Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
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(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended September 30, 2009
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period
from to
Commission
file number 001-33117
GLOBALSTAR,
INC.
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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41-2116508
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(State
or Other Jurisdiction of
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(I.R.S.
Employer Identification No.)
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Incorporation
or Organization)
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461
South Milpitas Blvd.
Milpitas,
California 95035
(Address
of principal executive offices and zip code)
(408)
933-4000
Registrant’s
telephone number, including area code
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer ¨
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Accelerated
filer x
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Non-accelerated
filer ¨
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Smaller
reporting company ¨
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
Indicate
the number of shares outstanding of each of the issuer’s classes of Common
Stock, as of the latest practicable date. As of October
30, 2009, 153,242,370 shares of Common Stock, par value $0.0001 per
share and no
shares of Nonvoting Common Stock, par value $0.0001 per share, were
outstanding.
TABLE OF
CONTENTS
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Page
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PART I
- Financial Information
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Item
1.
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Financial
Statements
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3
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Consolidated
Statements of Operations for the three and nine months ended
September 30, 2009 and 2008 (unaudited)
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3
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Consolidated
Balance Sheets as of September 30, 2009 and December 31, 2008
(unaudited)
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4
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Consolidated
Statements of Cash Flows for the nine months ended September 30, 2009
and 2008 (unaudited)
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5
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Notes
to Unaudited Interim Consolidated Financial Statements
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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23
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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36
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Item
4.
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Controls
and Procedures
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37
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PART II
- Other Information
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Item
1.
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Legal
Proceedings
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37
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Item
1A. Risk Factors
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38
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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51
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Item
6.
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Exhibits
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52
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Signatures
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53
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PART I.
FINANCIAL INFORMATION
Item
1. Financial Statements
GLOBALSTAR,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
(Unaudited)
|
|
|
Three Months Ended
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|
Nine Months Ended
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September 30,
2009
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September 30,
2008
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|
September 30,
2009
|
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September 30,
2008
|
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As Adjusted –
Note 1
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As Adjusted –
Note 1
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Revenue:
|
|
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|
|
|
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Service
revenue
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$ |
13,260 |
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$ |
16,150 |
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$ |
36,953 |
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$ |
48,833 |
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Equipment
sales
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|
|
4,261 |
|
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|
6,375 |
|
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|
11,447 |
|
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|
18,825 |
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|
Total
revenue
|
|
|
17,521 |
|
|
|
22,525 |
|
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|
48,400 |
|
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|
67,658 |
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Operating
expenses:
|
|
|
|
|
|
|
|
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|
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|
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Cost
of services (exclusive of depreciation and amortization shown separately
below)
|
|
|
9,403 |
|
|
|
10,452 |
|
|
|
27,772 |
|
|
|
26,534 |
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|
Cost
of equipment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost
of equipment sales
|
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|
1,987 |
|
|
|
4,942 |
|
|
|
7,814 |
|
|
|
14,050 |
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|
Cost
of equipment sales — Impairment of assets
|
|
|
7 |
|
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|
— |
|
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|
655 |
|
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|
404 |
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Total
cost of equipment sales
|
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|
1,994 |
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|
4,942 |
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8,469 |
|
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14,454 |
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Marketing,
general, and administrative
|
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12,328 |
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17,372 |
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37,713 |
|
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48,602 |
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Depreciation
and amortization
|
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|
5,473 |
|
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|
7,196 |
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16,365 |
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|
19,135 |
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Total
operating expenses
|
|
|
29,198 |
|
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|
39,962 |
|
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|
90,319 |
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|
108,725 |
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Operating
loss
|
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|
(11,677
|
) |
|
|
(17,437
|
) |
|
|
(41,919
|
) |
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|
(41,067
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) |
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Other
income (expense):
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|
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|
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Interest
income
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181 |
|
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1,474 |
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365 |
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4,407 |
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Interest
expense
|
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|
(1,763
|
) |
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|
(1,201
|
) |
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(5,144
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) |
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|
(2,499
|
) |
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Derivative
gain (loss)
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|
5,993 |
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|
(229
|
) |
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5,196 |
|
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(25
|
) |
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Other
|
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1,839 |
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(6,587
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) |
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393 |
|
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|
1,587 |
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Total
other income (expense)
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|
6,250 |
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(6,543
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) |
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|
810 |
|
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3,470 |
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Loss
before income taxes
|
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|
(5,427
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) |
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|
(23,980
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) |
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(41,109
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) |
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(37,597
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) |
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Income
tax expense (benefit)
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|
92 |
|
|
|
2,039 |
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(70
|
) |
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2,234 |
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Net
loss
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|
$ |
(5,519 |
) |
|
$ |
(26,019 |
) |
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$ |
(41,039 |
) |
|
$ |
(39,831 |
) |
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Loss
per common share:
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Basic
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$ |
(0.04 |
) |
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$ |
(0.31 |
) |
|
$ |
(0.30 |
) |
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$ |
(0.48 |
) |
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Diluted
|
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|
(0.04
|
) |
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|
(0.31
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) |
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(0.30
|
) |
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(0.48
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) |
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Weighted-average
shares outstanding:
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|
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|
|
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|
|
|
|
|
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Basic
|
|
|
144,827 |
|
|
|
84,631 |
|
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|
135,831 |
|
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|
83,711 |
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Diluted
|
|
|
144,827 |
|
|
|
84,631 |
|
|
|
135,831 |
|
|
|
83,711 |
|
See
accompanying notes to unaudited interim consolidated financial
statements.
GLOBALSTAR,
INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except par value and Preferred Stock share data)
(Unaudited)
|
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
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As Adjusted –
Note 1
|
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|
ASSETS
|
|
|
|
|
|
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Current
assets:
|
|
|
|
|
|
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Cash
and cash equivalents
|
|
$ |
131,699 |
|
|
$ |
12,357 |
|
|
Accounts
receivable, net of allowance of $5,429 (2009) and $5,205
(2008)
|
|
|
10,468 |
|
|
|
10,075 |
|
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Inventory
|
|
|
59,006 |
|
|
|
55,105 |
|
|
Advances
for inventory
|
|
|
9,332 |
|
|
|
9,314 |
|
|
Prepaid
expenses and other current assets
|
|
|
5,806 |
|
|
|
5,565 |
|
|
Total
current assets
|
|
|
216,311 |
|
|
|
92,416 |
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
863,099 |
|
|
|
642,264 |
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
42,538 |
|
|
|
57,884 |
|
|
Deferred
financing costs
|
|
|
65,297 |
|
|
|
2,132 |
|
|
Other
assets, net
|
|
|
30,688 |
|
|
|
13,538 |
|
|
Total
assets
|
|
$ |
1,217,933 |
|
|
$ |
808,234 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
50,272 |
|
|
$ |
28,370 |
|
|
Accrued
expenses
|
|
|
24,229 |
|
|
|
29,998 |
|
|
Payables
to affiliates
|
|
|
983 |
|
|
|
3,344 |
|
|
Deferred
revenue
|
|
|
19,249 |
|
|
|
19,354 |
|
|
Current
portion of long term debt
|
|
|
2,259 |
|
|
|
33,575 |
|
|
Total
current liabilities
|
|
|
96,992 |
|
|
|
114,641 |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under revolving credit facility
|
|
|
— |
|
|
|
66,050 |
|
|
Long
term debt
|
|
|
461,474 |
|
|
|
172,295 |
|
|
Employee
benefit obligations, net of current portion
|
|
|
4,735 |
|
|
|
4,782 |
|
|
Other
non-current liabilities
|
|
|
48,230 |
|
|
|
13,713 |
|
|
Total
non-current liabilities
|
|
|
514,439 |
|
|
|
256,840 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.0001 par value; 100,000,000 shares authorized, issued and
outstanding — one at September 30, 2009; none at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
Series A
Preferred Convertible Stock, $0.0001 par value: 1 share authorized, issued
and outstanding at September 30, 2009; none authorized, issued or
outstanding at December 31, 2008
|
|
|
— |
|
|
|
— |
|
|
Voting
Common Stock, $0.0001 par value; 800,000 and 865,000 shares authorized at
December 31, 2008 and September 30, 2009, respectively, 152,555 shares
issued and outstanding at September 30, 2009; 136,606 shares issued
and outstanding at December 31, 2008
|
|
|
15 |
|
|
|
14 |
|
|
Nonvoting
Common Stock, $0.0001 par value; 135,000 shares authorized, no shares
issued and outstanding at September 30, 2009; none authorized, issued or
outstanding at December 31, 2008
|
|
|
— |
|
|
|
— |
|
|
Additional
paid-in capital
|
|
|
671,421 |
|
|
|
463,822 |
|
|
Accumulated
other comprehensive loss
|
|
|
(3,116
|
) |
|
|
(6,304
|
) |
|
Retained
deficit
|
|
|
(61,818
|
) |
|
|
(20,779
|
) |
|
Total
stockholders’ equity
|
|
|
606,502 |
|
|
|
436,753 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,217,933 |
|
|
$ |
808,234 |
|
See
accompanying notes to unaudited interim consolidated financial
statements.
GLOBALSTAR,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
As Adjusted –
Note 1
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(41,039 |
) |
|
$ |
(39,831 |
) |
|
Adjustments
to reconcile net loss to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
— |
|
|
|
1,800 |
|
|
Depreciation
and amortization
|
|
|
16,365 |
|
|
|
19,135 |
|
|
Change
in fair value of derivative instruments and derivative
liabilities
|
|
|
(5,196 |
) |
|
|
25 |
|
|
Stock-based
compensation expense
|
|
|
8,042 |
|
|
|
10,318 |
|
|
Loss
on disposal of fixed assets
|
|
|
53 |
|
|
|
59 |
|
|
Provision
for bad debts
|
|
|
563 |
|
|
|
1,871 |
|
|
Interest
income on restricted cash
|
|
|
(115
|
) |
|
|
(3,526
|
) |
|
Contribution
of services
|
|
|
295 |
|
|
|
337 |
|
|
Cost
of equipment sales - impairment of assets
|
|
|
654 |
|
|
|
404 |
|
|
Amortization
of deferred financing costs
|
|
|
3,583 |
|
|
|
514 |
|
|
Loss
on debt to equity conversion
|
|
|
305 |
|
|
|
— |
|
|
Loss
in equity method investee
|
|
|
1,001 |
|
|
|
105 |
|
|
Changes
in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(598 |
) |
|
|
(4,931
|
) |
|
Inventory
|
|
|
1,331 |
|
|
|
(13,871
|
) |
|
Advances
for inventory
|
|
|
1,075 |
|
|
|
(74
|
) |
|
Prepaid
expenses and other current assets
|
|
|
493 |
|
|
|
1,219 |
|
|
Other
assets
|
|
|
(8,389 |
) |
|
|
(1,290
|
) |
|
Accounts
payable
|
|
|
(7,116 |
) |
|
|
1,665 |
|
|
Payables
to affiliates
|
|
|
(2,485 |
) |
|
|
1,722 |
|
|
Accrued
expenses and employee benefit obligations
|
|
|
661 |
|
|
|
(3,504
|
) |
|
Other
non-current liabilities
|
|
|
1,734 |
|
|
|
1,075 |
|
|
Deferred
revenue
|
|
|
1,315 |
|
|
|
804 |
|
|
Net
cash from operating activities
|
|
|
(27,468 |
) |
|
|
(25,974
|
) |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Spare
and second-generation satellites and launch costs
|
|
|
(232,850
|
) |
|
|
(199,525
|
) |
|
Second-generation
ground
|
|
|
(17,476
|
) |
|
|
(5,294
|
) |
|
Property
and equipment additions
|
|
|
(1,807
|
) |
|
|
(4,551
|
) |
|
Proceeds
from sale of property and equipment
|
|
|
— |
|
|
|
141 |
|
|
Purchase
of other investment
|
|
|
(145
|
) |
|
|
(2,000
|
) |
|
Cash
acquired on purchase of subsidiary
|
|
|
— |
|
|
|
1,839 |
|
|
Restricted
cash
|
|
|
12,165 |
|
|
|
(18,298
|
) |
|
Net
cash from investing activities
|
|
|
(240,113
|
) |
|
|
(227,688
|
) |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Borrowings
from long-term convertible senior notes
|
|
|
— |
|
|
|
150,000 |
|
|
Borrowings
from long term debt
|
|
|
— |
|
|
|
100,000 |
|
|
Borrowings
from revolving credit loan
|
|
|
7,750 |
|
|
|
35,000 |
|
|
Borrowings
from $55M Convertible Senior Notes
|
|
|
55,000 |
|
|
|
— |
|
|
Borrowings
from Facility Agreement
|
|
|
371,219 |
|
|
|
— |
|
|
Borrowings
under subordinated loan agreement
|
|
|
25,000 |
|
|
|
— |
|
|
Borrowings
under short term loan
|
|
|
2,260 |
|
|
|
— |
|
|
Repayment
of revolving credit loan
|
|
|
— |
|
|
|
(50,000
|
) |
|
Proceeds
from equity contributions
|
|
|
1,000 |
|
|
|
— |
|
|
Deferred
financing cost payments
|
|
|
(62,748
|
) |
|
|
(4,880
|
) |
|
Payments
for the interest rate cap instrument
|
|
|
(12,425
|
) |
|
|
— |
|
|
Reduction
in derivative margin account balance requirements
|
|
|
— |
|
|
|
159 |
|
|
Net
cash from financing activities
|
|
|
387,056 |
|
|
|
230,279 |
|
|
Effect
of exchange rate changes on cash
|
|
|
(133 |
) |
|
|
(1,234
|
) |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
119,342 |
|
|
|
(24,617
|
) |
|
Cash
and cash equivalents, beginning of period
|
|
|
12,357 |
|
|
|
37,554 |
|
|
Cash
and cash equivalents, end of period
|
|
$ |
131,699 |
|
|
$ |
12,937 |
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
11,628 |
|
|
$ |
5,502 |
|
|
Income
taxes
|
|
$ |
92 |
|
|
$ |
994 |
|
|
Supplemental
disclosure of non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
Conversion
of debt to Series A Convertible Preferred Stock
|
|
$ |
180,177 |
|
|
$ |
— |
|
|
Accrued
launch costs and second-generation satellites costs
|
|
$ |
28,539 |
|
|
$ |
27,481 |
|
|
Capitalization
of accrued interest for spare and second-generation satellites and launch
costs
|
|
$ |
8,662 |
|
|
$ |
10,460 |
|
|
Vendor
financing of second-generation satellites
|
|
$ |
— |
|
|
$ |
48,215 |
|
|
Subordinated
loan
|
|
$ |
25,778 |
|
|
$ |
— |
|
|
Conversion
of debt to Common Stock
|
|
$ |
7,500 |
|
|
$ |
— |
|
|
Non
cash effect of debt discount on convertible notes
|
|
$ |
— |
|
|
$ |
20,084 |
|
|
Accretion
of debt discount and amortization of prepaid finance costs
|
|
$ |
5,627 |
|
|
$ |
— |
|
|
Conversion
of convertible notes into common stock
|
|
$ |
5,033 |
|
|
$ |
— |
|
See
accompanying notes to unaudited interim consolidated financial
statements.
GLOBALSTAR,
INC.
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Note
1: The Company and Summary of Significant Accounting Policies
Nature
of Operations
Globalstar, Inc.
(“Globalstar” or the “Company”) was formed as a Delaware limited liability
company in November 2003, and was converted into a Delaware corporation on
March 17, 2006.
Globalstar
is a leading provider of mobile voice and data communications services via
satellite. Globalstar’s network, originally owned by Globalstar, L.P. (“Old
Globalstar”), was designed, built and launched in the late 1990s by a technology
partnership led by Loral Space and Communications (“Loral”) and Qualcomm
Incorporated (“Qualcomm”). On February 15, 2002, Old Globalstar and three
of its subsidiaries filed voluntary petitions under Chapter 11 of the United
States Bankruptcy Code. In 2004, Thermo Capital Partners L.L.C., together with
its affiliates (“Thermo”), became Globalstar’s principal owner, and Globalstar
completed the acquisition of the business and assets of Old Globalstar. Thermo
remains Globalstar’s largest stockholder. Globalstar’s Chairman
controls Thermo and its affiliates. Two other members of Globalstar’s Board of
Directors are also directors, officers or minority equity owners of various
Thermo entities.
Globalstar
offers satellite services to commercial and recreational users in more than 120
countries around the world. The Company’s voice and data products include mobile
and fixed satellite telephones, Simplex and duplex satellite data modems and
flexible service packages. Many land based and maritime industries benefit from
Globalstar with increased productivity from remote areas beyond cellular and
landline service. Globalstar’s customers include those in the following
industries: oil and gas, government, mining, forestry, commercial fishing,
utilities, military, transportation, heavy construction, emergency preparedness,
and business continuity, as well as individual recreational users.
Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America (“GAAP”) for interim financial information. These
unaudited interim consolidated financial statements include the accounts of
Globalstar and its majority owned or otherwise controlled subsidiaries. All
significant intercompany transactions and balances have been eliminated in the
consolidation. In the opinion of management, such information includes all
adjustments, consisting of normal recurring adjustments, that are necessary for
a fair presentation of the Company’s consolidated financial position, results of
operations, and cash flows for the periods presented. The results of operations
for the three and nine months ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the full year or any future
period.
The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The Company evaluates its
estimates on an ongoing basis, including those related to revenue recognition,
allowance for doubtful accounts, inventory valuation, deferred tax assets,
property and equipment, interest rate cap, warrants and embedded conversion
option classified as a liability, warranty obligations and contingencies and
litigation. Actual results could differ from these estimates.
During the quarter ended September 30, 2009, the
Company changed its estimates of the costs necessary to complete an
engineering services project it is contracted to perform. The
Company accounts for this contract under the percentage-of-completion
method. The contract calls for the Company to install certain equipment that
allows for Simplex and duplex service capabilities at an independent gateway
operator, which the Company holds an equity interest in. During the third
quarter of 2009, the Company substantially completed the installation of Simplex
capabilities at the gateway, at a cost that was below the Company’s initial
estimates. Based on its revised estimates for this project, the Company
recognized approximately $2.2 million of revenue and $2.0 million of gross
profit during the three months ended September 30, 2009.
These
unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and related notes
included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008, as amended. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have
been condensed or omitted. Certain reclassifications have been made to prior
year consolidated financial statements to conform to current year
presentation.
Globalstar
operates in one segment, providing voice and data communication services via
satellite.
Recent
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued new standards
setting forth a single source of authoritative generally accepted accounting
principles (“GAAP”) for all non-governmental entities. The Accounting Standards
Codification (“ASC”), changes the referencing and organization of accounting
guidance, but is not intended to change existing GAAP. Accordingly, the ASC does
not have any impact on the Company’s consolidated financial statements, except
that the references to accounting standards have been updated to refer to the
ASC.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-15.
The ASU amends the ASC guidance on accounting for share loan facilities. The
Company is evaluating the impact of the adoption of this ASU on its financial
position, results of operations, and cash flows.
In
October 2009, the FASB issued ASU No. 2009-14, which provides new standards
for the accounting for certain revenue arrangements that include software
elements. These new standards amend the scope of pre-existing software revenue
guidance by removing from the guidance non-software components of tangible
products and certain software components of tangible products. These new
standards are effective for Globalstar beginning in the first quarter
of fiscal year 2011, however early adoption is permitted. The Company
does not expect these new standards to significantly impact its
consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-13, which eliminates the use of the
residual method and incorporates the use of an estimated selling price to
allocate arrangement consideration. In addition, the revenue recognition
guidance amends the scope to exclude tangible products that contain software and
non-software components that function together to deliver the product’s
essential functionality. The amendments to the accounting standards related to
revenue recognition are effective for fiscal years beginning after June 15,
2010. Upon adoption, the Company may apply the guidance retrospectively or
prospectively for new or materially modified arrangements. The Company is
currently evaluating the financial impact that this accounting standard will
have on its Consolidated Financial Statements.
Effective
June 30, 2009, the Company adopted the requirements of FASB ASC 855 (previously
FASB SFAS No. 165, “Subsequent Events”) for
subsequent events, which established standards for the accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are available to be issued. These standards are largely the
same guidance on subsequent events which previously existed only in auditing
literature. The requirements include disclosure of the date through which
subsequent events have been evaluated, as well as whether that date is the date
the financial statements were issued or the date the financial statements were
available to be issued.
Effective
April 1, 2009, the Company adopted the disclosure requirements of FASB ASC
820-10-50 (previously FSP FAS 107-1 and APB 28-1, “Interim Disclosures About Fair
Value of Financial Instruments"). These disclosures have been provided in
Note 11, “Derivative Instruments.”
Effective
January 1, 2009, the Company adopted the fair value measurement and
disclosure requirements of FASB ASC 820 (previously SFAS No. 157, “Fair Value Measurements") for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The January 1, 2009 adoption did not have an
impact on the Consolidated Financial Statements.
Effective
January 1, 2009, the Company adopted the requirements of FASB ASC 470-20
(previously FSP Accounting Principles Board Opinion (APB) No. 14-1,
“Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement)”) for convertible debt instruments that have cash
settlement features. These requirements included separation of the liability and
equity components of the instruments. The debt is recognized at the present
value of its cash flows discounted using the issuer’s nonconvertible debt
borrowing rate at the time of issuance with the resulting debt discount being
amortized over the expected life of the debt. The equity component is recognized
as the difference between the proceeds from the issuance of the convertible debt
instrument and the fair value of the liability. The adoption required
retrospective application to all periods presented, and did not grandfather
existing instruments.
The
adoption of FASB ASC 470-20 changed the Company’s full-year 2008 Consolidated
Statements of Operations because the gains associated with conversions and
exchanges of 5.75% Convertible Senior Notes (the “5.75% Notes”) in 2008 were
recorded in stockholders’ equity prior to adoption of this standard. The
adoption also changed the Company’s Consolidated Statement of Operations for the
three and nine months ended September 30, 2008 because the Company issued
the 5.75% Notes in April 2008. The Company capitalized the interest
associated with the accretion of debt discount recorded in connection with this
adoption, which resulted in an increase to property and equipment. The following
tables present the effects of the adoption on the Company’s affected Balance
Sheet items as of September 30, 2008 and December 31,
2008:
|
|
|
As of September 30, 2008
|
|
|
|
|
As Originally
|
|
|
Effect of
|
|
|
As
|
|
|
|
|
Reported
|
|
|
Change
|
|
|
Adjusted
|
|
|
|
|
(in thousands)
|
|
|
Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$ |
435,218 |
|
|
$ |
4,094 |
|
|
$ |
439,312 |
|
|
Other
assets
|
|
|
15,174 |
|
|
|
(1,507
|
) |
|
|
13,667 |
|
|
Long-term
debt
|
|
|
150,000 |
|
|
|
(50,581
|
) |
|
|
99,419 |
|
|
Other
non-current liabilities
|
|
|
54,583 |
|
|
|
22,417 |
|
|
|
77,000 |
|
|
Additional
paid-in capital
|
|
|
424,443 |
|
|
|
30,505 |
|
|
|
454,948 |
|
|
Retained
deficit
|
|
$ |
(45,704
|
) |
|
$ |
257 |
|
|
$ |
(45,447
|
) |
|
|
|
As of December 31, 2008
|
|
|
|
|
As Originally
|
|
|
Effect of
|
|
|
As
|
|
|
|
|
Reported
|
|
|
Change
|
|
|
Adjusted
|
|
|
|
|
(in thousands)
|
|
|
Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$ |
636,362 |
|
|
$ |
5,902 |
|
|
$ |
642,264 |
|
|
Other
assets
|
|
|
16,376 |
|
|
|
(706
|
) |
|
|
15,670 |
|
|
Long-term
debt
|
|
|
195,429 |
|
|
|
(23,134
|
) |
|
|
172,295 |
|
|
Additional
paid-in capital
|
|
|
488,343 |
|
|
|
(24,521
|
) |
|
|
463,822 |
|
|
Retained
deficit
|
|
$ |
(73,630
|
) |
|
$ |
52,851 |
|
|
$ |
(20,779
|
) |
Note
2: Basic and Diluted Loss Per Share
The
Company computes basic earnings per share based on the weighted-average number
of shares of Common Stock outstanding during the period. The Company includes
Common Stock equivalents in the calculation of diluted earnings per share only
when the effect of their inclusion would be dilutive.
The
following table sets forth the computations of basic and diluted loss per share
(in thousands, except per share data):
|
|
|
Three Months Ended September 30, 2009
|
|
|
Nine Months Ended September 30, 2009
|
|
|
|
|
Income
(Numerator)
|
|
|
Weighted
Average Shares
Outstanding
(Denominator)
|
|
|
Per-Share
Amount
|
|
|
Income
(Numerator)
|
|
|
Weighted
Average Shares
Outstanding
(Denominator)
|
|
|
Per-Share
Amount
|
|
|
Basic
and Dilutive loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,519
|
) |
|
|
144,827 |
|
|
$ |
(0.04
|
) |
|
$ |
(41,039
|
) |
|
|
135,831 |
|
|
$ |
(0.30
|
) |
|
|
|
Three Months Ended September 30, 2008
(As Adjusted –
Note
1)
|
|
|
Nine Months Ended September 30, 2008
(As Adjusted –
Note
1)
|
|
|
|
|
Income
(Numerator)
|
|
|
Weighted
Average Shares
Outstanding
(Denominator)
|
|
|
Per-Share
Amount
|
|
|
Income
(Numerator)
|
|
|
Weighted
Average Shares
Outstanding
(Denominator)
|
|
|
Per-Share
Amount
|
|
|
Basic
and Dilutive loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(26,019
|
) |
|
|
84,631 |
|
|
$ |
(0.31
|
) |
|
$ |
(39,831
|
) |
|
|
83,711 |
|
|
$ |
(0.48
|
) |
For the
three and nine month periods ended September 30, 2009 and 2008, diluted net
loss per share of Common Stock is the same as basic net loss per share of Common
Stock, because the effects of potentially dilutive securities are
anti-dilutive.
The
Company included the outstanding shares issued under the Share Lending Agreement
(17.3 million shares outstanding at September 30, 2009) in the computation
of earnings per share (See Note 12 “Borrowings”).
Note 3: Property and
Equipment
Property
and equipment consist of the following (in thousands):
|
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
As
Adjusted –
Note
1
|
|
|
Globalstar
System:
|
|
|
|
|
|
|
|
Space
component
|
|
$ |
132,982 |
|
|
$ |
132,982 |
|
|
Ground
component
|
|
|
27,704 |
|
|
|
26,154 |
|
|
Construction
in progress:
|
|
|
|
|
|
|
|
|
|
Second-generation
satellites, ground and related launch costs
|
|
|
750,509 |
|
|
|
516,530 |
|
|
Other
|
|
|
979 |
|
|
|
958 |
|
|
Furniture
and office equipment
|
|
|
19,223 |
|
|
|
16,872 |
|
|
Land
and buildings
|
|
|
4,255 |
|
|
|
3,810 |
|
|
Leasehold
improvements
|
|
|
791 |
|
|
|
687 |
|
|
|
|
|
936,443 |
|
|
|
697,993 |
|
|
Accumulated
depreciation
|
|
|
(73,344
|
) |
|
|
(55,729
|
) |
|
|
|
$ |
863,099 |
|
|
$ |
642,264 |
|
Property
and equipment consists of an in-orbit satellite constellation, ground equipment,
second-generation satellites under construction and related launch costs,
second-generation ground component and support equipment located in various
countries around the world.
In June
2009, Globalstar and Thales Alenia Space entered into an amended and restated
contract for the construction of 48 low-earth orbit second-generation satellites
to incorporate prior amendments, acceleration requests and make other
non-material changes to the contract entered into in November 2006.
The total contract price, including subsequent additions, is approximately
€678.9 million (approximately $940.1 million at a weighted average
conversion rate of €1.00 = $1.385) including approximately €146.8 million
which was paid by the Company in U.S. dollars at an average conversion rate of
€1.00 = $1.294. Upon closing of the Facility Agreement (See Note 12
“Borrowings”), amounts in the escrow account became unrestricted and were
reclassed to cash and cash equivalents.
In
March 2007, the Company and Thales Alenia Space entered into an agreement
for the construction of the Satellite Operations Control Centers, Telemetry
Command Units and In Orbit Test Equipment (collectively, the “Control Network
Facility”) for the Company’s second-generation satellite constellation. The
total contract price for the construction and associated services is €9.2
million (approximately $13.2 million at a weighted average conversion rate of
€1.00 = $1.44) consisting of €4.1 million for the Satellite Operations Control
Centers, €3.1 million for the Telemetry Command Units and €2.0 million for the
In Orbit Test Equipment, with payments to be made on a quarterly basis through
completion of the Control Network Facility in the first quarter of
2010.
In
September 2007, the Company and Arianespace (the “Launch Provider”) entered into
an agreement for the launch of the Company’s second-generation satellites and
certain pre and post-launch services. Pursuant to the agreement, the Launch
Provider agreed to make four launches of six satellites each, and the Company
had the option to require the Launch Provider to make four additional launches
of six satellites each. The total contract price for the first four launches is
approximately $216.1 million. In July 2008, the Company amended its agreement
with the Launch Provider for the launch of the Company’s second-generation
satellites and certain pre and post-launch services. Under the amended terms,
the Company could defer payment on up to 75% of certain amounts due to the
Launch Provider. The deferred payments incurred annual interest at 8.5% to 12%
and became payable one month from the corresponding launch date. As of September
30, 2009 and December 31, 2008, the Company had approximately none and $47.3
million, respectively, in deferred payments outstanding to the Launch Provider.
In June 2009, the Company and the Launch Provider again amended their
agreement reducing the number of optional launches from four to one and
modifying the agreement in certain other respects including terminating the
deferred payment provisions. Notwithstanding the one optional launch, the
Company is free to contract separately with the Launch Provider or another
provider of launch services after the Launch Provider’s firm launch commitments
are fulfilled.
In May
2008, the Company and Hughes Network Systems, LLC (“Hughes”) entered into an
agreement under which Hughes will design, supply and implement the Radio Access
Network (“RAN”) ground network equipment and software upgrades for installation
at a number of the Company’s satellite gateway ground stations and satellite
interface chips to be a part of the User Terminal Subsystem (UTS) in various
next-generation Globalstar devices. The total contract purchase price of
approximately $100.8 million is payable in various increments over a period of
40 months. The Company has the option to purchase additional RANs and other
software and hardware improvements at pre-negotiated prices. In August 2009, the
Company and Hughes amended their agreement extending the performance schedule by
15 months and revising certain payment milestones. Costs associated
with certain projects under this contract will be capitalized once the Company
has determined that technological feasibility has been achieved on these
projects. As of September 30, 2009, the Company had made payments of $35.0
million under this contract and expensed $5.7 million of these payments and
capitalized $19.3 million under second-generation satellites, ground and related
launch costs and $10.0 million has been classified as a prepayment in other
assets, net.
In
October 2008, the Company signed an agreement with Ericsson Federal Inc., a
leading global provider of technology and services to telecom operators.
According to the $22.7 million contract, Ericsson will work with the Company to
develop, implement and maintain a ground interface, or core network, system that
will be installed at the Company’s satellite gateway ground
stations.
As of
September 30, 2009 and December 31, 2008, capitalized interest
recorded was $59.1 million and $37.4 million, respectively. Interest
capitalized during the three and nine months ended September 30, 2009 was
$9.8 million and $22.6 million, respectively, and $5.4 million and $13.7 million
for the three and nine months ended September 30, 2008, respectively.
Depreciation expense for the three and nine months ended September 30, 2009
was $5.5 million and $16.3 million, respectively, and $7.2 million and
$19.0 million for the three and nine months ended September 30, 2008,
respectively.
Note
4: Payables to Affiliates
Payables
to affiliates relate to normal purchase transactions, excluding interest, and
were $0.8 million at September 30, 2009 and December 31, 2008.
Thermo
incurs certain general and administrative expenses on behalf of the Company,
which are charged to the Company. For the three and nine month periods ended
September 30, 2009, total expenses were approximately $21,000 and $109,000,
respectively, and $57,000 and $167,000 for the three and nine month periods
ended September 30, 2008, respectively.
For the
three and nine month periods ended September 30, 2009, the Company also
recorded approximately $42,000 and $295,000, respectively, of non-cash expenses
related to services provided by two executive officers of Thermo and the Company
who receive no compensation from the Company, which were accounted for as a
contribution to capital. The Company recorded $112,000 and $337,000 for the
three and nine month periods ended September 30, 2008, respectively, in
similar charges. The Thermo expense charges are based on actual amounts incurred
or upon allocated employee time. Management believes the allocations are
reasonable.
Note
5: Other Related Party Transactions
Since
2005, Globalstar has issued separate purchase orders for additional phone
equipment and accessories under the terms of previously executed commercial
agreements with Qualcomm. Within the terms of the commercial agreements, the
Company paid Qualcomm approximately 7.5% to 25% of the total order as advances
for inventory. As of September 30, 2009 and December 31,
2008, total advances to Qualcomm for inventory were $9.2 million. As of
September 30, 2009 and December 31, 2008, the Company had outstanding
commitment balances of approximately $58.5 million and $49.4 million,
respectively. On October 28, 2008, the Company amended its agreement with
Qualcomm to extend the term for 12 months and defer delivery of mobile phones
and related equipment until April 2010 through July 2011.
On
August 16, 2006, the Company entered into an amended and restated credit
agreement with Wachovia Investment Holdings, LLC, as administrative agent
and swingline lender, and Wachovia Bank, National Association, as issuing
lender, which was subsequently amended on September 29 and October 26,
2006. On December 17, 2007, Thermo was assigned all the rights (except
indemnification rights) and assumed all the obligations of the administrative
agent and the lenders under the amended and restated credit agreement, and the
credit agreement was again amended and restated. In connection with fulfilling
the conditions precedent to funding under the Company’s Facility Agreement, in
June 2009, Thermo converted the loans outstanding under the credit
agreement into equity and terminated the credit agreement. In addition, Thermo
and its affiliates deposited $60.0 million in a contingent equity account to
fulfill a condition precedent for borrowing under the Facility Agreement,
purchased $11.4 million of the Company’s 8% convertible senior unsecured notes,
provided a $2.2 million short-term loan to the Company, and loaned $25.0 million
to the Company to fund its debt service reserve account (See Note 12
“Borrowings”).
During
the three and nine month periods ended September 30, 2009, the Company
purchased approximately $1.0 million and $3.2 million, respectively, of services
and equipment from a company whose non-executive chairman serves as a member of
the Company’s board of directors. Corresponding purchases made during the three
month and nine month periods ended September 30, 2008 were $2.3 million and
$6.4 million, respectively.
Purchases
and other transactions with Affiliates
Total
purchases and other transactions from affiliates, excluding interest and capital
transactions, were $1.1 million and $3.4 million for the three and nine months
ended September 30, 2009, respectively. Total purchases and other transactions
from affiliates, excluding interest and capital transactions, were $2.4 million
and $8.0 million for the three and nine months ended September 30, 2008,
respectively.
Note
6: Income Taxes
On
January 1, 2009, the Company adopted FASB ASC 470-20, which was effective
retrospectively. Prior to this adoption, the Company had recorded the net tax
effect of the conversions and exchanges of the Company’s 5.75% Notes
(See Note 12 “Borrowings”) during the fourth quarter of 2008 against
additional-paid-in-capital and reduced its deferred tax assets at
December 31, 2008. This adoption resulted in the Company
recording a gain from the exchanges and conversions of the Notes and reversing
the charge taken to additional-paid-in-capital and deferred tax assets. The
Company established a valuation allowance to reduce the deferred tax assets to
an amount that is more likely than not to be realized. As of December 31,
2008, the Company had established valuation allowances of approximately
$125.5 million. Accordingly, at September 30, 2009 and
December 31, 2008, net deferred tax assets were $0.
The
Company has been notified that one of its subsidiaries and its predecessor,
Globalstar L.P., are currently under audit for the 2004 and 2005 tax years.
During the audit period, the Company and its subsidiaries were taxed as
partnerships. Neither the Company nor any of its subsidiaries, except for the
one noted above, are currently under audit by the Internal Revenue Service or by
any state jurisdiction in the United States with respect to income taxes. The
Company’s corporate U.S. tax returns for 2006 and 2007 and U.S. partnership tax
returns filed for years before 2006 remain subject to examination by tax
authorities. In the Company’s international tax jurisdictions, numerous tax
years remain subject to examination by tax authorities, including tax returns
for 2001 and subsequent years in most of the Company’s major international tax
jurisdictions.
Note
7: Comprehensive Loss
Comprehensive
income (loss) includes all changes in equity during a period from non-owner
sources. The change in accumulated other comprehensive income for all periods
presented resulted from foreign currency translation adjustments.
The
following are the components of comprehensive loss (in thousands):
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2009
|
|
|
2008 (1)
|
|
|
2009
|
|
|
2008 (1)
|
|
|
Net
loss
|
|
$ |
(5,519
|
) |
|
$ |
(26,019
|
) |
|
$ |
(41,039
|
) |
|
$ |
(39,831
|
) |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
1,604 |
|
|
|
(488
|
) |
|
|
3,188 |
|
|
|
(1,944
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
$ |
(3,915
|
) |
|
$ |
(26,507
|
) |
|
$ |
(37,851
|
) |
|
$ |
(41,775
|
) |
Note
8: Equity Incentive Plan
The
Company’s 2006 Equity Incentive Plan (the “Equity Plan”) is a broad based,
long-term retention program intended to attract and retain talented employees
and align stockholder and employee interests. Including grants to both employees
and executives, 8.5 million and 8.6 million restricted stock awards and
restricted stock units were granted during the three and nine month periods
ended September 30, 2009, respectively. Approximately 0.1 million and 2.1
million restricted stock awards and restricted stock units (including grants to
both employees and executives) were granted during the three and nine months
ended September 30, 2008, respectively. In January and August
2009, 2.7 million shares and 10.0 million shares, respectively, of the
Company’s Common Stock were added to the shares available for issuance under the
Equity Plan.
The Company also granted options to purchase 3.6 million shares
of common stock for the nine months ended September 30, 2009 compared to
options to purchase 1.3 million shares of common stock for the same period in
the prior year. The Company recognized approximately $1.1 million in
expense related to these grants in the nine months ended September 30,
2009.
Note
9: Litigation and Other Contingencies
From time
to time, the Company is involved in various litigation matters involving
ordinary and routine claims incidental to our business. Management currently
believes that the outcome of these proceedings, either individually or in the
aggregate, will not have a material adverse effect on the Company’s business,
results of operations or financial condition. The Company is involved in certain
litigation matters as discussed below.
IPO Securities
Litigation. On February 9, 2007, the first of three
purported class action lawsuits was filed against the Company, its then-current
CEO and CFO in the Southern District of New York alleging that the Company’s
registration statement related to its initial public offering in
November 2006 contained material misstatements and omissions. The Court
consolidated the three cases as Ladmen Partners, Inc. v.
Globalstar, Inc., et al., Case No. 1:07-CV-0976 (LAP), and appointed
Connecticut Laborers’ Pension Fund as lead plaintiff. The parties and the
Company’s insurer have agreed to a settlement of the litigation for $1.5 million
to be paid by the insurer, which received the presiding judge’s preliminary
approval on September 18, 2009. A hearing on final approval of the settlement is
scheduled for February 18, 2010.
Walsh and Kesler v.
Globalstar, Inc. (formerly Stickrath v.
Globalstar, Inc.) On April 7, 2007, Kenneth
Stickrath and Sharan Stickrath filed a purported class action complaint against
the Company in the U.S. District Court for the Northern District of California,
Case No. 07-cv-01941. The complaint is based on alleged violations of
California Business & Professions Code § 17200 and California
Civil Code § 1750, et seq., the Consumers’ Legal Remedies Act. In
July 2008, the Company filed a motion to deny class certification and a
motion for summary judgment. The court deferred action on the class
certification issue but granted the motion for summary judgment on
December 22, 2008. The court did not, however, dismiss the case with
prejudice but rather allowed counsel for plaintiffs to amend the complaint and
substitute one or more new class representatives. On January 16, 2009,
counsel for the plaintiffs filed a Third Amended Class Action Complaint
substituting Messrs. Walsh and Kesler as the named plaintiffs. The Company
filed its answer on February 2, 2009.
Appeal of FCC S-Band Sharing
Decision. This case is Sprint Nextel Corporation’s petition in
the U.S. Court of Appeals for the District of Columbia Circuit for review of,
among others, the FCC’s April 27, 2006, decision regarding sharing of the
2495-2500 MHz portion of the Company’s radiofrequency spectrum. This is known as
“The S-band Sharing Proceeding.” The Court of Appeals has granted the FCC’s
motion to hold the case in abeyance while the FCC considers the petitions for
reconsideration pending before it. The Court has also granted the Company’s
motion to intervene as a party in the case. The Company cannot determine when
the FCC might act on the petitions for reconsideration.
Appeal of FCC L-Band
Decision. On November 9, 2007, the FCC released a Second
Order on Reconsideration, Second Report and Order and Notice of Proposed
Rulemaking. In the Report and Order (“R&O”) portion of the decision, the FCC
effectively decreased the L-band spectrum available to the Company while
increasing the L-band spectrum available to Iridium Communications by 2.625 MHz.
On February 5, 2008, the Company filed a notice of appeal of the FCC’s
decision in the U.S. Court of Appeals for the D.C. Circuit. Briefs were filed
and oral argument was held on February 17, 2009. On May 1, 2009, the
court issued a decision denying the Company’s appeal and affirming the FCC’s
decision.
Appeal of FCC ATC
Decision. On October 31, 2008, the FCC issued an Order
granting the Company modified Ancillary Terrestrial Component (“ATC”) authority.
The modified authority allows the Company and Open Range
Communications, Inc. to implement their plan to roll out ATC service in
rural areas of the United States. On December 1, 2008, Iridium
Communications filed a petition with the U.S. Court of Appeals for the District
of Columbia Circuit for review of the FCC’s Order. On the same day, CTIA-The
Wireless Association petitioned the FCC to reconsider its Order. The court has
granted the FCC’s motion to hold the appeal in abeyance pending the FCC’s
decision on reconsideration.
Sorensen Research & Development
Trust v. Axonn LLC, et al.. On July 2, 2008, the
Company’s subsidiary, Spot LLC, received a notice of patent infringement
from Sorensen Research and Development. Sorensen asserts that the process used
to manufacture the Spot Satellite GPS Messenger violates a U.S. patent held by
Sorensen. The manufacturer, Axonn LLC, has assumed responsibility for
managing the case under an indemnity agreement with the Company and
Spot LLC. Axonn was unable to negotiate a mutually acceptable settlement
with Sorensen, and on January 14, 2009, Sorensen filed a complaint against
Axonn, Spot LLC and the Company in the U.S. District Court for the Southern
District of California. The Company and Axonn filed an answer and counterclaim
and a motion to stay the proceeding pending completion of the re-examination of
the subject patent. The court granted the motion for stay on July 29,
2009.
YMax Communications Corp. v.
Globalstar, Inc. and Spot LLC. On May 6, 2009, YMax
Communications Corp. filed a patent infringement complaint against the Company
and its subsidiary, Spot LLC, in the Delaware U.S. District Court (Civ. Action
No. 09-329) alleging that the SPOT Satellite GPS Messenger service
infringes a patent for which YMax is the exclusive licensee. The
complaint followed an exchange of correspondence between the Company and
YMax in which the Company endeavored to explain why the SPOT service does not
infringe the YMax patent. Globalstar filed its answer to the complaint on
June 26, 2009. The parties are in the process of responding to document
requests from each other. The Company does not believe that the
complaint has merit and intends to defend itself vigorously.
Note
10: Geographic Information
Revenue
by geographic location, presented net of eliminations for intercompany sales,
was as follows for the three and nine month periods ended September 30,
2009 and 2008 (in thousands):
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Service:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
8,003 |
|
|
$ |
8,233 |
|
|
$ |
21,899 |
|
|
$ |
24,908 |
|
|
Canada
|
|
|
3,654 |
|
|
|
5,018 |
|
|
|
9,610 |
|
|
|
16,140 |
|
|
Europe
|
|
|
302 |
|
|
|
946 |
|
|
|
1,548 |
|
|
|
3,018 |
|
|
Central
and South America
|
|
|
1,211 |
|
|
|
1,747 |
|
|
|
3,646 |
|
|
|
4,165 |
|
|
Others
|
|
|
90 |
|
|
|
206 |
|
|
|
250 |
|
|
|
602 |
|
|
Total
service revenue
|
|
|
13,260 |
|
|
|
16,150 |
|
|
|
36,953 |
|
|
|
48,833 |
|
|
Equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
1,188 |
|
|
|
3,742 |
|
|
|
4,116 |
|
|
|
9,730 |
|
|
Canada
|
|
|
367 |
|
|
|
1,632 |
|
|
|
2,469 |
|
|
|
5,644 |
|
|
Europe
|
|
|
139 |
|
|
|
115 |
|
|
|
607 |
|
|
|
1,534 |
|
|
Central
and South America
|
|
|
364 |
|
|
|
685 |
|
|
|
1,341 |
|
|
|
1,677 |
|
|
Others
(1)
|
|
|
2,203 |
|
|
|
201 |
|
|
|
2,914 |
|
|
|
240 |
|
|
Total
equipment revenue
|
|
|
4,261 |
|
|
|
6,375 |
|
|
|
11,447 |
|
|
|
18,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
17,521 |
|
|
$ |
22,525 |
|
|
$ |
48,400 |
|
|
$ |
67,658 |
|
|
|
(1)
|
Includes
revenue from Africa of $2.2 million and $2.9 million for the
three and nine months ended September 30, 2009,
respectively.
|
Note
11: Derivative Instruments
In
July 2006, in connection with entering into its credit agreement with
Wachovia, which provided for interest at a variable rate (See Note 12
“Borrowings”), the Company entered into a five-year interest rate swap
agreement. The interest rate swap agreement reflected a $100.0 million notional
amount at a fixed interest rate of 5.64%. The interest rate swap agreement did
not qualify for hedge accounting treatment. The decline in fair value for the
three and nine months ended September 30, 2008 was charged to “Derivative
gain (loss)” in the accompanying Consolidated Statements of Operations. The
interest rate swap agreement was terminated on December 10, 2008, by the
Company making a payment of approximately $9.2 million.
In
June 2009, in connection with entering into the Facility Agreement (See
Note 12 “Borrowings”), which provides for interest at a variable rate, the
Company entered into ten-year interest rate cap agreements. The interest rate
cap agreements reflect a variable notional amount ranging from $586.3 million to
$14.8 million at interest rates that provide coverage to the Company for
exposure resulting from escalating interest rates over the term of the Facility
Agreement. The interest rate cap provides limits on the 6 month Libor rate
(“Base Rate”) used to calculate the coupon interest on outstanding amounts on
the Facility Agreement of 4.00% from the date of issuance through December 2012.
Thereafter, the Base Rate is capped at 5.50% should the Base Rate not exceed
6.5%. Should the Base Rate exceed 6.5%, the Company’s Base Rate will be 1% less
than the then 6 month Libor rate. The Company paid an approximately $12.4
million upfront fee for the interest rate cap agreement. The interest rate cap
did not qualify for hedge accounting treatment.
The
Company recorded the conversion rights and features embedded within the 8.00%
Convertible Senior Unsecured Notes (“8.00% Notes”) as a compound embedded
derivative liability within Other Non-Current Liabilities on its
Consolidated Balance Sheet with a corresponding debt discount which is netted
against the face value of the 8.00% Notes (See Note 12 “Borrowings”). The
Company will amortize the debt discount associated with the compound embedded
derivative liability to interest expense over the term of the 8.00% Notes using
the effective interest rate method. The fair value of the compound embedded
derivative liability will be marked-to-market at the end of each reporting
period, with any changes in value reported as “Derivative gain (loss)” in the
Consolidated Statements of Operations. The Company determined the fair value of
the compound embedded derivative using a Monte Carlo simulation model based upon
a risk-neutral stock price model.
Due
to the cash settlement provisions and reset features in the warrants
issued with the 8.00% Notes (See Note 12 “Borrowings”) , the Company recorded
the warrants as Other Long Term Liabilities on its Consolidated Balance Sheet
with a corresponding debt discount which is netted against the face value of the
8.00% Notes. The Company will amortize the debt discount associated with the
warrant liability to interest expense over the term of the warrants using the
effective interest rate method. The fair value of the warrant liability will be
marked-to-market at the end of each reporting period, with any changes in value
reported as “Derivative gain (loss)” in the Consolidated Statements of
Operations. The Company determined the fair value of the Warrant derivative
using a Monte Carlo simulation model based upon a risk-neutral stock price
model.
The
Company determined that the warrants issued in conjunction with the availability
fee for the Contingent Equity Agreement (See Note 12 “Borrowings”), were a
liability and recorded it as a component of Other Non-Current Liabilities,
at issuance. The corresponding benefit is recorded in prepaid and other current
assets and is being amortized over the one-year availability
period.
None of
the derivative instruments described above was designated as a hedge. The
following tables disclose the fair value of the derivative instruments as of
September 30, 2009 and December 31, 2008, and their impact on the
Company’s unaudited interim Consolidated Statements of Operations for the three
and nine month periods ended September 30, 2009 and 2008 (in
thousands):
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
|
Interest
rate cap derivative
|
Other
assets, net
|
|
$
|
6,138
|
|
N/A
|
|
N/A
|
|
|
Compound
embedded conversion option
|
Other
non-current liabilities
|
|
(14,217
|
)
|
N/A
|
|
N/A
|
|
|
Warrants
issued with 8.00% Notes
|
Other
non-current liabilities
|
|
(7,575
|
)
|
N/A
|
|
N/A
|
|
|
Warrants
issued with contingent equity agreement
|
Other
non-current liabilities
|
|
(6,000
|
)
|
N/A
|
|
N/A
|
|
|
Total
|
|
|
$
|
(21,654
|
)
|
|
|
$
|
N/A
|
|
|
|
Three months ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
Location of Gain
(loss) recognized
in Statement of
Operations
|
|
Amount of Gain
(loss) recognized
on Statement of
Operations
|
|
Location of Gain
(loss) recognized in
Statement of
Operations
|
|
Amount of Gain
(loss) recognized
on Statement of
Operations
|
|
|
Interest
rate swap derivative
|
N/A
|
|
N/A
|
|
Derivative
gain (loss)
|
|
$
|
(229)
|
|
|
Interest
rate cap derivative
|
Derivative
gain (loss)
|
|
(2,193
|
)
|
N/A
|
|
N/A
|
|
|
Compound
embedded conversion option
|
Derivative
gain (loss)
|
|
3,997
|
|
N/A
|
|
N/A
|
|
|
Warrants
issued with 8.00% Notes
|
Derivative
gain (loss)
|
|
4,189
|
|
N/A
|
|
N/A
|
|
|
Warrants
issued with contingent equity agreement
|
Derivative
gain (loss)
|
|
—
|
|
N/A
|
|
N/A
|
|
|
Total
|
|
|
$
|
5,993
|
|
|
|
$
|
(229)
|
|
|
|
Nine months ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
Location of Gain
(loss) recognized
in Statement of
Operations
|
|
Amount of Gain
(loss) recognized
on Statement of
Operations
|
|
Location of Gain
(loss) recognized in
Statement of
Operations
|
|
Amount of Gain
(loss) recognized
on Statement of
Operations
|
|
|
Interest
rate swap derivative
|
N/A
|
|
N/A
|
|
Derivative
gain (loss)
|
|
$
|
(25)
|
|
|
Interest
rate cap derivative
|
Derivative
gain (loss)
|
|
(6,287
|
)
|
N/A
|
|
N/A
|
|
|
Compound
embedded conversion option
|
Derivative
gain (loss)
|
|
6,267
|
|
N/A
|
|
N/A
|
|
|
Warrants
issued with 8.00% Notes
|
Derivative
gain (loss)
|
|
5,216
|
|
N/A
|
|
N/A
|
|
|
Warrants
issued with contingent equity agreement
|
Derivative
gain (loss)
|
|
—
|
|
N/A
|
|
N/A
|
|
|
Total
|
|
|
$
|
5,196
|
|
|
|
$
|
(25)
|
|
Note
12: Borrowings
Current
portion of long term debt
Current
portion of long term debt at September 30, 2009 consisted of a loan of $2.3 from
Thermo which is payable within one year at an annual interest rate of 12%.
Current portion of long term debt at December 31, 2008 consisted of $33.6
million due to the Company’s vendors under vendor financing agreements. Details
of vendor financing agreements are described later in this Note.
Long
Term Debt:
Long term
debt consists of the following (in thousands):
|
|
|
September 30,
2009
|
|
|
December 31,
2008
As Adjusted –
Note 1
|
|
|
Amended
and Restated Credit Agreement:
|
|
|
|
|
|
|
|
Term
Loan
|
|
$ |
— |
|
|
$ |
100,000 |
|
|
Revolving
credit loans
|
|
|
— |
|
|
|
66,050 |
|
|
Total
Borrowings under Amended and Restated Credit Agreement
|
|
|
— |
|
|
|
166,050 |
|
|
|
|
|
|
|
|
|
|
|
|
5.75%
Convertible Senior Notes due 2028
|
|
|
52,145 |
|
|
|
48,670 |
|
|
8.00%
Convertible Senior Unsecured Notes
|
|
|
17,440 |
|
|
|
— |
|
|
Vendor
Financing (long term portion)
|
|
|
— |
|
|
|
23,625 |
|
|
Facility
Agreement
|
|
|
371,219 |
|
|
|
— |
|
|
Subordinated
loan
|
|
|
20,670 |
|
|
|
— |
|
|
Total
long term debt
|
|
$ |
461,474 |
|
|
$ |
238,345 |
|
Borrowings
under Facility Agreement
On June 5, 2009, the Company
entered into a $586.3 million senior secured facility agreement (the “Facility
Agreement”) with a syndicate of bank lenders, including BNP Paribas, Natixis,
Société Générale, Caylon, Crédit Industriel et Commercial as arrangers and BNP
Paribas as the security agent and COFACE agent. Ninety-five percent of the
Company’s obligations under the agreement are guaranteed by COFACE, the French
export credit agency. The initial funding process of the Facility
Agreement began on June 29, 2009 and was completed on July 1, 2009.
The new facility is comprised of:
|
|
·
|
a
$563.3 million tranche for future payments and to reimburse the Company
for amounts it previously paid to Thales Alenia Space for construction of
its second-generation satellites. Such reimbursed amounts will be used by
the Company (a) to make payments to the Launch Provider for launch
services, Hughes for ground network equipment, software and satellite
interface chips and Ericsson for ground system upgrades, (b) to
provide up to $150 million for the Company’s working capital and general
corporate purposes and (c) to pay a portion of the insurance premium
to COFACE; and
|
|
|
·
|
a
$23 million tranche that will be used to make payments to the Launch
Provider for launch services and to pay a portion of the insurance premium
to COFACE.
|
The
facility will mature 96 months after the first repayment date. Scheduled
semi-annual principal repayments will begin the earlier of eight months after
the launch of the first 24 satellites from the second generation constellation
or December 15, 2011. The facility will bear interest at a floating
LIBOR rate, plus a margin of 2.07% through December 2012, increasing to
2.25% through December 2017 and 2.40% thereafter. Interest payments
will be due on a semi-annual basis beginning January 4, 2010.
The
Company’s obligations under the facility are guaranteed on a senior secured
basis by all of its domestic subsidiaries and are secured by a first priority
lien on substantially all of the assets of Globalstar and its domestic
subsidiaries (other than their FCC licenses), including patents and trademarks,
100% of the equity of the Company’s domestic subsidiaries and 65% of the equity
of certain foreign subsidiaries.
The
Company may prepay the borrowings without penalty on the last day of each
interest period after the full facility has been borrowed or the earlier of
seven months after the launch of the second generation constellation or
November 15, 2011, but amounts repaid may not be reborrowed. The Company
must repay the loans (a) in full upon a change in control or
(b) partially (i) if there are excess cash flows on certain dates,
(ii) upon certain insurance and condemnation events and (iii) upon
certain asset dispositions. The Facility Agreement includes covenants that
(a) require the Company to maintain a minimum liquidity amount after the
second repayment date, a minimum adjusted consolidated EBITDA, a minimum debt
service coverage ratio and a maximum net debt to adjusted consolidated EBITDA
ratio, (b) place limitations on the ability of the Company and its
subsidiaries to incur debt, create liens, dispose of assets, carry out mergers
and acquisitions, make loans, investments, distributions or other transfers and
capital expenditures or enter into certain transactions with affiliates and (c)
limit capital expenditures incurred by the Company not to exceed $391.0 million
in 2009 and $234.0 million in 2010. The Company is permitted to make cash
payments under the terms of its 5.75% Notes . At September 30,
2009, the Company was in compliance with the covenants of the Facility
Agreement.
Subordinated
Loan Agreement
On
June 25, 2009, the Company entered into a Loan Agreement with Thermo
whereby Thermo agreed to lend the Company $25 million for the purpose of
funding the debt service reserve account required under the Facility Agreement.
This loan is subordinated to, and the debt service reserve account is pledged to
secure, all of the Company’s obligations under the Facility Agreement. The loan
accrues interest at 12% per annum, which will be capitalized and added to the
outstanding principal in lieu of cash payments. The Company will make payments
to Thermo only when permitted under the Facility Agreement. The loan becomes due
and payable six months after the obligations under the Facility Agreement have
been paid in full, the Company has a change in control or any acceleration of
the maturity of the loans under the Facility Agreement occurs. As additional
consideration for the loan, the Company issued Thermo a warrant to purchase
4,205,608 shares of Common Stock at $0.01 per share with a five-year exercise
period. No Common Stock is issuable upon such exercise if such
issuance would cause Thermo and its affiliates to own more than 70% of the
Company’s outstanding voting stock.
Thermo borrowed
$20 million of the $25 million loaned to the Company under the Loan Agreement
from two Company vendors and also agreed to reimburse another Company vendor if
its guarantee of a portion of the debt service reserve account were
called. The debt service reserve account is included in restricted
cash. The Company agreed to grant one of these vendors a one-time option to
convert its debt into equity of the Company on the same terms as Thermo at the
first call (if any) by the Company for funds under the Contingent Equity
Agreement (described below).
The
Company determined that the warrant was an equity instrument and recorded it as
a part of its stockholders’ equity with a corresponding debt discount of $5.2
million, which is netted against the face value of the loan. The Company will
amortize the debt discount associated with the warrant to interest expense over
the term of the loan agreement using an effective interest rate method. At
issuance, the Company allocated the proceeds under the subordinated loan
agreement to the underlying debt and the warrants based upon their relative fair
values.
Contingent
Equity Agreement
On
June 19, 2009, the Company entered into a Contingent Equity Agreement with
Thermo whereby Thermo agreed to deposit $60 million into a contingent
equity account to fulfill a condition precedent for borrowing under the Facility
Agreement. Under the terms of the Facility Agreement, the Company will be
required to make drawings from this account if and to the extent it has an
actual or projected deficiency in our ability to meet indebtedness obligations
due within a forward-looking 90 day period. Thermo has pledged the
contingent equity account to secure the Company’s obligations under the Facility
Agreement. If the Company makes any drawings from the contingent equity account,
it will issue Thermo shares of Common Stock calculated using a price per share
equal to 80% of the volume-weighted average closing price of the Common Stock
for the 15 trading days immediately preceding the draw. Thermo
may withdraw undrawn amounts in the account after the Company has
made the second scheduled repayment under the Facility Agreement, which the
Company currently expects to be no later than June 15, 2012.
The
Contingent Equity Agreement also provides that the Company will pay Thermo an
availability fee of 10% per year for maintaining funds in the contingent equity
account. This fee is payable solely in warrants to purchase Common Stock at
$0.01 per share with a five-year exercise period from issuance, with respect to
a number of shares equal to the available balance in the contingent equity
account divided by $1.37, subject to an annual retroactive adjustment at
December 31 of each year, and subject to certain conditions limiting the maximum
number of shares issuable. The Company issued Thermo a warrant to purchase
4,379,562 shares of Common Stock for this fee at origination of the loan. No
Common Stock is issuable if it would cause Thermo and its affiliates to own more
than 70% of the Company’s outstanding voting stock. The Company may issue
nonvoting common stock in lieu of Common Stock to the extent issuing Common
Stock would cause Thermo and its affiliates to exceed this 70% ownership
level.
The
Company determined that the warrants issued in conjunction with the availability
fee were a liability and recorded it as a component of Other Long Term
Liabilities, at issuance. The corresponding benefit is recorded in prepaid and
other current assets and will be amortized over the one year of the availability
period.
8.00%
Convertible Senior Notes
On
June 19, 2009, the Company sold $55 million in aggregate principal amount
of 8.00% Convertible Senior Unsecured Notes (“8.00% Notes”) and warrants
(“Warrants”) to purchase 15,277,771 shares of the Company’s Common Stock at an
initial exercise price of $1.80 per share to selected institutional investors
(including an affiliate of Thermo) in a direct offering registered under the
Securities Act of 1933. The 8.00% Notes are convertible into shares of Common
Stock at an initial conversion price of $1.80 per share of Common Stock, subject
to adjustment in the manner set forth in the supplemental indenture governing
the 8.00% Notes.
The
Warrants have full ratchet anti-dilution protection, and the exercise price of
the Warrants is subject to adjustment under certain other
circumstances. In addition, if the closing price of the Common Stock
on September 19, 2010 is less than the exercise price of the Warrants then
in effect, the exercise price of the Warrants will be reset to equal the
volume-weighted average closing price of the Common Stock for the previous 15
trading days. In the event of certain transactions that involve a
change of control, the holders of the Warrants have the right to make the
Company purchase the Warrants for cash, subject to certain conditions. The
exercise period for the Warrants will begin on December 19, 2009 and end on
June 19, 2014.
The 8.00%
Notes are subordinated to all of the Company’s obligations under the Facility
Agreement. The 8.00% Notes are the Company’s senior unsecured debt obligations
and, except as described in the preceding sentence, rank pari passu with its
existing unsecured, unsubordinated obligations, including its 5.75% Notes. The
8.00% Notes mature at the later of the tenth anniversary of closing or six
months following the maturity date of the Facility Agreement and bear interest
at a rate of 8.00% per annum. Interest on the 8.00% Notes is payable in the form
of additional 8.00% Notes or, subject to certain restrictions, in Common Stock
at the option of the holder. Interest is payable semi-annually in arrears on
June 15 and December 15 of each year, commencing December 15,
2009.
Holders
may convert their 8.00% Notes at any time. The initial base conversion price for
the 8.00% Notes is $1.80 per share or 555.6 shares of the Company’s Common Stock
per $1,000 principal amount of the 8.00% Notes, subject to certain adjustments
and limitations. In addition, if the volume-weighted average closing price for
one share of the Company’s Common Stock for the 15 trading days immediately
preceding September 19, 2010 (“reset day price”) is less than the base
conversion price then in effect, the base conversion rate shall be adjusted to
equal the reset day price. If the Company issues or sells shares of its Common
Stock at a price per share less than the base conversion price on the trading
day immediately preceding such issuance or sale subject to certain limitations,
the base conversion rate will be adjusted lower based on a formula described in
the supplemental indenture governing the 8.00% Notes. However, no adjustment to
the base conversion rate shall be made if it would cause the Base Conversion
Price to be less than $1.00. If at any time the closing price of the Common
Stock exceeds 200% of the conversion price of the 8.00% Notes then in effect for
30 consecutive trading days, all of the outstanding 8.00% Notes will be
automatically converted into Common Stock. Upon certain automatic and optional
conversions of the 8.00% Notes, the Company will pay holders of the 8.00% Notes
a make-whole premium by increasing the number of shares of Common Stock
delivered upon such conversion. The number of additional shares per $1,000
principal amount of 8.00% Notes constituting the make-whole premium shall be
equal to the quotient of (i) the aggregate principal amount of the 8.00%
Notes so converted multiplied by 32.00%, less the aggregate
interest paid on such Securities prior to the applicable Conversion Date divided by (ii) 95% of
the volume-weighted average Closing Price of the Common Stock for the 10 trading
days immediately preceding the Conversion Date. As of September 30, 2009,
approximately $5.0 million of the 8% Notes had been converted resulting in the
issuance of approximately 4.5 million shares of Common Stock. These conversions
also resulted in a decrease of approximately $3.1 million in the embedded
derivative liabilities in the 8% Notes. This decrease was recorded to
Additional Paid In Capital.
Subject
to certain exceptions set forth in the supplemental indenture, if certain
changes of control of the Company or events relating to the listing of the
Common Stock occur (a “fundamental change”), the 8.00% Notes are subject to
repurchase for cash at the option of the holders of all or any portion of the
8.00% Notes at a purchase price equal to 100% of the principal amount of the
8.00% Notes, plus a make-whole payment and accrued and unpaid interest, if any.
Holders that require the Company to repurchase 8.00% Notes upon a fundamental
change may elect to receive shares of Common Stock in lieu of
cash. Such holders will receive a number of shares equal to (i) the
number of shares they would have been entitled to receive upon conversion of the
8.00% Notes, plus (ii) a make-whole premium of 12% or 15%, depending on the date
of the fundamental change and the amount of the consideration, if any, received
by the Company’s shareholders in connection with the fundamental
change.
The
indenture governing the 8.00% Notes contains customary financial reporting
requirements. The indenture also provides that upon certain events of
default, including without limitation failure to pay principal or interest,
failure to deliver a notice of fundamental change, failure to convert the 8.00%
Notes when required, acceleration of other material indebtedness and failure to
pay material judgments, either the trustee or the holders of 25% in aggregate
principal amount of the 8.00% Notes may declare the principal of the 8.00% Notes
and any accrued and unpaid interest through the date of such declaration
immediately due and payable. In the case of certain events of bankruptcy or
insolvency relating to the Company or its significant subsidiaries, the
principal amount of the 8.00% Notes and accrued interest automatically becomes
due and payable.
The
Company evaluated the various embedded derivatives resulting from the conversion
rights and features within the Indenture for bifurcation from the 8.00% Notes.
Based upon its detailed assessment, the Company concluded that the conversion
rights and features could not be either excluded from bifurcation as a result of
being clearly and closely related to the 8.00% Notes or were not indexed to the
Company’s Common Stock and could not be classified in stockholders’ equity if
freestanding. The Company recorded this compound embedded derivative liability
as a component of Other Non-Current Liabilities on its Consolidated Balance
Sheet with a corresponding debt discount which is netted with the face value of
the 8.00% Notes. The Company will amortize the debt discount associated with the
compound embedded derivative liability to interest expense over the term of the
8.00% Notes using an effective interest rate method. The fair value of the
compound embedded derivative liability will be marked-to-market at the end of
each reporting period, with any changes in value reported as “Derivative gain
(loss)” in the Consolidated Statements of Operations. The Company determined the
fair value of the compound embedded derivative using a Monte Carlo simulation
model based upon a risk-neutral stock price model.
Due
to the cash settlement provisions and reset features in the Warrants, the
Company recorded the Warrants as a component of Other Non-Current
Liabilities on its Consolidated Balance Sheet with a corresponding debt discount
which is netted with the face value of the 8.00% Notes. The Company will
amortize the debt discount associated with the Warrants liability to interest
expense over the term of the 8.00% Notes using an effective interest rate
method. The fair value of the Warrants liability will be marked-to-market at the
end of each reporting period, with any changes in value reported as “Derivative
gain (loss)” in the Consolidated Statements of Operations. The Company
determined the fair value of the Warrants derivative using a Monte Carlo
simulation model based upon a risk-neutral stock price model.
The
Company allocated the proceeds received from the 8.00% Notes among the
conversion rights and features, the detachable Warrants and the remainder to the
underlying debt. The Company netted the debt discount associated with the
conversion rights and features and Warrants against the face value of the 8.00%
Notes to determine the carrying amount of the 8.00% Notes. The accretion of debt
discount will increase the carrying amount of the debt over the term of the
8.00% Notes. The Company allocated the proceeds at issuance as follows (in
thousands):
|
Fair
value of compound embedded derivative
|
|
$
|
23,542
|
|
|
Fair
value of Warrants
|
|
12,791
|
|
|
Debt
|
|
18,667
|
|
|
Face
Value of 8.00% Notes
|
|
$
|
55,000
|
|
Amended
and restated credit agreement
On
August 16, 2006, the Company entered into an amended and restated credit
agreement with Wachovia Investment Holdings, LLC, as administrative agent
and swingline lender, and Wachovia Bank, National Association, as issuing
lender, which was subsequently amended on September 29 and October 26,
2006. On December 17, 2007, Thermo was assigned all the rights (except
indemnification rights) and assumed all the obligations of the administrative
agent and the lenders under the amended and restated credit agreement and the
credit agreement was again amended and restated. On December 18, 2008, the
Company entered into a First Amendment to Second Amended and Restated Credit
Agreement with Thermo, as lender and administrative agent, to increase the
amount available to Globalstar under the revolving credit facility from $50.0
million to $100.0 million. In May 2009, $7.5 million outstanding under the
$200 million credit agreement was converted into 10 million shares of the
Company’s Common Stock. As of December 31, 2008, the Company had
drawn $66.1 million of the revolving credit facility and the entire $100.0
million delayed draw term loan facility was outstanding.
The
delayed draw term loan facility bore an annual commitment fee of 2.0% until
drawn or terminated. Commitment fees related to the loans, incurred during the
three and nine months ended September 30, 2009 were none and $0.2 million,
respectively. Commitment fees for the same periods in 2008 were $0.1 million and
$0.3 million, respectively. To hedge a portion of the interest rate risk with
respect to the delayed draw term loan, the Company entered into a five-year
interest rate swap agreement. The Company terminated this interest rate swap
agreement on December 10, 2008 (see Note 11 “Derivative
Instruments”).
On
June 19, 2009, Thermo exchanged all of the outstanding secured debt
(including accrued interest) owed to it by the Company under the credit
agreement, which totaled approximately $180.2 million, for one share of
Series A Convertible Preferred Stock (the “Series A Preferred”), and
the credit agreement was terminated. The Series A Preferred
includes the following terms:
Liquidation Preference. The Series A
Preferred has a $0.01 liquidation preference upon any voluntary or involuntary
liquidation, dissolution or winding up of the company.
Dividend
Preference. The Series A Preferred has no dividend
preference to the Common Stock.
Voting Rights. Subject to the
conversion limitation set forth below, Thermo Funding may vote its share of
Series A Preferred with holders of the Company’s Common Stock, voting as a
single class, on an as-converted basis.
Conversion Rights and
Limitations. The Series A Preferred is convertible into
126,174,034 shares of Common Stock or nonvoting common stock. As of
September 30, 2009, Thermo has not exercised its conversion rights. In addition,
no Common Stock is issuable upon such conversion if such issuance would cause
Thermo and its affiliates to own more than 70% of the Company’s outstanding
voting stock. The Company may issue nonvoting common stock in lieu of common
stock to the extent issuing Common Stock would cause Thermo and its affiliates
to exceed this 70% ownership level.
Additional
Issuances. The Company may not issue additional shares of
Series A Preferred or create any other class or series of capital stock
that ranks senior to or on parity with the Series A Preferred without the
consent of Thermo.
The
Company determined that the exchange of debt for Series A Preferred was a
capital transaction and did not record any gain as a result of this
exchange.
5.75%
Convertible Senior Notes due 2028
The
Company issued $150.0 million aggregate principal amount of 5.75% Notes pursuant
to a Base Indenture and a Supplemental Indenture each dated as of April 15,
2008.
The
Company placed approximately $25.5 million of the proceeds of the offering of
the 5.75% Notes in an escrow account that is being used to make the first six
scheduled semi-annual interest payments on the 5.75% Notes. The Company pledged
its interest in this escrow account to the Trustee as security for these
interest payments. At September 30, 2009, the balance in the escrow account
was $8.3 million.
Except
for the pledge of the escrow account, the 5.75% Notes are senior unsecured debt
obligations of the Company. The 5.75% Notes mature on April 1, 2028 and
bear interest at a rate of 5.75% per annum. Interest on the 5.75% Notes is
payable semi-annually in arrears on April 1 and October 1 of each
year.
Subject
to certain exceptions set forth in the Indenture, the 5.75% Notes are subject to
repurchase for cash at the option of the holders of all or any portion of the
5.75% Notes (i) on each of April 1, 2013, April 1, 2018 and
April 1, 2023 or (ii) upon a fundamental change, both at a purchase
price equal to 100% of the principal amount of the 5.75% Notes, plus accrued and
unpaid interest, if any. A fundamental change will occur upon certain changes in
the ownership of the Company, or certain events relating to the trading of the
Company’s Common Stock.
Holders
may convert their 5.75% Notes into shares of Common Stock at their option at any
time prior to maturity, subject to the Company’s option to deliver cash in lieu
of all or a portion of the share. The 5.75% Notes are convertible at an initial
conversion rate of 166.1820 shares of Common Stock per $1,000 principal amount
of 5.75% Notes, subject to adjustment. In addition to receiving the applicable
amount of shares of Common Stock or cash in lieu of all or a portion of the
shares, holders of 5.75% Notes who convert them prior to April 1, 2011 will
receive the cash proceeds from the sale by the Escrow Agent of the portion of
the government securities in the escrow account that are remaining with respect
to any of the first six interest payments that have not been made on the 5.75%
Notes being converted.
Holders
who convert their 5.75% Notes in connection with a fundamental change occurring
on or prior to April 1, 2013 will be entitled to an increase in the
conversion rate as specified in the indenture governing the 5.75%
Notes.
Except as
described above with respect to holders of 5.75% Notes who convert their 5.75%
Notes prior to April 1, 2011, there is no circumstance in which holders
could receive cash in addition to the maximum number of shares of common stock
issuable upon conversion of the 5.75% Notes.
If the
Company makes at least 10 scheduled semi-annual interest payments, the 5.75%
Notes are subject to redemption at the Company’s option at any time on or after
April 1, 2013, at a price equal to 100% of the principal amount of the
5.75% Notes to be redeemed, plus accrued and unpaid interest, if
any.
The
indenture governing the 5.75% Notes contains customary financial reporting
requirements and also contains restrictions on mergers and asset sales. The
indenture also provides that upon certain events of default, including without
limitation failure to pay principal or interest, failure to deliver a notice of
fundamental change, failure to convert the 5.75% Notes when required,
acceleration of other material indebtedness and failure to pay material
judgments, either the trustee or the holders of 25% in aggregate principal
amount of the 5.75% Notes may declare the principal of the 5.75% Notes and any
accrued and unpaid interest through the date of such declaration immediately due
and payable. In the case of certain events of bankruptcy or insolvency relating
to the Company or its significant subsidiaries, the principal amount of the
5.75% Notes and accrued interest automatically becomes due and
payable.
Conversion
of 5.75% Notes
In 2008,
$36.0 million aggregate principal amount of 5.75% Notes, or 24% of the 5.75%
Notes originally issued, were converted into Common Stock. The Company also
exchanged an additional $42.2 million aggregate principal amount of 5.75% Notes,
or 28% of the 5.75% Notes originally issued for a combination of Common Stock
and cash. The Company has issued approximately 23.6 million shares of its Common
Stock and paid a nominal amount of cash for fractional shares in connection with
the conversions and exchanges. In addition, the holders whose 5.75% Notes were
converted or exchanged received an early conversion make whole amount of
approximately $9.3 million representing the next five semi-annual interest
payments that would have become due on the converted 5.75% Notes, which was paid
from funds in an escrow account maintained for the benefit of the holders of
5.75% Notes. In the exchanges, 5.75% Note holders received additional
consideration in the form of cash payments or additional shares of the Company’s
Common Stock in the amount of approximately $1.1 million to induce exchanges.
After these transactions, approximately $71.8 million aggregate principal amount
of 5.75% Notes remained outstanding at September 30, 2009.
Common
Stock Offering and Share Lending Agreement
Concurrently
with the offering of the 5.75% Notes, the Company entered into a share lending
agreement (the “Share Lending Agreement”) with Merrill Lynch International (the
“Borrower”), pursuant to which the Company agreed to lend up to 36,144,570
shares of Common Stock (the “Borrowed Shares”) to the Borrower, subject to
certain adjustments, for a period ending on the earliest of (i) at the
Company’s option, at any time after the entire principal amount of the 5.75%
Notes ceases to be outstanding, (ii) the written agreement of the Company
and the Borrower to terminate, (iii) the occurrence of a Borrower default,
at the option of Lender, and (iv) the occurrence of a Lender default, at
the option of the Borrower. Pursuant to the Share Lending Agreement, upon the
termination of the share loan, the Borrower must return the Borrowed Shares to
the Company. Upon the conversion of 5.75% Notes (in whole or in part), a number
of Borrowed Shares proportional to the conversion rate for such notes must be
returned to the Company. At the Company’s election, the Borrower may deliver
cash equal to the market value of the corresponding Borrowed Shares instead of
returning to the Company the Borrowed Shares otherwise required by conversions
of 5.75% Notes.
Pursuant
to and upon the terms of the Share Lending Agreement, the Company will issue and
lend the Borrowed Shares to the Borrower as a share loan. The Borrowing Agent
also is acting as an underwriter with respect to the Borrowed Shares, which are
being offered to the public. The Borrowed Shares included approximately 32.0
million shares of Common Stock initially loaned by the Company to the Borrower
on separate occasions, delivered pursuant to the Share Lending Agreement and the
Underwriting Agreement, and an additional 4.1 million shares of Common Stock
that, from time to time, may be borrowed from the Company by the Borrower
pursuant to the Share Lending Agreement and the Underwriting Agreement and
subsequently offered and sold at prevailing market prices at the time of sale or
negotiated prices. The Borrowed Shares are free trading shares. At
September 30, 2009, approximately 17.3 million Borrowed Shares remained
outstanding.
The
Company did not receive any proceeds from the sale of the Borrowed Shares
pursuant to the Share Lending Agreement, and it will not reserve any proceeds
from any future sale. The Borrower has received all of the proceeds from the
sale of Borrowed Shares pursuant to the Share Lending Agreement and will receive
all of the proceeds from any future sale. At the Company’s election, the
Borrower may remit cash equal to the market value of the corresponding Borrowed
Shares instead of returning the Borrowed Shares due back to the Company as a
result of conversions by 5.75% Note holders.
The
Borrowed Shares are treated as issued and outstanding for corporate law
purposes, and accordingly, the holders of the Borrowed Shares will have all of
the rights of a holder of the Company’s outstanding shares, including the right
to vote the shares on all matters submitted to a vote of the Company’s
stockholders and the right to receive any dividends or other distributions that
the Company may pay or makes on its outstanding shares of Common Stock. However,
under the Share Lending Agreement, the Borrower has agreed:
|
|
·
|
To
pay, within one business day after the relevant payment date, to the
Company an amount equal to any cash dividends that the Company pays on the
Borrowed Shares; and
|
|
|
·
|
To
pay or deliver to the Company, upon termination of the loan of Borrowed
Shares, any other distribution, in liquidation or otherwise, that the
Company makes on the Borrowed
Shares.
|
To the
extent the Borrowed Shares the Company initially lent under the share lending
agreement and offered in the Common Stock offering have not been sold or
returned to it, the Borrower has agreed that it will not vote any such Borrowed
Shares. The Borrower has also agreed under the Share Lending Agreement that it
will not transfer or dispose of any Borrowed Shares, other than to its
affiliates, unless the transfer or disposition is pursuant to a registration
statement that is effective under the Securities Act. However, investors that
purchase the shares from the Borrower (and any subsequent transferees of such
purchasers) will be entitled to the same voting rights with respect to those
shares as any other holder of the Company’s Common Stock.
On
December 18, 2008, the Company entered into Amendment No. 1 to the
Share Lending Agreement with the Borrower and the Borrowing Agent. Pursuant to
Amendment No.1, the Company has the option to request the Borrower to deliver
cash instead of returning Borrowed Shares upon any termination of loans at the
Borrower’s option, at the termination date of the Share Lending Agreement or
when the outstanding loaned shares exceed the maximum number of shares permitted
under the Share Lending Agreement. The consent of the Borrower is required
for any cash settlement, which consent may not be unreasonably withheld, subject
to the Borrower’s determination of applicable legal, regulatory or
self-regulatory requirements or other internal policies. Any loans settled
in shares of Company Common Stock will be subject to a return fee based on the
stock price as agreed by the Company and the Borrower. The return fee will
not be less than $0.005 per share or exceed $0.05 per share.
As a
result of this amendment, the Company believes that, under generally accepted
accounting principles in the United States as currently in effect, the
approximately 17.3 million Borrowed Shares outstanding at September 30,
2009 under the Share Lending Agreement will be considered outstanding for the
purpose of computing and reporting its earnings per share. Prior to this
amendment, the Company did not consider the Borrowed Shares outstanding for the
purpose of computing and reporting its earnings per share due to the substantial
elimination of the economic dilution due to contractual provisions that
otherwise would have resulted from the issuance of the Borrowed
Shares.
The
Company evaluated the various embedded derivatives within the Indenture for
bifurcation from the 5.75% Notes. Based upon its detailed assessment, the
Company concluded that these embedded derivatives were either (i) excluded
from bifurcation as a result of being clearly and closely related to the 5.75%
Notes or are indexed to the Company’s Common Stock and would be classified in
stockholders’ equity if freestanding or (ii) the fair value of the embedded
derivatives was estimated to be immaterial.
The
Company adopted FASB ASC 470-20 on January 1, 2009, and it is applied on a
retrospective basis. FASB ASC 470-20 calls for a separation of the liability and
equity components of the convertible debt instrument. The carrying amount of the
liability component is computed by measuring the fair value of a similar
liability (including any embedded features other than the conversion option)
that does not have an associated equity component. The carrying amount of the
equity component is represented by the embedded conversion option by deducting
the fair value of the liability component from the initial proceeds ascribed to
the convertible debt instrument as a whole. The excess of the principal amount
of the liability component over its carrying amount is recorded as debt discount
and is amortized to interest cost using the interest method over a period of
five years. This adoption resulted in a decrease in the Company’s
long-term debt of approximately $23.1 million; an increase in its stockholders’
equity of approximately $28.3 million; and an increase in its net property,
plant and equipment of approximately $5.9 million as of December 31,
2008.This adoption changed the Company’s full year 2008 Consolidated Statement
of Operations, because the gains associated with conversions and exchanges of
5.75% Notes in 2008 were recorded in stockholders’ equity prior to adoption of
this standard. This adoption impacted the Company’s Consolidated
Statement of Operations for the three and nine month periods ended
September 30, 2008 by reducing the net loss by approximately $0.1 and $0.3
million, respectively. At September 30, 2009 and December 31, 2008,
the remaining term for amortization associated with debt discount was
approximately 42 and 51 months, respectively. The annual effective interest rate
utilized for the amortization of debt discount during the three and nine month
periods ended September 30, 2009 was 9.14%. The interest cost associated
with the coupon rate on the 5.75% Notes plus the corresponding debt discount
amortized during the three and nine month periods ended September 30, 2009,
was $2.2 million and $6.6 million, respectively, all of which was capitalized.
The carrying amount of the equity and liability component, as of
September 30, 2009 and December 31, 2008, is presented below (in
thousands):
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
$ |
54,675 |
|
|
$ |
54,675 |
|
|
Liability:
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
71,804 |
|
|
|
71,804 |
|
|
Unamortized
debt discount
|
|
|
(19,659
|
) |
|
|
(23,134
|
) |
|
Net
carrying amount of liability
|
|
$ |
52,145 |
|
|
$ |
48,670 |
|
Vendor
Financing
In
July 2008 the Company amended the agreement with the Launch Provider for
the launch of the Company’s second-generation satellites and certain pre and
post-launch services. Under the amended terms, the Company could defer payment
on up to 75% of certain amounts due to the Launch Provider. The deferred
payments incurred annual interest at 8.5% to 12%. In June 2009, the Company
and the Launch Provider again amended their agreement modifying the agreement in
certain respects including cancelling the deferred payment provisions. The
Company paid all deferred amounts to the vendor in July 2009.
In
September 2008 the Company amended its agreement with Hughes for the
construction of its RAN ground network equipment and software upgrades for
installation at a number of the Company’s satellite gateway ground stations and
satellite interface chips to be a part of the UTS in various next-generation
Globalstar devices. Under the amended terms, the Company deferred certain
payments due under the contract in 2008 and 2009 to December 2009. The
deferred payments incurred annual interest at 10%. In June 2009, the
Company and Hughes further amended their agreement modifying the agreement in
certain respects including cancelling the deferred payment provisions. The
Company paid all deferred amounts to the vendor in
July 2009.
Note
13: Fair Value of Financial Instruments
The
Company measures its financial assets and liabilities on a recurring basis and
reports on a fair value basis. The Company classifies its fair value
measurements in one of the following three categories:
Level 1: Unadjusted quoted
prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2: Quoted prices in
markets that are not active or inputs which are observable, either directly or
indirectly, for substantially the full term of the asset or
liability;
The
Company uses observable pricing inputs including benchmark yields, reported
trades, and broker/dealer quotes. The financial assets in Level 2 include the
interest rate cap derivative instrument.
Level 3: Prices or valuation
techniques that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported by little or no market
activity).
The
financial liabilities in Level 3 include the compound embedded conversion option
in the 8.00% Notes and warrants issued with the 8.00% Notes and contingent
equity agreement. The Company marks-to-market these liabilities at each
reporting date with the changes in fair value recognized in the Company’s
results of operations.
The
following table presents the financial instruments that are carried at fair
value as of September 30, 2009:
|
|
|
|
|
|
Fair Value Measurements at September 30, 2009
using
|
|
|
|
|
|
|
|
Quoted
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
|
Instruments
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
(In Thousands)
|
|
December 31, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total Balance
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate cap derivative
|
|
$ |
N/A |
|
|
$ |
— |
|
|
$ |
6,138 |
|
|
$ |
— |
|
|
$ |
6,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other assets measured at fair value
|
|
|
N/A |
|
|
|
— |
|
|
$ |
6,138 |
|
|
|
— |
|
|
|
6,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound
embedded conversion option
|
|
|
N/A |
|
|
|
— |
|
|
|
— |
|
|
|
(14,217
|
) |
|
|
(14,217
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued with 8.00% Notes
|
|
|
N/A |
|
|
|
— |
|
|
|
— |
|
|
|
(7,575
|
) |
|
|
(7,575
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued with contingent equity agreements
|
|
|
N/A |
|
|
|
— |
|
|
|
— |
|
|
|
(6,000
|
) |
|
|
(6,000
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-current liabilities measured at fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(27,792 |
) |
|
$ |
(27,792 |
) |
The
following tables present a reconciliation for all assets and liabilities
measured at fair value on a recurring basis, excluding accrued interest
components, using significant unobservable inputs (Level 3) for the three and
nine months ended September 30, 2009 as follows (amounts in
thousands):
|
|
|
Three Months
Ended
September 30,
2009
|
|
|
|
|
|
|
|
Balance
at June 30, 2009
|
|
$
|
(39,036)
|
|
|
Derivative
adjustment related to conversions
|
|
3,058
|
|
|
Unrealized
gain, included in derivative gain (loss) on the income
statement
|
|
8,186
|
|
|
Balance
at September 30, 2009
|
|
$
|
(27,792
|
)
|
|
|
|
Nine Months
Ended
September 30,
2009
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$
|
—
|
|
|
Issuance
of compound embedded conversion option and warrants
liabilities
|
|
(42,333
|
)
|
|
Derivative
adjustment related to conversions
|
|
3,058
|
|
|
Unrealized
gain, included in derivative gain (loss) on the income
statement
|
|
11,483
|
|
|
Balance
at September 30, 2009
|
|
$
|
(27,792
|
)
|
Note
14: Subsequent Events
The
Company has evaluated subsequent events for potential recognition or disclosure
through the issuance of these consolidated financial statements, which occurred
on November 6, 2009.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statements
Certain
statements contained in or incorporated by reference into this Report, other
than purely historical information, including, but not limited to, estimates,
projections, statements relating to our business plans, objectives and expected
operating results, and the assumptions upon which those statements are based,
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally are
identified by the words “believe,” “project,” “expect,” “anticipate,”
“estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,”
“will be,” “will continue,” “will likely result,” and similar expressions,
although not all forward-looking statements contain these identifying words.
These forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause actual
results to differ materially from the forward-looking statements.
Forward-looking statements, such as the statements regarding our ability to
develop and expand our business, our ability to manage costs, our ability to
exploit and respond to technological innovation, the effects of laws and
regulations (including tax laws and regulations) and legal and regulatory
changes, the opportunities for strategic business combinations and the effects
of consolidation in our industry on us and our competitors, our anticipated
future revenues, our anticipated capital spending (including for future
satellite procurements and launches), our anticipated financial resources, our
expectations about the future operational performance of our satellites
(including their projected operational lives), the expected strength of and
growth prospects for our existing customers and the markets that we serve, and
our ability to obtain additional financing, if needed and other statements
contained in this Report regarding matters that are not historical facts,
involve predictions. Risks and uncertainties that could cause or contribute to
such differences include, without limitation, those in Part II. Item 1A.
Risk Factors in this Report or incorporated by reference into this Report,
including those described in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.
Although
we believe that the forward-looking statements contained or incorporated by
reference in this Report are based upon reasonable assumptions, the
forward-looking events and circumstances discussed in this Report may not occur,
and actual results could differ materially from those anticipated or implied in
the forward-looking statements.
New risk
factors emerge from time to time, and it is not possible for us to predict all
risk factors, nor can we assess the impact of all factors on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements. We
undertake no obligation to update publicly or revise any forward-looking
statements. You should not rely upon forward-looking statements as predictions
of future events or performance. We cannot assure you that the events and
circumstances reflected in the forward-looking statements will be achieved or
occur. These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
This
“Management’s Discussion and Analysis of Financial Condition” should be read in
conjunction with the “Management’s Discussion and Analysis of Financial
Condition” and information included in our Annual Report on Form 10-K for
the year ended December 31, 2008.
Overview
We are a
provider of mobile voice and data communication services via satellite. Our
communications platform extends telecommunications beyond the boundaries of
terrestrial wireline and wireless telecommunications networks to serve our
customer’s desire for connectivity. Using in-orbit satellites and ground
stations, which we call gateways, we offer voice and data communications
services to government agencies, businesses and other customers in over 120
countries.
Material Trends and
Uncertainties. Our satellite communications business, by
providing critical mobile communications to our subscribers, serves principally
the following markets: government, public safety and disaster relief; recreation
and personal; oil and gas; maritime and fishing; natural resources, mining and
forestry; construction; utilities; and transportation. Our industry has been
growing as a result of:
|
|
·
|
favorable
market reaction to new pricing plans with lower service
charges;
|
|
|
·
|
awareness
of the need for remote communication
services;
|
|
|
·
|
increased
demand for communication services by disaster and relief agencies and
emergency first responders;
|
|
|
·
|
improved
voice and data transmission
quality;
|
|
|
·
|
a
general reduction in prices of user equipment;
and
|
|
|
·
|
innovative
data products and services.
|
Nonetheless,
as further described under Part II. Item 1A “Risk Factors,” we face a number of
challenges and uncertainties, including:
|
|
·
|
Constellation life and
health. Our current satellite constellation is aging. We
successfully launched our eight spare satellites in 2007. All of our
satellites launched prior to 2007 have experienced various anomalies over
time, one of which is a degradation in the performance of the solid-state
power amplifiers of the S-band communications antenna subsystem (our
“two-way communication issues”). The S-band antenna provides the downlink
from the satellite to a subscriber’s phone or data terminal. Degraded
performance of the S-band antenna amplifiers reduces the availability of
two-way voice and data communication between the affected satellites and
the subscriber and may reduce the duration of a call. When the S-band
antenna on a satellite ceases to be functional, two-way communication is
impossible over that satellite, but not necessarily over the constellation
as a whole. We continue to provide two-way subscriber service because some
of our satellites are fully functional but at certain times in any given
location it may take longer to establish calls and the average duration of
calls may be reduced. There are periods of time each day during which no
two-way voice and data service is available at any particular location.
The root cause of our two-way communication issues is unknown, although we
believe it may result from irradiation of the satellites in orbit caused
by the space environment at the altitude that our satellites
operate.
|
The
decline in the quality of two-way communication does not affect adversely our
one-way Simplex data transmission services, including our SPOT satellite GPS
messenger products and services, which utilize only the L-band uplink from a
subscriber’s Simplex terminal to the satellites. The signal is transmitted back
down from the satellites on our C-band feeder links, which are functioning
normally, not on our S-band service downlinks.
We
continue to work on plans, including new products and services and pricing
programs to mitigate the effects of reduced service availability upon our
customers and operations until our second-generation satellites are deployed.
See “Part II, Item 1A. Risk Factors—Our satellites have a limited life
and some have failed, which causes our network to be compromised and which
materially and adversely affects our business, prospects and
profitability.”
|
|
·
|
Launch
delays. Thales
Alenia Space has informed us of a force majeure event
that has affected its satellite delivery schedule which will result in a
satellite delivery delay. A major earthquake in Italy in April
2009 damaged its satellite component fabrication facility in l’Aquila,
Italy, but none of Globalstar’s satellites nor its
components. We believe that this delay will not have a material
adverse effect on our operations and business plan because we are able to
defer a significant portion of our capital expense unrelated to the launch
and construction of our satellites. Thales Alenia Space may be
able to accelerate the satellite delivery schedule over the next few
months. We believe this result is achievable. We
currently expect the launch of the first six second-generation satellites
to take place in the summer of 2010 with the launch campaign, consisting
of a total of 24 satellites, to be completed in the spring of
2011.
|
|
|
·
|
The
economy. The current recession and its effects on credit
markets and consumer spending is adversely affecting sales of our products
and services.
|
|
|
·
|
Competition and pricing
pressures. We face increased competition from both the
expansion of terrestrial-based cellular phone systems and from other
mobile satellite service providers. For example, Inmarsat plans to
commence offering satellite services to handheld devices in the United
States in 2010, and several competitors, such as ICO Global and TerreStar,
are constructing or have launched geostationary satellites that provide
mobile satellite service. Increased numbers of competitors, and the
introduction of new services and products by competitors, increases
competition for subscribers and pressures all providers, including us, to
reduce prices. Increased competition may result in loss of subscribers,
decreased revenue, decreased gross margins, higher churn rates, and,
ultimately, decreased profitability and
cash.
|
|
|
·
|
Technological
changes. It is difficult for us to respond promptly to
major technological innovations by our competitors because substantially
modifying or replacing our basic technology, satellites or gateways is
time-consuming and very expensive. Approximately 71% of our total assets
at September 30, 2009 represented fixed assets. Although we plan to
procure and deploy our second-generation satellite constellation and
upgrade our gateways and other ground facilities, we may nevertheless
become vulnerable to the successful introduction of superior technology by
our competitors.
|
|
|
·
|
Capital
Expenditures. We have incurred significant capital
expenditures from 2007 through September 30, 2009, and we expect to incur
additional significant expenditures through 2013 to complete and launch
our second-generation constellation and related
upgrades.
|
|
|
·
|
Introduction of new
products. We work continuously with the manufacturers of
the products we sell to offer our customers innovative and improved
products. Virtually all engineering, research and development costs of
these new products are paid by the manufacturers. However, to the extent
the costs are reflected in increased inventory costs to us, and we are
unable to raise our prices to our subscribers correspondingly, our margins
and profitability would be reduced.
|
Simplex Products (Personal Tracking
Services and Emergency Messaging). In early
November 2007, we introduced the SPOT satellite GPS messenger, aimed at
attracting both the recreational and commercial markets that require personal
tracking, emergency location and messaging solutions for users that require
these services beyond the range of traditional terrestrial and wireless
communications. Using the Globalstar Simplex network and web-based mapping
software, this device provides consumers with the capability to trace or map the
location of the user on Google Maps™. The product enables users to transmit
messages to specific preprogrammed email addresses, phone or data devices, and
to request assistance in the event of an emergency. On July 21, 2009, we
introduced our SPOT 2.0 with new features and improved
functionality. We are continuing to work on additional SPOT-like
applications.
|
|
·
|
SPOT
Satellite GPS Messenger Addressable
Market
|
We
believe the addressable market for our SPOT satellite GPS messenger products and
services in North America alone is approximately 50 million units
consisting primarily of outdoor enthusiasts. Our objective is to capture 2-3% of
that market in the next few years. The reach of our Simplex System, on which our
SPOT satellite GPS messenger products and services rely, covers approximately
60% of the world population. We intend to market our SPOT satellite GPS
messenger products and services aggressively in our overseas markets including
South and Central America, Western Europe, and through independent gateway
operators in their respective territories.
|
|
·
|
SPOT
Satellite GPS Messenger Pricing
|
We intend
the pricing for SPOT satellite GPS messenger products and services and equipment
to be very attractive in the consumer marketplace. Annual service fees,
depending whether they are for domestic or international service, currently
range from $99.99 to approximately $150.00 for our basic level plan, and $149.98
to approximately $168.00 with additional tracking capability. The equipment is
sold to end users at $149.99 to approximately $225.00 per unit (subject to
foreign currency rates). Our distributors set their own retail prices for SPOT
satellite GPS messenger equipment.
|
|
·
|
SPOT
Satellite GPS Messenger
Distribution
|
We are
distributing and selling our SPOT satellite GPS messenger through a variety of
existing and new distribution channels. We have distribution relationships with
a number of “Big Box” retailers and other similar distribution channels
including Amazon.com, Bass Pro Shops, Best Buy, Pep Boys, Big 5 Sporting Goods,
Big Rock Sports, Cabela’s, Campmor, London Drugs, Gander Mountain, REI,
Sportsman’s Warehouse, Wal-Mart.com, West Marine, DBL Distributing, D.H.
Distributing, and CWR Electronics. We currently sell SPOT satellite GPS
messenger products through approximately 10,000 distribution points. We also
sell directly using our existing sales force into key vertical markets and
through our direct e-commerce website (www.findmespot.com).
SPOT
satellite GPS messenger products and services have been on the market for only
twenty-three months in North America and their commercial introduction and their
commercial success globally cannot be assured.
|
|
·
|
Fluctuations in currency
rates. A substantial portion of our revenue (31% and 34%
for the three and nine month periods ended September 30, 2009,
respectively) is denominated in foreign currencies. In addition, certain
obligations under the contracts for our second-generation constellation
and related control network facility are denominated in Euros. Any decline
in the relative value of the U.S. dollar may adversely affect our revenues
and increase our capital expenditures. See “Item 3. Quantitative and
Qualitative Disclosures about Market Risk” for additional
information.
|
|
|
·
|
Ancillary Terrestrial
Component (ATC). ATC is the integration of a
satellite-based service with a terrestrial wireless service resulting in a
hybrid mobile satellite service. The ATC network would extend our services
to urban areas and inside buildings in both urban and rural areas where
satellite services currently are impractical. We believe we are at the
forefront of ATC development and expect to be the first market entrant
through our contract with Open Range described below. In addition, we are
considering a range of options for rollout of our ATC services. We are
exploring selective opportunities with a variety of media and
communication companies to capture the full potential of our spectrum and
U.S. ATC license.
|
On
October 31, 2007, we entered into an agreement with Open Range
Communications, Inc. that permits Open Range to deploy service in certain
rural geographic markets in the United States under our ATC authority. Open
Range will use our spectrum to offer dual mode mobile satellite based and
terrestrial wireless WiMAX services to over 500 rural American communities. On
December 2, 2008, we amended our agreement with Open Range. The amended
agreement reduced our preferred equity commitment to Open Range from
$5 million to $3 million (which investment was made in the form of
bridge loans that converted into preferred equity at the closing of Open Range’s
equity financing). Under the agreement as amended, Open Range will have the
right to use a portion of our spectrum within the United States and, if Open
Range so elects, it can use the balance of our spectrum authorized for ATC
services, to provide these services. Open Range has options to expand this
relationship over the next six years, some of which are conditional upon Open
Range electing to use all of the licensed spectrum covered by the agreement.
Commercial availability is expected to begin in selected markets in the first
half of 2010. The initial term of the agreement of up to 30 years is
co-extensive with our ATC authority and is subject to renewal options
exercisable by Open Range. Either party may terminate the agreement before the
end of the term upon the occurrence of certain events, and Open Range may
terminate it at any time upon payment of a termination fee that is based upon a
percentage of the remaining lease payments. Based on Open Range’s business plan
used in support of its $267 million loan under a federally authorized loan
program, the fixed and variable payments to be made by Open Range over the
initial term of 30 years indicate a value for this agreement between $0.30
and $0.40/MHz/POP. Open Range satisfied the conditions to implementation of the
agreement on January 12, 2009 when it completed its equity and debt
financing, consisting of a $267 million broadband loan from the Department
of Agriculture Rural Utilities Program and equity financing of
$100 million. Open Range has remitted to us its initial down payment of
$2 million. Open Range’s annual payments in the first six years of the
agreement will range from approximately $0.6 million to up to
$10.3 million, assuming it elects to use all of the licensed spectrum
covered by the agreement. The amount of the payments that we will receive from
Open Range will depend on a number of factors, including the eventual geographic
coverage of and the number of customers on the Open Range system.
In
addition to our agreement with Open Range, we hope to exploit additional ATC
monetization strategies and opportunities in urban markets or in suburban areas
that are not the subject of our agreement with Open Range. Our system is
flexible enough to allow us to use different technologies and network
architectures in different geographic areas.
Service and Equipment Sales
Revenues. The table below sets forth amounts and percentages
of our revenue by type of service and equipment sales for the three and nine
month periods ended September 30, 2009 and 2008 (dollars in
thousands).
|
|
|
Three months ended
September 30, 2009
|
|
|
Three months ended
September 30, 2008
|
|
|
Nine months ended
September 30, 2009
|
|
|
Nine months ended
September 30, 2008
|
|
|
|
|
Revenue
|
|
|
% of Total
Revenue
|
|
|
Revenue
|
|
|
% of Total
Revenue
|
|
|
Revenue
|
|
|
% of Total
Revenue
|
|
|
Revenue
|
|
|
% of Total
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
|
|
$ |
7,215 |
|
|
|
41
|
% |
|
$ |
9,976 |
|
|
|
44
|
% |
|
$ |
20,501 |
|
|
|
42
|
% |
|
$ |
33,199 |
|
|
|
49
|
% |
|
Fixed
|
|
|
571 |
|
|
|
3 |
|
|
|
920 |
|
|
|
4 |
|
|
|
1,821 |
|
|
|
4 |
|
|
|
2,817 |
|
|
|
4 |
|
|
Data
|
|
|
160 |
|
|
|
1 |
|
|
|
174 |
|
|
|
1 |
|
|
|
450 |
|
|
|
1 |
|
|
|
600 |
|
|
|
1 |
|
|
Simplex
|
|
|
3,684 |
|
|
|
21 |
|
|
|
1,838 |
|
|
|
8 |
|
|
|
9,246 |
|
|
|
19 |
|
|
|
4,239 |
|
|
|
6 |
|
|
IGO
|
|
|
(33 |
) |
|
|
— |
|
|
|
889 |
|
|
|
4 |
|
|
|
803 |
|
|
|
2 |
|
|
|
2,617 |
|
|
|
4 |
|
|
Other(1)
|
|
|
1,663 |
|
|
|
10 |
|
|
|
2,353 |
|
|
|
10 |
|
|
|
4,132 |
|
|
|
8 |
|
|
|
5,361 |
|
|
|
8 |
|
|
Total
Service Revenue
|
|
|
13,260 |
|
|
|
76 |
|
|
|
16,150 |
|
|
|
71 |
|
|
|
36,953 |
|
|
|
76 |
|
|
|
48,833 |
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
|
|
|
492 |
|
|
|
3 |
|
|
|
2,043 |
|
|
|
9 |
|
|
|
2,111 |
|
|
|
4 |
|
|
|
6,383 |
|
|
|
9 |
|
|
Fixed
|
|
|
46 |
|
|
|
— |
|
|
|
162 |
|
|
|
1 |
|
|
|
159 |
|
|
|
— |
|
|
|
1,053 |
|
|
|
2 |
|
|
Data
and Simplex
|
|
|
1,840 |
|
|
|
11 |
|
|
|
1,936 |
|
|
|
9 |
|
|
|
6,136 |
|
|
|
13 |
|
|
|
6,471 |
|
|
|
10 |
|
|
Accessories
|
|
|
1,883 |
|
|
|
10 |
|
|
|
2,234 |
|
|
|
10 |
|
|
|
3,041 |
|
|
|
7 |
|
|
|
4,918 |
|
|
|
7 |
|
|
Total
Equipment Sales
|
|
|
4,261 |
|
|
|
24 |
|
|
|
6,375 |
|
|
|
29 |
|
|
|
11,447 |
|
|
|
24 |
|
|
|
18,825 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
$ |
17,521 |
|
|
|
100
|
% |
|
$ |
22,525 |
|
|
|
100
|
% |
|
$ |
48,400 |
|
|
|
100
|
% |
|
$ |
67,658 |
|
|
|
100
|
% |
|
(1)
|
Includes
engineering services and activation
fees
|
Subscribers and ARPU for the three
and nine months ended September 30, 2009 and 2008. The following
table set forth our average number of subscribers and ARPU for retail, IGO and
Simplex customers for the three and nine months ended September 30, 2009
and 2008. The following numbers are subject to immaterial rounding inherent in
calculating averages.
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Net
Change
|
|
|
2009
|
|
|
2008
|
|
|
% Net
Change
|
|
|
Average
number of subscribers for the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
111,203 |
|
|
|
119,222 |
|
|
|
(7
|
)% |
|
|
112,792 |
|
|
|
178,448 |
|
|
|
(37 |
)
% |
|
IGO
|
|
|
67,545 |
|
|
|
76,101 |
|
|
|
(11
|
) |
|
|
72,538 |
|
|
|
120,488 |
|
|
|
(40
|
) |
|
Simplex
|
|
|
198,151 |
|
|
|
127,328 |
|
|
|
56 |
|
|
|
181,026 |
|
|
|
161,802 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARPU
(monthly):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
27.60 |
|
|
$ |
35.32 |
|
|
|
(22
|
) |
|
$ |
25.49 |
|
|
$ |
37.34 |
|
|
|
(32
|
) |
|
IGO
|
|
$ |
(0.16 |
) |
|
$ |
3.89 |
|
|
|
N/A |
|
|
$ |
1.23 |
|
|
$ |
3.62 |
|
|
|
(66
|
) |
|
Simplex
|
|
$ |
6.11 |
|
|
$ |
4.85 |
|
|
|
26 |
|
|
$ |
5.63 |
|
|
$ |
4.36 |
|
|
|
29 |
|
|
|
|
September 30,
2009
|
|
|
September 30,
2008
|
|
|
% Net Change
|
|
|
Ending
number of subscribers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
110,293 |
|
|
|
118,802 |
|
|
|
(7
|
)% |
|
IGO
|
|
|
65,598 |
|
|
|
74,272 |
|
|
|
(12
|
) |
|
Simplex
|
|
|
206,422 |
|
|
|
136,314 |
|
|
|
51 |
|
|
Total
|
|
|
382,313 |
|
|
|
329,388 |
|
|
|
16
|
% |
The total
number of net subscribers increased from 329,388 at September 30, 2008 to
382,313 at September 30, 2009. Although we experienced a net increase in
our total customer base of 16% from September 30, 2008 to
September 30, 2009, our total service revenue decreased for the same
period. This is due primarily to reduction of our prices in response to our
two-way communication issues in addition to the change in our product
mix.
Independent
Gateway Acquisition Strategy
Currently,
13 of the 27 gateways in our network are owned and operated by unaffiliated
companies, which we call independent gateway operators, some of whom operate
more than one gateway. Except for the new gateway in Nigeria, in which we will
hold a 30% equity interest, we have no financial interest in these independent
gateway operators other than arms’ length contracts for wholesale minutes of
service. Some of these independent gateway operators have been unable to grow
their businesses adequately due in part to limited resources. Old Globalstar
initially developed the independent gateway operator acquisition strategy to
establish operations in multiple territories with reduced demands on its
capital. In addition, there are territories in which for political or other
reasons, it is impractical for us to operate directly. We sell services to the
independent gateway operators on a wholesale basis and they resell them to their
customers on a retail basis.
We have
acquired, and intend to continue to pursue the acquisition of, independent
gateway operators when we believe we can do so on favorable terms and the
current independent operator has expressed a desire to sell its assets to us,
subject to capital availability. We believe that these acquisitions can enhance
our results of operations in three respects. First, we believe that, with our
greater financial and technical resources, we can grow our subscriber base and
revenue faster than some of the independent gateway operators. Second, we
realize greater margin on retail sales to individual subscribers than we do on
wholesale sales to independent gateway operators. Third, we believe expanding
the territory we serve directly will better position us to market our services
directly to multinational customers who require a global communications
provider.
However,
acquisitions of independent gateway operators do require us to commit capital
for acquisition of their assets, as well as management resources and working
capital to support the gateway operations, and therefore increase our risk in
operating in these territories directly rather than through the independent
gateway operators. In addition, operating the acquired gateways increases our
marketing, general and administrative expenses. Our Facility Agreement limits to
$25.0 million the aggregate amount of cash we may invest in foreign
acquisitions without the consent of our lenders and requires us to satisfy
certain conditions in connection with any acquisition.
In
March 2008, we acquired an independent gateway operator that owns three
satellite gateway ground stations in Brazil for $6.5 million, paid in
shares of our Common Stock. We also incurred transaction costs of
$0.3 million related to this acquisition. On June 24, 2009,
we entered into a business transfer agreement with LG Dacom, the independent
gateway operator in Korea, to acquire its gateway and other Globalstar assets
for approximately $1 million in cash. No
closing has been set for the Korean acquisition. We are unable to predict
the timing or cost of further acquisitions because independent gateway
operations vary in size and value.
Performance
Indicators
Our
management reviews and analyzes several key performance indicators in order to
manage our business and assess the quality of and potential variability of our
earnings and cash flows. These key performance indicators include:
|
|
·
|
total
revenue, which is an indicator of our overall business
growth;
|
|
|
·
|
subscriber
growth and churn rate, which are both indicators of the satisfaction of
our customers;
|
|
|
·
|
average
monthly revenue per unit, or ARPU, which is an indicator of our pricing
and ability to obtain effectively long-term, high-value customers. We
calculate ARPU separately for each of our retail, IGO and Simplex
businesses;
|
|
|
·
|
operating
income, which is an indication of our
performance;
|
|
|
·
|
EBITDA,
which is an indicator of our financial performance;
and
|
|
|
·
|
capital
expenditures, which are an indicator of future revenue growth potential
and cash requirements.
|
Critical
Accounting Policies and Estimates
There
have been no material changes to our critical accounting policies and estimates
described in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in our Annual Report on Form 10-K for the year ended
December 31, 2008, as amended, except as described in Notes 11 and 12 to the
Unaudited Interim Consolidated Financial Statements, which describe our
accounting policy for measuring convertible debt instruments and our accounting
policy for measuring fair value with respect to nonfinancial assets and
nonfinancial liabilities as a result of the adoption of new accounting
standards.
New
Accounting Standards
See Note 1 to the Unaudited Interim
Consolidated Financial Statements for information on the new accounting
standards relevant to us.
Results
of Operations
Comparison
of Results of Operations for the Three Months Ended September 30, 2009 and
2008 (in thousands):
|
|
|
Three months ended
September 30,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Service
revenue
|
|
$ |
13,260 |
|
|
$ |
16,150 |
|
|
|
(18
|
)% |
|
Equipment
sales
|
|
|
4,261 |
|
|
|
6,375 |
|
|
|
(33
|
) |
|
Total
revenue
|
|
|
17,521 |
|
|
|
22,525 |
|
|
|
(22
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization shown separately
below)
|
|
|
9,403 |
|
|
|
10,452 |
|
|
|
10 |
|
|
Cost
of equipment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of equipment sales
|
|
|
1,987 |
|
|
|
4,942 |
|
|
|
60 |
|
|
Cost
of equipment sales — Impairment of assets
|
|
|
7 |
|
|
|
—- |
|
|
|
— |
|
|
Total
cost of equipment sales
|
|
|
1,994 |
|
|
|
4,942 |
|
|
|
60 |
|
|
Marketing,
general and administrative
|
|
|
12,328 |
|
|
|
17,372 |
|
|
|
29 |
|
|
Depreciation
and amortization
|
|
|
5,473 |
|
|
|
7,196 |
|
|
|
24 |
|
|
Total
operating expenses
|
|
|
29,198 |
|
|
|
39,962 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(11,677
|
) |
|
|
(17,437
|
) |
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
181 |
|
|
|
1,474 |
|
|
|
(88
|
) |
|
Interest
expense
|
|
|
(1,763
|
) |
|
|
(1,201
|
) |
|
|
(47
|
) |
|
Derivative
gain (loss)
|
|
|
5,993 |
|
|
|
(229 |
) |
|
|
N/A |
|
|
Other
income (expense)
|
|
|
1,839 |
|
|
|
(6,587
|
) |
|
|
N/A |
|
|
Total
other income (expense)
|
|
|
6,250 |
|
|
|
(6,543 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
loss before income taxes
|
|
|
(5,427
|
) |
|
|
(23,980
|
) |
|
|
77 |
|
|
Income
tax expense
|
|
|
92 |
|
|
|
2,039 |
|
|
|
95 |
|
|
Net
loss
|
|
$ |
(5,519 |
) |
|
$ |
(26,019 |
) |
|
|
79
|
% |
Revenue. Total
revenue decreased by approximately $5.0 million, or 22%, to $17.5 million for
the three months ended September 30, 2009, from $22.5 million for the three
months ended September 30, 2008. We attribute this decrease to lower
service revenues as a result of our two-way communication issues and lower
equipment sales. Our service revenue decreased due primarily to price reductions
aimed at maintaining our subscriber base despite our two-way communication
issues. Our equipment sales decreased during the three months ended
September 30, 2009 as compared to the same period in 2008, primarily as a
result of lower sales of our duplex products. Our retail ARPU during the three
months ended September 30, 2009, decreased by 22% to $27.60 from $35.32 for
the same period in 2008. The decrease in our ARPU was partially offset by an
increase of approximately 53,000 in net subscribers during the twelve-month
period from September 30, 2008 to September 30, 2009.
Service Revenue. Service
revenue decreased $2.9 million, or approximately 18%, to $13.3 million
for the three months ended September 30, 2009, from $16.2 million for
the same period in 2008. Although our subscriber base grew 16% during the
twelve-month period ended September 30, 2009, to approximately 382,000, we
experienced decreased retail ARPU resulting in lower service revenue. The
primary reason for this decrease in our service revenue was the reduction of our
prices in response to our two-way communication issues and changes in product
mix. The decrease in duplex service revenue was partially offset by
increased service revenue from our SPOT Satellite services as a result of
additional SPOT service subscribers and prior year SPOT service subscribers’
renewing their annual subscriptions.
Equipment Sales. Equipment
sales decreased by approximately $2.1 million, or 33%, to $4.3 million
for the three months ended September 30, 2009, from $6.4 million for
the same period in 2008. The decrease was due primarily to lower sales of our
duplex products during the three months ended September 30, 2009, partially
offset by a change in estimate which increased equipment sales by approximately
$2.2 million (see Note 1 "The Company and Summary of Significant Accounting
Policies" of our Unaudited Interim Consolidated Financial
Statements.)
Operating
Expenses. Total operating expenses decreased $10.8 million, or
approximately 27%, to $29.2 million for the three months ended
September 30, 2009, from $40.0 million for the same period in 2008. This
decrease was due primarily to reductions in our contract labor costs, reduced
marketing and advertising expenses, lower employee related expenses due to
reductions in our headcount and lower cost of goods sold related to lower sales
of subscriber equipment of our duplex products.
Cost of Services. Our cost of
services for the three months ended September 30, 2009 and 2008, were
$9.4 million and $10.5 million, respectively. Our cost of services
comprises primarily of network operating costs. The decrease was due to
reductions in headcount, telecom, subcontractor and maintenance charges
partially offset by higher research and development expenses related to our
second generation ground component development.
Cost of Equipment Sales. Cost
of equipment sales decreased approximately $2.9 million, or 60%, to
$2.0 million for the three months ended September 30, 2009, from $4.9
million for the three months ended September 30, 2008. This decrease was
due primarily to lower sales of our duplex products.
Marketing, General and
Administrative. Marketing, general and administrative expenses decreased
approximately $5.0 million, or 29%, to $12.3 million for the three
months ended September 30, 2009, from $17.4 million for the same
period in 2008. This decrease was due primarily to reductions in our
contract labor, lower marketing and advertising costs and
decreases in payroll and related expenses as our average headcount
decreased in the three months ended September 30, 2009, when compared to the
same period in 2008.
Depreciation and
Amortization. Depreciation and amortization expense decreased
approximately $1.7 million for the three months ended September 30,
2009 from the same period in 2008. The decrease in depreciation expense was due
primarily to the first-generation satellite constellation reaching
fully-depreciated status at December 31, 2008.
Operating
Loss. Operating loss decreased approximately
$5.8 million, to $11.7 million, for the three months ended
September 30, 2009, from $17.4 million for the same period in 2008. This
decrease resulted primarily from the lower operating expenses described above
and was partially offset by the decrease in service and equipment sales
revenue.
Interest Income. Interest
income decreased by approximately $1.3 million, to $0.2 million, for
the three months ended September 30, 2009, from $1.5 million for the
same period in 2008. This decrease was due to lower average cash and restricted
cash balances on hand and lower interest rates.
Interest Expense. Interest
expense increased by $0.6 million to $1.8 million, for the three months ended
September 30, 2009, from $1.2 million for the same period in 2008. This
increase resulted from higher expenses due to our deferred financing costs
related to our financing in June 2009.
Derivative gain
(loss). We recognized a derivative gain of $6.0 million for
the three months ended September 30, 2009, as compared to a loss of $0.2
million during the same period in 2008, due primarily to the fair market value
adjustments related to the derivatives embedded in our 8% Notes. This
gain was partially offset by a decrease in the fair value of our interest rate
cap agreement as a result of a decrease in market interest rates.
Other Income (Expense). Other
income (expense) generally consists of foreign exchange transaction gains and
losses. Other income was a $1.8 million for the three months ended
September 30, 2009, as compared to a loss of $6.6 million in the same
period in 2008. This change resulted primarily from an expense in 2008 due to an
unfavorable exchange rate on the euro denominated escrow account for our
second-generation constellation procurement contract resulting from the
appreciation of the U.S dollar in 2008. The gain in 2009 was due
primarily to the favorable change in the exchange rate of the Canadian dollar
during the three months ended September 30, 2009.
Income Tax Expense. Income
tax expense for the three months ended September 30, 2009 was
$0.1 million compared to an expense of $2.0 million during the same period
in 2008. The change between periods was due primarily to a reduction
of our deferred tax assets during the 2008 period.
Net Loss.
Our net loss decreased approximately $20.5 million, to a loss of
$5.5 million, for the three months ended September 30, 2009, from a
net loss of $26.0 million for the same period in 2008. The decrease in our
net loss was primarily due to our derivative gains, lower operating expenses as
a result of cost and headcount reductions and increases in other income as
described above. This decrease was partially offset by our lower service and
equipment sales revenue.
Comparison
of Results of Operations for the Nine Months Ended September 30, 2009 and
2008 (in thousands):
|
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Service
revenue
|
|
$ |
36,953 |
|
|
$ |
48,833 |
|
|
|
(24
|
)% |
|
Equipment
sales
|
|
|
11,447 |
|
|
|
18,825 |
|
|
|
(39
|
) |
|
Total
revenue
|
|
|
48,400 |
|
|
|
67,658 |
|
|
|
(28
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization shown separately
below)
|
|
|
27,772 |
|
|
|
26,534 |
|
|
|
(5 |
) |
|
Cost
of equipment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of equipment sales
|
|
|
7,814 |
|
|
|
14,050 |
|
|
|
44 |
|
|
Cost
of equipment sales — Impairment of assets
|
|
|
655 |
|
|
|
404 |
|
|
|
(62 |
) |
|
Total
cost of equipment sales
|
|
|
8,469 |
|
|
|
14,454 |
|
|
|
41 |
|
|
Marketing,
general and administrative
|
|
|
37,713 |
|
|
|
48,602 |
|
|
|
22 |
|
|
Depreciation
and amortization
|
|
|
16,365 |
|
|
|
19,135 |
|
|
|
14 |
|
|
Total
operating expenses
|
|
|
90,319 |
|
|
|
108,725 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(41,919
|
) |
|
|
(41,067
|
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
365 |
|
|
|
4,407 |
|
|
|
(92
|
) |
|
Interest
expense
|
|
|
(5,144
|
) |
|
|
(2,499
|
) |
|
|
(106 |
) |
|
Derivative
gain (loss)
|
|
|
5,196 |
|
|
|
(25 |
) |
|
|
N/A |
|
|
Other
income (expense)
|
|
|
393 |
|
|
|
1,587 |
|
|
|
(75 |
) |
|
Total
other income
|
|
|
810 |
|
|
|
3,470 |
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
loss before income taxes
|
|
|
(41,109
|
) |
|
|
(37,597
|
) |
|
|
(9 |
) |
|
Income
tax expense (benefit)
|
|
|
(70
|
) |
|
|
2,234 |
|
|
|
N/A |
|
|
Net
loss
|
|
$ |
(41,039 |
) |
|
$ |
(39,831 |
) |
|
|
(3 |
)
% |
Revenue. Total
revenue decreased by $19.3 million, or approximately 28%, from $67.7 million for
the nine months ended September 30, 2008 to $48.4 million for the nine
months ended September 30, 2009. We attribute this decrease mainly to lower
service revenue which we believe stems from lower price service plans introduced
in order to maintain our subscriber base despite our two-way communication
issues and from reductions in sales of our duplex equipment. Our
retail ARPU during the nine months ended September 30, 2009 decreased by
32% to $25.49 from $37.34 for the nine months ended September 30,
2008.
Service Revenue. Service
revenue decreased $11.9 million, or approximately 24%, from $48.8 million for
the nine months ended September 30, 2008 to $36.9 million for the nine
months ended September 30, 2009. Although our overall subscriber base grew
16% to approximately 382,000 over the twelve-month period from
September 30, 2008 to September 30, 2009, we experienced decreased
retail ARPU. We believe that our two-way communication issues and
related price reductions were the primary reasons for this
decrease.
Equipment Sales. Equipment
sales decreased by approximately $7.4 million, or approximately 39%, from $18.8
million for the nine months ended September 30, 2008 to $11.4 million for
the nine months ended September 30, 2009. We attribute this decrease to
reduced sales of our duplex products, partially offset by a change in estimate
which increased equipment sales by approximately $2.2 million (see Note 1 "The
Company and Summary of Significant Accounting Policies" of our Unaudited Interim
Consolidated Financial Statements.)
Operating
Expenses. Total operating expenses decreased $18.4 million, or
approximately 17%, from $108.7 million for the nine months ended
September 30, 2008 to $90.3 million for the nine months ended
September 30, 2009. This decrease was due primarily to lower cost of goods
sold as a result of lower equipment sales related to our duplex products, lower
marketing and advertising costs and reductions in our headcount, partially
offset by higher research and development expenses.
Cost of Services. Our cost of
services for the nine months ended September 30, 2009 and 2008 were $27.8
million and $26.5 million, respectively. Our cost of services is
comprised primarily of network operating costs, which are generally fixed in
nature. The increase in the cost of services during the nine months ended
September 30, 2009 is due primarily to higher research and development
expenses related to our second-generation ground component development, offset
by lower contract labor and other operating expenses.
Cost of Equipment Sales. Cost
of equipment sales decreased $6.0 million, or approximately 41%, from $14.5
million for the nine months ended September 30, 2008 to $8.5 million for
the nine months ended September 30, 2009. This decrease was due
primarily to lower sales of our duplex products.
Marketing, General and
Administrative. Marketing, general and administrative expenses decreased
$10.9 million, or approximately 22%, from $48.6 million for the nine months
ended September 30, 2008 to $37.7 million for the nine months ended
September 30, 2009. This decrease was due primarily to lower marketing and
advertising costs, legal fees and reductions in payroll and related
expenses as our average headcount decreased in the nine months ended September
30, 2009 when compared to the same period in 2008.
Depreciation and Amortization.
Depreciation and amortization expense decreased approximately $2.7
million, or approximately 14%, from $19.1 million for the nine months ended
September 30, 2008 to $16.4 million for the nine months ended
September 30, 2009. This decrease was due primarily to the first-generation
satellite constellation reaching fully-depreciated status at December 31,
2008.
Operating Loss.
Our operating loss of $41.9 million for the nine months ended
September 30, 2009 increased approximately $0.8 million from an
operating loss of $41.1 million for the nine months ended September 30,
2008. The increase was due primarily to lower revenues partially offset by lower
operating expenses.
Interest Income. Interest
income decreased by $4.0 million for the nine months ended September 30,
2009 to $0.4 million. This decrease was due to lower average cash balances on
hand and lower interest rates as compared to the prior year.
Interest Expense. Interest
expense increased by $2.6 million, to $5.1 million for the nine months ended
September 30, 2009 from $2.5 million for the nine months ended
September 30, 2008. This increase resulted from higher expenses due to our
deferred financing costs related to our financing in June 2009.
Derivative gain
(loss). We recognized a derivative gain of $5.2 million for
the nine months ended September 30, 2009, compared to a loss of less than
$0.1 million during the same period in 2008, due primarily to the
fair market value adjustments related to the derivatives from our 8% Notes. This
gain was partially offset by a decrease in the fair value of our interest rate
cap agreement as a result of a decrease in market interest rates.
Other Income (Expense). Other
income (expense) generally consists of foreign exchange transaction gains and
losses. Other income decreased by $1.2 million for the nine months ended
September 30, 2009 as compared to the same period in 2008. This decrease
primarily resulted from less favorable conversion rates for Euro to the U.S.
Dollar and the Canadian Dollar to the U.S. Dollar resulting in fewer euro
denominated payments made in the nine months ended September, 30, 2009 and
lower balances on our euro denominated escrow account in the current
year.
Income Tax Expense(benefit).
Income tax benefit for the nine months ended September 30, 2009 was
$0.1 million compared to an expense of $2.2 million during the same period in
2008. The change between periods was due primarily to a reduction of our
deferred tax assets during the 2008 period.
Net Loss.
Our net loss increased approximately $1.2 million to a loss of
$41.0 million, for the nine months ended September 30, 2009, from a
net loss of $39.8 million for the same period in 2008. This increase
resulted from our lower service and equipment sales revenue and decreases in
interest and other income as described above. The increase in our net loss was
partially offset by our derivative gains and lower operating expenses as a
result of cost reductions.
Liquidity
and Capital Resources
The
following table shows our cash flows from operating, investing, and financing
activities for the nine months ended September 30, 2009 and
2008:
|
|
|
Nine Months Ended
September 30, 2009
|
|
|
Nine Months Ended
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Net
cash from (used in) operating activities
|
|
$ |
(27,468 |
) |
|
$ |
(25,974 |
) |
|
Net
cash used in investing activities
|
|
|
(240,113 |
) |
|
|
(227,688 |
) |
|
Net
cash from financing activities
|
|
|
387,056 |
|
|
|
230,279 |
|
|
Effect
of exchange rate changes on cash
|
|
|
(133 |
) |
|
|
(1,234 |
) |
|
Net
increase (decrease) in cash and cash equivalents
|
|
$ |
119,342 |
|
|
$ |
(24,617 |
) |
At
October 1, 2009, our principal short-term liquidity needs
were:
|
|
·
|
to
make payments to procure our second-generation satellite constellation,
construct the Control Network Facility and launch related costs, in a
total amount not yet determined, but which will include approximately
$232.2 million payable to Thales Alenia Space by September 2010
under the purchase contract for our second-generation satellites and €0.9
million payable to Thales Alenia Space by March 2010 under the
contract for construction of the Control Network
Facility;
|
|
|
·
|
to
make payments related to our launch for the second-generation satellite
constellation in the amount of $102.4 million payable to our Launch
Provider by September 30,
2010;
|
|
|
·
|
to
make payments related to the construction of our second-generation ground
component in the amount of $13.3 million by September 30, 2010;
and
|
|
|
·
|
to
fund our working capital.
|
During
the nine months ended September 30, 2009 and the year ended
December 31, 2008, our principal sources of liquidity were:
|
Dollars in millions
|
|
Nine Months Ended
September 30, 2009
|
|
|
Year Ended
December 31, 2008
|
|
|
Cash
on-hand at beginning of period
|
|
$ |
12.4 |
|
|
$ |
37.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from 5.75% Notes
|
|
$ |
— |
|
|
$ |
145.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from 8.00% Notes
|
|
$ |
51.3 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Thermo equity purchases
|
|
$ |
1.0 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under Thermo credit agreement and other debt, net
|
|
$ |
35.0 |
|
|
$ |
116.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under Facility Agreement
|
|
$ |
371.2 |
|
|
|
|
|
We plan
to fund our short-term liquidity requirements from the following
sources:
|
|
·
|
cash
from our Facility Agreement ($215.1 million was available at
September 30, 2009);
|
|
|
·
|
cash
from the issuance in June 2009 of our 8.00% Notes, which provided $51.3
million of net proceeds; and
|
|
|
·
|
excess
cash on hand at September 30,
2009.
|
Our
principal long-term liquidity needs are:
|
|
·
|
to
pay the costs of procuring and deploying the remainder of our
second-generation satellite constellation and upgrading our gateways and
other ground facilities;
|
|
|
·
|
to
fund our working capital, including any growth in working capital required
by growth in our business; and
|
|
|
·
|
to
fund the cash requirements of our independent gateway operator acquisition
strategy, in an amount not determinable at this
time.
|
Sources
of long-term liquidity may include, if necessary, a $34.3 million debt
service reserve account and related $12.5 million guarantee and a $60.0 million
contingent equity account established in connection with the Facility Agreement
and additional debt and equity financings. We also expect cash flow
from operations to be a source of long-term liquidity once we have
deployed our second-generation satellite constellation.
Based on
our operating plan combined with our borrowing capacity under our Facility
Agreement, we believe we will have sufficient resources to meet our cash
obligations for the next 12 months.
Net
Cash used in Operating Activities
Net cash
used in operating activities during the nine months ended September 30,
2009 was $27.5 million compared to $26.0 million in the
same period in 2008. The increase in cash used for the nine months
ended September 30, 2009 when compared to the nine months ended September 30,
2008 resulted primarily from lower revenues during the nine months ended
September 30, 2009, as compared to the same period in 2008.
Net
Cash used in Investing Activities
Cash used
in investing activities was $240.1 million during the nine months ended
September 30, 2009, compared to $227.7 million during the same period
in 2008. This increase was primarily the result of increased payments related to
the construction of our second-generation constellation during the nine months
ended September 30, 2009.
Net
Cash from Financing Activities
Net cash
provided by financing activities increased by $156.8 million to
$387.1 million during the nine months ended September 30, 2009, from
$230.3 million during the same period in 2008. The increase was
due primarily to timing of cash draws on the funds available to us in the nine
months ended September 30, 2009 as compared to the nine months ended
September 30, 2008. During the nine months ended
September 30, 2008, we issued $150 million of 5.75% Notes and borrowed $100
million under the Thermo credit agreement as compared to borrowings of $371.2
million from our Facility Agreement, issuance of $55.0 million of 8.00% Notes,
and $35.0 million from our other facilities in the nine months ended
September 30, 2009.
Capital
Expenditures
We
currently estimate that the capitalized expenditures related to procuring and
deploying our second-generation satellite constellation and upgrading our
gateways and other ground facilities will cost approximately $1.29 billion
including total contract values for Thales, our Launch Provider, Hughes and
Ericsson and excluding launch costs for the second 24 satellites, internal costs
and capitalized interest, which we expect will be reflected in capital
expenditures through 2013. Since the fourth quarter of 2006, we have used
portions of the proceeds from sales of Common Stock to Thermo, the proceeds from
our initial public offering, the net proceeds from the sale of the 5.75% Notes
and 8% Notes and borrowings under our credit facility with Thermo and the
Facility Agreement to fund the approximately $640.4 million (excluding internal
costs) incurred through September 30, 2009. We plan to fund the balance of
the capital expenditures through the use of the remaining funds
available under our Facility Agreement, additional debt and equity financings
(if necessary) and cash flow from operations once we have deployed our
second-generation satellite constellation.
The
amount of actual and contractual capital expenditures related to the
construction of the second-generation constellation and satellite operations
control centers, ground component and related costs and the launch services
contracts is presented in the table below (in millions):
|
|
|
Currency
|
|
Payments
through
September 30,
|
|
Estimated Future Payments
|
|
|
Contract
|
|
of Payment
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
Thales
Alenia Second Generation Constellation
|
|
EUR
|
|
€ |
357.5 |
|
|
€ |
35.6 |
|
|
€ |
150.4 |
|
|
€ |
68.7 |
|
|
€ |
66.7 |
|
|
€ |
678.9 |
|
|
Thales
Alenia Satellite Operations Control Centers
|
|
EUR
|
|
€ |
8.2 |
|
|
€ |
0.7 |
|
|
€ |
0.3 |
|
|
€ |
— |
|
|
€ |
— |
|
|
€ |
9.2 |
|
|
Arianespace
Launch Services
|
|
USD
|
|
$ |
105.1 |
|
|
$ |
52.5 |
|
|
$ |
58.5 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
216.1 |
|
|
Hughes
second-generation ground component (including research and development
expense)
|
|
USD
|
|
$ |
35.0 |
|
|
$ |
— |
|
|
$ |
15.0 |
|
|
$ |
35.7 |
|
|
$ |
15.1 |
|
|
$ |
100.8 |
|
|
Ericsson
|
|
USD
|
|
$ |
0.5 |
|
|
$ |
0.5 |
|
|
$ |
5.9 |
|
|
$ |
13.0 |
|
|
$ |
2.8 |
|
|
$ |
22.7 |
|
The
exchange rate on September 30, 2009 was €1.00 = $1.4643.
Cash
Position and Indebtedness
As of
September 30, 2009, our total cash and cash equivalents were $131.7 million
and we had total indebtedness of $463.7 million compared to total cash and cash
equivalents and total indebtedness at December 31, 2008 of $12.4 million
and $271.9 million, respectively.
Facility
Agreement
On
June 5, 2009, we entered into a $586.3 million senior secured facility
agreement (the “Facility Agreement”) with a syndicate of bank lenders, including
BNP Paribas, Natixis, Société Générale, Caylon, Crédit Industriel et Commercial
as arrangers and BNP Paribas as the security agent and COFACE agent. Ninety-five
percent of our obligations under the agreement are guaranteed by COFACE, the
French export credit agency. The initial funding process of the Facility
Agreement began on June 29, 2009 and was completed on July 1, 2009.
The new facility is comprised of:
|
|
·
|
a
$563.3 million tranche for future payments to and to reimburse us for
amounts we previously paid to Thales Alenia Space for construction of our
second-generation satellites. Such reimbursed amounts will be used by us
(a) to make payments to the Launch Provider for launch services,
Hughes for ground network equipment, software and satellite interface
chips and Ericsson for ground system upgrades, (b) to provide up to
$150 million for our working capital and general corporate purposes and
(c) to pay a portion of the insurance premium to COFACE;
and
|
|
|
·
|
a
$23 million tranche that will be used to make payments to Arianespace for
launch services and to pay a portion of the insurance premium to
COFACE.
|
The
facility will mature 96 months after the first repayment date. Scheduled
semi-annual principal repayments will begin the earlier of eight months after
the launch of the first 24 satellites from the second generation constellation
or December 15, 2011. The facility bears interest at a floating LIBOR
rate, capped at 4%, plus 2.07% through December 2012, increasing to 2.25%
through December 2017 and 2.40% thereafter. Interest payments will be
due on a semi-annual basis.
The
Facility Agreement requires that:
|
|
·
|
we
not permit our capital expenditures (other than those funded with cash
proceeds from insurance and condemnation events, equity issuances or the
issuance of our stock to acquire certain assets) to exceed $391.0 million
in 2009 and $234.0 million in 2010 (with unused amounts permitted to be
carried over to subsequent years)
|
|
|
·
|
after
the second scheduled interest payment, we maintain a minimum liquidity of
$5.0 million;
|
|
|
·
|
we
achieve for each period the following minimum adjusted consolidated
EBITDA:
|
|
Period
|
|
Minimum Amount
|
|
|
|
|
|
1/1/09-12/31/09
|
|
$ |
(25.0)
million
|
|
7/1/09-6/30/10
|
|
$ |
(21.0)
million
|
|
1/1/10-12/31/10
|
|
$ |
(10.0)
million
|
|
7/1/10-6/30/11
|
|
$ |
10.0
million
|
|
1/1/11-12/31/11
|
|
$ |
25.0
million
|
|
7/1/11-6/30/12
|
|
$ |
35.0
million
|
|
1/1/12-12/31/12
|
|
$ |
55.0
million
|
|
7/1/12-6/30/12
|
|
$ |
65.0
million
|
|
1/1/13-12/31/13
|
|
$ |
78.0
million
|
|
|
·
|
beginning
in 2011, we maintain a minimum debt service coverage ratio of 1.00:1,
gradually increasing to a ratio of 1.50:1 through
2019;
|
|
|
·
|
beginning
in 2012, we maintain a maximum net debt to adjusted consolidated EBITDA
ratio of 9.90:1, gradually decreasing to 2.50:1 through
2019.
|
At
September 30, 2009, we were in compliance with the covenants of the Facility
Agreement.
Our
obligations under the facility are guaranteed on a senior secured basis by all
of our domestic subsidiaries and are secured by a first priority lien on
substantially all of our assets and those of our domestic subsidiaries (other
than FCC licenses), including patents and trademarks, 100% of the equity of our
domestic subsidiaries and 65% of the equity of certain foreign
subsidiaries.
We are
required to pay the borrowings without penalty on the last day of each interest
period after the full facility has been borrowed or the earlier of seven months
after the launch of the second generation constellation or November 15,
2011, but amounts repaid may not be reborrowed. We must repay the loans
(a) in full upon a change in control or (b) partially (i) if
there are excess cash flows on certain dates, (ii) upon certain insurance
and condemnation events and (iii) upon certain asset dispositions. In
addition to the financial covenants described above, the Facility Agreement
places limitations on our ability and our subsidiaries to incur debt, create
liens, dispose of assets, carry out mergers and acquisitions, make loans,
investments, distributions or other transfers and capital expenditures or enter
into certain transactions with affiliates.
See Note
12 of our Unaudited Interim Consolidated Financial Statements for descriptions
of our other debt agreements.
Contractual
Obligations and Commitments
Significant
changes to our contractual obligations and commitments since June 30, 2009 are
described below.
At
September 30, 2009, we have a remaining commitment to purchase a total of
$58.5 million of mobile phones, services and other equipment under various
commercial agreements with Qualcomm. We expect to fund this remaining commitment
from our working capital, funds generated by our operations, and, if necessary,
additional capital from the issuance of equity or debt or a combination thereof.
On August 18, 2009, we and Qualcomm amended our agreement to extend the term for
5 additional months and defer the final delivery date of mobile phones and
related equipment until January 2012.
In May
2008, we and Hughes entered into an agreement under which Hughes will
design, supply and implement the RAN ground network equipment and software
upgrades for installation at a number of our satellite gateway ground
stations and satellite interface chips to be a part of the UTS in various
next-generation Globalstar devices. The total contract purchase price of
approximately $100.8 million is payable in various increments over a period of
40 months. We have the option to purchase additional RANs and other
software and hardware improvements at pre-negotiated prices. In August
2009, we and Hughes amended our agreement extending the performance
schedule by 15 months and revising certain payment milestones to reflect our
expected second-generation constellation launch schedule and business
plan. Future costs associated with certain projects under this
contract will be capitalized once we have determined that technological
feasibility has been achieved on these projects. As of September 30,
2009, we had made payments of $35.0 million under this contract and
expensed $5.7 million of these payments and capitalized $19.3 million under
second-generation ground component and $10.0 million has been classified as a
prepayment in other assets, net.
In
October 2008, we signed an agreement with Ericsson, a leading global provider of
technology and services to telecom operators. According to the
$22.7 million contract, Ericsson will work with us to develop, implement
and maintain a ground interface, or core network, system that will be installed
at our satellite gateway ground stations. The all Internet protocol (IP) based
core network system is wireless 3G/4G compatible and will link our radio access
network to the public-switched telephone network (PSTN) and/or Internet. Design
of the new core network system is now underway. The agreement represents the
final significant ground network infrastructure component for our
next-generation of advanced IP-based satellite voice and data
services.
Off-Balance
Sheet Transactions
We have
no material off-balance sheet transactions.
Recently
Issued Accounting Pronouncements
The
information provided under “Note 1: The Company and Summary of Significant
Accounting Policies — Recent Accounting Pronouncements” of the notes to
unaudited Interim Consolidated Financial Statements in Part I, Item 1 of
this Report is incorporated herein by reference.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
Our
services and products are sold, distributed or available in over 120 countries.
Our international sales are made primarily in U.S. dollars, Canadian dollars,
Brazilian reals and Euros. In some cases insufficient supplies of U.S. currency
may require us to accept payment in other foreign currencies. We reduce our
currency exchange risk from revenues in currencies other than the U.S. dollar by
requiring payment in U.S. dollars whenever possible and purchasing foreign
currencies on the spot market when rates are favorable. We currently do not
purchase hedging instruments to hedge foreign currencies. However, our Facility
Agreement requires us to do so on terms reasonably acceptable to the COFACE
agent not later than 90 days after the end of any quarter in which more
than 25% of our revenue is originally denominated in a single currency other
than U.S. or Canadian dollars.
As
discussed in “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources—Contractual
Obligations and Commitments,” we have entered into two separate contracts with
Thales Alenia Space to construct 48 low earth orbit satellites for our
second-generation satellite constellation and to provide launch-related and
operations support services, and to construct the Satellite Operations Control
Centers, Telemetry Command Units and In-Orbit Test Equipment for our
second-generation satellite constellation. A substantial majority of the
payments under the Thales Alenia Space agreements is denominated in
Euros.
Our
exposure to fluctuations in currency exchange rates has decreased as a result of
certain portions of our contracts for the construction of our second-generation
constellation satellite and the related control network facility, which are
payable primarily in Euros, are at a fixed exchange rate. A 1.0%
decline in the relative value of the U.S. dollar, on the remaining balance not
at a fixed exchange rate of approximately €227 million on September 30,
2009, would result in $3.2 million of additional payments. See “Note
3: Property and Equipment” of the unaudited interim consolidated financial
statements in Part I, Item 1 of this Report. Our interest rate risk arises
from our variable rate debt under our Facility Agreement, under which loans bear
interest at a floating rate based on the LIBOR. In order to minimize the
interest rate risk, we completed an arrangement with the lenders under the
Facility Agreement to limit the interest to which we are exposed. The
interest rate cap provides limits on the 6 month Libor rate (“Base Rate”) used
to calculate the coupon interest on outstanding amounts on the Facility
Agreement of 4.00% from the date of issuance through December 2012.
Thereafter, the Base Rate is capped at 5.50% should the Base Rate not exceed
6.5%. Should the Base Rate exceed 6.5%, our Base rate will be 1% less than the
then 6 month Libor rate. The applicable margin from the base rate
ranges from 2.07% to 2.4% through the termination date of the
facility. Assuming that we borrowed the entire $586.3 million
under the Facility Agreement, a 1.0% change in interest rates would result in a
change to interest expense of approximately $5.9 million
annually.
Item
4. Controls and Procedures
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(a)
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Evaluation
of disclosure controls and
procedures.
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Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15(b) under the Securities Exchange
Act of 1934 as of September 30, 2009, the end of the period covered by this
Report. The evaluation included certain internal control areas in which we have
made and are continuing to make changes to improve and enhance controls. This
evaluation was based on the guidelines established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
Based on
this evaluation, our chief executive officer and chief financial officer
concluded that as of September 30, 2009 our disclosure controls and
procedures were effective to provide reasonable assurance that information we
are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and that
such information is accumulated and communicated to our management, including
our chief executive officer and chief financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
We
believe that the consolidated financial statements included in this Report
fairly present, in all material respects, our consolidated financial position
and results of operations as of and for the three and nine months ended
September 30, 2009.
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(b)
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Changes
in internal control over financial
reporting.
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As of
September 30, 2009, our management, with the participation of our chief
executive officer and chief financial officer, evaluated our internal control
over financial reporting. Based on that evaluation, our CEO and CFO concluded
that there were no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2009, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II:
OTHER INFORMATION
Item
1. Legal Proceedings
We are
involved in certain litigation matters as discussed elsewhere in this Report.
For more detailed information on litigation matters outstanding please see Note
9 of the Notes to our unaudited Interim Consolidated Financial Statements in
Part I, Item 1 of this Report. From time to time, we are involved in
various other litigation matters involving ordinary and routine claims
incidental to our business. Management currently believes that the outcome of
these proceedings, either individually or in the aggregate, will not have a
material adverse effect on our business, results of operations or financial
conditions.
Item
1A. Risk Factors
You
should carefully consider the risks described below, as well as all of the
information in this Report and our other past and future filings with the SEC,
in evaluating and understanding us and our business. Additional risks not
presently known or that we currently deem immaterial may also impact our
business operations and the risks identified below may adversely affect our
business in ways we do not currently anticipate. Our business, financial
condition or results of operations could be materially adversely affected by any
of these risks.
Risks
Related to Our Business
Our
indebtedness could impair our ability to react to changes in our business and
may limit our ability to use debt to fund future capital needs.
Our debt
has increased by $191.8 million to $463.7 million as of September 30, 2009 when
compared to December 31, 2008. We anticipate that our cash requirements for the
next 12 months will require us to borrow additional funds available under our
Facility Agreement.
If an
event of default were to occur with respect to our Facility Agreement or other
indebtedness, our creditors could accelerate the maturity of our indebtedness.
Our indebtedness under our Facility Agreement is secured by a lien on
substantially all of our assets and the assets of our domestic subsidiaries and
the lenders could foreclose on these assets to repay the
indebtedness.
Our
ability to make scheduled payments on or to refinance indebtedness obligations
depends on our financial condition and operating performance, which are subject
to prevailing economic and competitive conditions and to certain financial,
business and other factors beyond our control. We may not be able to maintain a
level of cash flows from operating activities sufficient to permit us to pay the
principal, premium, if any, and interest on our indebtedness. If our cash flows
and capital resources are insufficient to fund our debt service obligations, we
could face substantial liquidity problems and could be forced to sell assets,
seek additional capital or seek to restructure or refinance our indebtedness.
These alternative measures may not be successful or feasible. Our Facility
Agreement restricts our ability to sell assets. Even if we could consummate
those sales, the proceeds that we realize from them may not be adequate to meet
any debt service obligations then due.
Our
operating results have fluctuated, with operating losses in three of the last
five years, and may continue to do so.
We
acquired the assets of Old Globalstar in December 2003 in a proceeding
under the Bankruptcy Code. Prior to that time, Old Globalstar incurred
substantial losses, including operating losses of $260.7 million in 2003.
Since our acquisition of the Globalstar business, we incurred an operating loss
of $3.5 million in 2004, had operating profits of $21.9 million in
2005 and $15.7 million in 2006, and incurred operating losses of
$24.6 million and $57.7 million in 2007 and 2008 respectively. Largely as a
result of problems with our two-way communications services, we incurred an
operating loss of $41.9 million during the nine months ended
September 30, 2009. We expect that our operating results will continue to
be volatile, at least until we have deployed and placed into service our
second-generation satellite constellation.
Our
satellites have a limited life and most have degraded, which causes our network
to be compromised and which materially and adversely affects our business,
prospects and profitability.
Since the
first Old Globalstar satellites were launched in 1998, fifteen satellites have
failed in orbit and have been retired, and we expect others to fail in the
future. We consider a satellite “failed” only when it can no longer provide any
communications service, and we do not intend to undertake any further efforts to
return it to service or when the other satellite subsystems can no longer
support operations. In-orbit failure may result from various causes,
including component failure, loss of power or fuel, inability to control
positioning of the satellite, solar or other astronomical events, including
solar radiation and flares, the quality of construction, gradual degradation of
solar panels, the durability of components, and collision with other satellites
or space debris. Radiation induced failure of satellite components may result in
damage to or loss of a satellite before the end of its currently expected
life.
As a
result of the issues described above, some of our in-orbit satellites may not be
fully functioning at any given time. As discussed below, all of our current
satellites launched before 2007 have experienced S-band downlink communications
degradation and some have experienced failures of other types. Except
for the fifteen satellites that have been decommissioned, this does not impair
their ability to continue to support Simplex data transmissions in the L-band,
and accordingly, we do not classify them as “failed.”
Although
we do not incur any direct cash costs related to the failure of a satellite, if
a satellite fails, we record an impairment charge reflecting its net book value.
There are some remote tools we use to remedy certain types of problems affecting
the performance of our satellites, but the physical repair of satellites in
space is not feasible. We do not insure our satellites against in-orbit
failures, whether such failures are caused by internal or external
factors.
S-band
Antenna Amplifier Degradation
The
degradation of the S-band antenna amplifier in our satellites launched prior to
2007, has negatively affected our ability to provide two-way voice and data
communications at all times and in all locations. The S-band antenna provides
the downlink from the satellite to a subscriber’s phone or data terminal.
Degraded performance of the S-band antenna reduces the call completion rate for
two-way voice and data communication between the affected satellites and the
subscriber and may reduce the duration of a call. When the S-band antenna on a
satellite ceases to be functional, two-way communication is impossible over that
satellite, but not for Simplex service and over the constellation as a whole.
The root cause of the degradation in performance of the S-band antenna
amplifiers is unknown, although we believe it may result from the satellites
being exposed to radiation over their life in orbit. The S-band antenna
amplifier degradation does not affect adversely our one-way Simplex data
transmission services, which utilize only the L-band uplink from a subscriber’s
Simplex terminal to the satellites.
In the
past, we have reconfigured our constellation and placed less impaired satellites
into key orbital positions to maximize our capacity and quality of service. We
will continue to do this. We forecast the time and duration of two-way service
coverage at any particular location in our service area, and we have made this
information available without charge to our customers and service providers,
including our wholly owned operating subsidiaries, value added resellers, and
IGO’s, so that they may work with their subscribers to reduce the impact of the
service interruptions in their respective service areas. Nonetheless, we expect
the S-band antenna amplifier degradation to continue as our satellites age in
orbit. Substantially all of our in-orbit satellites launched prior to 2007 have
ceased to be able to provide two-way communications as a result of this
degradation.
Accordingly,
as the number of in-orbit satellites (other than the eight spare satellites
launched in 2007) with properly functioning S-band antenna amplifiers has
decreased, even with optimized placement in orbit of the eight spare satellites,
increasingly larger coverage gaps have occurred and will continue to occur over
areas in which we have provided two-way communications service. This has
materially adversely affected our ability to attract new subscribers and
maintain our existing subscribers for our two-way communications services,
equipment sales of two-way communication devices, retail average revenue per
unit, or ARPU, and our results of operations and is likely to have a further
material adverse effect on each of these in the future. If our subscriber base
declines, our ability to attract and retain subscribers at higher rates when our
second-generation constellation is placed in service may be affected
adversely.
During
the first nine months of 2009, our ARPU decreased by approximately 40% from the
same period in 2008. In addition, our service revenue declined from
$48.8 million to $37.0 million. We believe that customer reaction to
the S-band antenna amplifier degradation and our related price reductions have
been the primary causes of the reductions in service revenue. If we are unable
to maintain our customer base for two-way communications service, our business
and profitability may be further materially and adversely affected. In addition,
after our second-generation satellite constellation becomes operational, we may
face challenges in maintaining our current subscriber base for two-way
communications service because we plan then to increase prices, consistent with
market conditions, to reflect our improved two-way service and
coverage.
Our
business plan includes exploiting our ATC license in the United States by
combining ATC services with our existing business. If we are unable to
accomplish this effectively, our anticipated future revenues and profitability
will be reduced and we will lose our investment in developing ATC
services.
The FCC
licenses us to use a portion of our spectrum to provide ATC services in the
United States in combination with our existing communication services. If we can
integrate ATC services with our existing business, which will require us to make
satisfactory arrangements with terrestrial wireless or other communications
service providers, we will be able to use the spectrum currently licensed to us
to provide an integrated telecommunications offering incorporating both our
satellite and ground station system and a terrestrial-based cellular-like
system. If successful, this will allow us to address a broader market for our
products and services, thereby increasing our revenue and profitability and the
value of our business. However, neither we nor any other company has yet
successfully integrated a commercial ATC service with satellite services, and we
may be unable to do so.
Northern
Sky Research estimates that development of an independent terrestrial network to
provide ATC services could cost $2.5 to $3.0 billion in the United States
alone. We do not expect to have sufficient capital resources to develop
independently the terrestrial component of an ATC network. Therefore, in the
foreseeable future full exploitation of our ATC opportunity will require us to
lease portions of our ATC-licensed spectrum to, or form satisfactory
partnerships, service contracts, joint ventures or other arrangements with,
other telecommunications or spectrum-based service providers.
We have
entered into an ATC lease agreement with Open Range Communications Inc. We
may not be able to establish additional arrangements to exploit our ATC
authority at all or on favorable terms and, if such arrangements are
established, the other parties may not fulfill their obligations. If we are
unable to form additional suitable partnerships or enter into service contracts,
joint venture agreements or additional leases, we may not be able to capitalize
fully on our plan to deploy ATC services, which would limit our ability to
expand our business and reduce our revenues and profitability, and adversely
affect the value of our ATC license. In addition, in such event we will lose any
resources we have invested in developing ATC services, which may be
substantial.
The FCC
rules governing ATC are relatively new and are subject to interpretation.
The scope of ATC services that we will be permitted and required to provide
under our existing FCC license is unclear and we may be required to seek
additional amendments to our ATC license to execute our business plan. The FCC’s
rules require ATC service providers to demonstrate that their mobile
satellite and ATC services satisfy certain gating criteria, such as constituting
an “integrated service offering,” and maintain at least one in-orbit spare
satellite. The FCC reserves the right to rescind ATC authority if the FCC
determines that a licensee has failed to provide an “integrated service
offering” or to comply with other gating criteria. It is therefore possible that
we could lose our existing or future ATC authority, in which case we could lose
all or much of our investment in developing ATC services, as well as future
revenues from such services.
The
development and operation of our ATC system may also infringe on unknown and
unidentified intellectual property rights of other persons, which could require
us to modify our business plan, thereby increasing our development costs and
slowing our time to market. If we are unable to meet the regulatory requirements
applicable to ATC services or develop or acquire the required technology, we may
not be able to realize our plan to offer ATC services, which would decrease our
revenues and profitability.
We have
decided to register our second generation satellite constellation with the
International Telecommunication Union (the ITU) through France rather than the
United States. The French radiofrequency spectrum regulatory agency,
ANFR, submitted the technical papers to the ITU on our behalf in July
2009. As with the first generation constellation, we will be required
to coordinate our spectrum assignments with other companies that use any portion
of our spectrum bands. We cannot predict how long the coordination
process will take; however, we are able to use the frequencies during the
coordination process in accordance with our national licenses.
The
implementation of our business plan depends on increased demand for wireless
communications services via satellite, both for our existing services and
products and for new services and products. If this increased demand does not
occur, our revenues and profitability may not increase as we
expect.
Demand
for wireless communication services via satellite may not grow, or may even
shrink, either generally or in particular geographic markets, for particular
types of services or during particular time periods. A lack of demand could
impair our ability to sell our services and to develop and successfully market
new services, or could exert downward pressure on prices, or both. This, in
turn, could decrease our revenues and profitability and adversely affect our
ability to increase our revenues and profitability over time.
The
success of our business plan will depend on a number of factors,
including:
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our
ability to complete the construction, delivery and launch of our
second-generation satellites and, once launched, our ability to maintain
their health, capacity and control;
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our
ability to maintain or reduce costs until our second-generation
constellation is in service;
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the
level of market acceptance and demand for all of our
services;
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our
ability to introduce new products and services that meet this market
demand;
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our
ability to retain our existing voice and duplex data customers until we
have launched our second-generation satellite
constellation;
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our
ability to obtain additional business using our existing spectrum
resources both in the United States and
internationally;
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our
ability to control the costs of developing an integrated network providing
related products and services;
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our
ability to market successfully our new Simplex products and services,
especially our SPOT satellite GPS messenger products and
services;
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our
ability to develop and deploy innovative network management techniques to
permit mobile devices to transition between satellite and terrestrial
modes;
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our
ability to limit the effects of further degradation of, and to maintain
the capacity and control of, our existing satellite
network;
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our
ability to sell the equipment inventory on hand and under commitment to
purchase from Qualcomm;
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the
effectiveness of our competitors in developing and offering similar
products and services and in persuading our customers to switch service
providers; and
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with
the addition of our retail product line, general economic conditions that
affect consumer discretionary spending and consumer confidence, which have
declined sharply in the current
recession.
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The
implementation of our business plan and our ability to return to profitability
assumes that we are able to generate sufficient revenue and cash flow as our
existing satellite constellation continues to age, and to deploy successfully
our second-generation satellite constellation, both of which are contingent on a
number of factors.
As a
result of the factors described above, our customers currently are unable to
access our two-way communications service at all times and places. Our ability
to generate revenue and positive cash flow, at least until our second-
generation satellite constellation is deployed and begins to generate revenue,
will depend upon several factors, including:
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whether
we can maintain a sufficient number of our existing two-way communications
service customers;
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whether
we can introduce successfully new product and service offerings;
and
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whether
we can continue to compete successfully against other mobile satellite
service providers.
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Our
ability to generate revenue and cash flow has been adversely impacted by our
need to reduce our prices for two-way communications services as we seek to
maintain our customer base in the face of the challenges to our two-way
services. We have implemented new pricing strategies designed to stem
further diminution of revenue from two-way services described
above.
Further,
our business plan and our ability to return to profitability assume that we will
be able to deploy successfully our second-generation satellite constellation. In
order to do so, we are dependent on third parties to build and launch our
satellites. The construction of these satellites is technically complex and
subject to construction and delivery delays that could result from a variety of
causes, including the failure of third-party vendors to perform as anticipated,
changes in the technical specifications of the satellites and other unforeseen
circumstances. For example, we have entered into contracts with Thales Alenia
Space, our satellite manufacturer, that anticipated launch of our
second-generation satellites beginning in the first quarter of 2010 into late
2010. However, Thales Alenia Space has informed us that delivery of
our satellites will be delayed due to earthquake damage to their assembly
facility which
will delay our launch campaign. We currently expect the launch of the first six
second generation satellites to take place in the summer of 2010 with the launch
campaign, consisting of a total of 24 satellites, to be completed in the spring
of 2011. Should we experience additional launch delays, our operations
and business plan which assume a functioning second-generation constellation in
the first half of 2011, may be materially adversely affected.
We have
filed an application with the FCC to modify our constellation license to take
account of the technical improvements in our second-generation satellites and to
change our approved orbital configuration. We intend to amend this application
to reflect our decision to register our second generation constellation through
France. If the FCC were not to grant our amended application as filed, we might
not be able to re-establish our duplex services as soon as planned.
We
depend in large part on the efforts of third parties for the retail sale of our
services and products. The inability of these third parties to sell our services
and products successfully may decrease our revenue and
profitability.
For the
nine months ended September 30, 2009 and 2008, we derived approximately 78%
and 87%, respectively, of our revenue from products and services sold
through independent agents, dealers and resellers, including, outside the United
States, independent gateway operators. If these third parties are unable to
market our products and services successfully, our revenue and profitability may
decrease.
We
depend on independent gateway operators to market our services in important
regions around the world. If the independent gateway operators are unable to do
this successfully, we will not be able to grow our business in those areas as
rapidly as we expect.
Although
we derive most of our revenue from retail sales to end users in the United
States, Canada, a portion of Western Europe, Central America and portions of
South America, either directly or through agents, dealers and resellers, we
depend on independent gateway operators to purchase, install, operate and
maintain gateway equipment, to sell phones and data user terminals, and to
market our services in other regions where these independent gateway operators
hold exclusive or non-exclusive rights. Not all of the independent gateway
operators have been successful and, in some regions, they have not initiated
service or sold as much usage as originally anticipated. Some of the independent
gateway operators are not earning revenues sufficient to fund their operating
costs. If they are unable to continue in business, we will lose the revenue we
receive for selling equipment to them and providing services to their customers.
Although we have implemented a strategy for the acquisition of certain
independent gateway operators when circumstances permit, we may not be able to
continue to implement this strategy on favorable terms and may not be able to
realize the additional efficiencies that we anticipate from this strategy. In
some regions it is impracticable to acquire the independent gateway operators
either because local regulatory requirements or business or cultural norms do
not permit an acquisition, because the expected revenue increase from an
acquisition would be insufficient to justify the transaction, or because the
independent gateway operator will not sell at a price acceptable to us. In those
regions, our revenue and profits may be adversely affected if those independent
gateway operators do not fulfill their own business plans to increase
substantially their sales of services and products.
Our
success in generating sufficient cash from operations to fund a portion of the
cost of our second-generation satellite constellation will depend on the market
acceptance and success of our current and future products and services, which
may not occur.
In 2007,
we launched new products to expand the scope of our Simplex services. On
November 1, 2007, we introduced the SPOT satellite GPS messenger, aimed at
both recreational and commercial customers who require personal tracking,
emergency location and messaging solutions that operate beyond the range of
traditional terrestrial and wireless communications. In September 2009, we
unveiled our second generation SPOT satellite GPS messenger.
We plan
on introducing additional Duplex and Simplex products and services. However, we
cannot predict with certainty the potential longer term demand for these
products and services or the extent to which we will be able to meet demand. Our
business plan assumes growing our Duplex subscriber base beyond levels achieved
in the past, rapidly growing our Simplex subscriber base and returning the
business to profitability. However, we may not be able to generate sufficient
positive cash flow from our operations to enable us to fund a portion of the
cost of our second-generation satellite constellation. Among other things, end
user acceptance of our Duplex and Simplex products and services will depend
upon:
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the actual size of the
addressable market;
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our ability to provide attractive
service offerings at competitive prices to our target
markets;
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the cost and availability of user
equipment, including the data modems that operate on our
network;
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the effectiveness of our
competitors in developing and offering alternate technologies or lower
priced services; and
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general
and local economic conditions, which have been adversely affected by the
current recession.
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Our
business plan assumes a growing subscriber base for Simplex products. If we
cannot implement this business plan successfully and gain market acceptance for
these planned Simplex products and services, our business, financial condition,
results of operations and liquidity could be materially and adversely
affected.
Because
consumers will use SPOT satellite GPS messenger products and services in
isolated and, in some cases, dangerous locations, we cannot predict whether
users of the device who suffer injury or death may seek to assert claims against
us alleging failure of the device to facilitate timely emergency response.
Although we will seek to limit our exposure to any such claims through
appropriate disclaimers and liability insurance coverage, we cannot assure
investors that the disclaimers will be effective, claims will not arise or
insurance coverage will be sufficient.
We
have incurred substantial contractual obligations.
We
estimate that the capitalized expenditures related to procuring and deploying
our second-generation satellite constellation and upgrading our gateways and
other ground facilities will cost approximately $1.29 billion including
total contract values for Thales, our Launch Provider, Hughes and Ericsson and
excluding launch costs for the second 24 satellites, internal costs and
capitalized interest, which we expect will be reflected in capital expenditures
through 2013.The nature of these purchases requires us to enter into long-term
fixed price contracts. We could cancel some of these purchase commitments,
subject to the incurrence of specified cancellation penalties. We believe we
currently have most of the funds necessary to fulfill these purchase
commitments but may need to access additional funds through debt and/or
equity issuances.
In
addition, our cost of services is comprised primarily of network operating
costs, which are generally fixed in nature. Accordingly, we are generally unable
to adjust our operating costs or capital expenditures to match fluctuations in
our revenue.
We
currently are unable to offer service in important regions of the world due to
the absence of gateways in those areas, which is limiting our growth and our
ability to compete.
Our
objective is to establish a worldwide service network, either directly or
through independent gateway operators, but to date we have been unable to do so
in certain areas of the world and we may not succeed in doing so in the future.
We have been unable to finance our own gateways or to find capable independent
gateway operators for several important regions and countries, including Eastern
and Southern Africa, India, and certain parts of Southeast Asia. In addition to
the lack of global service availability, cost-effective roaming is not yet
available in certain countries because the independent gateway operators have
been unable to reach business arrangements with one another. This could reduce
overall demand for our products and services and undermine our value for
potential users who require service in these areas.
Rapid
and significant technological changes in the satellite communications industry
may impair our competitive position and require us to make significant
additional capital expenditures.
The
hardware and software we currently utilize in operating our gateways were
designed and manufactured over 10 years ago and portions are becoming
obsolete. We have contracted to replace the hardware and software beginning in
2012; however the original equipment may become less reliable as it ages and
will be more difficult and expensive to service. Although we maintain
inventories of spare parts, it nonetheless may be difficult or impossible to
obtain all necessary replacement parts for the hardware before the new equipment
and software is fully deployed. We expect to face competition in the future from
companies using new technologies and new satellite systems. The space and
communications industries are subject to rapid advances and innovations in
technology. New technology could render our system obsolete or less competitive
by satisfying consumer demand in more attractive ways or through the
introduction of incompatible standards. Particular technological developments
that could adversely affect us include the deployment by our competitors of new
satellites with greater power, greater flexibility, greater efficiency or
greater capabilities, as well as continuing improvements in terrestrial wireless
technologies. We have had to commit, and must continue to commit, to make
significant capital expenditures to keep up with technological changes and
remain competitive. Customer acceptance of the services and products that we
offer will continually be affected by technology-based differences in our
product and service offerings. New technologies may be protected by patents and
therefore may not be available to us.
A
natural disaster could diminish our ability to provide communications
service.
Natural
disasters could damage or destroy our ground stations resulting in a disruption
of service to our customers. In addition, the collateral effects of such
disasters such as flooding may impair the functioning of our ground equipment.
If a natural disaster were to impair or destroy any of our ground facilities, we
might be unable to provide service to our customers in the affected area for a
period of time. Even if our gateways are not affected by natural disasters, our
service could be disrupted if a natural disaster damages the public switch
telephone network or terrestrial wireless networks or our ability to connect to
the public switch telephone network or terrestrial wireless networks. Such
failure or service disruptions could harm our business and results of
operations.
We
may not be able to launch our satellites successfully. Loss of one or more
satellites during launch could delay or impair our ability to offer our services
or reduce our revenues and launch insurance will not fully cover this
risk.
We have
in the past insured the launch of our satellites, but we do not insure our
existing satellites during their remaining in-orbit operational lives. Insurance
proceeds would likely be available in the event of a launch failure, but
acquiring replacements for any of the satellites will cause a delay in the
deployment of our second-generation constellation and any insurance proceeds
would not cover lost revenue.
If launch
insurance rates were to rise substantially, our future launch costs would
increase. Under our Facility Agreement, we are required to obtain launch
insurance for launching the first 24 satellites of the second-generation
constellation. Launch insurance rates have fluctuated significantly
in the past and are highly contingent on market conditions. We
anticipate our launch failure insurance policy will include specified
exclusions, deductibles and material change limitations. Some (but not all)
exclusions could include damage arising from acts of war, anti-satellite devices
and other similar potential risks for which exclusions were customary in the
industry at the time the policy was written.
We cannot
assure you that sufficient launch insurance will be obtained on acceptable
terms. It is also possible that insurance could become unavailable, either
generally or for a specific launch vehicle, or that new insurance could be
subject to broader exclusions on coverage.
An
FCC decision to license a second CDMA operator in our band, or to take other
steps that would reduce our existing spectrum allocation or impose additional
spectrum sharing agreements on us, could adversely affect our services and
operations.
Under the
FCC’s plan for mobile satellite services in our frequency bands, we must share
frequencies in the United States with other licensed mobile satellite services
operators. To date, there are no other authorized CDMA-based mobile satellite
services operators and no pending applications for authorization. However the
FCC or other regulatory authorities may require us to share spectrum with other
systems that are not currently licensed by the United States or any other
jurisdiction. The FCC’s decision in October 2008 to reduce the number of
channels we have available in our L-band may impair our ability to grow over the
long term.
Spectrum
values historically have been volatile, which could cause the value of our
company to fluctuate.
Our
business plan may include forming strategic partnerships to maximize value for
our spectrum, network assets and combined service offerings in the United States
and internationally. Value that we may be able to realize from such partnerships
will depend in part on the value ascribed to our spectrum. Valuations of
spectrum in other frequency bands historically have been volatile, and we cannot
predict at what amount a future partner may be willing to value our spectrum and
other assets. In addition, to the extent that the FCC takes action that makes
additional spectrum available or promotes the more flexible use or greater
availability (e.g., via spectrum leasing or new spectrum sales) of existing
satellite or terrestrial spectrum allocations, the availability of such
additional spectrum could reduce the value of our spectrum authorizations and
business.
We
face intense competition in all of our markets, which could result in a loss of
customers and lower revenues and make it more difficult for us to enter new
markets.
Satellite-based
Competitors
There are
currently four other satellite operators providing services similar to ours on a
global or regional basis: Iridium, Inmarsat and its subsidiary ACeS, SkyTerra,
and Thuraya. In addition, ICO Global Communications (Holdings) Limited launched
a satellite in 2008 but has not offered any services yet, TerreStar Corporation
launched a satellite in 2009 and plans to start offering services in 2010 and
SkyTerra plans to launch its new satellites in the next year. The provision of
satellite-based products and services is subject to downward price pressure when
the capacity exceeds demand.
Although
we believe there is currently no commercially available product comparable in
size, price and functionality to our SPOT satellite GPS messenger, other
providers of satellite-based products could introduce their own similar products
if the SPOT satellite GPS messenger is successful, which may materially
adversely affect our business plan. In addition, we may face competition from
new competitors or new technologies. With so many companies targeting many of
the same customers, we may not be able to retain successfully our existing
customers and attract new customers and as a result may not grow our customer
base and revenue.
In
addition to our satellite-based competitors, terrestrial wireless voice and data
service providers are continuing to expand into rural and remote areas,
particularly in less developed countries, and providing the same general types
of services and products that we provide through our satellite-based system.
Many of these companies have greater resources, greater name recognition and
newer technologies than we do. Industry consolidation could adversely affect us
by increasing the scale or scope of our competitors and thereby making it more
difficult for us to compete. We could lose market share and revenue as a result
of increasing competition from the extension of land-based communication
services.
Although
satellite communications services and ground-based communications services are
not perfect substitutes, the two compete in certain markets and for certain
services. Consumers generally perceive wireless voice communication products and
services as cheaper and more convenient than satellite-based ones.
We also
expect to compete with a number of other satellite companies that plan to
develop ATC integrated networks. For example, SkyTerra and ICO Global have
received licenses from the FCC to operate an ATC network. Other competitors are
expected to seek approval from the FCC to operate ATC services. Any of these
competitors could offer an integrated satellite and terrestrial network before
we do, could combine with terrestrial networks that provide them with greater
financial or operational flexibility than we have, or could offer an ATC network
that customers prefer over ours.
The
loss of customers, particularly our large customers, may reduce our future
revenues.
We may
lose customers due to competition, consolidation, regulatory developments,
business developments affecting our customers or their customers, the
constellation degradation or for other reasons. Our top 10 customers for the
nine months ended September 30, 2009 accounted for, in the aggregate,
approximately 9% of our total revenues. For the nine months ended
September 30, 2009 revenues from our largest customer were
$0.7 million or 2% of our total revenues. If we fail to maintain our
relationships with our major customers, if we lose them and fail to replace them
with other similar customers, or if we experience reduced demand from our major
customers, our profitability could be significantly reduced through the loss of
these revenues. In addition, we may be required to record additional costs to
the extent that amounts due from these customers become uncollectible. More
generally, our customers may fail to renew or may cancel their service contracts
with us, which could negatively affect future revenues and
profitability.
Our
customers include multiple agencies of the U.S. government. Service sales to
U.S. government agencies constituted approximately 9% and 8% of our total
service revenue for the three and nine months ended September 30, 2009,
respectively. Government sales are made pursuant to individual purchase orders
placed from time to time by the governmental agencies and are not related to
long-term contracts. U.S. government agencies may terminate their business with
us at any time without penalty and are subject to changes in government budgets
and appropriations.
Our
business is subject to extensive government regulation, which mandates how we
may operate our business and may increase our cost of providing services, slow
our expansion into new markets and subject our services to additional
competitive pressures.
Our
ownership and operation of wireless communication systems are subject to
significant regulation in the United States by the FCC and in foreign
jurisdictions by similar local authorities. The rules and regulations of
the FCC or these foreign authorities may change and may not continue to permit
our operations as presently conducted or as we plan to conduct them. For
example, the FCC has cancelled and refused to date to reinstate our license for
spectrum in the 2 GHz band and has since licensed this spectrum to other
entities for their mobile satellite service systems.
Failure
to provide services in accordance with the terms of our licenses or failure to
operate our satellites, ground stations, or other terrestrial facilities
(including those necessary to provide ATC services) as required by our licenses
and applicable government regulations could result in the imposition of
government sanctions against us, up to and including cancellation of our
licenses.
Our
system requires regulatory authorization in each of the markets in which we or
the independent gateway operators provide service. We and the independent
gateway operators may not be able to obtain or retain all regulatory approvals
needed for operations. For example, the company with which Old Globalstar
contracted to establish an independent gateway operation in South Africa was
unable to obtain an operating license from the Republic of South Africa and
abandoned the business in 2001. Regulatory changes, such as those resulting from
judicial decisions or adoption of treaties, legislation or regulation in
countries where we operate or intend to operate, may also significantly affect
our business. Because regulations in each country are different, we may not be
aware if some of the independent gateway operators and/or persons with which we
or they do business do not hold the requisite licenses and
approvals.
Our
current regulatory approvals could now be, or could become, insufficient in the
view of foreign regulatory authorities. Furthermore, any additional necessary
approvals may not be granted on a timely basis, or at all, in all jurisdictions
in which we wish to offer services, and applicable restrictions in those
jurisdictions could become unduly burdensome.
Our
operations are subject to certain regulations of the United States State
Department’s Directorate of Defense Trade Controls (i.e., the export of
satellites and related technical data), United States Treasury Department’s
Office of Foreign Assets Control (i.e., financial transactions) and the
United States Commerce Department’s Bureau of Industry and Security
(i.e., our gateways and phones). These regulations may limit or delay our
ability to operate in a particular country. As new laws and regulations are
issued, we may be required to modify our business plans or operations. If we
fail to comply with these regulations in any country, we could be subject to
sanctions that could affect, materially and adversely, our ability to operate in
that country. Failure to obtain the authorizations necessary to use our assigned
radio frequency spectrum and to distribute our products in certain countries
could have a material adverse effect on our ability to generate revenue and on
our overall competitive position.
If
we do not develop, acquire and maintain proprietary information and intellectual
property rights, it could limit the growth of our business and reduce our market
share.
Our
business depends on technical knowledge, and we believe that our future success
is based, in part, on our ability to keep up with new technological developments
and incorporate them in our products and services. We own or have the right to
use our patents, work products, inventions, designs, software, systems and
similar know-how. Although we have taken diligent steps to protect that
information, the information may be disclosed to others or others may
independently develop similar information, systems and know-how. Protection of
our information, systems and know-how may result in litigation, the cost of
which could be substantial. Third parties may assert claims that our products or
services infringe on their proprietary rights. Any such claims, if made, may
prevent or limit our sales of products or services or increase our costs of
sales. Thus far, two companies have filed lawsuits against us for allegedly
infringing with their patent rights. See “Item 1—Legal Proceedings.”
Additional claims could be made in the future.
We
license much of the software we require to support critical gateway operations
from third parties, including Qualcomm and Space Systems/Loral Inc. This
software was developed or customized specifically for our use. We also license
software to support customer service functions, such as billing, from third
parties which developed or customized it specifically for our use. If the third
party licensors were to cease to support and service the software, or the
licenses were to no longer be available on commercially reasonable terms, it may
be difficult, expensive or impossible to obtain such services from alternative
vendors. Replacing such software could be difficult, time consuming and
expensive, and might require us to obtain substitute technology with lower
quality or performance standards or at a greater cost.
We
face special risks by doing business in developing markets, including currency
and expropriation risks, which could increase our costs or reduce our revenues
in these areas.
Although
our most economically important geographic markets currently are the United
States and Canada, we have substantial markets for our mobile satellite services
in, and our business plan includes, developing countries or regions that are
underserved by existing telecommunications systems, such as rural Venezuela,
Brazil and Central America. Developing countries are more likely than
industrialized countries to experience market, currency and interest rate
fluctuations and may have higher inflation. In addition, these countries present
risks relating to government policy, price, wage and exchange controls, social
instability, expropriation and other adverse economic, political and diplomatic
conditions.
Although
we receive a majority of our revenues in U.S. dollars, and our independent
gateway operators are required to pay us in U.S. dollars, limited availability
of U.S. currency in some local markets or governmental controls on the export of
currency may prevent an independent gateway operator from making payments in
U.S. dollars or delay the availability of payment due to foreign bank currency
processing and approval. In addition, exchange rate fluctuations may affect our
ability to control the prices charged for the independent gateway operators’
services.
Fluctuations
in currency exchange rates may adversely impact our financial
results.
Our
operations involve transactions in a variety of currencies. Sales denominated in
foreign currencies primarily involve the Canadian dollar and the Euro. Certain
of our obligations are denominated in Euros. Accordingly, our operating results
may be significantly affected by fluctuations in the exchange rates for these
currencies, and increases in the value of the Euro compared to the U.S. dollar
have effectively increased the Euro-denominated costs of procuring our
second-generation satellite constellation and related ground facilities. Further
declines in the dollar will exacerbate this problem. A 1% decline in the dollar
vis-à-vis the Euro would increase our committed purchase obligations by
approximately $3.2 million. Approximately 36% and 37% of our total sales
were to retail customers in Canada, Europe, Venezuela and Brazil (which we added
in the first quarter of 2008) during 2008 and 2007, respectively. Our results of
operations for 2008 and 2007 reflected losses of $4.5 million and
$8.2 million, respectively, on foreign currency transactions. We may be
unable to offset unfavorable currency movements as they adversely affect our
revenue and expenses or to hedge them effectively. Our inability to do so could
have a substantial negative impact on our operating results and cash
flows.
If
we become subject to unanticipated foreign tax liabilities, it could materially
increase our costs.
We
operate in various foreign tax jurisdictions. We believe that we have complied
in all material respects with our obligations to pay taxes in these
jurisdictions. However, our position is subject to review and possible challenge
by the taxing authorities of these jurisdictions. If the applicable taxing
authorities were to challenge successfully our current tax positions, or if
there were changes in the manner in which we conduct our activities, we could
become subject to material unanticipated tax liabilities. We may also become
subject to additional tax liabilities as a result of changes in tax laws, which
could in certain circumstances have a retroactive effect. As a result of our
acquisition of an independent gateway operator in Brazil during 2008, at the
acquisition date, we became exposed to potential pre-acquisition tax liabilities
estimated at approximately $11.1 million, for which we are fully
indemnified by the seller. We may also be exposed to potential pre-acquisition
liabilities for which we may not be fully indemnified by the seller or the
seller may fail to perform its indemnification obligations.
We
rely on a limited number of key vendors for timely supply of equipment and
services. If our key vendors fail to provide equipment and services to us, we
may face difficulties in finding alternative sources and may not be able to
operate our business successfully.
We have
depended on Qualcomm as the exclusive manufacturer of phones using the IS 41
CDMA North American standard, which incorporates Qualcomm proprietary
technology. We and Qualcomm have mutually agreed to terminate our business
relationship when Qualcomm’s current contractual obligations to deliver
second-generation phones, data modems and accessories is completed in January
2012. Although we have contracted with Hughes and Ericsson to provide new
hardware and software for our ground component, there could be a substantial
period of time in which their products or services are not available
and Qualcomm no longer supports its products and services.
We depend
on Axonn L.L.C. to produce and sell the products through which we provide
our Simplex service, including our SPOT satellite GPS messenger products, which
incorporate Axonn proprietary technology. Axonn is currently our sole source for
obtaining these products. If Axonn were to cease producing and selling these
products, in order to continue to expand our Simplex service, we would either
have to acquire from Axonn the right to have the devices manufactured by
another vendor or develop devices that did not rely on Axonn’s proprietary
technology. We have no long-term commitments from Axonn for the production and
sale of these products.
Pursuing
strategic transactions may cause us to incur additional risks.
We may
pursue acquisitions, joint ventures or other strategic transactions on an
opportunistic basis. We may face costs and risks arising from any such
transactions, including integrating a new business into our business or managing
a joint venture. These may include legal, organizational, financial and other
costs and risks.
In
addition, if we were to choose to engage in any major business combination or
similar strategic transaction, we may require significant external financing in
connection with the transaction. Depending on market conditions, investor
perceptions of us and other factors, we may not be able to obtain capital on
acceptable terms, in acceptable amounts or at appropriate times to implement any
such transaction. Any such financing, if obtained, may further dilute our
existing stockholders.
Restrictive
covenants in our Facility Agreement impose restrictions that may limit our
operating and financial flexibility.
Our
Facility Agreement contains a number of significant restrictions and covenants
that limit our ability to:
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incur or guarantee additional
indebtedness;
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pay dividends or make
distributions to our
stockholders;
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make investments, acquisitions or
capital expenditures;
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repurchase or redeem capital
stock or subordinated
indebtedness;
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grant liens on our
assets;
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incur restrictions on the ability
of our subsidiaries to pay dividends or to make other payments to
us;
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enter into transactions with our
affiliates;
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merge or consolidate with other
entities or transfer all or substantially all of our assets;
and
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transfer
or sell assets.
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Complying
with these restrictive covenants, as well as the financial covenants in the
Facility Agreement and those that may be contained in any agreements governing
future indebtedness, may impair our ability to finance our operations or capital
needs or to take advantage of other favorable business opportunities. Our
ability to comply with these covenants will depend on our future performance,
which may be affected by events beyond our control. If we violate any of these
covenants and are unable to obtain waivers, we would be in default under the
agreement and payment of the indebtedness could be accelerated. The acceleration
of our indebtedness under one agreement may permit acceleration of indebtedness
under other agreements that contain cross-default or cross-acceleration
provisions. If our indebtedness is accelerated, we may not be able to repay our
indebtedness or borrow sufficient funds to refinance it. Even if we are able to
obtain new financing, it may not be on commercially reasonable terms or on terms
that are acceptable to us. If our indebtedness is in default for any reason, our
business, financial condition and results of operations could be materially and
adversely affected. In addition, complying with these covenants may also cause
us to take actions that are not favorable to holders of the common stock and may
make it more difficult for us to successfully execute our business plan and
compete against companies who are not subject to such restrictions. Furthermore,
our ability to draw on our credit facility is subject to conditions, including
that no default is continuing or would be likely to result from a proposed
plan.
Risks
Related to Our Common Stock
Recessionary
indicators and continued volatility in global economic conditions and the
financial markets have adversely affected and may continue to affect adversely
sales of our SPOT satellite GPS messenger.
The
volatility and disruption to the financial markets has reached unprecedented
levels and has significantly adversely impacted global economic conditions. As a
result, consumer confidence and demand have declined substantially. These
conditions could lead to further reduced consumer spending in the foreseeable
future, especially for discretionary travel and related products. A substantial
portion of the potential addressable market for our SPOT satellite GPS messenger
products and services relates to recreational users, such as mountain climbers,
campers, kayakers, sport fishermen and wilderness hikers. These potential
customers may reduce their activities due to economic conditions, which could
adversely affect our business, financial condition, results of operations and
liquidity. These disruptions have had and may continue to have a material
adverse effect on the market price of our Common Stock.
Failure
to satisfy NASDAQ Global Select Market listing requirements may result in our
common stock being removed from listing on the NASDAQ Global Select
Market.
Our
Common Stock is currently listed on the NASDAQ Global Select Market under the
symbol “GSAT.” For continued inclusion on the NASDAQ Global Select Market, we
must generally maintain, among other requirements, either (a) stockholders’
equity of at least $10 million, a minimum closing bid price of $1.00 per
share and a market value of our public float of at least $5 million; or
(b) market capitalization of at least $50 million, a minimum closing
bid price of $1.00 per share and a market value of our public float of at least
$15 million. On September 29, 2009, NASDAQ informed us that our Common
Stock was not in compliance with the minimum bid requirement and that we had a
grace period of 180 days, or until March 29, 2010, to regain compliance. For us
to regain compliance, anytime before March 29, 2010, the bid price of our Common
Stock must close at $1.00 per share or more for a minimum of 10 consecutive
business days. If we do not regain compliance with Rule 5450(a)(1) by March 29,
2010, we will be eligible for an additional 180 calendar day compliance
period if we meet The NASDAQ Capital Market initial listing criteria except
for the bid price requirement. If we are not eligible for an additional
compliance period, Nasdaq will provide us with written notification that our
Common Stock will be delisted. At that time, we may appeal NASDAQ's
determination to delist our Common Stock to the Listing Qualifications Panel. If
we do not satisfy the listing criteria for the NASDAQ Capital Market, trading of
our Common Stock may be conducted in the over-the-counter market in the
so-called “pink sheets” or, if available, the National Association of Securities
Dealer’s “Electronic Bulletin Board.” Consequently, broker-dealers may be less
willing or able to sell and/or make a market in our Common Stock, which may make
it more difficult for stockholders to dispose of, or to obtain accurate
quotations for the price of, our Common Stock. Removal of our Common Stock from
listing on NASDAQ may also make it more difficult for us to raise capital
through the sale of our securities.
In
addition, if our Common Stock is not listed on a U.S. national stock exchange,
such as NASDAQ, or approved for quotation and trading on a national automated
dealer quotation system or established automated over-the-counter trading
market, holders of our 5.75% Notes and our 8% Notes will have the
option to require us to repurchase the Notes, which we may not have sufficient
financial resources to do.
We
do not expect to pay dividends on our Common Stock in the foreseeable
future.
We do not
expect to pay cash dividends on our Common Stock. Any future dividend payments
are within the discretion of our board of directors and will depend on, among
other things, our results of operations, working capital requirements, capital
expenditure requirements, financial condition, contractual restrictions,
business opportunities, anticipated cash needs, provisions of applicable law and
other factors that our board of directors may deem relevant. We may not generate
sufficient cash from operations in the future to pay dividends on our Common
Stock. Our Facility Agreement currently prohibits the payment of cash
dividends.
The
market price of our Common Stock is volatile and there is a limited market for
our shares.
The
trading price of our Common Stock is subject to wide fluctuations. Factors
affecting the trading price of our common stock may include:
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actual
or anticipated variations in our operating
results;
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further
failure in the performance of our current or future satellites or a delay
in the launch of our second-generation
satellites;
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changes
in financial estimates by research analysts, or any failure by us to meet
or exceed any such estimates, or changes in the recommendations of any
research analysts that elect to follow our common stock or the common
stock of our competitors;
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actual
or anticipated changes in economic, political or market conditions, such
as recessions or international currency
fluctuations;
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actual
or anticipated changes in the regulatory environment affecting our
industry;
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actual
or anticipated sales of common stock by our controlling stockholder or
others;
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changes
in the market valuations of our industry peers;
and
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announcements
by us or our competitors of significant acquisitions, strategic
partnerships, divestitures, joint ventures or other strategic
initiatives.
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The
trading price of our Common Stock might also decline in reaction to events that
affect other companies in our industry even if these events do not directly
affect us. Our stockholders may be unable to resell their shares
of our Common Stock at or above the initial purchase price. Additionally,
because we are a controlled company there is a limited market for our Common
Stock and we cannot assure our stockholders that a trading market will
develop further or be maintained.
Trading
volume for our Common Stock historically has been low. Sales of significant
amounts of shares of our Common Stock in the public market could lower the
market price of our stock.
The
future issuance of additional shares of our Common Stock could cause dilution of
ownership interests and adversely affect our stock price.
We may in
the future issue our previously authorized and unissued securities, resulting in
the dilution of the ownership interests of our current stockholders. Following
our Annual Meeting on September 23, 2009, we are authorized to issue 1.0 billion
shares of common stock (135 million are designated as nonvoting), of which
approximately 152.6 million shares of Common Stock were issued
and outstanding as of September 30, 2009 and 847.4 million were available
for future issuance, of which approximately 205.6 million shares are reserved
for specific future issuances. The potential issuance of such additional shares
of Common Stock, whether directly or pursuant to any conversion right of any
convertible securities, may create downward pressure on the trading price of our
Common Stock. We may also issue additional shares of our Common Stock or other
securities that are convertible into or exercisable for Common Stock for capital
raising or other business purposes. Future sales of substantial amounts of
Common Stock, or the perception that sales could occur, could have a material
adverse effect on the price of our Common Stock.
We
have issued and may issue shares of preferred stock or debt securities with
greater rights than our Common Stock.
Subject
to the rules of The NASDAQ Global Select Market, our certificate of
incorporation authorizes our board of directors to issue one or more series of
preferred stock and set the terms of the preferred stock without seeking any
further approval from holders of our common stock. Currently, there are
100 million shares of preferred stock authorized and one share of
Series A Convertible Preferred Stock issued which has a $0.01 liquidity
preference and is convertible into shares of Common Stock. Any preferred stock
that is issued may rank ahead of our Common Stock in terms of dividends,
priority and liquidation premiums and may have greater voting rights than
holders of our Common Stock.
If
persons engage in short sales of our Common Stock, the price of our Common Stock
may decline.
Selling
short is a technique used by a stockholder to take advantage of an anticipated
decline in the price of a security. A significant number of short sales or a
large volume of other sales within a relatively short period of time can create
downward pressure on the market price of a security. Further sales of Common
Stock could cause even greater declines in the price of our Common Stock due to
the number of additional shares available in the market, which could encourage
short sales that could further undermine the value of our Common Stock. Holders
of our securities could, therefore, experience a decline in the value of their
investment as a result of short sales of our Common Stock.
Provisions
in our charter documents and credit agreement and provisions of Delaware law may
discourage takeovers, which could affect the rights of holders of our Common
Stock.
Provisions
of Delaware law and our amended and restated certificate of incorporation,
amended and restated bylaws and our Facility Agreement and indentures could
hamper a third party’s acquisition of us or discourage a third party from
attempting to acquire control of us. These provisions include:
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·
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the absence of cumulative voting
in the election of our directors, which means that the holders of a
majority of our Common Stock may elect all of the directors standing for
election;
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·
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the ability of our board of
directors to issue preferred stock with voting rights or with rights
senior to those of the Common Stock without any further vote or action by
the holders of our Common
Stock;
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·
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the division of our board of
directors into three separate classes serving staggered three-year
terms;
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·
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the ability of our stockholders,
at such time when Thermo does not own a majority of our outstanding
capital stock entitled to vote in the election of directors, to remove our
directors only for cause and only by the vote of at least 662/3% of the outstanding shares of
capital stock entitled to vote in the election of
directors;
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·
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prohibitions, at such time when
Thermo does not own a majority of our outstanding capital stock entitled
to vote in the election of directors, on our stockholders acting by
written consent;
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·
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prohibitions on our stockholders
calling special meetings of stockholders or filling vacancies on our board
of directors;
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·
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the requirement, at such time
when Thermo does not own a majority of our outstanding capital stock
entitled to vote in the election of directors, that our stockholders must
obtain a super-majority vote to amend or repeal our amended and restated
certificate of incorporation or
bylaws;
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·
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change of control provisions in
our Facility Agreement, which provide that a change of control will
constitute an event of default and, unless waived by the lenders, will
result in the acceleration of the maturity of all indebtedness under the
credit agreement;
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·
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change of control provisions
relating to our 5.75% Notes and 8% Notes, which provide that a change
of control will permit holders of the Notes to demand immediate repayment;
and
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change of control provisions in
our 2006 Equity Incentive Plan, which provide that a change of control may
accelerate the vesting of all outstanding stock options, stock
appreciation rights and restricted
stock.
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We also
are subject to Section 203 of the Delaware General Corporation Law, which,
subject to certain exceptions, prohibits us from engaging in any business
combination with any interested stockholder, as defined in that section, for a
period of three years following the date on which that stockholder became an
interested stockholder. This provision does not apply to Thermo, which became
our principal stockholder prior to our initial public offering.
These
provisions also could make it more difficult for you and our other stockholders
to elect directors and take other corporate actions, and could limit the price
that investors might be willing to pay in the future for shares of our common
stock.
We
are controlled by Thermo, whose interests may conflict with yours.
As of
September 30, 2009, Thermo owned approximately 50.1% of our outstanding
Common Stock and 69.9% of our voting power. Additionally, Thermo owns Series A
Preferred Stock, warrants and 8.00% Notes that may be converted into or
exercised for additional shares of Common Stock. Thermo is able to control the
election of all of the members of our board of directors and the vote on
substantially all other matters, including significant corporate transactions
such as the approval of a merger or other transaction involving our
sale.
We have
depended substantially on Thermo to provide capital to finance our business. In
2006 and 2007, Thermo purchased an aggregate of $200 million of our Common
Stock at prices substantially above market. On December 17, 2007, Thermo
assumed all of the obligations and was assigned all of the rights (other than
indemnification rights) of the administrative agent and the lenders under our
amended and restated credit agreement. In connection with fulfilling the
conditions precedent to our Facility Agreement, in June 2009, Thermo agreed
to convert the loans outstanding under the credit agreement into equity and
terminate the credit agreement. In addition, Thermo and its affiliates deposited
$60.0 million in a contingent equity account to fulfill a condition precedent
for borrowing under the Facility Agreement, purchased $11.4 million of our 8%
Notes, and loaned us $25.0 million to fund our debt service reserve account
under the Facility Agreement.
Thermo is
controlled by James Monroe III, our chairman. Through Thermo, Mr. Monroe
holds equity interests in, and serves as an executive officer or director of, a
diverse group of privately-owned businesses not otherwise related to us.
Although Mr. Monroe receives no compensation from us, he has advised us
that he intends to devote whatever portion of his time is necessary to perform
his duties as our chairman. We do reimburse Thermo and Mr. Monroe for
certain expenses they incur in connection with our business.
The
interests of Thermo may conflict with the interests of our other stockholders.
Thermo may take actions it believes will benefit its equity investment in us or
loans to us even though such actions might not be in your best interests as a
holder of our common stock.
As
a “controlled company,” as defined in the NASDAQ Marketplace Rules, we qualify
for, and rely on, exemptions from certain corporate governance
requirements.
Thermo
owns Common Stock representing more than a majority of the voting power in
election of our directors. As a result, we are considered a “controlled company”
within the meaning of the corporate governance standards in the NASDAQ
Marketplace Rules. Under these rules, a “controlled company” may elect not to
comply with certain corporate governance requirements, including the requirement
that a majority of its board of directors consist of independent directors, the
requirement that it have a nominating/corporate governance committee that is
composed entirely of independent directors with a written charter addressing the
committee’s purpose and responsibilities and the requirement that it have a
compensation committee that is composed entirely of independent directors with a
written charter addressing the committee’s purpose and responsibilities. We have
elected to be treated as a controlled company and thus utilize these exemptions.
As a result, we do not have a majority of independent directors nor do we have
compensation and nominating/corporate governance committees consisting entirely
of independent directors. Accordingly, you do not have the same protection
afforded to stockholders of companies that are subject to all of the NASDAQ
Marketplace corporate governance requirements.
Our
pre-emptive rights offering, which we may commence in the future, is not in
strict compliance with the technical requirements of our prior certificate of
incorporation.
Our
certificate of incorporation as in effect when we entered into the irrevocable
standby stock purchase agreement with Thermo in 2006 provided that stockholders
who are accredited investors (as defined under the Securities Act) were entitled
to pre-emptive rights with respect to the transaction with Thermo. We may offer
our stockholders as of June 15, 2006 who are accredited investors the
opportunity to participate in the transaction contemplated by the irrevocable
standby stock purchase agreement with Thermo on a pro rata basis on
substantially the same terms as Thermo. Some of our stockholders could allege
that the offering does not comply fully with the terms of our prior certificate
of incorporation. Although we believe any variance from the requirements of our
former certificate of incorporation is immaterial and that we had valid reasons
for delaying the pre-emptive rights offering until after our initial public
offering, a court may not agree with our position if these stockholders allege
that we have violated their pre-emptive rights. In that case, we cannot predict
the type of remedy the court could award such stockholders.
The
pre-emptive rights offering, which we are required to make to our existing
stockholders, will be done on a registered basis, and may negatively affect the
trading price of our stock.
The
pre-emptive rights offering will be made pursuant to a registration statement
filed with, and potentially reviewed by, the SEC. After giving effect to waivers
that we have already received, up to 785,328 shares of our Common Stock may be
purchased if the pre-emptive rights offering is fully subscribed. Such shares
may be purchased at approximately $16.17 per share, regardless of the trading
price of our Common Stock. The nature of the pre-emptive rights offering may
negatively affect the trading price of our Common Stock.
Item
4. Submission of Matters to a Vote of Security Holders
In
connection with the company's Annual Meeting of Stockholders held on September
23, 2009, our Board of Directors solicited proxies pursuant to Regulation 14A
under the Securities Exchange Act of 1934. The following votes (representing
83.6% of the shares eligible to vote) were cast at that meeting:
1.
Election of Class C Directors
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Votes
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Name
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For
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Withheld
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Peter
J. Dalton
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206,795,579 |
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975,902 |
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William
A. Hasler
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207,577,719 |
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193,762 |
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James
Monroe III
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206,828,706 |
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942,775 |
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2. Approval
of Amendment #1 to our Amended and Restated Certificate of Incorporation to
authorize an additional 200,000,000 shares of common stock and create a new
class of nonvoting common stock.
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Votes
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Broker
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For
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Against
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Abstain
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Non-Votes
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Approve
Amendment #1
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207,428,697 |
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312,105 |
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30,679 |
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0 |
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Item
6. Exhibits
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3.1*
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Amended
and Restated Certificate of Incorporation, as amended through September
24,2009 (Exhibit 3.1 to Current Report on Form 8-K filed September 29,
2009)
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10.1*
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Award
Agreement between Globalstar, Inc. and Peter J. Dalton dated September 23,
2009 (Exhibit 10.1 to Current Report on Form 8-K filed September 29,
2009)
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10.2†
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Amendment
#2 to Contract between Globalstar, Inc. and Hughes Network Systems
LLC dated August 28, 2009
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10.3†
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Amendment
#3 to Contract between Globalstar, Inc. and Hughes Network Systems
LLC dated September 21, 2009
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31.1
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Section
302 Certification of the Chief Executive
Officer
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31.2
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Section
302 Certification of the Chief Financial
Officer
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32.1
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Section
906 Certifications
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*
Incorporated by reference
† Portions
of the exhibit have been omitted pursuant to a request for confidential
treatment filed with the Commission. The omitted portions of the exhibit have
been filed with the Commission.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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GLOBALSTAR,
INC.
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By:
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/s/Peter J. Dalton
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Date:
November 6, 2009
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Peter
J. Dalton
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Chief
Executive Officer
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By:
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/s/ Fuad Ahmad
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Date:
November 6, 2009
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Fuad
Ahmad
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Senior
Vice President and Chief Financial
Officer
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