(63
|
)
|
|
|
27
|
|
|
|
304
|
|
|
|
186
|
|
|
|
(645
|
)
|
Change in fair value of preferred stock derivatives
|
|
|
|
|
|
|
(7,657
|
)
|
|
|
(1,156
|
)
|
|
|
2,461
|
|
|
|
(21,009
|
)
|
|
|
(13,865
|
)
|
|
|
(12,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1,276
|
)
|
|
|
(15,634
|
)
|
|
|
(1,493
|
)
|
|
|
16,238
|
|
|
|
(14,163
|
)
|
|
|
(8,912
|
)
|
|
|
(5,624
|
)
|
Income tax expense
|
|
|
|
|
|
|
(115
|
)
|
|
|
(628
|
)
|
|
|
(5,882
|
)
|
|
|
(5,457
|
)
|
|
|
(3,863
|
)
|
|
|
(4,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(1,276
|
)
|
|
|
(15,749
|
)
|
|
|
(2,121
|
)
|
|
|
10,356
|
|
|
|
(19,620
|
)
|
|
|
(12,775
|
)
|
|
|
(10,577
|
)
|
Less: Net income (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable, non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
|
235
|
|
|
|
292
|
|
|
|
230
|
|
|
|
211
|
|
Redeemable, non-controlling interest
|
|
|
|
|
|
|
151
|
|
|
|
971
|
|
|
|
1,715
|
|
|
|
10
|
|
|
|
15
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to RigNet, Inc. stockholders
|
|
$
|
(1,276
|
)
|
|
$
|
(15,900
|
)
|
|
$
|
(3,259
|
)
|
|
$
|
8,406
|
|
|
$
|
(19,922
|
)
|
|
$
|
(13,020
|
)
|
|
$
|
(10,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to RigNet, Inc. common
stockholders
|
|
$
|
(1,811
|
)
|
|
$
|
(23,451
|
)
|
|
$
|
(3,931
|
)
|
|
$
|
(4,190
|
)
|
|
$
|
(22,118
|
)
|
|
$
|
(14,610
|
)
|
|
$
|
(13,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RigNet, Inc. common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.80
|
)
|
|
$
|
(8.48
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(4.16
|
)
|
|
$
|
(2.75
|
)
|
|
$
|
(2.50
|
)
|
Diluted
|
|
$
|
(1.80
|
)
|
|
$
|
(8.48
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(4.16
|
)
|
|
$
|
(2.75
|
)
|
|
$
|
(2.50
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,005
|
|
|
|
2,765
|
|
|
|
5,279
|
|
|
|
5,301
|
|
|
|
5,312
|
|
|
|
5,310
|
|
|
|
5,318
|
|
Diluted
|
|
|
1,005
|
|
|
|
2,765
|
|
|
|
5,279
|
|
|
|
5,301
|
|
|
|
5,312
|
|
|
|
5,310
|
|
|
|
5,318
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
316
|
|
|
$
|
3,096
|
|
|
$
|
6,862
|
|
|
$
|
15,376
|
|
|
$
|
11,379
|
|
|
$
|
13,917
|
|
|
$
|
14,514
|
|
Restricted cashcurrent portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
775
|
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
2,500
|
|
Restricted cashlong-term portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
7,500
|
|
|
|
7,500
|
|
Total assets
|
|
|
16,862
|
|
|
|
65,485
|
|
|
|
72,925
|
|
|
|
89,517
|
|
|
|
88,810
|
|
|
|
88,175
|
|
|
|
93,179
|
|
Current maturities of long-term debt
|
|
|
2,891
|
|
|
|
11,550
|
|
|
|
11,807
|
|
|
|
5,753
|
|
|
|
8,664
|
|
|
|
8,697
|
|
|
|
8,644
|
|
Long-term deferred revenue
|
|
|
391
|
|
|
|
693
|
|
|
|
679
|
|
|
|
1,516
|
|
|
|
348
|
|
|
|
293
|
|
|
|
348
|
|
Long-term debt
|
|
|
331
|
|
|
|
12,007
|
|
|
|
20,427
|
|
|
|
18,322
|
|
|
|
21,022
|
|
|
|
23,183
|
|
|
|
24,529
|
|
Preferred stock derivatives
|
|
|
|
|
|
|
8,241
|
|
|
|
9,808
|
|
|
|
8,413
|
|
|
|
30,446
|
|
|
|
22,962
|
|
|
|
44,447
|
|
Preferred stock
|
|
|
11
|
|
|
|
13,457
|
|
|
|
14,097
|
|
|
|
16,257
|
|
|
|
17,333
|
|
|
|
17,060
|
|
|
|
18,146
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (non-GAAP measure)
|
|
$
|
1,171
|
|
|
$
|
(471
|
)
|
|
$
|
17,536
|
|
|
$
|
30,409
|
|
|
$
|
29,093
|
|
|
$
|
22,751
|
|
|
$
|
21,311
|
|
Pro forma as adjusted net income (loss) attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RigNet, Inc. common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,074
|
|
|
|
|
|
|
$
|
1,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net income per share attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RigNet, Inc. common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.22
|
|
|
|
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.20
|
|
|
|
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,156
|
|
|
|
|
|
|
|
14,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,712
|
|
|
|
|
|
|
|
15,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
The following table presents a reconciliation of net income
(loss) to Adjusted EBITDA for each of the periods identified.
Net income (loss) is the most comparable GAAP measure to
Adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Reconciliation of Net Income (Loss) to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,276
|
)
|
|
$
|
(15,749
|
)
|
|
$
|
(2,121
|
)
|
|
$
|
10,356
|
|
|
$
|
(19,620
|
)
|
|
$
|
(12,775
|
)
|
|
$
|
(10,577
|
)
|
Interest expense
|
|
|
230
|
|
|
|
1,401
|
|
|
|
5,497
|
|
|
|
2,464
|
|
|
|
5,146
|
|
|
|
4,638
|
|
|
|
1,174
|
|
Depreciation and amortization
|
|
|
2,237
|
|
|
|
5,863
|
|
|
|
9,451
|
|
|
|
10,519
|
|
|
|
12,554
|
|
|
|
9,596
|
|
|
|
11,349
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,898
|
|
|
|
2,898
|
|
|
|
|
|
(Gain) loss on sale of property and equipment
|
|
|
(20
|
)
|
|
|
|
|
|
|
(27
|
)
|
|
|
(92
|
)
|
|
|
111
|
|
|
|
91
|
|
|
|
320
|
|
Change in fair value of preferred stock derivatives
|
|
|
|
|
|
|
7,657
|
|
|
|
1,156
|
|
|
|
(2,461
|
)
|
|
|
21,009
|
|
|
|
13,865
|
|
|
|
12,384
|
|
Stock-based compensation
|
|
|
|
|
|
|
242
|
|
|
|
169
|
|
|
|
231
|
|
|
|
277
|
|
|
|
203
|
|
|
|
334
|
|
Initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
2,783
|
|
|
|
3,510
|
|
|
|
1,261
|
|
|
|
372
|
|
|
|
1,374
|
|
Income tax expense
|
|
|
|
|
|
|
115
|
|
|
|
628
|
|
|
|
5,882
|
|
|
|
5,457
|
|
|
|
3,863
|
|
|
|
4,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (non-GAAP measure)
|
|
$
|
1,171
|
|
|
$
|
(471
|
)
|
|
$
|
17,536
|
|
|
$
|
30,409
|
|
|
$
|
29,093
|
|
|
$
|
22,751
|
|
|
$
|
21,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion together with our
consolidated financial statements and the related notes included
elsewhere in this prospectus. This discussion contains
forward-looking statements about our business and operations.
Our actual results may differ materially from those we currently
anticipate as a result of the factors we describe under
Risk Factors and elsewhere in this prospectus.
Overview
We, along with our wholly and majority-owned subsidiaries,
provide information and communication technology for the oil and
gas industry through a controlled and managed IP/MPLS global
network, enabling drilling contractors, oil companies and
oilfield service companies to communicate more effectively.
We enable our customers to deliver voice, fax, video and data,
in real-time, between remote sites and home offices throughout
the world while we manage and operate the infrastructure from
our land-based network operations center. We serve offshore
drilling rigs and production platforms, land rigs and remote
locations including offices and supply bases, in approximately
30 countries on six continents.
Our
Operations
We focus on developing customer relationships with the owners
and operators of drilling rig fleets resulting in a significant
portion of our revenue being concentrated in a few customers. In
addition, due to the concentration of our customers in the oil
and gas industry, we face the challenge of service demands
fluctuating with the exploration and development plans and
capital expenditures of that industry.
Network service customers are primarily served under
fixed-price, day-rate contracts, which are based on the concept
of pay per day of use and are consistent with terms used in the
oil and gas industry. Our contracts are generally in the form of
Master Service Agreements, or MSAs, with specific services being
provided under individual service orders that have a term of one
to three years with renewal options, while land-based locations
are generally shorter term or terminable on short notice without
a penalty. Service orders are executed under the MSA for
individual remote sites or groups of sites, and generally can be
terminated early on short notice without penalty in the event of
force majeure, breach of the MSA or cold stacking of a drilling
rig (when a rig is taken out of service and is expected to be
idle for a protracted period of time). In the year ended
December 31, 2009, our largest customer, who has been our
customer for over five years, provided approximately 10.9% of
our total revenue. Further, from 2007 to 2009, revenue generated
from this customer grew at a compounded annual rate of 28.7%.
We operate three reportable business segments based on
geographic location, which are managed as distinct business
units.
|
|
|
|
|
Eastern Hemisphere. Our eastern
hemisphere segment provides remote communications services for
offshore drilling rigs, production facilities, energy support
vessels and other remote sites. Our eastern hemisphere segment
services are performed out of our Norway, Qatar, United Kingdom
and Singapore based offices for customers and rig sites located
on the eastern side of the Atlantic Ocean primarily off the
coasts of the U.K., Norway and West Africa, around the Indian
Ocean in Qatar, Saudi Arabia and India, around the Pacific Ocean
near Australia, and within the South China Sea.
|
|
|
|
Western Hemisphere. Our western
hemisphere segment provides remote communications services for
offshore drilling rigs, production facilities, energy support
vessels and other remote sites. Our western hemisphere segment
services are performed out of
|
45
|
|
|
|
|
our United States and Brazil based offices for customers and rig
sites located on the western side of the Atlantic Ocean
primarily off the coasts of the United States, Mexico and
Brazil, and within the Gulf of Mexico, but excluding land rigs
and other land-based sites in North America.
|
|
|
|
|
|
U.S. Land. Our U.S. land
segment provides remote communications services for drilling
rigs and production facilities located onshore in North America.
Our U.S. land segment services are performed out of our
Louisiana based office for customers and rig sites located in
the continental United States.
|
Cost of revenue consists primarily of satellite charges, voice
and data termination costs, network operations expenses,
Internet connectivity fees and direct service labor. Satellite
charges consist of the costs associated with obtaining satellite
bandwidth (the measure of capacity) used in the transmission of
service to and from leased satellites. Network operations
expenses consist primarily of costs associated with the
operation of our network operations center, which is maintained
24 hours a day, seven days a week. Depreciation and
amortization is recognized on all property and equipment either
installed at a customers site or held at our corporate and
regional offices, as well as intangibles arising from
acquisitions. Selling and marketing expenses consist primarily
of salaries and commissions, travel costs and marketing
communications. General and administrative expenses consist of
expenses associated with our management, finance, contract,
support and administrative functions.
Profitability increases at a site as we add customers and
value-added services. Assumptions used in developing the day
rates for a site may not cover cost variances from inherent
uncertainties or unforeseen obstacles, including both physical
conditions and unexpected problems encountered with third party
service providers. Profitability risks, including oil and gas
market trends, service responsiveness to remote locations,
communication network complexities, political and economic
instability in certain regions, export restrictions, licenses
and other trade barriers, may result in the delay of service
initiation, which may negatively impact our results of
operations.
Critical
Accounting Policies
Certain of our accounting policies require judgment by
management in selecting the appropriate assumptions for
calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty.
These judgments are based on our historical experience, terms of
existing contracts, observance of trends in the industry,
information provided by our customers, and information available
from other outside sources, as appropriate. Actual results may
differ from these judgments under different assumptions or
conditions. Our accounting policies that require management to
apply significant judgment include:
Revenue
Recognition
All revenue is recognized when persuasive evidence of an
arrangement exists, the service is complete, the amount is fixed
or determinable and collectability is reasonably assured.
Network service fee revenue is based on fixed-price, day-rate
contracts and recognized monthly as the service is provided.
Generally, customer contracts also provide for installation and
maintenance services. Installation services are paid upon
initiation of the contract and recognized over the life of the
respective contract. Maintenance charges are recognized as
specific services are performed. Deferred revenue consists of
installation billings, customer deposits and other prepayments
for which services have not yet been rendered. Revenue is
reported net of any tax assessed and collected on behalf of a
governmental authority. Such tax is then remitted directly to
the appropriate jurisdictional entity.
46
Accounts
Receivable
Trade accounts receivable are recognized as customers are billed
in accordance with customer contracts. We report an allowance
for doubtful accounts for probable credit losses existing in
accounts receivable. Management determines the allowance based
on a review of currently outstanding receivables and our
historical collection experience. Significant individual
receivables and balances which have been outstanding greater
than 90 days are reviewed individually. Account balances,
when determined to be uncollectible, are charged against the
allowance.
Property and
Equipment
Property and equipment, which consists of rig-based
telecommunication equipment (including antennas), computer
equipment and furniture and other, is stated at acquisition cost
net of accumulated depreciation. Depreciation is calculated
using the straight-line method over the expected useful lives of
the respective assets, which range from two to seven years. We
assess property and equipment for impairment when events
indicate the carrying value exceeds fair value. Maintenance and
repair costs are charged to expense when incurred. During the
years ended December 31, 2008 and 2007, and the nine month
period ended September 30, 2010, no events have occurred to
indicate an impairment of our property and equipment. During the
nine months ended September 30, 2009, in connection with
the impairment of goodwill discussed below, we performed the
first step of the impairment test of LandTels property and
equipment and found that the carrying amount of the assets were
recoverable indicating that the assets were not impaired.
Preferred
Stock Derivatives
Preferred stock derivatives represent conversion and redemption
rights associated with our series A, B and C preferred
stock, which were bifurcated based on an analysis of the
features in relation to the preferred stock. Our preferred stock
derivatives are non-current and reported at fair value.
All contracts are evaluated for embedded derivatives which are
bifurcated when (a) the economic characteristics and risks
of such instruments are not clearly and closely related to the
economic characteristics and risks of the preferred stock
agreement, (b) the contract is not already reported at fair
value and (c) such instruments meet the definition of a
derivative instrument and are not scope exceptions under the
Financial Accounting Standards Boards (FASB) guidance on
Derivatives and Hedging. As of September 30, 2010
and 2009 and December 31, 2009 and 2008, we have identified
embedded features within our preferred stock agreements which
qualify as derivatives and are reported separately from
preferred stock. See our consolidated financial statements
included elsewhere in this prospectus.
Fair values of derivatives are determined using a combination of
the expected present value of future cash flows and a market
approach. The present value of future cash flows is estimated
using our most recent forecast and our weighted average cost of
capital. The market approach uses a market multiple on the cash
generated from operations. Significant estimates for determining
fair value include cash flow forecasts, our weighted average
cost of capital, projected income tax rates and market
multiples. For the purpose of measuring the fair value of the
preferred stock derivatives, all bifurcated derivatives were
bundled together for each class of preferred stock and were
reported at the aggregate fair value.
Goodwill
Goodwill relates to the acquisitions of LandTel and OilCamp as
the consideration paid exceeded the fair value of acquired
identifiable net tangible assets and intangibles. Goodwill is
reviewed for impairment annually, as of July 31st, with
additional evaluations being performed when events or
circumstances indicate that the carrying value of these assets
may not be recoverable.
47
Goodwill impairment is determined using a two-step process. The
first step of the impairment test is used to identify potential
impairment by comparing the fair value of each reporting unit to
the book value of the reporting unit, including goodwill. Fair
value of the reporting unit is determined using a combination of
the reporting units expected present value of future cash
flows and a market approach. The present value of future cash
flows is estimated using our most recent forecast and our
weighted average cost of capital. The market approach uses a
market multiple on the reporting units cash generated from
operations. Significant estimates for each reporting unit
included in our impairment analysis are cash flow forecasts, our
weighted average cost of capital, projected income tax rates and
market multiples. Changes in these estimates could affect the
estimated fair value of our reporting units and result in an
impairment of goodwill in a future period.
If the fair value of a reporting unit is less than its book
value, goodwill of the reporting unit is considered to be
impaired and the second step of the impairment test is performed
to measure the amount of impairment loss, if any. The second
step of the impairment test compares the implied fair value of
the reporting units goodwill with the book value of that
goodwill. If the book value of the reporting units
goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess.
The implied fair value of goodwill is determined by allocating
the reporting units fair value to all of its assets and
liabilities other than goodwill in the same manner as a purchase
price allocation.
Any impairment in the value of goodwill is charged to earnings
in the period such impairment is determined. In 2009, we
recognized $2.9 million in impairment of goodwill. Such
impairment was a result of a significant reduction in the
U.S. land rig count as of June 30, 2009 as a result of
reduced natural gas and oil prices. This circumstance resulted
in a reduction in our cash flow projections utilizing
Spears & Associates, Inc. forward land-based rig count
projections in the revision of internal forecasts, which reduced
the estimated fair value of our U.S. land reporting unit
below its carrying value. Our projections in 2009 provided for a
slow recovery of revenue and Adjusted EBITDA (non-GAAP measure)
from 2010 through 2014, which is consistent with our
year-to-date 2010 results.
We recorded no goodwill impairments in 2007, 2008, or for the
nine months ended September 30, 2010. As of July 31,
2010, our latest completed goodwill impairment testing date, the
fair values of our reporting units are substantially in excess
of their carrying values. While we believe that there appears to
be no indication of current or future impairment, historical
operating results may not be indicative of future operating
results and events and circumstances may occur causing a
triggering event in a period as short as three months.
Long-Term
Debt
Long-term debt is recognized in the consolidated balance sheets
net of costs incurred in connection with obtaining the
financing. Debt financing costs are deferred and reported as a
reduction to the principal amount of the debt. Such costs are
amortized over the life of the debt using the effective interest
rate method and included in interest expense in the consolidated
statements of income (loss) and comprehensive income (loss). We
believe the carrying amount of our debt, which has a floating
interest rate, approximates fair value, since the interest rates
are based on short-term maturities and recent quoted rates from
financial institutions.
Stock-Based
Compensation
We have two stock-based compensation plans, the RigNet, Inc.
2006 Long-Term Incentive Plan, or the 2006 Plan, and the RigNet
Inc. 2001 Performance Stock Option Plan, or the 2001 Plan. All
equity instruments granted under the two stock-based
compensation plans are settled in stock.
We recognize expense for stock-based compensation using the
calculated fair value of options on the grant date of the
awards. Fair value of options on the grant date is determined
using the Black-Scholes model, which requires judgment in
estimating the expected term of
48
the option, risk-free interest rate, expected volatility of our
stock and dividend yield of the option. We did not issue
fractional shares nor pay cash in lieu of fractional shares and
currently do not have any awards accounted for as a liability.
Our policy is to recognize compensation expense for
service-based awards on a straight-line basis over the requisite
service period for the entire award. Stock-based compensation
expense is based on awards ultimately expected to vest.
The fair value of each option award is estimated on the grant
date using a Black-Scholes option valuation model, which uses
certain assumptions as of the date of grant:
|
|
|
|
|
Expected Volatilitybased on peer group price
volatility for periods equivalent to the expected term of the
options
|
|
|
|
Expected Termexpected life adjusted based on
managements best estimate for the effects of
non-transferability, exercise restriction and behavioral
considerations
|
|
|
|
Risk-free Interest Raterisk-free rate, for
periods within the contractual terms of the options, is based on
the U.S. Treasury yield curve in effect at the time of grant
|
|
|
|
Dividend Yieldexpected dividends based on
the Companys historical dividend rate at the date of grant
|
Taxes
Income taxes are provided using the asset and liability method.
Under this method, income taxes (i.e., deferred tax assets,
deferred tax liabilities, taxes currently payable, refunds
receivable and tax expense) are recorded based on amounts
refundable or payable in the current year and include the
results of any difference between book and tax reporting.
Deferred income taxes reflect the tax effect of net operating
losses, foreign tax credits and the tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial statement and income tax purposes, as
determined under enacted tax laws and rates. Valuation
allowances are established when management determines that it is
more likely than not that some portion or the entire deferred
tax asset will not be realized. The financial effect of changes
in tax laws or rates is accounted for in the period of enactment.
Effective January 1, 2007, we adopted new accounting
provisions requiring the evaluation of our tax positions and
recognizing only tax benefits that, more likely than not, will
be sustained upon examination, including resolutions of any
related appeals or litigation processes, based on technical
merits of the position. Tax positions are measured at the
largest amount of benefit that has a greater than 50% likelihood
of being realized upon settlement. The cumulative effect of
applying these provisions on January 1, 2007 resulted in a
$0.4 million adjustment to beginning accumulated deficit.
From time to time, we engage in transactions in which the tax
consequences may be subject to uncertainty. Examples of such
transactions include business acquisitions, certain financing
transactions, international investments, stock-based
compensation and foreign tax credits. Significant judgment is
required in assessing and estimating the tax consequences of
these transactions. In the normal course of business, we prepare
and file tax returns based on interpretation of tax laws and
regulations, which are subject to examination by various taxing
authorities. Such examinations may result in future tax and
interest assessments by these taxing authorities. In determining
our tax provision for financial reporting purposes, we establish
a reserve for uncertain income tax positions unless such
positions are determined to be more likely than not sustained
upon examination, based on their technical merits. There is
considerable judgment involved in determining whether positions
taken on our tax return will, more likely than not, be sustained.
49
New Accounting
Pronouncements
See our audited and unaudited consolidated financial statements
included elsewhere in this prospectus for details regarding our
implementation and assessment of new accounting standards.
Results of
Operations
The following table sets forth selected financial and operating
data for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Percentage Change
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
2007 to
|
|
|
2008 to
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2008
|
|
|
2009
|
|
|
2009 to 2010
|
|
|
|
(in thousands, except percentages)
|
|
|
Revenue
|
|
$
|
67,164
|
|
|
$
|
89,909
|
|
|
$
|
80,936
|
|
|
$
|
60,871
|
|
|
$
|
68,604
|
|
|
|
33.9
|
%
|
|
|
(10.0
|
)%
|
|
|
12.7
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
29,747
|
|
|
|
39,294
|
|
|
|
35,165
|
|
|
|
26,200
|
|
|
|
31,242
|
|
|
|
32.1
|
%
|
|
|
(10.5
|
)%
|
|
|
19.2
|
%
|
Depreciation and amortization
|
|
|
9,451
|
|
|
|
10,519
|
|
|
|
12,554
|
|
|
|
9,596
|
|
|
|
11,349
|
|
|
|
11.3
|
%
|
|
|
19.3
|
%
|
|
|
18.3
|
%
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
2,898
|
|
|
|
2,898
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
(100.0
|
)%
|
Selling and marketing
|
|
|
2,405
|
|
|
|
2,605
|
|
|
|
2,187
|
|
|
|
1,559
|
|
|
|
1,576
|
|
|
|
8.3
|
%
|
|
|
(16.0
|
)%
|
|
|
1.1
|
%
|
General and administrative
|
|
|
20,338
|
|
|
|
21,277
|
|
|
|
16,444
|
|
|
|
11,213
|
|
|
|
15,858
|
|
|
|
4.6
|
%
|
|
|
(22.7
|
)%
|
|
|
41.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
61,941
|
|
|
|
73,695
|
|
|
|
69,248
|
|
|
|
51,466
|
|
|
|
60,025
|
|
|
|
19.0
|
%
|
|
|
(6.0
|
)%
|
|
|
16.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,223
|
|
|
|
16,214
|
|
|
|
11,688
|
|
|
|
9,405
|
|
|
|
8,579
|
|
|
|
210.4
|
%
|
|
|
(27.9
|
)%
|
|
|
(8.8
|
)%
|
Other income (expense), net
|
|
|
(6,716
|
)
|
|
|
24
|
|
|
|
(25,851
|
)
|
|
|
(18,317
|
)
|
|
|
(14,203
|
)
|
|
|
100.4
|
%
|
|
|
|
*
|
|
|
22.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1,493
|
)
|
|
|
16,238
|
|
|
|
(14,163
|
)
|
|
|
(8,912
|
)
|
|
|
(5,624
|
)
|
|
|
*
|
|
|
|
(187.2
|
)%
|
|
|
36.9
|
%
|
Income tax expense
|
|
|
(628
|
)
|
|
|
(5,882
|
)
|
|
|
(5,457
|
)
|
|
|
(3,863
|
)
|
|
|
(4,953
|
)
|
|
|
(836.6
|
)%
|
|
|
7.2
|
%
|
|
|
(28.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,121
|
)
|
|
|
10,356
|
|
|
|
(19,620
|
)
|
|
|
(12,775
|
)
|
|
|
(10,577
|
)
|
|
|
588.3
|
%
|
|
|
(289.5
|
)%
|
|
|
17.2
|
%
|
Less: net income attributable to non-controlling interests
|
|
|
1,138
|
|
|
|
1,950
|
|
|
|
302
|
|
|
|
245
|
|
|
|
236
|
|
|
|
71.4
|
%
|
|
|
(84.5
|
)%
|
|
|
(3.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to RigNet, Inc.
stockholders
|
|
$
|
(3,259
|
)
|
|
$
|
8,406
|
|
|
$
|
(19,922
|
)
|
|
$
|
(13,020
|
)
|
|
$
|
(10,813
|
)
|
|
|
357.9
|
%
|
|
|
(337.0
|
)%
|
|
|
17.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Amount is greater than 1000%,
therefore it is not meaningful.
|
Our business operations are managed through three reportable
operating segments: eastern hemisphere, western hemisphere and
U.S. land. The following represents selected financial
operating results for our segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Percentage Change
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
2007 to
|
|
|
2008 to
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2008
|
|
|
2009
|
|
|
2009 to 2010
|
|
|
|
(in thousands, except percentages)
|
|
|
Eastern hemisphere:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
38,229
|
|
|
$
|
54,586
|
|
|
$
|
60,917
|
|
|
$
|
45,835
|
|
|
$
|
45,979
|
|
|
|
42.8
|
%
|
|
|
11.6
|
%
|
|
|
0.3
|
%
|
Cost of revenue
|
|
|
20,674
|
|
|
|
23,721
|
|
|
|
23,247
|
|
|
|
17,523
|
|
|
|
17,986
|
|
|
|
14.7
|
%
|
|
|
(2.0
|
)%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin(1)
|
|
|
17,555
|
|
|
|
30,865
|
|
|
|
37,670
|
|
|
|
28,312
|
|
|
|
27,993
|
|
|
|
75.8
|
%
|
|
|
22.0
|
%
|
|
|
(1.1
|
)%
|
Depreciation and amortization
|
|
|
3,049
|
|
|
|
5,186
|
|
|
|
6,894
|
|
|
|
5,088
|
|
|
|
6,022
|
|
|
|
70.1
|
%
|
|
|
32.9
|
%
|
|
|
18.4
|
%
|
Selling, general and administrative
|
|
|
3,824
|
|
|
|
6,974
|
|
|
|
5,818
|
|
|
|
4,155
|
|
|
|
5,520
|
|
|
|
82.4
|
%
|
|
|
(16.6
|
)%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern hemisphere operating income
|
|
$
|
10,682
|
|
|
$
|
18,705
|
|
|
$
|
24,958
|
|
|
$
|
19,069
|
|
|
$
|
16,451
|
|
|
|
75.1
|
%
|
|
|
33.4
|
%
|
|
|
(13.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Percentage Change
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
2007 to
|
|
|
2008 to
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2008
|
|
|
2009
|
|
|
2009 to 2010
|
|
|
|
(in thousands, except percentages)
|
|
|
Western hemisphere:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
12,228
|
|
|
$
|
12,225
|
|
|
$
|
11,222
|
|
|
$
|
8,030
|
|
|
$
|
13,980
|
|
|
|
(0.0
|
)%
|
|
|
(8.2
|
)%
|
|
|
74.1
|
%
|
Cost of revenue
|
|
|
3,822
|
|
|
|
5,599
|
|
|
|
4,841
|
|
|
|
3,410
|
|
|
|
6,556
|
|
|
|
46.5
|
%
|
|
|
(13.5
|
)%
|
|
|
92.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin(1)
|
|
|
8,406
|
|
|
|
6,626
|
|
|
|
6,381
|
|
|
|
4,620
|
|
|
|
7,424
|
|
|
|
(21.2
|
)%
|
|
|
(3.7
|
)%
|
|
|
60.7
|
%
|
Depreciation and amortization
|
|
|
2,924
|
|
|
|
1,994
|
|
|
|
2,428
|
|
|
|
1,731
|
|
|
|
2,861
|
|
|
|
(31.8
|
)%
|
|
|
21.8
|
%
|
|
|
65.3
|
%
|
Selling, general and administrative
|
|
|
3,705
|
|
|
|
2,016
|
|
|
|
1,834
|
|
|
|
1,228
|
|
|
|
1,792
|
|
|
|
(45.6
|
)%
|
|
|
(9.0
|
)%
|
|
|
45.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western hemisphere operating income
|
|
$
|
1,777
|
|
|
$
|
2,616
|
|
|
$
|
2,119
|
|
|
$
|
1,661
|
|
|
$
|
2,771
|
|
|
|
47.2
|
%
|
|
|
(19.0
|
)%
|
|
|
66.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. land:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
17,480
|
|
|
$
|
23,047
|
|
|
$
|
9,850
|
|
|
$
|
7,617
|
|
|
$
|
8,971
|
|
|
|
31.8
|
%
|
|
|
(57.3
|
)%
|
|
|
17.8
|
%
|
Cost of revenue
|
|
|
4,972
|
|
|
|
9,011
|
|
|
|
5,195
|
|
|
|
4,006
|
|
|
|
4,829
|
|
|
|
81.2
|
%
|
|
|
(42.3
|
)%
|
|
|
20.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin(1)
|
|
|
12,508
|
|
|
|
14,036
|
|
|
|
4,655
|
|
|
|
3,611
|
|
|
|
4,142
|
|
|
|
12.2
|
%
|
|
|
(66.8
|
)%
|
|
|
14.7
|
%
|
Depreciation and amortization
|
|
|
3,450
|
|
|
|
3,325
|
|
|
|
3,204
|
|
|
|
2,767
|
|
|
|
2,484
|
|
|
|
(3.6
|
)%
|
|
|
(3.6
|
)%
|
|
|
(10.2
|
)%
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
2,898
|
|
|
|
2,898
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
(100.0
|
)%
|
Selling, general and administrative
|
|
|
5,672
|
|
|
|
4,166
|
|
|
|
2,749
|
|
|
|
2,137
|
|
|
|
1,910
|
|
|
|
(26.6
|
)%
|
|
|
(34.0
|
)%
|
|
|
(10.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. land operating income (loss)
|
|
$
|
3,386
|
|
|
$
|
6,545
|
|
|
$
|
(4,196
|
)
|
|
$
|
(4,191
|
)
|
|
$
|
(252
|
)
|
|
|
93.3
|
%
|
|
|
(164.1
|
)%
|
|
|
94.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Gross margin, a non-GAAP measure,
is defined as revenue less cost of revenue. This measure is used
to evaluate operating margins and the effectiveness of cost
management within our operating segments.
|
Nine Months
Ended September 30, 2010 and 2009
Revenue. Revenue increased by
$7.7 million, or 12.7%, to $68.6 million for the nine
months ended September 30, 2010 from $60.9 million for
the nine months ended September 30, 2009. The increase in
revenue was primarily attributable to a 74.1% increase in
western hemisphere revenue resulting primarily from our
expansion in Brazil and from an increase in contract orders and
unit counts. Furthermore, U.S. land revenue increased 17.8%
resulting primarily from increased U.S. land rig counts
driven by increased natural gas and oil prices.
Cost of Revenue. Costs increased by
$5.0 million, or 19.2%, to $31.2 million for the nine
months ended September 30, 2010 from $26.2 million for
the nine months ended September 30, 2009, primarily due to
the incremental network services and capacity required to serve
the increased unit counts. Gross margin decreased to 54.5% for
the nine months ended September 30, 2010 compared to 57.0%
for the nine months ended September 30, 2009. The decline
in the operating profitability resulted from decreases in gross
margin across all operating segments. This decrease in gross
margin is consistent with the increase in cost of revenue and
results from increased contracted satellite bandwidth costs to
position our business for future organic growth. The future
relationship between the revenue and profitability growth of our
operating segments will depend on a variety of factors,
including the timing of major contracts, which are difficult to
predict.
Depreciation and
Amortization. Depreciation and amortization
expenses increased by $1.7 million, or 18.3%, to
$11.3 million for the nine months ended September 30,
2010 from $9.6 million for the nine months ended
September 30, 2009.
The increase resulted from an increase in the acquisition of
rig-based equipment, which was acquired in conjunction with
growth initiatives during 2009 and 2010.
General and Administrative. General and
administrative expenses increased by $4.7 million, or
41.4%, to $15.9 million for the nine months ended
September 30, 2010 from $11.2 million for the nine
months ended September 30, 2009. The increase was primarily
due
51
to non-recurring costs of $1.4 million incurred during 2010
in preparation of an initial public offering of our common stock
combined with increases in (i) eastern hemisphere technical
personnel, (ii) development of our Brazil regional office
and (iii) senior level staff.
Other Income (Expense). The change in
other income (expense) is comprised primarily of changes in
interest expense and changes in fair value of preferred stock
derivatives. Interest expense decreased by $3.4 million, or
74.7%, to $1.2 million for the nine months ended
September 30, 2010 from $4.6 million for the nine
months ended September 30, 2009. The decrease in interest
expense also reflects the fact that the value of warrants issued
in connection with stockholder notes were fully recognized as
interest expense during 2009. We had no interest expense related
to warrants for the nine months ended September 30, 2010.
Change in fair value of preferred stock derivatives decreased by
$1.5 million, or 10.7%, to $12.4 million for the nine
months ended September 30, 2010 from $13.9 million for
the nine months ended September 30, 2009, as a result of
fair value changes related to conversion and redemption features
of our preferred stock. Accounting standards require the
separate valuation and recording of certain features of our
preferred stock until such shares are converted or redeemed.
Those features are revalued and reported each period at the then
fair value, with changes in fair value recorded in the
consolidated statements of income (loss) and comprehensive
income (loss).
Income Tax Expense. Our effective
income tax rate was (88.1)% and (43.3)% for the nine months
ended September 30, 2010 and 2009, respectively. Our
effective tax rates are affected by factors including
fluctuations in income across international jurisdictions with
varying tax rates, non-deductibility of changes in fair value of
preferred stock derivatives, changes in the valuation allowance
related to operating in a loss jurisdiction for which a benefit
cannot be claimed, and changes in income tax reserves.
Years Ended
December 31, 2009 and 2008
Revenue. Revenue decreased by
$9.0 million, or 10.0%, to $80.9 million for the year
ended December 31, 2009 from $89.9 million for the
year ended December 31, 2008. The decrease in revenue was
primarily attributable to our U.S. land segment which
declined by 57.3% in 2009 due to a decline in U.S. land rig
count as a result of reduced natural gas and oil prices.
According to the November 5, 2010 Baker Hughes North
America Rotary Rig Count report, the U.S. land rig count
dropped from the peak of 1,961 in August 2008 to the bottom of
829 in June 2009. Demand for our service and revenue can change
in as little as three months for our U.S. land operations
as drilling rig counts change in response to oil and gas prices.
Furthermore, western hemisphere revenue decreased 8.2% in 2009
due to the decline in shallow offshore drilling, while eastern
hemisphere revenue increased by 11.6% due to increased unit
counts and subscriptions in connection with long-term deepwater
drilling programs. Such programs have lag times of one to three
years before significantly impacting our related service
revenues.
Cost of Revenue. Costs decreased by
$4.1 million, or 10.5%, to $35.2 million for the year
ended December 31, 2009 from $39.3 million for the
year ended December 31, 2008, primarily due to reduced
materials, supplies, salaries and travel costs as a result of
the decrease in revenue. As the U.S. land rig count
declined in 2009, we implemented cost measures in all of our
reportable segments with priority on our U.S. land and our
western hemisphere segments. Gross margin increased slightly to
56.6% for the year ended December 31, 2009 compared to
56.3% for the year ended December 31, 2008. The increase in
gross margin was primarily driven by decreases in materials,
supplies, and travel costs, along with a shift to contract
labor. The cost decreases were partially offset by an increase
in contracted costs for satellite bandwidth associated with
increased unit counts in our eastern hemisphere segment. Eastern
hemisphere gross margin increased to 61.8% in 2009 from 56.5% in
2008,
52
and western hemisphere gross margin increased to 56.9% in 2009
from 54.2% in 2008. These increases were offset by a decrease in
U.S. land gross margin to 47.3% in 2009 from 60.9% in 2008.
The future relationship between the revenue and margin growth of
our operating segments will depend on a variety of factors,
including the timing of major contracts, our ability to leverage
existing infrastructure and our exploitation of market
opportunities, which are difficult to predict.
Depreciation and
Amortization. Depreciation and amortization
expenses increased by $2.0 million, or 19.3%, to
$12.5 million for the year ended December 31, 2009
from $10.5 million for the year ended December 31,
2008. The increase resulted from increased depreciation of
rig-based telecommunication equipment, which was acquired in
conjunction with growth in offshore operations in the western
hemisphere during 2008 and 2009.
Impairment of Goodwill. Goodwill
relates primarily to our U.S. land segment wherein goodwill
has been recorded from prior acquisitions of a majority-owned
subsidiary, LandTel. U.S. land revenue declined 57.3%
during 2009 due to a significant decline in land-based drilling
activity and rig counts, which hit a low point in June 2009,
resulting in a triggering event and an impairment test. The test
as of June 30, 2009 resulted in the recognition of a
$2.9 million impairment of goodwill.
Selling and Marketing. Selling and
marketing expenses decreased by $0.4 million, or 16.0%, to
$2.2 million for the year ended December 31, 2009 from
$2.6 million for the year ended December 31, 2008. The
decrease was primarily the result of cost management of
compensation due to the general downturn in the economy and,
secondarily, the decrease in revenue.
General and Administrative. General and
administrative expenses decreased by $4.9 million, or
22.7%, to $16.4 million for the year ended
December 31, 2009 from $21.3 million for the year
ended December 31, 2008. The decrease was primarily due to
non-recurring costs of $3.5 million incurred during 2008
related to a prior effort to prepare for an initial public
offering of our common stock. In addition, we reduced our
general and administrative compensation costs and travel, but
increased certain costs associated with implementing
U.S. GAAP accounting standards.
Other Income (Expense). The change in
other income expense is comprised primarily of changes in
interest expense and changes in fair value of preferred stock
derivatives. Interest expense increased $2.6 million, or
108.8%, to $5.1 million for the year ended
December 31, 2009 from $2.5 million for the year ended
December 31, 2008. The increase was primarily due to
expense recognized for warrants issued in connection with a
restructuring of short-term stockholder notes in December 2008.
This increased cost was partially offset by lower interest rates
resulting from the restructuring of our term loans with
financial institutions and full retirement of stockholder notes.
Change in fair value of preferred stock derivatives increased
other expense by $23.5 million, or 953.7%, to
$(21.0) million for the year ended December 31, 2009
from $2.5 million in income for the year ended
December 31, 2008, as a result of the increased fair value
of certain bifurcated derivatives related to the conversion and
redemption features of our preferred stock. The increase in
value of the conversion option was in part due to increased
probability of an initial public offering in 2010. Accounting
standards require the separate valuation and recording of
certain features of our preferred stock until such shares are
converted or redeemed. As a result the original proceeds were
allocated between the stock and separate derivative features.
Those features are revalued and reported each period at the then
fair value, with changes in fair value recorded in the
consolidated statements of income (loss) and comprehensive
income (loss).
53
Income Tax Expense. Our effective
income tax rate was (38.5)% for the year ended December 31,
2009. For the year ended December 31, 2008, our effective
income tax rate was 36.2%. See Note 16Income Taxes,
to our consolidated financial statements included elsewhere in
this prospectus for more information regarding the items
comprising our effective tax rates.
Years Ended
December 31, 2008 and 2007
Revenue. Revenue increased by
$22.7 million, or 33.9%, to $89.9 million for the year
ended December 31, 2008 from $67.2 million for the
year ended December 31, 2007. The increase in revenue was
primarily driven by a 42.8% increase in eastern hemisphere
revenue, as well as a 31.8% increase in U.S. land revenue,
due to increases in both offshore and onshore drilling activity
in these regions, driven by rising oil and gas prices.
Cost of Revenue. Costs increased by
$9.6 million, or 32.1%, to $39.3 million for the year
ended December 31, 2008 from $29.8 million for the
year ended December 31, 2007 due to increased contracted
satellite bandwidth, labor and materials related to the growth
in revenue and positioning for future growth. Gross margin
increased to 56.3% for the year ended December 31, 2008
compared to 55.7% for the year ended December 31, 2007. The
increase in the gross margin was driven primarily by increased
leverage of contracted satellite bandwidth capacities resulting
in eastern hemisphere gross margin increasing to 56.5% in 2008
from 45.9% in 2007. The gross margin of western hemisphere
decreased to 54.2% in 2008 compared to 68.7% in 2007 as did the
gross margin of U.S. land which decreased to 60.9% in 2008
compared to 71.6% in 2007, both due to increased satellite
bandwidth, materials and labor costs.
Depreciation and
Amortization. Depreciation and amortization
expenses increased by $1.0 million, or 11.3%, to
$10.5 million for the year ended December 31, 2008
from $9.5 million for the year ended December 31,
2007. The increase resulted from increased depreciation from
acquisitions of property and equipment primarily related to our
eastern hemisphere operations.
Selling and Marketing. Selling and
marketing expenses increased by $0.2 million, or 8.3%, to
$2.6 million for the year ended December 31, 2008 from
$2.4 million for the year ended December 31, 2007. The
increase was primarily a result of increased compensation costs
driven by the increase in revenue.
General and Administrative. General and
administrative expenses increased by $1.0 million, or 4.6%,
to $21.3 million for the year ended December 31, 2008
from $20.3 million for the year ended December 31,
2007. The increase was primarily due to costs incurred during
2008 for a prior effort to prepare for an initial public
offering of our common stock. The increase was partially offset
by cost management decreasing employee compensation costs.
Other Income (Expense). The change in
other income expense is comprised primarily of changes in
interest expense and changes in fair value of preferred stock
derivatives. Interest expense decreased $3.0 million, or
55.2%, to $2.5 million for the year ended December 31,
2008 from $5.5 million for the year ended December 31,
2007. The decrease resulted primarily from less interest expense
associated with warrants issued during 2006 and 2007 in
connection with stockholder notes, because they were fully
expensed as of December 31, 2007.
Changes in fair value of derivatives increased other income by
$3.7 million, or 312.9%, to $2.5 million in income for
the year ended December 31, 2008 from $(1.2) million
for the year ended December 31, 2007, as a result of the
decreased fair value of certain bifurcated derivatives related
to the conversion and redemption features of our preferred stock.
Income Tax Expense. Our effective
income tax rate was 36.2% for the year ended December 31,
2008. For the year ended December 31, 2007, our effective
income tax rate was
54
(42.1)%. See Note 16Income Taxes, to our consolidated
financial statements included elsewhere in this prospectus for
more information regarding the items comprising our effective
tax rates.
Liquidity and
Capital Resources
Our primary sources of liquidity and capital since our formation
have been proceeds from private equity issuances, stockholder
loans, cash flow from operations and bank borrowings. To date,
our primary use of capital has been to fund our growing
operations and to finance acquisitions. Through
September 30, 2010, we raised approximately
$38.3 million of net proceeds through private offerings of
our common and preferred stock. In addition, our stockholders
loaned $13.3 million in stockholder notes, which were
repaid in full during 2009. See Related Party
Transactions.
At September 30, 2010, we had working capital of
$9.5 million, including cash and cash equivalents of
$14.5 million, restricted cash of $2.5 million,
accounts receivable of $16.2 million and other current
assets of $4.5 million, offset by $4.8 million in
accounts payable, $6.6 million in accrued expenses,
$8.6 million in current maturities of long-term debt,
$7.1 million in tax related liabilities and
$1.1 million in deferred revenue.
Our term loan agreement imposes certain restrictions, including
on our ability to obtain additional debt financing and on our
payment of cash dividends; and requires us to maintain certain
financial covenants such as a funded debt to adjusted earnings
ratio, as defined in the agreement, of less than or equal to 2.0
to 1.0, and a fixed charge coverage ratio of not less than 1.5
to 1.0. At September 30, 2010, our adjusted earnings, as
defined in the agreement, exceeded the minimum levels required
by the fixed charge coverage ratio by 39.6% and the funded debt
to adjusted earnings ratio by 66.7%.
At December 31, 2009, we had working capital of
$5.3 million, including cash and cash equivalents of
$11.4 million, restricted cash of $2.5 million,
accounts receivable of $12.7 million and other current
assets of $4.4 million, offset by $3.8 million in
accounts payable, $5.9 million in accrued expenses,
$8.7 million in current maturities of long-term debt,
$6.0 million in tax related liabilities and
$1.3 million in deferred revenue.
On May 8, 2010, the LandTel non-controlling interest owner
formally exercised its right to sell its remaining interest to
the Company for $4.6 million, based on a previously
agreed-upon formula. On July 21, 2010, the Company made a
cash payment of $4.6 million to satisfy its obligation for
the remaining redeemable,
non-controlling
interest consistent with the previously agreed upon formula. On
September 23, 2010, the LandTel non-controlling interest
owner exercised a right to a recalculation of the purchase price
by a third party arbiter. Prior to the arbitration, the parties
agreed to a purchase price of $4.7 million on October 6,
2010. The $0.1 million incremental purchase price is
expected to be paid by December 31, 2010. The owner has
assigned to us all remaining shares in LandTel which is now our
wholly-owned subsidiary. In addition, capital resources of
$4.8 million for the year ended December 31, 2009 and
$6.7 million for the year ended December 31, 2008 were
used to redeem redeemable non-controlling interests in LandTel.
We amended our term loan agreement on June 10, 2010 and, again,
on August 19, 2010 to increase outstanding borrowings by
$10.0 million to approximately $35.5 million. The
amendments also temporarily reduced restricted cash from
$10.0 million to $5.25 million from July 3, 2010
to August 19, 2010 at which time we agreed to maintain
$10.0 million in restricted cash through July 3, 2011,
after which we may reduce total restricted cash to
$7.5 million. Uses of the additional borrowings include
providing $5.25 million for working capital and general
corporate purposes and the remaining $4.75 million was used
to increase restricted cash from $5.25 million to
$10.0 million. The increase in borrowings will be due upon
maturity of the loan
55
on May 31, 2012. With respect to our term loan covenants,
the increase in long-term debt does not affect our fixed charge
coverage ratio.
Subsequently, on November 9, 2010, we amended our term loan
agreement providing for a draw feature under which we can borrow
up to an additional $5.5 million to be used solely for
purchases of equipment. The advance period commenced on
November 9, 2010 and ends on May 9, 2011. Under the
terms of the amendment, we can draw 75% of the cost of the
equipment from the bank with 25% being funded from available
cash and cash equivalents. Borrowings under this feature of our
term loan agreement totaled $1.1 million at
November 24, 2010.
Since 2007, we have spent $7.2 million to
$10.2 million annually on capital expenditures. Based on
our current expectations, we believe our liquidity and capital
resources will be sufficient for the conduct of our business and
operations. Furthermore, we expect that the net proceeds to us
from this offering will be sufficient for our projected capital
expenditures.
During the next twelve months, we expect our principal sources
of liquidity to be cash flows from operating activities,
available cash and cash equivalents and the expansion of our
existing term loan agreement as evidenced by our November 9,
2010 amendment to our term loan discussed further below. In
forecasting our cash flows we have considered factors including
contracted services related to long-term deepwater drilling
programs, U.S. land rig count trends, projected oil and
natural gas prices and contracted and available satellite
bandwidth. During the nine months ended September 30, 2010,
we expended $6.6 million to satisfy debt repayment
obligations and $9.6 million on capital expenditures funded
from available working capital and cash flows from operations.
We expect that cash flows from operations, expansion of our
existing term loan agreement, and the proceeds of this offering
will fully fund our capital expenditure requirements, debt
obligations and working capital needs for the next twelve months.
Beyond the next twelve months, we expect our principal sources
of liquidity to be cash flows provided by operating activities,
cash and cash equivalents and additional financing activities we
may pursue, which may include equity offerings. We intend to use
cash from operations and the net proceeds generated by this
offering for capital expenditures, working capital and other
general corporate purposes. In addition, we may also use a
portion of the net proceeds of this offering to finance growth
through the acquisition of, or investment into, businesses,
products, services or technologies complementary to our current
business, through mergers, acquisitions, joint ventures or
otherwise. However, we have no agreements or commitments for any
specific acquisitions at this time.
While we believe we have sufficient liquidity and capital
resources to meet our current operating requirements and
expansion plans, we may want to pursue additional expansion
opportunities within the next year which could require
additional financing, either debt or equity. If we are unable to
secure additional financing at favorable terms in order to
pursue such additional expansions opportunities, our ability to
maintain our desired level of revenue growth could be materially
adversely affected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Consolidated Statements of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning
|
|
$
|
3,096
|
|
|
$
|
6,864
|
|
|
$
|
15,376
|
|
|
$
|
15,376
|
|
|
$
|
11,379
|
|
Net cash provided by operating activities
|
|
|
5,352
|
|
|
|
19,655
|
|
|
|
26,189
|
|
|
|
22,644
|
|
|
|
14,812
|
|
Net cash used by investing activities
|
|
|
(7,204
|
)
|
|
|
(9,363
|
)
|
|
|
(19,305
|
)
|
|
|
(16,279
|
)
|
|
|
(9,586
|
)
|
Net cash provided (used) by financing activities
|
|
|
5,871
|
|
|
|
(1,669
|
)
|
|
|
(10,774
|
)
|
|
|
(9,106
|
)
|
|
|
(1,466
|
)
|
Changes is foreign currency translation
|
|
|
(251
|
)
|
|
|
(111
|
)
|
|
|
(107
|
)
|
|
|
1,282
|
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending
|
|
$
|
6,864
|
|
|
$
|
15,376
|
|
|
$
|
11,379
|
|
|
$
|
13,917
|
|
|
$
|
14,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Operating
Activities
Net cash provided by operating activities was $14.8 million
for the nine months ended September 30, 2010 compared to
$22.6 million for the nine months ended September 30,
2009. The decrease in cash provided by operating activities of
$7.8 million was primarily due to the timing of collections
of our accounts receivable. Net cash provided by operating
activities was $26.2 million for the year ended
December 31, 2009 compared to $19.7 million for the
year ended December 31, 2008. The increase in cash provided
by operating activities of $6.5 million was primarily due
to increased cash flow from the eastern hemisphere operations
and cost management, partially offset by decreased cash flow
from U.S. land operations.
Our cash provided by operations is subject to many variables,
the most significant of which is the volatility of the oil and
gas industry and, therefore, the demand for our services. Other
factors impacting operating cash flows include the availability
and cost of satellite bandwidth, as well as the timing of
collecting our receivables. Our future cash flow from operations
will depend on our ability to increase our contracted services
through our sales and marketing efforts while leveraging the
contracted satellite and other communication service costs.
Currently, the Norwegian kroner and the British pound sterling
are the currencies that could materially impact our liquidity.
Our historical experience with exchange rates for these
currencies has been relatively stable and, consequently, we do
not currently hedge these risks, but evaluate these risks on a
continual basis and may put financial instruments in place in
the future if deemed necessary. During the nine months ended
September 30, 2010 and 2009, 77.8% and 77.2% of our revenue
was denominated in U.S. dollars, respectively.
Investing
Activities
Net cash used by investing activities was $9.6 million for
the nine months ended September 30, 2010 compared to
$16.3 million for the nine months ended September 30,
2009, which included a $9.2 million increase in restricted
cash and a $2.5 million increase in capital expenditures.
Net cash used by investing activities was $19.3 million,
$9.4 million and $7.2 million in the years ended
December 31, 2009, 2008 and 2007, respectively. Of these
amounts $10.2 million, $8.7 million and
$7.2 million during the years ended December 31, 2009,
2008 and 2007, respectively, were for capital expenditures. The
remaining cash used by investing activities resulted from
increases in our restricted cash. The continued growth in
capital expenditures of $2.5 million for the nine months
ended September 30, 2010 and $1.5 million for each of
the years ended December 31, 2009 and 2008, compared to
each of the respective prior periods, is primarily attributable
to growth opportunities arising from increasing demand for
deepwater drilling in our eastern and western hemispheres
operations. As we expand our global operations, we expect our
capital expenditure trend to continue using available cash,
proceeds from this offering and borrowings from our term loan,
discussed above, to fund such expenditures.
Financing
Activities
Net cash used by financing activities was $1.5 million in
the nine month period ended September 30, 2010 as compared
to $9.1 million in the same period ended September 30,
2009. Net cash used by financing activities was
$10.8 million and $1.7 million in the years ended
December 31, 2009 and 2008, respectively, and net cash
provided by financing activities was $5.9 million in the
year ended December 31, 2007. Cash used in financing
activities during the nine month periods ended
September 30, 2010 and 2009, were attributable to principal
payments of long-term debt and the redemption of non-controlling
interest. Cash proceeds in financing activities during the nine
month periods ended September 30, 2010 was attributable to
the amendment of our term loan in August 2010, increasing our
principal balance by
57
$10.0 million. During the year ended December 31,
2009, we also refinanced our outstanding credit facilities and
notes to stockholders with a new term loan facility providing
cash proceeds of $35.0 million, as discussed in more detail
below, made principal payments of long-term debt of
$40.4 million and redeemed a portion of the outstanding
non-controlling interest for $4.8 million. During the year
ended December 31, 2008, we issued notes to stockholders
for $6.0 million, made principal payments of long-term debt
of $3.9 million and redeemed a portion of outstanding
non-controlling interest in LandTel for $6.7 million.
During the year ended December 31, 2007, our cash provided
by financing activities of $5.9 million was primarily due
to the issuance of notes to stockholders in the amount of
$5.4 million.
Term
Loan
In May 2009, we entered into a $35.0 million term loan
agreement with two participating financial institutions, the
proceeds of which were used to repay existing outstanding parent
and subsidiary term loans and credit facilities and all
outstanding notes to stockholders. The term loan is secured by
substantially all of our assets and bears interest at a rate
ranging from 4.3% to 5.3% based on a funded debt to adjusted
earnings ratio, as defined in the agreement. Interest is payable
monthly along with quarterly installments of approximately
$2.2 million in principal. At December 31, 2009,
$29.9 million was outstanding, with an interest rate of
5.0%. The weighted average interest rate for the year ended
December 31, 2009 was 5.2%. At September 30, 2010,
$33.3 million was outstanding, with an interest rate of
5.0%. The weighted average interest rate for the nine months
ended September 30, 2010 was 5.0%.
On August 19, 2010, we amended our term loan agreement to
increase outstanding borrowings by $10.0 million to
approximately $35.5 million. Uses of the additional
borrowings include providing $5.25 million for working
capital and general corporate purposes and the remaining
$4.75 million will be used to increase restricted cash from
$5.25 million to $10.0 million. The increase in
borrowings will be due upon maturity of the loan on May 31,
2012.
On November 9, 2010, we amended our term loan agreement
providing for a draw feature under which we can borrow up to an
additional $5.5 million to be used solely for purchases of
equipment. The advance period commenced on November 9, 2010
and ends on May 8, 2011. Under the terms of the amendment,
we can draw 75% of the cost of the equipment from the bank with
25% being funded from available cash and cash equivalents.
Our term loan agreement imposes certain restrictions, including
on our ability to obtain additional debt financing and on our
payment of cash dividends; and requires us to maintain certain
financial covenants such as a funded debt to adjusted earnings
ratio, as defined in the agreement, of less than or equal to 2.0
to 1.0, and a fixed charge coverage ratio of not less than 1.5
to 1.0.
Off-Balance
Sheet Arrangements
We do not engage in any off-balance sheet arrangements.
58
Contractual
Obligations and Commercial Commitments
At December 31, 2009, we had contractual obligations and
commercial commitments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2010
|
|
|
2011 - 2012
|
|
|
2013 - 2014
|
|
|
2015 and Beyond
|
|
|
|
(In thousands)
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
29,681
|
|
|
$
|
8,659
|
|
|
$
|
21,022
|
|
|
$
|
|
|
|
$
|
|
|
Equipment loans
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (1)
|
|
|
2,625
|
|
|
|
1,439
|
|
|
|
1,186
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
2,295
|
|
|
|
751
|
|
|
|
775
|
|
|
|
625
|
|
|
|
144
|
|
Redeemable non-controlling interest (3)
|
|
|
4,576
|
|
|
|
4,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends (2)
|
|
|
1,095
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock derivatives (2)
|
|
|
30,446
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock (2)
|
|
|
17,333
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities
|
|
|
5,994
|
|
|
|
|
|
|
|
348
|
|
|
|
|
|
|
|
5,646
|
|
Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite and network services
|
|
|
17,589
|
|
|
|
10,300
|
|
|
|
6,475
|
|
|
|
814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,639
|
|
|
$
|
25,730
|
|
|
$
|
29,806
|
|
|
$
|
1,439
|
|
|
$
|
5,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Computed on the balance outstanding
at December 31, 2009 through the term of the loan, at the
interest rate in effect at that time.
|
|
(2)
|
|
Preferred stock, inclusive of the
separately reported derivatives, are convertible under certain
circumstances. The initial public offering is such a
circumstance. As described earlier in this prospectus, we plan
to convert all outstanding preferred stock and accrued and
unpaid dividends on our series B and series C
preferred stock into common stock and pay the major event
preference in common stock immediately prior to this public
offering.
|
|
(3)
|
|
The LandTel redeemable,
non-controlling interest was redeemed for $4.7 million
during 2010 by making a $4.6 million payment to the LandTel
non-controlling interest owner, with the balance expected to be
paid prior to December 31, 2010.
|
Adjusted EBITDA
(Non-GAAP Measure)
The non-GAAP financial measure, Adjusted EBITDA, as defined
earlier in this prospectus and used by us, may not be comparable
to similarly titled measures used by other companies. Therefore,
this non-GAAP measure should be considered in conjunction with
net income and other performance measures prepared in accordance
with GAAP, such as operating income or net cash provided by
operating activities. Further, Adjusted EBITDA should not be
considered in isolation or as a substitute for GAAP measures
such as net income, operating income or any other GAAP measure
of liquidity or financial performance.
59
The following presents a reconciliation of our net income to
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(2,121
|
)
|
|
$
|
10,356
|
|
|
$
|
(19,620
|
)
|
|
$
|
(12,775
|
)
|
|
$
|
(10,577
|
)
|
Interest expense
|
|
|
5,497
|
|
|
|
2,464
|
|
|
|
5,146
|
|
|
|
4,638
|
|
|
|
1,174
|
|
Depreciation and amortization
|
|
|
9,451
|
|
|
|
10,519
|
|
|
|
12,554
|
|
|
|
9,596
|
|
|
|
11,349
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
2,898
|
|
|
|
2,898
|
|
|
|
|
|
(Gain) loss on sale of property and equipment
|
|
|
(27
|
)
|
|
|
(92
|
)
|
|
|
111
|
|
|
|
91
|
|
|
|
320
|
|
Change in fair value of preferred stock derivatives
|
|
|
1,156
|
|
|
|
(2,461
|
)
|
|
|
21,009
|
|
|
|
13,865
|
|
|
|
12,384
|
|
Stock-based compensation
|
|
|
169
|
|
|
|
231
|
|
|
|
277
|
|
|
|
203
|
|
|
|
334
|
|
Initial public offering costs
|
|
|
2,783
|
|
|
|
3,510
|
|
|
|
1,261
|
|
|
|
372
|
|
|
|
1,374
|
|
Income tax expense
|
|
|
628
|
|
|
|
5,882
|
|
|
|
5,457
|
|
|
|
3,863
|
|
|
|
4,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
17,536
|
|
|
$
|
30,409
|
|
|
$
|
29,093
|
|
|
$
|
22,751
|
|
|
$
|
21,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We evaluate Adjusted EBITDA generated from our operations and
operating segments to assess the potential recovery of
historical capital expenditures, determine timing and investment
levels for growth opportunities, extend commitments of satellite
bandwidth cost to expand our offshore production platform and
vessel market share, invest in new products and services, expand
or open new offices, service centers and Secure Oil Information
Link, or SOIL, nodes and assist purchasing synergies.
During the nine months ended September 30, 2010, Adjusted
EBITDA declined $1.5 million, or 6.6%, from
$22.8 million in 2009 to $21.3 million in 2010 which
resulted primarily from additional regional and senior staff
members as well as increased contracted satellite bandwidth
costs to position for future organic growth. Similarly, Adjusted
EBITDA declined $1.3 million, or 4.3%, to
$29.1 million for the year ended December 31, 2009
from $30.4 million for the year ended December 31,
2008. The decrease in Adjusted EBITDA was primarily attributable
to our U.S. land segment driven by a decline in onshore
drilling activity as a result of reduced natural gas and oil
prices. Adjusted EBITDA increased $12.9 million, or 73.4%,
to $30.4 million for the year ended December 31, 2008
from $17.5 million for the year ended December 31,
2007. The increase resulted from revenue growth across all
operating segments along with improved leverage of contracted
satellite bandwidth capacities and expansion of the quality and
capability of our SOIL network.
Quantitative and
Qualitative Disclosures about Market Risk
We are subject to a variety of risks, including foreign currency
exchange rate fluctuations relating to foreign operations and
certain purchases from foreign vendors. In the normal course of
business, we assess these risks and have established policies
and procedures to manage our exposure to fluctuations in foreign
currency values.
Our objective in managing our exposure to foreign currency
exchange rate fluctuations is to reduce the impact of adverse
fluctuations in earnings and cash flows associated with foreign
currency exchange rates. Accordingly, we may utilize from time
to time foreign currency forward contracts to hedge our exposure
on firm commitments denominated in foreign currency. During the
year ended December 31, 2009, 22.8% of our revenues were
earned in
non-U.S. currencies.
At September 30, 2010 and December 31, 2009, we had no
significant outstanding foreign exchange contracts.
60
Our results of operations and cash flows are subject to
fluctuations due to changes in interest rates primarily from our
variable interest rate long-term debt. We do not currently use
interest rate derivative instruments to manage exposure to
interest rate changes. The following analysis reflects the
annual impacts of potential changes in our interest rate to net
income (loss) attributable to us and our total
stockholders equity based on our outstanding long-term
debt on September 30, 2010 and December 31, 2009
assuming those liabilities were outstanding for the entire year.
|
|
|
|
|
|
|
|
|
|
|
Effect on Net Income (Loss)
|
|
|
|
and Equity Increase/Decrease
|
|
|
|
December 31, 2009
|
|
|
September 30, 2010
|
|
|
|
(In thousands)
|
|
|
1% Decrease/increase in rate
|
|
$
|
297
|
|
|
$
|
332
|
|
2% Decrease/increase in rate
|
|
$
|
594
|
|
|
$
|
663
|
|
3% Decrease/increase in rate
|
|
$
|
891
|
|
|
$
|
995
|
|
Internal Control
over Financial Reporting
Effective internal control over financial reporting is necessary
for us to provide reliable annual and interim financial reports
and to prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, our operating results and financial
condition could be materially misstated and our reputation could
be significantly harmed. As a private company, we were not
subject to the same standards applicable to a public company. As
a public company, we will be subject to requirements and
standards set by the SEC.
In relation to our consolidated financial statements for the
year ended December 31, 2009, we identified a material
weakness in our internal controls over our financial close and
reporting cycle. In addition, we identified a significant
deficiency in our property and equipment records and accounting
and other control deficiencies.
In relation to our consolidated financial statements for the
year ended December 31, 2008, we identified a significant
deficiency in our year end reporting process and other control
deficiencies.
A deficiency in internal control over financial
reporting exists when the design or operation of a control does
not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect and
correct misstatements on a timely basis. A deficiency in design
exists when (a) a control necessary to meet the control
objective is missing, or (b) an existing control is not
properly designed so that, even if the control operates as
designed, the control objective would not be met. A deficiency
in operation exists when (a) a properly designed control
does not operate as designed, or (b) the person performing
the control does not possess the necessary authority or
competence to perform the control effectively.
A material weakness is a deficiency, or combination
of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material
misstatement of the entitys financial statements will not
be prevented, or detected and corrected on a timely basis.
A significant deficiency is a deficiency, or
combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet
important enough to merit attention by those charged with
governance.
61
Material
Weakness
The material weakness over our financial close and reporting
cycle identified uncontrolled risks related to:
|
|
|
|
|
documentation and the independent review and approval of journal
entries;
|
|
|
|
significant account reconciliations;
|
|
|
|
documentation of management estimates;
|
|
|
|
manual consolidation process and the use of top-side
entries; and
|
|
|
|
evaluation of tax and accounting impacts on unusual transactions.
|
Remediation
Activities
In order to strengthen our internal control over our financial
reporting, we have:
|
|
|
|
|
expanded our financial and accounting staff increasing the level
of experience in public company accounting matters and
disclosures;
|
|
|
|
engaged outside consultants with extensive financial reporting
experience to augment our current accounting resources to assist
with this initial public offering and future filings;
|
|
|
|
implemented a company-wide financial accounting and reporting
system to account for all financial operations and support a
common closing process throughout the organization and have
utilized independent third-party consultants to assist with the
implementation of the system, which we expect to complete during
2010;
|
|
|
|
developed and implemented a process for documenting account
reconciliations, journal entries and changes in estimates during
our monthly, quarterly and annual close processes;
|
|
|
|
implemented independent review and approval procedures for
journal entries and application of accounting standards related
to unusual transactions; and
|
|
|
|
developed procedures to identify and track fixed asset changes,
including additions, movements, sales and dispositions.
|
While we have taken certain actions to address the material
weakness and deficiencies identified, additional measures will
be necessary and these measures, along with other measures we
expect to take to improve our internal control over financial
reporting, may not be sufficient to address the material
weakness or deficiencies identified to provide reasonable
assurance that our internal control over financial reporting is
effective. Material weaknesses or other deficiencies in our
internal controls may impede our ability to produce timely and
accurate financial statements, which could cause us to fail to
file our periodic reports timely, result in inaccurate financial
reporting or restatements of our financial statements, subject
our stock to delisting and materially harm our business
reputation and our stock price.
Limitations of
the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the internal control system are met. Because of
the inherent limitations of any internal control system, no
evaluation of controls can provide absolute assurance that all
control issues, if any, within a company have been detected.
The process of improving our internal controls has required and
will continue to require us to expend significant resources to
design, implement and maintain a system of internal controls
that is adequate to satisfy our reporting obligations as a
public company. As a private company, we were not subject to the
same internal control standards applicable to a public company.
As a result of our initial public offering, we will, after a
phase-in period applicable to
62
all companies after filing an initial public offering, become
subject to the requirements of the Sarbanes-Oxley Act of 2002,
Section 404, which requires our management to assess the
effectiveness of our internal controls over financial reporting.
The remediation efforts we have taken may not be successful in
meeting this standard. We will continue to evaluate the
effectiveness of our disclosure controls and procedures and
internal controls over financial reporting on an ongoing basis.
63
OUR
COMPANY
Overview
We are a leading data network infrastructure provider serving
the remote communications needs of the oil and gas industry.
Through a controlled and managed IP/MPLS (Internet
Protocol/Multiprotocol Label Switching) global network, we
deliver voice, data, video and other value-added services, under
a multi-tenant revenue model. These turnkey solutions simplify
the management of communications services and allow our users to
focus attention on their core drilling and production
operations. Our customers use our secure communications and
private extranet to manage information flows and execute
mission-critical operations primarily in remote areas where
conventional telecommunications infrastructure is either
unavailable or unreliable. We provide our clients in the oil and
gas industry with a broad suite of services available through
our IP/MPLS global network infrastructure, ranging from voice
and data to advanced video and application hosting. We offer our
clients what is often the sole means of communications with
their remote operations, including offshore and land-based
drilling rigs, offshore production facilities, energy support
vessels and support offices. To ensure the maximum reliability
demanded by our customers, we deliver our services through an
IP/MPLS global network, tuned and optimized for remote
communications with satellite endpoints, that serves oil and gas
customers in North America and internationally. As of
September 30, 2010, we were operating as the primary
provider of remote communications and collaborative applications
to over 375 customers in over 800 locations in
approximately 30 countries on six continents.
The emergence of highly sophisticated processing and
visualization systems has allowed oil and gas companies to make
decisions based on reliable and secure real-time information
carried by our network from anywhere in the world to their home
offices. While traditional remote communications providers in
the oil and gas industry have historically focused on delivering
voice services or providing data connectivity, we provide a
fully-managed IP/MPLS global communications network designed for
greater reliability, security, flexibility and scalability as
compared to other network transport technologies. We deliver
turnkey solutions and value-added services that simplify the
management of multiple communications services, allowing our
customers to focus their attention on their core oil and gas
drilling and production operations. We enable reliable
information flows between remote sites and to centralized
customer offices that are critical to their efficient
operations. We supply our customers with solutions to enable
broadband data, voice and video communications with quality,
reliability, security and scalability that is superior to
conventional switched transport networks. Key aspects of our
services include:
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managed solutions offered at a per rig, per day subscription
rate primarily through customer agreements with terms that
typically range from one month to three years, with some
customer agreement terms as long as five years;
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enhanced
end-to-end
IP/MPLS global network to ensure significantly greater network
reliability, faster trouble shooting and service restoration
time and quality of service for various forms of data traffic;
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enhanced
end-to-end
IP/MPLS network allows new components to be plugged into our
network and be immediately available for use
(plug-and-play);
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a network designed to accommodate multiple customer groups
resident at a site, including rig owners, drillers, operators,
service companies and
pay-per-use
individuals;
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value-added services, such as WiFi hotspots, Internet kiosks and
video conferencing, benefiting the multiple customer groups
resident at a site;
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proactive network monitoring and management through a network
operations center that actively manages network reliability at
all times and serves as an in-bound call center for trouble
shooting, 24 hours per day, 365 days per year;
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engineering and design services to determine the appropriate
product and service solution for each customer;
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installation of
on-site
equipment designed to perform in extreme and harsh environments
with minimal maintenance; and
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maintenance and support through locally-deployed engineering and
service support teams and warehoused spare equipment inventories.
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We provide critically important communications services to our
customers that enable them to operate efficiently at a cost
which is a relatively small component of our customers
operating expenses for a drilling or production related project.
We believe our solutions help our customers to increase their
revenue and to better manage their costs and resource
allocations through the delivery, use and management of
real-time information. We believe our commitment to our
customers and the embedded nature of our solutions strengthen
and extend our customer relationships. Our top two customers
since 2005 have consistently been Noble Corporation and Ensco
plc. These two customers represented approximately 20.0% and
18.2% of our total revenue in 2005 and 2009, respectively. The
total revenue earned from both of these two customers has grown
at a CAGR of approximately 53.4% from 2005 to 2009. In 2009, we
earned approximately 56.2% of our revenue from our top 25
customers. We earned approximately 43.7% of our revenue from 23
of these 25 customers in 2007 and revenue from these 23
customers grew at a compound annual growth rate, or CAGR, of
approximately 19.6% from 2007 through 2009.
We have lower capital expenditures than other remote
communications providers because we do not own or operate any
satellites, develop or manufacture communications or networking
equipment, own terrestrial wireless facilities and landlines,
or, as a general rule, own or operate teleport facilities. In
order to provide our services, we procure bandwidth from
independent fixed satellite services operators and terrestrial
wireless and landline providers to meet the needs of our
customers for
end-to-end
IP-based
communications. We own the network infrastructure and
communications equipment we install on customer sites as well as
co-located equipment in third party teleport facilities and data
centers, all of which we procure through various equipment
providers. By owning the onsite network infrastructure and
communications equipment, we are better able to ensure the high
quality of our products and services and agnostically select the
optimal equipment suite for each customer. Our network and
communications services are designed to accommodate all
customers on offshore rigs including rig owners, drillers,
operators, service companies and
pay-per-use
individuals, such as off-duty rig workers and visiting
contractors, vendors and other visitors. Our communications
services are initially offered to rig owners and drillers, and
the initial investment is leveraged through up-selling
communications services to other parties present on the rigs,
such as operators, service companies and
pay-per-use
individuals, as well as through cross-selling value-added
services.
Our business operations are divided into three reportable
segments: eastern hemisphere, western hemisphere and
U.S. land.
Eastern
Hemisphere
Our eastern hemisphere segment services are performed out of our
Norway, Qatar, United Kingdom and Singapore based offices for
customers and rig sites located on the eastern side of the
Atlantic Ocean primarily off the coasts of the U.K., Norway and
West Africa, around the Indian Ocean in Qatar, Saudi Arabia and
India, around the Pacific Ocean near Australia, and
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within the South China Sea. As of September 30, 2010, this
segment was serving approximately 138 jackup,
semi-submersible and drillship rigs which we approximate to be a
28.4% market share of such rigs based on an ODS-Petrodata
RigBase Current Activity data download dated September 2,
2010. As of September 30, 2010, this segment also was
serving approximately 110 other sites, which include
production facilities, energy support vessels, land rigs, and
related remote support offices and supply bases.
For the year ended December 31, 2009, our eastern
hemisphere segment produced revenues of $60.9 million,
representing 75.3% of our total revenue, Adjusted EBITDA of
$32.0 million, compared to our total Adjusted EBITDA of
$29.1 million and net income of $24.7 million,
compared to our total net loss of $19.6 million. This
segments revenue, Adjusted EBITDA and net income had a
CAGR of 26.2%, 62.4% and 65.1%, respectively, for the two-year
period ended December 31, 2009. See the notes to our
consolidated financial statements included elsewhere in this
prospectus for more segment financial information.
Western
Hemisphere
Our western hemisphere segment services are performed out of our
United States and Brazil based offices for customers and rig
sites located on the western side of the Atlantic Ocean
primarily off the coasts of the United States, Mexico and
Brazil, and within the Gulf of Mexico, but excluding land rigs
and other land-based sites in North America. As of
September 30, 2010, this segment was serving approximately
87 jackup, semi-submersible and drillship rigs which we
approximate to be a 37.7% market share of such rigs based on an
ODS-Petrodata RigBase Current Activity data download dated
June 1, 2010. As of September 30, 2010, this segment
also was serving approximately 143 other sites, which
include production facilities, energy support vessels and
related remote support offices and supply bases.
For the year ended December 31, 2009, our western
hemisphere segment produced revenues of $11.2 million,
representing 13.9% of our total revenue, Adjusted EBITDA of
$4.6 million, compared to our total Adjusted EBITDA of
$29.1 million, and net income of $2.2 million,
compared to our total net loss of $19.6 million. This
segments revenue, Adjusted EBITDA and net income had a
negative CAGR of 4.2%, 29.9% and 41.8%, respectively, for the
two-year period ended December 31, 2009.
U.S.
Land
Our U.S. land segment provides remote communications
services for drilling rigs and production facilities located
onshore in North America. Our U.S. land segment services
are performed out of our Louisiana based office for customers
and rig sites located in the continental United States. As of
September 30, 2010, this segment was serving approximately
384 onshore drilling rigs and other remote sites. Our
product suite consists of broadband voice, data and Internet
access services along with rig location communications such as
wired and wireless intercoms and two-way radios. This segment
leverages the same network infrastructure and network operations
center used in our western hemisphere segment. We provide
installation and service support from nine service centers and
equipment depots located in key oil and gas producing areas
around the continental United States.
For the year ended December 31, 2009, our U.S. land
segment produced revenues of $9.9 million, representing
12.2% of our total revenue, Adjusted EBITDA of
$2.0 million, compared to our total Adjusted EBITDA of
$29.1 million, and net loss of $4.5 million, compared
to our total net loss of $19.6 million. This segments
revenue and Adjusted EBITDA had a negative CAGR of 24.9% and
45.6%, respectively, for the two-year period ended
December 31, 2009. The U.S. land segment generated net
income of $1.9 million in 2007 as compared to a net loss of
$4.5 million in 2009, which included an impairment of
goodwill of $2.9 million.
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Our Market
Opportunity
Oil and gas companies operate their remote locations through
global always-on networks driving demand for
communications services and managed services solutions that can
operate reliably in increasingly remote areas under harsh
environmental conditions.
Oil and gas companies with geographically dispersed operations
are particularly motivated to use secure and highly reliable
broadband networks due to several factors:
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oil and gas companies rely on secure real-time data collection
and transfer methods for the safe and efficient coordination of
remote operations;
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long-term growth of global demand for crude oil and natural gas
and increases in commodity prices are expected to improve the
outlook for new rig construction and dormant rig reactivation;
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technological advances in drilling techniques, driven by
declining production from existing oil and gas fields and strong
hydrocarbon demand, have enabled increased exploitation of
offshore deepwater reserves and development of unconventional
reserves (e.g. shales and tight sands) and require real time
data access to optimize performance; and
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transmission of increased data volumes and real-time data
management and access to key decision makers enable customers to
maximize operational results, safety and financial performance.
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Oil and gas
companies rely on secure real-time data collection and transfer
methods for the safe and efficient coordination of remote
operations
Due to the high costs of operating an offshore rig, which can
exceed $1 million a day to the operator, maximizing
efficiency of remote rig operations is important to the oil and
gas company and to the drilling contractor that is operating the
unit. Each well that is drilled requires a broad set of products
(including many of the following: drill bits, downhole drilling
tools, drill pipe, drilling fluids, casing, tubing and
completion products), services (including many of the following:
measurement-while-drilling, or MWD, and logging-while-drilling,
or LWD, systems, wireline logging, casing services, cementing,
stimulation, inspection and testing, mud logging and helicopter
and offshore vessel support services) and the rig crews and
service personnel to perform the work necessary to drill and
complete the well. The logistical challenge to organize all
these products, services and personnel, to deliver them to the
rig and execute the well construction process efficiently is
significant. The logistical challenge is exacerbated by the fact
that many rigs are operating in remote locations and far from
support bases, by the limited amount of space on each rig, which
requires most of these products and services to be delivered
when they are needed and not before, and also by the high
standby charges service companies invoice when they are offshore
but the rig is not ready for the services they are providing.
Oil and gas companies rely on secure global networks to
coordinate across these multiple providers of products and
services to rigs. Drilling contractors and operators are
increasingly tying their rig operations into their global
enterprise resource management, or ERM, systems which requires a
secure global communications network. The ability to coordinate
seamlessly across geographically dispersed entities in remote
locations is essential to the smooth and efficient operation of
a rig fleet.
While our customers reliance on secure global networks
requires our customers to increase their communications
bandwidth and expense, communication costs remain only a small
portion of total rig operating expenses. We believe improved
availability of broadband connectivity contributes to the trend
towards greater use of information technology in
67
management processes, planning and strategy execution. Multiple
points of global operations can be connected seamlessly at a low
cost. This trend has led to an increase in the need for
communication solutions that can be leveraged to drive greater
efficiency across oil and gas organizations and the drillers and
oilfield services firms that serve them.
VSAT-based networks have proven to be cost effective for
geographically dispersed enterprises that require reliable,
highly redundant and secure broadband interconnection among
remote sites that can be deployed quickly and without a
significant terrestrial component. Where available, we also
offer remote connectivity over fiber and terrestrial
line-of-sight
transport (e.g. microwave, WiMax), which generally offers high
bandwidth speeds and lower latency as compared to VSAT.
Regardless of our choice of backhaul transport, our network is
further enhanced by running the IP layer
end-to-end
providing greater reliability, scalability, flexibility and
security than conventional switched transport networks.
Long-term
growth of global demand for crude oil and natural gas and
increases in commodity prices are expected to improve the
outlook for new rig construction and dormant rig
reactivation
Our business is influenced by the number of active drilling
rigs, production facilities and energy support vessels. Drilling
activity and rig counts bottomed in the second quarter of 2009
and have steadily risen since, corresponding with rising
commodity prices, increasing consumption expectations and
growing confidence in overall economic growth. According to data
derived from Spears & Associates, Inc.s June
2010 Drilling and Production Outlook and September 2010
Drilling and Production Outlook, or collectively referred to in
this prospectus as the Spears & Associates Outlook,
the second quarter of 2009 marked the low point in the current
cycle and rig activity in the United States climbed 18.0% in the
second half of 2009 with the total number of Global rigs
increasing by 19.6% over the same period. Global
means worldwide, but excludes China, Russia and Central Asia
because these areas were excluded from the data in
Spears & Associates Outlook. The Spears &
Associates Outlook projects oil and gas prices to rise at a 1.7%
and 5.3% CAGR, respectively, from 2010 to 2016. We believe the
recovery in rig counts has driven a steady increase in the
demand for oil field services, including remote communications
services.
Offshore rigs are less likely to be de-activated even during
downturns given the fact that many of them operate under
long-term
contracts and usually have high costs of re-activation. The
average Global offshore rig count declined by only 17% according
to data derived from the Spears & Associates Outlook
from a peak count of 347 in 2005 to 288 in the fourth quarter of
2009. From the fourth quarter of 2009 to the end of the second
quarter of 2010, the average Global offshore rig count has
increased by 11.8% according to data derived from the
Spears & Associates Outlook. Offshore rigs can be
divided into two basic classes: fixed, meaning stationary rigs
in shallower offshore waters, such as jackups, submersibles and
some types of semi-submersibles; and floaters, which are either
dynamically positioned or moored in deeper waters, such as
drillships and semi-submersibles. The number of fixed rigs is
generally more responsive to energy price movements than the
number of floater rigs, but less so than the number of land
rigs. Offshore rigs represent 12% of total Global average rig
count, which includes land rigs, as of the second quarter of
2010 according to data derived from the Spears &
Associates Outlook.
Drilling for and producing oil and gas reserves in offshore
deepwater requires the use of technically sophisticated assets
that are in scarce supply or require long lead times and
significant capital to manufacture, including deepwater drilling
rigs and floating production facilities. According to the
ODS-Petrodata RigBase Current Activity data download dated
November 5, 2010, there are approximately 108 fixed
and floating rigs scheduled for delivery from November 5,
2010 to year-end 2014. This represents approximately 14.2% of
the existing fleet of fixed and floating rigs (including stacked
and non-marked rigs) as of November 5, 2010, as drillers
and producers seek to capitalize on the profitability associated
with developing
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offshore reservoirs. We expect to benefit from these rig
additions by winning additional contracts to provide reliable
communication services. In addition, there is construction
ongoing in other offshore asset classes such as energy support
vessels and offshore construction assets that require reliable
communication services. Moreover, according to data derived from
the Spears & Associates Outlook, Global offshore drilling
capital expenditures are expected to grow at a 7.6% CAGR between
2010 and 2016.
The number of land drilling rigs is relatively more responsive
to spot changes in oil and gas prices. As an example, according
to data derived from the Spears & Associates Outlook,
the average number of land drilling rigs in the continental
United States reached bottom in this cycle during the second
quarter of 2009 with an average of 885 rigs, consistent with the
dramatic drop in oil and gas prices from their cycle peaks in
2008. With oil and natural gas prices improving, the average
U.S. land rig count in the second quarter of 2010 increased
65.4% to 1,464 rigs, according to data derived from the
Spears & Associates Outlook. Outside of the United
States and Canada, the average international land rig count over
the same period proved less volatile, only increasing 10.0% to
782 total average land rigs, according to data derived from the
Spears & Associates Outlook. Total average land rig
count, including international, United States and Canada,
represents 88.2% of total land and offshore rig count as of the
second quarter of 2010, according to data derived from the
Spears & Associates Outlook.
Supporting the operations of offshore drilling rigs and
production facilities, upstream energy support vessels include
seismic survey vessels, offshore supply vessels, anchor-handling
vessels, offshore construction vessels, oilfield service
vessels, crew transport boats and lift boats. The newbuild
orderbook and activity level for these offshore vessels
generally correlate to the active number of offshore rigs. The
number of offshore production facilities is the least responsive
to changes in oil and gas price levels as offshore production
facilities generally remain active if their revenues cover their
marginal lifting and storage costs. Oil and gas companies,
rarely eliminate production facilities in response to an
economic downturn.
The following tables sets forth data relating to Global offshore
active drilling rigs and Global onshore active drilling rigs for
the periods indicated below:
The U.S. Energy Information Administration, or EIA, in its
2010 International Energy Outlook, or 2010 Energy Outlook,
estimates that world oil and gas consumption will increase by
28% and 45%, respectively, between 2007 and 2035. The EIA in its
2010 Energy Outlook estimates that global oil consumption will
increase by approximately 24.5 million barrels per day from
2007 to 2035. Countries that are not members of the Organization
for Economic Co-operation and Development, or OECD, including
Brazil, Russia, India and China, are expected to represent
approximately 89% of oil and gas consumption increase. While the
current economic downturn has moderated these forecasts, the
long-term
industrialization of the non-OECD countries is expected to
continue. Their growth is expected to drive global energy
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demand and is expected to result in increased spending by oil
and gas companies on exploration and development, including
offshore drilling services.
Technological
advances in drilling techniques driven by declining production
from existing oil and gas fields and strong hydrocarbon demand
have enabled increased exploitation of offshore deepwater
reserves and development of unconventional reserves (e.g. shales
and tight sands) and require real time data access to optimize
performance
Many of the historically important oil and gas deposits,
including certain fields in the Middle East, Mexico, Russia, the
North Sea and conventional fields in the United States, are in
structural decline. According to estimates by the National
Petroleum Council in its September 17, 2008 slide
presentation entitled Facing the Hard Truths about Energy, One
Year Later, existing production capacity declines of between 4%
and 7% coupled with a modest increase in demand will result in
the need to locate and develop crude oil sources equivalent to
70 to 100 million barrels of production per day by 2030.
In the wake of steeper decline rates and increasing demand, the
offshore oil and gas industry has focused its attention on large
scale resources that have historically been underexploited for
economic or geopolitical reasons, including the deepwater and
ultradeepwater offshore formations in West Africa, Brazil, Asia
and North America. Onshore U.S. exploration and production
companies, leveraging technological advances, have expanded into
new areas with significant geological challenges, including
unconventional oil and natural gas production from shale and
tight sand formations. Production from these unconventional
onshore basins accounted for approximately 50% of United States
natural gas production in 2008, up from 30% in 2000 according to
the International Energy Agencys World Energy Outlook
2009,
©OECD/IEA,
2009, Figure 11.5, page 398.
The table below sets forth estimated Global onshore and offshore
drilling capital expenditures for the years indicated below:
Technological advances, which include improvements in seismic
exploration techniques, drilling and completion systems and
techniques, and the development of new generation drilling rigs
have resulted in deepwater and unconventional reserves becoming
economic to develop and enabled exploitation of such reserves.
Our business benefits from our exposure to deepwater projects
due to their
long-term
nature and stability in relation to commodity spot price
movements. Short-term commodity price movements have less of an
impact on deepwater development activity than most other
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oil and gas projects because they tend to have the longest
development timetables and have decline rates lower than other
formations. Due to the high cost of drilling a deepwater
offshore well and the possibility that a mistake or failure to
optimize the drilling process can be very expensive, access to
real-time
data is invaluable. In addition, access to capital is often less
of a constraint for deepwater projects as the operators involved
are often among the largest and best capitalized in the industry.
We also benefit from our exposure to onshore unconventional
activity due to the high level of drilling activity required to
exploit these plays. These plays typically have much higher
decline rates than conventional reserves requiring continued
drilling activity in order to maintain production. Also,
unconventional reservoirs are being exploited by drilling
multiple similar wells, which is enabling operators to reduce
total costs as they learn from experience and develop repeatable
processes.
Transmission
of increased data volumes and real-time data management and
access to key decision makers enable customers to maximize
operational results and financial performance
The amount of data collected on a rig which can be analyzed in
real time to facilitate decision making is increasing
significantly as a result of technological developments and new
systems and tools. Additional data enhances decision making for
oil and gas companies not only by having more data available on
the rig, but by delivering the data to experts at onshore
facilities for evaluation. Data collected on a rig includes
information about rig operations (e.g. status, condition and
performance of the rigs drilling systems, pumps, generators,
HVAC and other rig equipment) and information being transmitted
from downhole (e.g. data from MWD and LWD systems which is
recorded during the drilling process, and wireline formation
evaluation logs which are recorded when drilling is periodically
halted to make such measurements). We believe that the demand
for such new systems, tools and technologies is increasing. As
examples, LWD experienced a 21% revenue CAGR from 2003 to 2008,
before the global economic downturn in 2009, and wireline
logging experienced a 15% CAGR from 2003 to 2008 according to
Spears & Associates, Inc.s Oilfield Market
Report
1999-2011.
Additional data volume transmission is also being driven by
drilling contractors and operators placing rigs on their global
ERM systems.
The ability for real-time data from rigs dispersed around the
world to be available to experts onshore at customer central
offices (often called smart rooms or decision
centers) is a key enabler for project success. Remote
communications services provide a critical link between rigs and
customer central offices, allowing experts to evaluate rig and
well data from a central location, and make and communicate
decisions back to rigs in real-time. Access to specialist
technicians onshore can not only improve productivity, but also
can improve safety, by having access to these experts in the
event of a failure of one of the rigs systems. Increases in
drilling activity in the energy sector have created significant
shortages of experienced personnel, including scientific and
engineering personnel key to evaluating on-going drilling
projects. This shortage is exacerbated by the increasing
geographic distribution of projects around the globe to remote
areas and the need to rotate rig personnel on shifts composed of
30 days on the rig and 30 days on shore leave.
Transporting data to central offices allows rig companies to
leverage experts and specialists by providing them real-time
access to data in a centralized location.
Companies that operate on a global basis find that their ability
to coordinate their operations seamlessly and receive and
deliver information instantaneously is often critical to their
profitability. That dependence is even stronger in the oil and
gas industry where companies often operate in remote and
inhospitable regions and require the ability to adjust rapidly
to shifts in the world markets, changes in local conditions and
real-time
on-site
developments. Successful rig operations are impacted by a
significant number of factors that must be taken
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into account, including drilling conditions, operational
developments and rig conditions and other factors that change
continuously. The operations of an oil and gas company, and thus
its profitability, depend on its ability to coordinate
exploration, accelerate or delay production, arrange
transportation and perform other ancillary functions on a
global, uninterrupted basis in response to changes in these
factors. It is critical for oil and gas companies to ensure that
decisions are based on the most complete and current data from
all of its operating systems. Access to this data requires a
strong communications network.
The economic crisis has brought into sharp focus the ability of
oil and gas companies to control costs through the effective use
of networks and increase the efficiency and profitability of
rigs. Real-time data transmission can drive meaningful cost
savings through lower utilization of helicopters and other
vessels for trips to offshore facilities and more efficient
remote production platform monitoring. Real-time data
transmission also assists with employee retention by providing
access to entertainment and the ability to call and
e-mail
friends and relatives and to connect with events outside the rig.
Competitive
Strengths
Our mission is to continue to establish ourselves as a leading
data network infrastructure provider within the oil and gas
industry. We seek to maximize our growth and profitability
through focused capital investments that enhance our competitive
strengths. We believe that our competitive strengths include:
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mission-critical services delivered by a trusted provider with
deep industry expertise and multi-national operations;
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operational leverage and multiple paths to growth supported by a
plug-and-play
IP/MPLS
global platform;
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scalable systems using standardized equipment that leverages our
global infrastructure;
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flexible, provider-neutral technology platform;
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high-quality customer support with full-time monitoring and
regional service centers; and
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long-term relationships with leading companies in the oil and
gas industry.
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Mission-critical
services delivered by a trusted provider with deep industry
expertise and multi-national operations
Our specific focus on the oil and gas industry provides us with
an in-depth understanding of our customers that enables us to
tailor our services to their needs. Our quality of service, and
the downtime associated with switching to another service
provider once our infrastructure is installed on a rig,
production platform or energy support vessel due to network
service interruptions that may occur during the switching
process, provide us with a high rate of customer retention. 96%
of our top 25 customers in 2007 were customers in 2009 and the
total revenue from these customers has grown by approximately
6.1% CAGR from 2007 through 2009.
Our global presence allows us to serve our clients around the
world. As of September 30, 2010, we were operating in
approximately 30 countries on six continents. Our global
terrestrial network also allows us to provide quality of service
controls for various forms of data traffic. Our ability to offer
our customers such global coverage sets us apart from regional
competitors at a time when our customers are expanding the
geographic reach of their own businesses, exploring for oil and
gas reserves in more remote locations and seeking partners that
can match the breadth of their global operations.
72
Operational
leverage and multiple paths to growth supported by a
plug-and-play
IP/MPLS platform
Our scalable, standardized communications platform provides us
with
plug-and-play
capabilities to easily expand or improve service offerings. Our
IP/MPLS global platform allows us the ability to add additional
services to our standard offerings or change our service
offerings on a rig, production platform or energy support vessel
with little incremental cost once installed onsite. We can offer
these services to all users of the rig, production platform or
energy support vessel, including drillers, operators, service
companies and
pay-per-use
individuals, such as
off-duty rig
workers and visiting contractors, vendors and others. We expect
this operating leverage to help drive an expansion in our
Adjusted EBITDA margins.
We expect the demand for our products and services to continue
to increase as oil and gas producers continue to invest in the
infrastructure needed to commercially produce deepwater
reserves. Our IP/MPLS global platform gives us an important
advantage by offering greater reliability, scalability,
flexibility and security than conventional switched transports
and accounts for what we believe to be a disproportionate market
share of installations on newly manufactured offshore drilling
rigs.
Scalable
systems using standardized equipment that leverages our global
infrastructure
We have built our global satellite and terrestrial network with
a significant amount of excess capacity to support our growth
without substantial incremental capital investment. Our
knowledge and capabilities can be applied to rigs located
anywhere in the world. We install standardized equipment on each
rig, which allows us to provide support and maintenance services
for our equipment in a cost-efficient manner. Not all of the
components of equipment that we install on each rig are the
same, but the components that vary are limited in number and
tend to be the same for rigs located in the same geography. As
of September 30, 2010, we leased capacity from 21
satellites, 18 teleports and co-located in 19 datacenters
worldwide. By leasing rather than owning our network enablers
and owning the
on-site
equipment on each rig, we are able to both minimize the capital
investment required by the base network infrastructure and
maintain the flexibility to install high quality equipment on
each rig tailored to its locale and environmental conditions.
The standardized nature of our equipment minimizes execution
risk, lowers maintenance costs and inventory carrying costs and
enables ease of service support. In addition, we are able to
remain current with technology upgrades due to our back end
flexibility.
Flexible,
provider-neutral technology platform
Because we procure communications connections and networks and
equipment from third parties we are able to customize the best
solution for our customers needs and reduce our required
fixed capital investments. We aim to preserve the flexibility to
select particular service providers and equipment so that we may
access multiple providers and avoid downtime if our initial
provider were to experience any problems. By procuring bandwidth
from a variety of communications providers instead of owning our
own satellites, we are able to minimize capital investment
requirements and can expand our geographic coverage in response
to customers needs with much greater flexibility. Our
product and service portfolio offers
best-in-breed
technology platforms using the optimal suite communications and
networking capabilities for customers.
73
High-quality
customer support with full-time monitoring and regional service
centers
Our IP/MPLS global network allows us to provide high quality
customer care by enabling us to monitor the network from
end-to-end
so that we can easily and rapidly identify and solve any network
problems that our customers may experience.
As of September 30, 2010, we had 23 service operations
centers and warehouses to support global deployment and service.
A Global Network Operations Center located in Houston, Texas is
staffed 24 hours per day, 365 days per year. We
provide non-stop,
end-to-end
monitoring and technical support for every customer. This
proactive network monitoring allows us to detect problems
instantly and keep our services running at optimum efficiency.
Fully managed technology is a key reason why we can support
solutions that deliver high performance and new technologies
that improve productivity.
As of September 30, 2010, our U.S. land segment was
supported through a network of nine field service centers and
equipment depots, located in major oil and gas regions in the
continental United States. Our onshore footprint allows us to
respond with high quality
same-day
service for the shorter drilling cycles inherent in onshore
drilling where rapid installation, decommissioning and repair
services are required. We maintain field technicians as well as
adequate spare parts and equipment inventory levels in these
service centers.
Long-term
relationships with leading companies in the oil and gas
industry
We have established relationships with some of the largest
companies in the oil and gas industry in the world. Some of our
key customers are the leading contract drillers around the
globe, with combined offshore fleets of hundreds of rigs. In
many cases, these customers are investment grade rated companies
with high standards of service that favor providers such as
RigNet.
Growth
Strategy
We increased revenues from $29.2 million in 2006 to
$89.9 million in 2008. Our revenues in 2009 were
$80.9 million, despite challenging industry conditions in
2009 driven by the global economic downturn. These results
reflect strong organic revenue growth and the development of new
products and services. To build on our base revenue, we plan to
leverage our in-depth understanding of our customers and the
strength of our network infrastructure to generate insight into
revenue opportunities. We then plan to focus our industry
expertise to increase our revenues in a profitable manner. We
have made, and continue to make, investments in our people,
network, systems and technology. We increased our sales force
from 16 at the end of 2009 to approximately 26 as of
September 30, 2010 to pursue this market share opportunity.
By the end of 2010, we plan to introduce improved real-time
portals for customers to constantly monitor capacity utilization
and other metrics.
To serve our customers and grow our business, we intend to
pursue aggressively the following strategies:
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expand our share of growing onshore and offshore drilling rig
markets;
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increase secondary customer penetration;
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commercialize additional value-added products and services;
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extend our presence into adjacent upstream energy segments and
other remote communications segments; and
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selectively pursue strategic acquisitions.
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74
Expand our share of growing onshore and offshore drilling
rig markets: We intend to expand our drilling
rig market share by increasing our penetration of the market for
newly built rigs and reactivated stacked rigs, capturing fleet
opportunities made available as a result of drilling rig
industry consolidation and improving penetration in underserved
and new geographic markets. We believe that we are well
positioned to participate in the reactivation of idled rigs
because of our established relationships with customers,
reliable and robust service offering and best in class customer
service. We believe that our established relationships with
industry participants with meaningful idled rig capacity
position us well to gain market share.
Fixed and
Floating Rigs Scheduled for Delivery
Source: ODS-Petrodata RigBase Current Activity data download
dated November 5, 2010.
We intend to continue to expand our penetration of the North
American and international onshore drilling rig market. Global
onshore drilling rig count is expected to increase by a CAGR of
3.5% between 2010 and 2016 according to data derived from the
Spears & Associates Outlook. We believe we are
well-positioned to increase our penetration in this segment
because of our experience in the U.S. onshore drilling rig
market, our in-depth understanding of the needs of customers,
high quality of service and global data network infrastructure.
Global Average
Active Onshore Rigs
Source: Spears & Associates Outlook.
Increase secondary customer
penetration: We intend to continue to
leverage our initial investment with rig owners and leverage our
incumbent position with other users on the
75
rigs. We will seek to increase revenue with low incremental
costs through up-selling our services to other parties on the
rigs, production platforms and energy support vessels, including
drillers, operators, services companies and
pay-per-use
individuals, and through cross-selling low incremental cost
value-added services.
Commercialize additional value-added products and
services: We intend to continue to serve our
individual customers needs by commercializing additional
products and services to complement our wide array of available
remote communications services. We expect that over the next
several years our customer base will require a variety of new
services such as real-time functionality, videoconferencing,
software acceleration technology, WiFi hotspots and media, and
we will seek to position ourselves to capture these new business
opportunities. Through our engineering expertise, sales force
and operational capabilities, we will continue to position
ourselves to offer our customers a full range of remote
communications services at different levels in the
customers organizations.
Extend our presence into adjacent upstream energy segments
and other remote communications segments: In
addition to secondary customer penetration and additional
value-added services on oil and gas rigs, we intend to enhance
and expand our presence in targeted adjacent upstream energy
segments where we believe there are significant opportunities
for growth and where we believe we are well positioned to
deliver remote communications solutions. We intend to target
segments such as upstream energy vessels (including seismic and
offshore support and supply vessels), offshore fixed and
floating production facilities and international onshore
drilling rigs and production facilities. We began specifically
targeting these stepout areas in late 2009 after only
opportunistically serving those segments prior to that time. We
estimate the current potential market size of these adjacent
upstream energy segments for our remote communications solutions
to be in excess of $600 million by 2012. In addition, we
will continue to look for and review opportunities in other
remote communications segments where we believe there are
significant opportunities for growth and we are well positioned
to take advantage of these opportunities.
Selectively pursue strategic
acquisitions: We have historically enhanced
our competitive position through strategic acquisitions. As we
continue to focus on expanding the target markets for our
products, services and solutions, we may find opportunities to
acquire companies or technologies that would be complementary to
our existing business. We will continue to consider strategic
acquisition opportunities to enhance our operations and further
our strategic objectives. We have no agreements or commitments
with respect to any acquisitions at this time.
Company
Overview
We are a leading data network infrastructure provider serving
the remote communications needs of the oil and gas industry.
Through a controlled and managed IP/MPLS global network, we
deliver voice, data, video and other value-added services, under
a multi-tenant revenue model. We were incorporated in Delaware
on July 6, 2004. Our predecessor began operations in 2000
as RigNet Inc., a Texas corporation. In July 2004, our
predecessor merged into us.
The communications services we provide to the offshore drilling
and production industry were established in 2001 by our
predecessor, who established initial operations in the Asia
Pacific region. Since we acquired our predecessor in 2004, we
have evolved into one of the leading global providers of remote
communications services in the offshore drilling and production
industry. As of September 30, 2010, we were servicing
approximately 225 global active jackup, semi-submersible and
drillship rigs which we approximate to be a 31.4% market share
of such rigs based on an ODS-Petrodata RigBase Current Activity
data download dated September 2, 2010. As of
September 30, 2010, we were also servicing approximately
223 other
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offshore sites, which include production facilities, energy
support vessels and related remote support offices and supply
bases worldwide.
In 2006, we expanded our services to land-based, coastal and
some shallow water drilling rigs through the acquisition of a
controlling interest in LandTel, a leading provider of remote
communications to the United States onshore drilling industry.
We acquired 75% of LandTel in September 2006. We acquired an
additional 18% between December 2008 and February 2009. In 2010,
the remaining 7% was redeemed for $4.7 million by making a
$4.6 million payment in July 2010 to the LandTel
non-controlling interest owner with the $0.1 million
balance expected to be paid prior to December 31, 2010. We
now own 100% of LandTel.
We provide essentially the same services onshore as we do
offshore, although sometimes we are able to utilize landlines
instead of satellites onshore. As of September 30, 2010, we
were providing communications services to approximately 300
remote land drilling rigs in the United States for operators,
drilling contractors, oilfield service companies and
pay-per-use
individuals. We believe that we hold a leading position in the
South Central United States, primarily in Texas and Louisiana
and their inland waters, and we have expanded geographically
into Oklahoma, Colorado, Wyoming and Pennsylvania to take
advantage of increased oil and gas exploration and production
activity in those areas. We believe that as of
September 30, 2010, we have a presence on approximately
18.3% of the United States land drilling rigs, based on 1,640
United States land drilling rigs according to the
November 5, 2010 Baker Hughes North America Rotary Rig
Count report. Our onshore services are growing through the
expansion of our coverage area and targeted sales efforts toward
the most active operators and drillers against a backdrop of
cyclical market recovery in active drilling rigs.
The onshore communications services we provide are represented
by our U.S. land segment. The majority of our eastern
hemisphere segment and western hemisphere segment operations
relates to offshore communication services. For the three years
ended December 31, 2009, the Company earned revenue from
both our domestic and international operations as follows:
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Year Ended December 31
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2007
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2008
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2009
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Domestic
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41.5
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%
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37.8
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%
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22.3
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%
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International
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58.5
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%
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62.2
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%
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77.7
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%
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Total
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100.0
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%
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|
100.0
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%
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100.0
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%
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We own the network infrastructure we install on rigs, production
facilities and marine vessels. Our network and communications
services are designed to accommodate all parties on offshore
rigs: rig owners, drillers, operators, service companies and
pay-per-use
individuals. Our communications services are initially offered
to rig owners and drillers, but the initial investment is
leveraged through upselling communications services to other
parties present on the rigs, such as operators, service
companies and
pay-per-use
individuals as well as through cross-selling value-added
services.
77
The figure below summarizes by area the number of drilling rigs
that we service. As illustrated by the figure, we believe we
have a substantial presence in most of the major areas that we
service.
Service
Offering
We offer a comprehensive communications package of voice, video,
networking and real-time data management to offshore and
land-based remote locations. We are a single source solutions
provider that links multiple offshore or remote site rigs and
production facilities with real-time onshore decision centers
and applications. We market an advanced
plug-and-play
infrastructure that facilitates productivity, providing all
parties onboard secure access to high-quality phone, high-speed
Internet,
e-mail and
corporate networks as soon as the rig arrives on location. This
plug-and-play
infrastructure allows us to leverage our initial investment
through offering services to operators, service companies and
pay-per-use
individuals present on the rig, in addition to the rig owner and
driller.
The main services we offer are high quality
voice-over-Internet-protocol,
or VoIP, data and high-speed Internet access. In addition, we
increasingly provide other value-added services, such as
real-time data management solutions, WiFi hotspots and Internet
kiosks, video conferencing solutions, wireless intercoms and
handheld radios. The price of value added services is included
in the day rate and becomes incorporated into the recurring
revenue from our customers.
78
Remote Video
Services
The oil and gas industry increasingly uses video conferencing to
save significant amounts of time and reduce costs. As an
alternative to excessive travel and traditional meetings, video
conferencing improves collaboration and expedites decision
making. We provide a complete, high-performance video
conferencing solution scalable for a wide range of uses.
Videoconferencing service is delivered over our SOIL network and
is branded as SOIL Meeting.
In addition, in 2009, we began offering high-resolution hand
held wireless cameras through our RemoteView service that allows
experts in offices to troubleshoot equipment offshore, which can
save customers time and money, with recent successful
deployments in the Gulf of Mexico and North Sea. This service is
also delivered over our SOIL network.
TurboNet
Solutions
Our customers are increasingly pushing software application use
to the edge of their networks (remote sites such as drilling
rigs, production facilities and vessels). While VSAT networks
are reliable, many software applications are not designed to
perform optimally over highly latent satellite links. Working
with Riverbed Technology, Inc., or Riverbed, we deploy
infrastructure appliances to improve the performance of
client-server interactions over wide-area networks, or WANs,
without breaking the semantics of the protocols, file systems or
applications. Whether our customers are copying a file from a
distant file server, getting mail from a remote Exchange server,
backing up remote file servers to a main datacenter or sending
very large files to colleagues at headquarters, slow WANs cost
time and money. The costs are borne in redundant infrastructure,
over-provisioned bandwidth, and lost productivity.
Working with Riverbeds appliances, RigNets TurboNet
solution can improve the performance, or throughput, of
client-server interactions over WANs by up to 100 times, giving
the illusion that the server is local rather than remote. That
degree of improvement enables our customers to centralize
currently distributed resources like storage, mail servers and
file servers and deliver new WAN-based IT services that have not
been possible before. Not only do the software applications
perform more as they would in offices, but our customers can
optimize the use of expensive satellite bandwidth.
Real-Time Data
Management Solutions
We offer real-time data management solutions in concert with two
partners: Petrolink International, or Petrolink, and Kongsberg
Intellifield AS, or Kongsberg. Petrolink is an independent data
distribution company that enables secure transmission and
distribution of geotechnical and associated petrophysical data
generated in remote locations and transmits this data to
customer offices for visualization, interpretation and
accelerated decision making.
We also provide real-time services based on the
SiteCom®
system developed by Kongsberg.
SiteCom®
enables users to gather, distribute and manage rig data from all
service providers and global sources in real-time, enabling
users to make faster and better decisions that translate into
major cost savings for drilling operations. The system manages
drilling instrumentation, mud logging, measurement while
drilling, or MWD, logging while drilling, or LWD, wireline
logging, cementing, weather, positioning and many other
applications.
SiteCom®
works for both small land rigs with a small number of sensors,
or large land and offshore operations with hundreds of sensor
readings per second. Multiple systems can therefore be
monitored, configured and administered from any location by
authorized personnel through a standard web browser interface.
We are a remote communications partner for Petrolink and
Kongsberg, providing access to our network infrastructure at
remote sites and otherwise ensuring a quality connection between
the remote site and the visualization application in the office.
We bill the end
79
customer for the real-time service and share the revenue for
this service with Kongsberg and Petrolink. These strategic
partnerships offer quality services for our customers, and we
have other partnership opportunities available.
WiFi Hotspot and
Internet Kiosk
We offer WiFi hotspot and Internet kiosk solutions that
facilitate access to the Internet by rig-based personnel. This
is advantageous for rig owners who seek to improve the quality
of life for employees by providing Internet access in the living
quarters, and for service companies that seek office-like
connectivity for their technicians and engineers. The WiFi
hotspot and Internet kiosk solutions provide ready access with a
familiar user interface without requiring specialized equipment
to connect to the service.
SOIL (Secure Oil
Information Link)
In addition to the services we provide to offshore and onshore
remote sites, we also operate a proprietary network enabling oil
companies and their counterparties, such as rig owners, service
companies and other suppliers, to connect and collaborate on a
secure basis. We call this network SOIL, which stands for Secure
Oil Information Link. We acquired SOIL in 2006 through the
acquisition of 100% of OilCamp, a Norwegian-based operator that
began operating the network in 1998.
As of September 30, 2010, SOILs value-added services
were being provided to more than 180 oil and gas companies and
oil and gas industry suppliers throughout the North Sea region.
These customers were using our SOIL services to collaborate with
partners and suppliers or for internal company communications.
We intend to extend the SOIL network to our other geographic
areas of focus and have begun to add new SOIL customers in the
United States Gulf Coast region.
Our SOIL network is a fully managed, high-performance,
members-only communications network hub that enables
collaborative partners, suppliers and customers to transfer and
share data quickly, reliably and securely. We believe that this
one-to-many
private extranet is a cost effective and
easy-to-deploy
alternative to building out
point-to-point
VPN (virtual private network) connections. The network members
do not have to extend the extranet to other partners or
suppliers individually. With one link to SOIL, clients are
connected to all other members.
With a service level uptime commitment of 99.7%, our SOIL
network supports a wide range of bandwidths from 64 Kbps to
1 Gbps, offering speed and reliability ideal for a variety of
applications used in the oil and gas industry as well as
value-added services we provide such as SOIL Meeting (video
conferencing), SOIL Hosting (application hosting), and SOIL Drop
Zone (large file storage). SOIL offers clients quality of
service and a guaranteed bandwidth that can be increased or
decreased according to requirements.
We charge a monthly fee for access to our SOIL network depending
on the desired access speed. In addition, we charge for
installation of the required equipment and value-added services.
Customer
Contracts
In order to streamline the addition of new projects and solidify
our position in the market, we have signed global Master
Services Agreements, or MSAs, that define the contractual
relationship with oil and gas producers, service companies and
drilling companies for our offshore and land-based
telecommunications services. The specific services being
provided are defined under individual service orders that have a
term of one to three years with renewal options, while
land-based locations are generally shorter term or terminable on
short notice
80
without penalty. Service orders are executed under the MSA for
individual remote sites or groups of sites, and generally can be
terminated early on short notice without penalty in the event of
force majeure, breach of the MSA or cold stacking of a drilling
rig (when a rig is taken out of service and is expected to be
idle for a protracted period of time).
Customers
We have an international customer base comprising many of the
largest drilling contractors, exploration and production
companies and oilfield services companies. For the year ended
December 31, 2009, our ten largest customers were the
following companies or their affiliates:
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Noble Corporation;
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Ensco plc;
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Transocean Ltd.;
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Brunei Shell Petroleum Sdn Bhd;
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Gulf Drilling International Ltd.;
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ConocoPhillips;
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Total SA;
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Seadrill Limited;
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Rowan Companies, Inc.; and
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Statoil ASA.
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These top ten customers represented approximately 38.3% of our
total revenue for the year ended December 31, 2009, while
one of these customers, Noble Corporation, accounted for
approximately 10.9% of our total revenue. In late 2009 and early
2010, we installed our infrastructure on the remaining eight
rigs for Ensco plc that we had not previously served in the
North Sea and Tunisia. With these installations in place, we now
serve as the remote communications partner to Ensco plc for all
of its offshore drilling rigs around the world, plus any of
their remote offices and supply bases existing beyond
traditional terrestrial communications networks or where they
desire those office sites to be directly connected through our
global network.
Suppliers
Although we have preferred suppliers of telecommunications and
networking equipment, the technology utilized in our solutions
is available from more than one supplier. The standardized
equipment can be deployed across any site or rig in any
geographic area.
In addition, we do not rely on one satellite provider for our
entire satellite bandwidth needs except for certain instances in
which only one satellite bandwidth provider is available in an
operating location, which is typically due to licensing
restrictions. This approach generally allows us flexibility to
use the satellite provider that offers the best service for
specific areas and to change providers if one provider
experiences any problems.
Technology
Our solutions are built on technology independence and network
excellence. We are principally a satellite communications
provider, however, we also utilize other remote data transport
technologies, such as
line-of-sight
(e.g., microwave, WiMax) or fiber. Optimal mode and
design of transport are tailored for each customer to ensure the
best possible
81
performance. Our standardized communications platforms are
designed for
plug-and-play
capability allowing us the ability to add additional services to
our platform with little additional cost.
Sales and
Marketing
We use a direct sales channel to market our communications
solutions and services. The sales and marketing group comprised
approximately 26 people as of September 30, 2010 and
its marketing activities are organized by geographic areas. Our
growth has driven a need for a scaled sales force. Our sales
teams are comprised of global account managers and regional
account managers, who establish customer account relationships
and determine business requirements. Additionally, our business
development managers are responsible for penetrating new
geographic markets and specialized product areas.
Competition
The telecommunications industry is highly competitive. We expect
competition in the markets that we serve to persist and
intensify. We face varying degrees of competition from a wide
variety of companies, including new entrants from adjacent
vertical markets.
Our primary global competitors include CapRock Communications,
Inc., which was recently acquired by Harris Corporation,
Schlumberger Ltds Global Connectivity Services division,
which Harris Corporation recently announced the entry into a
definitive agreement to acquire, and the Broadband Division of
Inmarsat plcs subsidiary Stratos Global Corporation. In
addition, there are a number of regional competitors in each
local market. Onshore, we also face competition from: drilling
instrumentation providers; living quarters companies; and other
pure-play providers like us.
Our customers generally choose their provider(s) based on the
quality and reliability of the service and the ability to
restore service quickly when there is an outage. Pricing and
breadth of service offerings is also a factor. The oil and gas
industry depends on maximum reliability, quality and continuity
of products and service. Established relationships with
customers and proven performance serve as significant barriers
to entry.
Government
Regulation
The provision of telecommunications is highly regulated. We are
required to comply with the laws and regulations of, and often
obtain approvals from, national and local authorities in
connection with most of the services we provide. In the United
States, we are subject to the regulatory authority of the United
States, primarily the Federal Communications Commission, or FCC.
We are subject to export control laws and regulations, trade and
economic sanction laws and regulations of the United States with
respect to the export of telecommunications equipment and
services. Certain aspects of our business are subject to state
and local regulation. We typically have to register to provide
our telecommunications services in each country in which we do
business. The laws and regulations governing these services are
often complex and subject to change. At times, the rigs or
vessels on which our equipment is located and to which our
services are provided will need to operate in a new location on
short notice and we must quickly qualify to provide our services
in such country. Failure to comply with any of the laws and
regulations to which we are subject may result in various
sanctions, including fines, loss of authorizations and denial of
applications for new authorizations or for renewal of existing
authorizations.
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Regulation by the
FCC
Overview
In general, the FCC has jurisdiction over telecommunications
facilities and services to the extent they are used in the
provision of interstate or international services, including the
use of local telephone networks to originate or terminate such
services. State regulatory commissions, commonly referred to as
Public Utility Commissions, generally have jurisdiction over
telecommunications facilities and services to the extent they
are used in the provision of intrastate services, unless
Congress or the FCC has preempted such regulation. Local
governments in some states may regulate aspects of our business
through zoning requirements, permit or
right-of-way
procedures, and franchise fees. Our operations also are subject
to various environmental, building, safety, health and other
governmental laws and regulations. Generally, the FCC and Public
Utility Commissions do not regulate the Internet, video
conferencing, or certain data services, although the underlying
communications components of such offerings may be regulated.
Federal
Regulation
The Communications Act grants the FCC authority to regulate
interstate and foreign telecommunications by wire or radio. The
degree of regulation applicable to a particular carrier depends
on the regulatory status of that carrier and the nature of the
service and facilities used. Internet or information services
are not considered telecommunications services and are not
regulated. Further, the FCC also recognizes a distinction
between common carrier and private carrier providers of
telecommunications services. Common carriers are generally
subject to greater regulation. The distinction is based on the
specific facts and circumstances of each case and, in
particular, the manner in which a company holds itself out to
the public. Carriers that offer highly specialized services only
to a limited number of stable, repeat customers pursuant to
individually tailored arrangements are considered private
carriers exempt from the obligations imposed on common carriers.
We operate as a private carrier because we offer and provide
highly specialized services to only a select number of stable,
repeat customers seeking remote telecommunications services, not
the general public, through medium to long-term, individually
negotiated and tailored to the exacting demands of oil and gas
industry customers. Therefore, we are exempt from many federal
obligations borne by common carriers.
As a private carrier, we may not market and provide
telecommunications services to the general public or otherwise
hold our services out indifferently to the public as
a common carrier. As a private carrier, we are not entitled to
certain interconnection and wholesale pricing from incumbent
local exchange carriers and do not operate pursuant to tariffs
filed at regulatory agencies that provide some legal protection
against contract challenges by a customer. Further, FCC rules
require that even private carriers comply with some regulations,
including licensing for wireless facilities and making
contributions to support the USF.
Section 254 of the Communications Act and the FCCs
implementing rules require all communications carriers providing
interstate or international communications services to
periodically contribute to the USF. In June 2006, the FCC
adopted rules requiring interconnected VoIP service providers to
contribute to the USF on the same basis as telecommunications
carriers. The USF supports four programs administered by the
Universal Service Administrative Company with oversight from the
FCC: (i) communications and information services for
schools and libraries, (ii) communications and information
services for rural health care providers, (iii) basic
telephone service in regions characterized by high
communications costs, and (iv) communications services
purchased by low income users. All telecommunications carriers,
including us, are generally required to contribute to the USF,
subject to certain exemptions, based on a rate determined by the
total subsidy funding needs and the total of
83
certain interstate and international end-user communications
revenues reported to the FCC by all communications carriers.
Each contributor pays based on its total collected revenue
subject to contribution to the USF. We and most of our
competitors can pass through USF contributions as part of the
price of our services, either as part of the base rate or, to
the extent allowed, as a separate surcharge on customer bills.
Due to the manner in which these contributions are calculated,
and the nature of our current business, we believe certain of
our services are exempt from USF contributions.
We are currently reassessing the nature and extent of our USF
obligations. Some of our services are exempt from USF
contributions. Changes in regulation may also have an impact on
the availability of some or all of these exemptions. If the FCC
finds that we have not fulfilled our USF obligations because we
have incorrectly calculated our contribution, failed to remit
any required USF contribution, or for any other reason, we could
be subject to the assessment and collection of past due
remittances as well as interest and fines, and penalties
thereon. Changes in the USF requirements or findings that we
have not met our obligations could materially increase our USF
contributions and have a material adverse effect on the cost of
our operations, and therefore development and growth of our
business.
The FCC has granted us several very small aperture terminal, or
VSAT, satellite earth station licenses which authorize operation
of networks of many small fixed Ku-band earth station terminals
communicating with larger hub earth stations in the United
States and its territorial waters. We also hold several private
land mobile radio licenses which authorize the use of many
mobile business/industrial radios. As a wireless licensee, we
are subject to Title III of the Communications Act of 1934
and related FCC regulations. Pursuant to Title III, foreign
governments or their representatives may not hold wireless
licenses. Other foreign ownership limits apply to common carrier
wireless providers, but because we operate as a private carrier
and hold private wireless licenses we are not subject to these
foreign ownership limitations. However, if the FCC were to
determine that we were subject to common carrier regulation, we
may need to seek FCC approval to exceed the foreign ownership
limits.
We are required to comply with the technical operating and
licensing requirements that pertain to our wireless licenses and
operations. Such requirements include the obligation to operate
only within the technical parameters set forth in our FCC earth
station and land mobile radio licenses, seek appropriate
renewals and authority to modify the licenses to reflect
material changes in operations, and obtain FCC consent prior to
an assignment or transfer of control of the licenses. Any
failure to comply with the FCCs regulatory requirements
could subject us to FCC enforcement actions, which could result
in, among other actions, revocation of licenses
and/or fines.
State
Regulation
The Communications Act preserves the authority of individual
states to impose their own regulation of rates, terms and
conditions of intrastate telecommunications services, as long as
such regulation is not inconsistent with the requirements of
federal law or has not been preempted. Internet services are not
subject to state telecommunications regulation. Because we
provide telecommunications services that originate and terminate
within individual states, including both local service and
in-state long distance calls, we may be subject to the
jurisdiction of the Public Utility Commissions, or PUCs, and
other regulators in each state in which we provide such
services. We believe that the nature of our operations as a
private carrier, however, exempts us from needing to hold such
authorizations. If a PUC were to determine that we should be
regulated as a common carrier, we would need to obtain a
Certificate of Public Convenience and Necessity, or CPCN, or
similar authorization to continue operating in that state. Once
certified, we may be subject to certain tariff and filing
requirements and obligations to contribute to state universal
service and other funds.
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Non-U.S.
Regulation
We must comply with the applicable laws and regulations and,
where required, obtain the approval of the regulatory authority
of each country in which we provide services or operate earth
stations. The laws and regulatory requirements regulating access
to satellite systems vary by country. In certain countries, a
license is required to provide our services and to operate
satellite earth stations. The application procedure can be
time-consuming and costly in some countries, and the terms of
licenses vary for different countries. In some countries, there
may be restrictions on our ability to interconnect with the
local switched telephone network. In addition, in certain
countries, there are limitations on the fees that can be charged
for the services we provide.
Many countries permit competition in the provision of voice,
data or video services, the ownership of the equipment needed to
provide telecommunications services and the provision of
transponder capacity to that country. We believe that this trend
should continue due to commitments by many countries to open
their satellite markets to competition. In other countries,
however, supply of services by foreign service providers
continues to be restricted, whether because a single provider
holds a monopoly or, more commonly, a number of national service
providers of different descriptions are protected from outside
competition by restrictive trade practices. In those cases, we
may be required to negotiate for access to service or equipment
provided by a local service provider, and we may not be able to
obtain favorable rates or other terms.
Export Control
Requirements and Sanctions Regulations
In the operation of our business, we must comply with all
applicable export control and economic sanctions laws and
regulations of the United States and other countries. Applicable
United States laws and regulations include the Arms Export
Control Act, the International Traffic in Arms Regulations, or
ITAR, the Export Administration Regulations and the trade
sanctions laws and regulations administered by the United States
Department of the Treasurys Office of Foreign Assets
Control, or OFAC.
The export of certain hardware, technical data and services
relating to satellites to
non-United States
persons is regulated by the United States Department of
States Directorate of Defense Trade Controls, under the
ITAR. Other items are controlled for export by the United States
Department of Commerces Bureau of Industry and Security,
or BIS, under the Export Administration Regulations. For
example, BIS regulates our export of equipment for earth
stations in ground networks located outside of the United
States. In addition, we cannot provide certain equipment or
services to certain countries subject to United States trade
sanctions unless we first obtain the necessary authorizations
from OFAC. We are also subject to the Foreign Corrupt Practices
Act, which prohibits payment of bribes or giving anything of
value to foreign government officials for the purpose of
obtaining or retaining business or gaining a competitive
advantage.
Employees
As of September 30, 2010, we had approximately 197 full
time employees consisting of 26 employees in sales and
marketing, 23 employees in finance and administration,
128 employees in operations and technical support and
20 employees in management, general and administrative. We
believe our employee relations are good.
Facilities
Our headquarters are located in Houston, Texas. We lease our
headquarters facility, which comprises approximately
13,055 square feet of office space. The term of this lease
runs through June 30, 2015. We have regional offices in
Lafayette, Louisiana, Stavanger, Norway,
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Doha, Qatar and Singapore, and additional offices and service
centers in the United States, Brazil, the United Kingdom,
Nigeria and Saudi Arabia. We believe our current facilities are
adequate for our current needs and for the foreseeable future.
Legal
Proceedings
From time to time, we have been subject to various claims and
legal actions in the ordinary course of our business. We are not
currently involved in any legal proceeding the ultimate outcome
of which, in our judgment based on information currently
available, would have a material adverse impact on our business,
financial condition or results of operations.
86
MANAGEMENT
Executive
Officers and Directors
The following table provides information regarding our executive
officers, directors and director nominees as of
November 11, 2010. Messrs. Slaughter, Browning,
OHara, Olsen and Whittington have been appointed to our
board of directors effective upon the completion of this
offering.
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Name
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Age
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Position(s)
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Executive Officers
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Mark Slaughter (1)
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52
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Chief Executive Officer, President and Director Nominee
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Martin Jimmerson
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47
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Chief Financial Officer
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William Sutton
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56
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Vice President and General Counsel
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Lars Eliassen
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38
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Vice President & General Manager, Europe Middle East Africa
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Hector Maytorena
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50
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Vice President & General Manager, Americas
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Directors
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Thomas M. Matthews (2)(3)(4)
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67
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Chairman of the Board
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James H. Browning (1)(5)
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61
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Director Nominee
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Charles L. Davis (2)
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45
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Director
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Omar Kulbrandstad (6)
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48
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Director
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Dirk McDermott (3)(6)
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54
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Director
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Kevin Neveu (3)
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50
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Director
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Kevin J. OHara (1)(7)
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49
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Director Nominee
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Keith Olsen (1)(5)
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54
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Director Nominee
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Ørjan Svanevik (6)
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44
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Director
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Brent K. Whittington (1)(5)
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39
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Director Nominee
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(1)
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Director nominee who will become a
director effective upon completion of this offering.
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(2)
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Member of our audit committee
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(3)
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Member of our compensation committee
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(4)
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Member of our corporate governance
and nominating committee
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(5)
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Member of our audit committee
effective upon completion of this offering.
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(6)
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Will resign upon completion of this
offering
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(7)
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Member of our compensation
committee effective upon completion of this offering.
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Mark Slaughter has served as our Chief
Executive Officer and President since August 2007. Prior to
that, Mr. Slaughter served as our President and Chief
Operating Officer from January 2007 to July 2007. Prior to
joining us, Mr. Slaughter served as Vice President and
General Manager for Security Services Americas, a division of
United Technologies Corporation from July 2005 to December 2006
and as President, Broadband Division for Stratos Global
Corporation from January 2003 to December 2004.
Mr. Slaughter is a graduate of United Technologies
Executive Program at the University of Virginias Darden
Graduate School of Business. He received an A.B. in General
Studies, C.L.G.S., concentration in Economics, from Harvard
College and an MBA from Stanfords Graduate School of
Business.
Martin Jimmerson has served as our Chief
Financial Officer since November 2006. Prior to that,
Mr. Jimmerson served as Chief Financial Officer for River
Oaks Imaging & Diagnostic, LP from November 2002 to
December 2005. Mr. Jimmerson received a B.A. degree in
accounting from Baylor University.
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William Sutton has served as our Vice
President and General Counsel since March 2008. Prior to that,
Mr. Sutton served as Chairman for Sweeten &
Sutton Brokerage, Inc. from March 2007 to February 2008 and
President and Chief Executive Officer for Abbey SA, LP from
April 2004 to October 2006. Mr. Sutton received a Bachelor
of Business Administration degree from the University of Texas
at Austin and a Juris Doctorate from the University of Houston.
Lars Eliassen has been with us and our
predecessor since May 2003 serving as our Vice
President & General Manager, Europe Middle East Africa
since November 2007, Vice PresidentGlobal Sales from March
2007 to November 2007, Vice PresidentAmericas from March
2005 to March 2007, and as Vice President - Global Operations
from May 2003 to March 2005. Mr. Eliassen has completed an
executive education course in Emerging Growth Companies at
Stanford Universitys Graduate School of Business. He
received a B.S. degree in Electrical Engineering from Rice
University.
Hector Maytorena has been with us since
November 2007 serving as our Vice President & General
Manager, Americas since November 2009 and as Vice President,
Global Sales & Marketing from November 2007 to October
2009. Prior to joining RigNet, he served as General Manager of
Southeast Texas for United Technologies UTC
Fire & Security (operating under the Chubb Security
and Redhawk brands) from November 2006 to November 2007. Prior
to that role, he was Director of Sales at Chubb Security USA
from August 2005 to November 2006. Prior to UTC,
Mr. Maytorena served in various leadership roles at Stratos
Global Corporations Broadband Division with his last
assignment as Director of Global Sales and Marketing from
November 2002 to August 2005. Mr. Maytorena is a graduate
of United Technologies Emerging Leaders Program at the
University of Virginias Darden Graduate School of Business.
Thomas M. Matthews has served as Chairman of
our Board of Directors since May 2008. Mr. Matthews served
as Chairman and Chief Executive officer of Avista Corporation
from July 1998 to December 2001, Chairman of Link Energy and its
predecessor EOTT Energy from April 2002 to February 2003 and as
Chief Executive Officer of Link Energy from March 2003 to
January 2005 and has served as Managing Trustee to Link Trust
since January 2005. Mr. Matthews received a BSCE from Texas
A&M University and attended advanced management programs in
International Business at Columbia University and in Finance at
Stanford University. Mr. Matthews brings a wealth of public
company board experience and knowledge of the energy industry to
our board.
James H. Browning is a director nominee.
Mr. Browning served as a partner at KPMG LLP, an
international accounting firm, from July 1980 to his retirement
in September 2009. Mr. Browning began his career at KPMG
LLP in 1971, becoming a partner in 1980. Mr. Browning most
recently served as KPMGs Southwest Area Professional
Practice Partner in Houston. Mr. Browning has also served
as an SEC Reviewing Partner and as Partner in Charge of KPMG
LLPs New Orleans audit practice. Mr. Browning
received a B.S. degree in Business Administration from Louisiana
State University and is a certified public accountant. He
currently serves on the Board and Audit Committee of Texas
Capital Bancshares, Inc., a publicly traded financial holding
company. Mr. Browning will bring a wealth of knowledge
dealing with financial and accounting matters to our board as
well as extensive knowledge of the role of public company boards
of directors.
Charles L. Davis has served as a member of
our Board of Directors since June 2005. Mr. Davis has been
a partner in SMH Private Equity Group, a United States based
investment firm that funds companies that apply technology
solutions in the energy sector, since December 2004.
Mr. Davis received a Bachelors degree in Business
from Washington and Lee University and is a Certified Public
Accountant in the Commonwealth of Virginia. Mr. Davis
brings experience in finance, accounting and investment banking
to our board as well as a wealth of experience in the energy
industry.
88
Omar Kulbrandstad has served as a member of
our Board of Directors and our predecessors Board of
Directors since 2001. Mr. Kulbrandstad co-founded our
predecessor and served as Chief Operating Officer of our
predecessor from 2001 to 2004, our Chief Executive Officer from
2004 to 2007 and as a non-employee advisor to us from 2007 to
2008. Mr. Kulbrandstad received a BSc in Electrical
Engineering, Electronics from Trondheim School of Technology in
Norway. Mr. Kulbrandstad brings a deep understanding of our
business and operations to our board as well as a technical
understanding of our business from an engineering perspective
and knowledge of the energy industry in Norway.
Dirk McDermott has served as a member of our
Board of Directors since March, 2010. Since 1997,
Mr. McDermott has served as managing director of Altira
Group LLC, a United States based venture capital firm that
invests in companies that develop and commercialize energy
technologies in the areas of natural resources, clean energy and
electric power, which Mr. McDermott founded.
Mr. McDermott holds a Master of Science in geophysics and a
Master of Business Administration from Stanford University.
Mr. McDermott brings over 25 years of experience as an
investor, manager and scientist in the energy industry to our
board.
Kevin Neveu has served as a member of our
Board of Directors since September 2004. Mr. Neveu has
served as the Chief Executive Officer of Precision Drilling
Corporation since August 2007 adding the title of President in
January 2009. Prior to that, Mr. Neveu was with National
Oilwell Varco, serving as President of its Rig Solutions Group
from May 2002 to August 2007 and president of its Downhole Tools
Business from January 1999 to May 2002. Mr. Neveu has
served as a director of Precision Drilling Corporation since
August 2007, as a director of Heart and Stroke Foundation of
Alberta since December 2009 and was appointed a Member of the
Board of Directors and a Member of the Executive Committee of
the International Association of Drilling Contractors, Houston,
Texas in January 2010. Mr. Neveu received a BSc degree in
Mechanical Engineering from the University of Alberta.
Mr. Neveu brings a wealth of knowledge of the energy
industry and international operations to our board as well as
experience running a public company and being on a public
company board.
Kevin J. OHara is a director nominee.
Mr. OHara is a co-founder and has served as the
Chairman of the Board of Troppus Software Corporation, an early
stage software company providing technical solutions to service
providers that support home technology and networks, since March
2009, and he has served as a director of Integra Telecom Inc., a
facility based communications company, since December 2009.
Prior to that, Mr. OHara was a co-founder Of
Level 3 Communications, Inc. and served as its President
from July 2000 to March 2008 and as the Chief Operating Officer
of Level 3 Communications, Inc. from March 1998 to March
2008. From August 1997 to July 2000, Mr. OHara served
as Executive Vice President of Level 3 Communications, Inc.
Prior to that, Mr. OHara served as President and
Chief Executive Officer of MFS Global Network Services, Inc.
from 1995 to 1997, and as Senior Vice President of MFS and
President of MFS Development, Inc. from October 1992 to August
1995. From 1990 to 1992, he was a Vice President of MFS Telecom,
Inc. Mr. OHara has a Master of Business
Administration from the University of Chicago and a Bachelor of
Science in Electrical Engineering from Drexel University.
Mr. OHara will bring a wealth of experience in the
communications industry to our board as well as experience
running a public company.
Keith Olsen is a director nominee. Mr. Olsen
served as Chief Executive Officer, President and Director of
Switch and Data Facilities Company, Inc., a provider of
network-neutral data centers that house, power and interconnect
the Internet, from February 2004 to May 2010, when Switch and
Data Facilities Company, Inc. was acquired by Equinix, Inc.
Prior to that, Mr. Olsen served as a Vice President of
AT&T, where he was responsible for indirect sales and
global sales channel management from May 1993 to February 2004.
From 1986 to 1993, Mr. Olsen served as Vice President of
Graphnet, Inc., a provider of integrated data messaging
technology and services. Mr. Olsen has a bachelors
degree from the State University of New
89
York, Geneseo. Mr. Olsen will bring experience in running a
public company to our board as well as a wealth of experience in
the communications industry.
Ørjan Svanevik has served as a member of
our Board of Directors since October 2009. Mr. Svanevik has
served as an independent advisor to Cubera Private Equity AS,
since October 2009. Prior to that, Mr. Svanevik served as
Head of M&A for Aker ASA from 2005 to 2008. During the fall
of 2008, he was a Partner at True North Capital AS. Since 2009,
he has been the Managing Director of Oavik Capital AS.
Mr. Svanevik received a masters degree in General
Economics from The Norwegian School of Management (BI) and an
MBA from Thunderbird. Mr. Svanevik brings experience in
finance, corporate development and international business to our
board.
Brent K. Whittington is a director nominee.
Mr. Whittington has served as the Chief Operating Officer
of Windstream Corporation, a publicly traded communications
company providing phone, high-speed Internet and high-definition
digital TV services, since August 2009. Prior to that,
Mr. Whittington served as the Executive Vice President and
Chief Financial Officer of Windstream Corporation from July 2006
to August 2009. From December 2005 to July 2006,
Mr. Whittington served as Executive Vice President and
Chief Financial Officer of Windstream Corporations
predecessor, Alltel Holding Corp. From 2002 to August 2005,
Mr. Whittington served as Vice President of Finance and
Accounting of Alltel Corporation, parent company of Alltel
Holding Corp and, from August 2005 to December 2005,
Mr. Whittington also served as the Senior Vice
President-Operations Support of Alltel Corporation. Prior to
joining Alltel, Mr. Whittington was with Arthur Andersen
LLP for over eight years. Mr. Whittington has a degree in
accounting from the University of Arkansas at Little Rock.
Mr. Whittington will bring experience in finance and
accounting to our board as well as a wealth of experience in the
communications industry.
Our executive officers are appointed by our board of directors
and serve until their successors have been duly elected and
qualified. There are no family relationships among any of our
directors, director nominees or executive officers.
Code of
Ethics
We have adopted a code of business conduct and ethics applicable
to our principal executive, financial and accounting officers
and all persons performing similar functions. A copy of that
code will be available on our corporate website at
www.rignet.com upon completion of this offering.
Composition of
the Board of Directors
Our board of directors currently consists of six members, all of
whom are non-employee members. Each director holds office until
the election and qualification of his or her successor, or his
or her earlier death, resignation or removal. Our post-offering
bylaws permit our board of directors to establish by resolution
the authorized number of directors.
Pursuant to the terms of our existing stockholders agreement,
our existing current directors were elected as follows:
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The holders of our common stock elected one independent member
of our board of directors: Omar Kulbrandstad;
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The holders of our series A preferred stock elected one
independent member of our board of directors, subject to the
approval of the holders of a majority of our outstanding shares
of series B preferred stock and series C preferred
stock: Charles Davis;
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90
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The holders of our series B preferred stock elected one
independent member of our board of directors, subject to the
approval of the holders of a majority of our outstanding shares
of series A preferred stock and series C preferred
stock: Kevin Neveu;
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Altira elected one member of our board of directors: Dirk
McDermott;
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Cubera elected one member of our board of directors: Ørjan
Svanevik; and
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The holders of a majority of our series A preferred stock,
the holders of a majority of our series B preferred stock
and the holders of a majority of our series C preferred
stock elected one independent member of our board of directors:
Thomas M. Matthews.
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Upon the closing of this offering, all of our preferred stock
will be converted into our common stock and all of the
contractual rights to appoint directors will be automatically
terminated. Messrs. Kulbrandstad, McDermott and Svanevik
will resign from our board of directors effective upon
completion of this offering. Commencing with our first annual
meeting of stockholders after the completion of this offering,
all of our director positions will be up for re-election.
Our post-offering certificate of incorporation provides that the
number of authorized directors will be determined from time to
time by resolution of the board of directors and that a director
may only be removed outside of the normal election process for
cause by the affirmative vote of the holders of a majority of
the shares then entitled to vote at an election of our directors.
Director
Independence
In the fourth quarter of 2010, our board of directors undertook
a review of the independence of each post-offering director and
considered whether any post-offering director had a material
relationship with us that could compromise his or her ability to
exercise independent judgment in carrying out his or her
responsibilities. As a result of this review, our board of
directors determined that all of our post-offering directors,
other than our chief executive officer, Mark Slaughter, were
independent directors and met the independence
requirements under the listing standards of the NASDAQ.
Committees of the
Board of Directors
Our board of directors has established an audit committee, a
compensation committee and a corporate governance and nominating
committee.
Audit
Committee
Our audit committee consists of Charles Davis and Thomas
Matthews, each of whom is a non-employee member of our board of
directors. In addition, James H. Browning, Keith Olsen and Brent
K. Whittington have been appointed to our audit committee
effective upon the completion of this offering. Mr. Davis
is the chairperson of our audit committee. Our board of
directors has determined that each current member of our audit
committee and each of Messrs. Browning, Olsen and Whittington
meet the requirements of financial literacy under the
requirements of the NASDAQ and SEC rules and regulations.
Mr. Davis serves as our audit committee financial expert,
as defined under SEC rules, and possesses financial
sophistication as required by the NASDAQ. Mr. Matthews is
independent as such term is defined in
Rule 10A-3(b)(1)
under the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Mr. Davis is not independent within the
meaning of
Rule 10A-3(b)(1)
because of his affiliation with Sanders Morris Harris Private
Equity Group and the present level of stock ownership of our
Company by funds and investors affiliated with Sanders Morris
Harris Private Equity Group. The test for independence under
Rule 10A-3(b)(1)
for the audit committee is different than the general test for
independence of board and committee members. In accordance with
91
Rule 10A-3(b)(1)
and the listing standards of the NASDAQ, we plan to
modify the composition of the audit committee within
12 months after the effectiveness of our registration
statement relating to this offering so that all of our audit
committee members will be independent as such term is defined in
Rule 10A-3(b)(1)
and under the listing standards of the NASDAQ. Our board of
directors has determined that Mr. Browning is also an audit
committee financial expert as defined under SEC rules.
Our audit committee is responsible for, among other things:
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selecting and hiring our independent auditors, and approving the
audit and non-audit services to be performed by our independent
auditors;
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evaluating the qualifications, performance and independence of
our independent auditors;
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