Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended June 30, 2010
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period
from to
Commission
file number 001-33117
GLOBALSTAR,
INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware
|
|
41-2116508
|
|
(State
or Other Jurisdiction of
|
|
(I.R.S.
Employer Identification No.)
|
|
Incorporation
or Organization)
|
|
|
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 if the Registrant is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer o
|
|
Accelerated
filer x
|
|
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|
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Non-accelerated
filer o
|
|
Smaller
reporting company x
|
|
(Do
not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
As of
July 30, 2010, 286,185,885 shares of voting common stock and 19,275,750 shares
of nonvoting common stock were outstanding. Unless the context otherwise
requires, references to common stock in this Report mean Registrant’s voting
common stock.
TABLE OF
CONTENTS
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Page
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PART I
- Financial Information
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3
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Item
1.
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Financial
Statements
|
3
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Consolidated
Statements of Operations for the three and six months ended June 30,
2010 and 2009 (unaudited)
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3
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Consolidated
Balance Sheets as of June 30, 2010 and December 31, 2009
(unaudited)
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4
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Consolidated
Statements of Cash Flows for the six months ended June 30, 2010 and
2009 (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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26
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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39
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Item
4.
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Controls
and Procedures
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40
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PART II
- Other Information
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40
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Item
1.
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Legal
Proceedings
|
40
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Item
1A.
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Risk
Factors
|
40
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Item
6.
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Exhibits
|
41
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Signatures
|
42
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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
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
2010
|
|
|
June 30,
2009
|
|
|
June 30,
2010
|
|
|
June 30,
2009
|
|
|
|
|
|
|
|
As Adjusted –
Note 1
|
|
|
|
|
|
As Adjusted –
Note 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenue
|
|
$ |
12,908 |
|
|
$ |
12,562 |
|
|
$ |
25,362 |
|
|
$ |
23,693 |
|
|
Subscriber
equipment sales
|
|
|
4,714 |
|
|
|
3,154 |
|
|
|
7,831 |
|
|
|
7,186 |
|
|
Total
revenue
|
|
|
17,622 |
|
|
|
15,716 |
|
|
|
33,193 |
|
|
|
30,879 |
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization shown separately
below)
|
|
|
6,974 |
|
|
|
7,961 |
|
|
|
14,592 |
|
|
|
18,369 |
|
|
Cost
of subscriber equipment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of subscriber equipment sales
|
|
|
3,477 |
|
|
|
2,832 |
|
|
|
5,989 |
|
|
|
5,827 |
|
|
Cost
of subscriber equipment sales — Impairment of assets
|
|
|
60 |
|
|
|
648 |
|
|
|
60 |
|
|
|
648 |
|
|
Total
cost of subscriber equipment sales
|
|
|
3,537 |
|
|
|
3,480 |
|
|
|
6,049 |
|
|
|
6,475 |
|
|
Marketing,
general, and administrative
|
|
|
10,122 |
|
|
|
11,408 |
|
|
|
18,334 |
|
|
|
25,385 |
|
|
Depreciation
and amortization
|
|
|
5,973 |
|
|
|
5,468 |
|
|
|
11,863 |
|
|
|
10,892 |
|
|
Total
operating expenses
|
|
|
26,606 |
|
|
|
28,317 |
|
|
|
50,838 |
|
|
|
61,121 |
|
|
Operating
loss
|
|
|
(8,984
|
) |
|
|
(12,601
|
) |
|
|
(17,645
|
) |
|
|
(30,242
|
) |
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
157 |
|
|
|
56 |
|
|
|
339 |
|
|
|
184 |
|
|
Interest
expense
|
|
|
(1,182
|
) |
|
|
(3,141
|
) |
|
|
(2,592
|
) |
|
|
(3,381
|
) |
|
Derivative
loss, net
|
|
|
(8,073
|
) |
|
|
(797 |
) |
|
|
(33,035
|
) |
|
|
(797 |
) |
|
Other
|
|
|
(1,132 |
) |
|
|
2,529 |
|
|
|
(1,859
|
) |
|
|
(1,446 |
) |
|
Total
other income (expense)
|
|
|
(10,230
|
) |
|
|
(1,353 |
) |
|
|
(37,147
|
) |
|
|
(5,440 |
) |
|
Loss
before income taxes
|
|
|
(19,214
|
) |
|
|
(13,954
|
) |
|
|
(54,792
|
) |
|
|
(35,682
|
) |
|
Income
tax expense (benefit)
|
|
|
35 |
|
|
|
(192 |
) |
|
|
99 |
|
|
|
(162 |
) |
|
Net
loss
|
|
$ |
(19,249 |
) |
|
$ |
(13,762 |
) |
|
$ |
(54,891 |
) |
|
$ |
(35,520 |
) |
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.07 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.31 |
) |
|
Diluted
|
|
|
(0.07
|
) |
|
|
(012
|
) |
|
|
(0.20
|
) |
|
|
(0.31
|
) |
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic
|
|
|
282,080 |
|
|
|
116,580 |
|
|
|
278,752 |
|
|
|
113,959 |
|
|
Diluted
|
|
|
282,080 |
|
|
|
116,580 |
|
|
|
278,752 |
|
|
|
113,959 |
|
See
accompanying notes to unaudited interim consolidated financial
statements.
GLOBALSTAR,
INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except par value and share data)
(Unaudited)
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
As Adjusted –
Note 1
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
87,188 |
|
|
$ |
67,881 |
|
|
Accounts
receivable, net of allowance of $5,263 (2010) and $5,735
(2009)
|
|
|
10,773 |
|
|
|
9,392 |
|
|
Inventory
|
|
|
59,366 |
|
|
|
61,719 |
|
|
Advances
for inventory
|
|
|
9,332 |
|
|
|
9,332 |
|
|
Prepaid
expenses and other current assets
|
|
|
4,396 |
|
|
|
5,404 |
|
|
Total
current assets
|
|
|
171,055 |
|
|
|
153,728 |
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,029,725 |
|
|
|
964,921 |
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
38,409 |
|
|
|
40,473 |
|
|
Deferred
financing costs
|
|
|
68,419 |
|
|
|
69,647 |
|
|
Other
assets, net
|
|
|
32,640 |
|
|
|
37,871 |
|
|
Total
assets
|
|
$ |
1,340,248 |
|
|
$ |
1,266,640 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
8,420 |
|
|
$ |
76,661 |
|
|
Accrued
expenses
|
|
|
26,529 |
|
|
|
30,520 |
|
|
Payables
to affiliates
|
|
|
696 |
|
|
|
541 |
|
|
Deferred
revenue
|
|
|
17,261 |
|
|
|
19,911 |
|
|
Current
portion of long term debt
|
|
|
— |
|
|
|
2,259 |
|
|
Total
current liabilities
|
|
|
52,906 |
|
|
|
129,892 |
|
|
|
|
|
|
|
|
|
|
|
|
Long
term debt
|
|
|
620,787 |
|
|
|
463,551 |
|
|
Employee
benefit obligations
|
|
|
4,483 |
|
|
|
4,499 |
|
|
Derivative
liabilities
|
|
|
66,618 |
|
|
|
49,755 |
|
|
Other
non-current liabilities
|
|
|
27,787 |
|
|
|
23,151 |
|
|
Total
non-current liabilities
|
|
|
719,675 |
|
|
|
540,956 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.0001 par value; 100,000,000 shares authorized and none issued
and outstanding:
|
|
|
|
|
|
|
|
|
|
Series A
Preferred Convertible Stock, $0.0001 par value: one share authorized and
none issued and outstanding
|
|
|
— |
|
|
|
— |
|
|
Voting
Common Stock, $0.0001 par value; 865,000,000 shares authorized
at June 30, 2010 and December 31, 2009, 285,483,000 shares issued and
outstanding at June 30, 2010; 274,384,000 shares issued and
outstanding at December 31, 2009
|
|
|
29 |
|
|
|
27 |
|
|
Nonvoting
Common Stock, $0.0001 par value; 135,000,000 shares authorized
at June 30, 2010 and December 31, 2009, 19,276,000 shares issued and
outstanding at June 30, 2010; 16,750,000 shares issued and
outstanding at December 31, 2009
|
|
|
2 |
|
|
|
2 |
|
|
Additional
paid-in capital
|
|
|
727,146 |
|
|
|
700,814 |
|
|
Accumulated
other comprehensive loss
|
|
|
(1,286
|
) |
|
|
(1,718
|
) |
|
Retained
deficit
|
|
|
(158,224
|
) |
|
|
(103,333
|
) |
|
Total
stockholders’ equity
|
|
|
567,667 |
|
|
|
595,792 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,340,248 |
|
|
$ |
1,266,640 |
|
See
accompanying notes to unaudited interim consolidated financial
statements.
GLOBALSTAR,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
|
Six Months Ended
|
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(54,891 |
) |
|
$ |
(35,520 |
) |
|
Adjustments
to reconcile net loss to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
11,863 |
|
|
|
10,892 |
|
|
Change
in fair value of derivative instruments and derivative
liabilities
|
|
|
33,035 |
|
|
|
797 |
|
|
Stock-based
compensation expense (benefit)
|
|
|
(810 |
) |
|
|
5,432 |
|
|
Loss
on disposal of fixed assets
|
|
|
4 |
|
|
|
53 |
|
|
Provision
for bad debts
|
|
|
(276 |
) |
|
|
334 |
|
|
Interest
income on restricted cash
|
|
|
— |
|
|
|
(115
|
) |
|
Contribution
of services
|
|
|
84 |
|
|
|
253 |
|
|
Cost
of subscriber equipment sales - impairment of assets
|
|
|
60 |
|
|
|
648 |
|
|
Amortization
of deferred financing costs
|
|
|
1,649 |
|
|
|
2,563 |
|
|
Loss
on debt to equity conversion
|
|
|
— |
|
|
|
305 |
|
|
Loss
in equity method investee
|
|
|
723 |
|
|
|
321 |
|
|
Changes
in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,489 |
) |
|
|
1,983 |
|
|
Inventory
|
|
|
2,731 |
|
|
|
2,295 |
|
|
Prepaid
expenses and other current assets
|
|
|
35 |
|
|
|
559 |
|
|
Other
assets
|
|
|
(714 |
) |
|
|
608 |
|
|
Accounts
payable
|
|
|
(358 |
) |
|
|
5,790 |
|
|
Payables
to affiliates
|
|
|
155 |
|
|
|
617 |
|
|
Accrued
expenses and employee benefit obligations
|
|
|
390 |
|
|
|
14,481 |
|
|
Other
non-current liabilities
|
|
|
817 |
|
|
|
(1,686
|
) |
|
Deferred
revenue
|
|
|
760 |
|
|
|
2,458 |
|
|
Net
cash from operating activities
|
|
|
(6,232 |
) |
|
|
13,068 |
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Spare
and second-generation satellites and launch costs
|
|
|
(117,322
|
) |
|
|
(78,444
|
) |
|
Second-generation
ground
|
|
|
(11,294
|
) |
|
|
(11
|
) |
|
Property
and equipment additions
|
|
|
(3,117
|
) |
|
|
(1,367
|
) |
|
Investment
in businesses
|
|
|
(1,108 |
) |
|
|
(144
|
) |
|
Restricted
cash
|
|
|
2,064 |
|
|
|
31,436 |
|
|
Net
cash from investing activities
|
|
|
(130,777
|
) |
|
|
(48,530
|
) |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Borrowings
from revolving credit loan
|
|
|
— |
|
|
|
7,750 |
|
|
Borrowings
from $55M Senior Convertible Notes
|
|
|
— |
|
|
|
55,000 |
|
|
Borrowings
under subordinated loan agreement
|
|
|
— |
|
|
|
5,000 |
|
|
Borrowings
under short term loan
|
|
|
— |
|
|
|
2,260 |
|
|
Proceeds
from equity contributions
|
|
|
— |
|
|
|
1,000 |
|
|
Proceeds
from exercise of warrants
|
|
|
4,385 |
|
|
|
— |
|
|
Borrowings
from facility agreement
|
|
|
151,024 |
|
|
|
— |
|
|
Deferred
financing cost payments
|
|
|
— |
|
|
|
(21,166
|
) |
|
Payments
for the interest rate cap instrument
|
|
|
— |
|
|
|
(12,425
|
) |
|
Net
cash from financing activities
|
|
|
155,409 |
|
|
|
37,419 |
|
|
Effect
of exchange rate changes on cash
|
|
|
907 |
|
|
|
1,723 |
|
|
Net
increase in cash and cash equivalents
|
|
|
19,307 |
|
|
|
3,680 |
|
|
Cash
and cash equivalents, beginning of period
|
|
|
67,881 |
|
|
|
12,357 |
|
|
Cash
and cash equivalents, end of period
|
|
$ |
87,188 |
|
|
$ |
16,037 |
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
8,769 |
|
|
$ |
6,228 |
|
|
Income
taxes
|
|
$ |
85 |
|
|
$ |
45 |
|
|
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
|
|
$ |
1,213 |
|
|
$ |
21,900 |
|
|
Capitalization
of accrued interest for spare and second-generation satellites and launch
costs
|
|
$ |
14,245 |
|
|
$ |
12,032 |
|
|
Vendor
financing of second-generation satellites
|
|
$ |
— |
|
|
|
11,977 |
|
|
Subordinated
loan
|
|
$ |
— |
|
|
$ |
10,000 |
|
|
Conversion
of debt to Common Stock
|
|
$ |
4,239 |
|
|
$ |
7,500 |
|
|
Amortization
and accrual of deferred financing costs
|
|
$ |
8,088 |
|
|
$ |
42,522 |
|
See
accompanying notes to unaudited interim consolidated financial
statements.
GLOBALSTAR,
INC.
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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 six months ended June 30, 2010 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, derivatives, warranty obligations, contingencies and
litigation. Actual results could differ from these estimates.
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 Form 10-K for the year ended
December 31, 2009, as amended by Form 8-K filed June 17, 2010. 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.
Issued
Accounting Pronouncements Recently Adopted
Accounting
for Own-Share Lending Arrangements in Contemplation of Convertible Debt
Issuance
Effective
January 1, 2010, the Company adopted the Financial Accounting Standards Board’s
(“FASB’s”) updated guidance on accounting for share loan facilities. This
guidance requires that share-lending arrangements be measured at fair value at
the date of issuance and recognized as debt issuance cost with an offset to
paid-in-capital. The issuance cost is required to be amortized as interest
expense over the life of the financing arrangement. Per Company policy, this
amortized debt issuance cost was capitalized as construction in process related
to our second generation satellite constellation and, therefore, included in
property and equipment, net on the Company’s Consolidated Balance Sheets. The
standard also requires additional disclosures including a description of the
terms of the arrangement and the reason for entering into the arrangement. As
described more fully in Note 13, Globalstar was obligated to lend up to 36.1
million shares of its common stock in conjunction with its 2008 $150.0 million
convertible debt issuance that is subject to the provisions of this updated
guidance.
The
Company has retrospectively revised the Consolidated Statement of Operations for
the three and six months ended June 30, 2009 and the Consolidated Balance Sheet
as of December 31, 2009 to reflect the adoption of this updated guidance. In
addition, the Company revised Notes 2, 4, and 13 to reflect the retrospective
adoption.
The
following table illustrates the impact of this adoption on the Company’s
Consolidated Balance Sheet as of December 31, 2009 and the Consolidated
Statement of Operations for the three and six months ended June 30,
2009:
|
|
|
As of December 31, 2009
|
|
|
|
|
As Originally
Reported
|
|
|
Effect
of Change
|
|
|
As Revised
|
|
|
|
|
(In thousands)
|
|
|
Property
and equipment, net
|
|
$ |
961,768 |
|
|
$ |
3,153 |
|
|
$ |
964,921 |
|
|
Deferred
financing costs
|
|
$ |
64,156 |
|
|
$ |
5,491 |
|
|
$ |
69,647 |
|
|
Additional
paid-in capital
|
|
$ |
684,539 |
|
|
$ |
16,275 |
|
|
$ |
700,814 |
|
|
Retained
deficit
|
|
$ |
(95,702 |
) |
|
$ |
(7,631 |
) |
|
$ |
(103,333 |
) |
|
|
|
Three Months Ended June 30, 2009
|
|
|
|
|
As Originally
Reported
|
|
|
Effect
of Change
|
|
|
As Revised
|
|
|
|
|
(In thousands)
|
|
|
Weighted
average shares outstanding – basic
|
|
|
133,880 |
|
|
|
(17,300 |
) |
|
|
116,580 |
|
|
Weighted
average shares outstanding – diluted
|
|
|
133,880 |
|
|
|
(17,300 |
) |
|
|
116,580 |
|
|
Basic
loss per share
|
|
$ |
(0.10 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.12 |
) |
|
Diluted
loss per share
|
|
$ |
(0.10 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.12 |
) |
|
|
|
Six Months Ended June 30, 2009
|
|
|
|
|
As Originally
Reported
|
|
|
Effect
of Change
|
|
|
As Revised
|
|
|
|
|
(In thousands)
|
|
|
Weighted
average shares outstanding – basic
|
|
|
131,259 |
|
|
|
(17,300 |
) |
|
|
113,959 |
|
|
Weighted
average shares outstanding – diluted
|
|
|
131,259 |
|
|
|
(17,300 |
) |
|
|
113,959 |
|
|
Basic
loss per share
|
|
$ |
(0.27 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.31 |
) |
|
Diluted
loss per share
|
|
$ |
(0.27 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.31 |
) |
Subsequent
Events
Effective
April 1, 2009, the Company adopted the FASB’s updated guidance related to
subsequent events, which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The updated
guidance initially required the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date — that is,
whether that date represents the date the financial statements were issued or
were available to be issued. However, in February 2010, the FASB amended the
guidance to remove the requirement to disclose the date through which subsequent
events were evaluated. Adoption of the updated guidance did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
Fair
Value Measurements and Disclosures
Effective
January 1, 2010, the Company adopted the FASB’s updated guidance related to fair
value measurements and disclosures, which requires a reporting entity to
disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and to describe the reasons for the
transfers. In addition, in the reconciliation for fair value measurements using
significant unobservable inputs, or Level 3, a reporting entity should disclose
separately information about purchases, sales, issuances and settlements (that
is, on a gross basis rather than one net number). The updated guidance also
requires that an entity should provide fair value measurement disclosures for
each class of assets and liabilities and disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and
non-recurring fair value measurements for Level 2 and Level 3 fair value
measurements. The guidance is effective for interim or annual financial
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances and settlements in the roll forward activity
in Level 3 fair value measurements, which are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years. Therefore, the Company has not yet adopted the guidance with respect to
the roll forward activity in Level 3 fair value measurements. Adoption of the
updated guidance did not have an impact on the Company’s consolidated results of
operations or financial condition.
Issued
Accounting Pronouncements Not Yet Adopted
In
October 2009, the FASB issued new guidance 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
materially impact its Consolidated Financial Statements.
In
October 2009, the FASB issued updated guidance 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.
2. Basic
and Diluted Loss Per Share
The
Company is required to present basic and diluted earnings per share. Basic
earnings per share is computed based on the weighted-average number of common
shares outstanding during the period. Common stock equivalents are included 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 June 30, 2010
|
|
|
Six Months Ended June 30, 2010
|
|
|
|
|
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
|
|
$ |
(19,249
|
) |
|
|
282,080 |
|
|
$ |
(0.07
|
) |
|
$ |
(54,891
|
) |
|
|
278,752 |
|
|
$ |
(0.20
|
) |
|
|
|
Three Months Ended June 30, 2009 (As Adjusted – Note 1)
|
|
|
Six Months Ended June 30, 2009 (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
|
|
$ |
(13,762
|
) |
|
|
116,580 |
|
|
$ |
(0.12
|
) |
|
$ |
(35,520
|
) |
|
|
113,959 |
|
|
$ |
(0.31
|
) |
For the
three and six month periods ended June 30, 2010 and 2009, 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.
See Note 13 for information on potentially dilutive shares.
At June
30, 2010 and 2009, 17.3 million Borrowed Shares related to the Company’s Share
Lending Agreement (See Note 13) remained outstanding. The Company does not
consider the Borrowed Shares outstanding for the purposes of computing and
reporting its earnings per share.
3. Acquisition
On
December 18, 2009, Globalstar entered into an agreement with Axonn L.L.C.
(“Axonn”) pursuant to which one of the Company’s wholly-owned subsidiaries
acquired certain assets and assumed certain liabilities of Axonn in exchange for
payment at closing of $1.5 million in cash, subject to a working capital
adjustment, and $5.5 million in shares of the Company’s voting common stock. Of
these amounts, $500,000 in cash was held in an escrow account to cover expenses
related to the voluntary replacement of first production models of the Company’s
second-generation SPOT satellite GPS messenger devices. Additionally, 2,750,000
shares of stock are held in escrow for any pre-acquisition contingencies not
disclosed during the transaction. Globalstar is also obligated to pay up to an
additional $10.8 million for earnout payments based on sales of existing and new
products over a five-year earnout period. As of December 31, 2009, the Company’s
best estimate of the total earnout was 100% or $10.8 million; consequently, the
Company accrued the fair value of that expected earnout or approximately $6.0
million. This estimate has not changed and nothing has been paid as
of June 30, 2010. Earnout payments will be made principally in stock (not to
exceed 10% of the Company’s pre-transaction outstanding common stock), but may
be paid in cash after 13 million shares have been issued at Globalstar’s option.
Prior to the acquisition, Axonn was the principal supplier of the SPOT satellite
GPS messenger products.
In
connection with the transaction described above, the Company issued 6,298,058
shares of voting common stock to Axonn and certain of its lenders under Section
4(2) of the Securities Act of 1933 as a transaction not involving a public
offering. The recipients may not sell any of these shares until the first
anniversary of the closing.
The
following table summarizes the Company’s initial allocation of the purchase
price to the assets acquired and liabilities assumed in the acquisition (in
thousands):
|
|
|
December 18,
2009
|
|
|
Accounts receivable
|
|
$ |
1,176 |
|
|
Inventory
|
|
|
2,897 |
|
|
Property and equipment
|
|
|
931 |
|
|
Intangible assets and
goodwill
|
|
|
10,303 |
|
|
Total assets acquired
|
|
$ |
15,307 |
|
|
Accounts payable and other
accrued liabilities
|
|
|
2,311 |
|
|
Total liabilities assumed
|
|
$ |
2,311 |
|
|
Net assets acquired
|
|
$ |
12,996 |
|
The
Company is accounting for the acquisition using the purchase method of
accounting. The Company allocated the total estimated purchase prices to net
tangible assets and identifiable intangible assets based on their fair values as
of the date of the acquisition, recording the excess of the purchase price over
those fair values as goodwill. The Company estimates that a portion of the final
purchase price will be allocated to goodwill because of the synergies within the
marketing organizations and the manufacturing expertise of Axonn. This
allocation is preliminary due to being unable to complete the valuation of the
earnout and certain assets prior to this Report’s filing date. This allocation
will be finalized within one year from the acquisition date.
The
Company has included the results of operations of Axonn in its consolidated
financial statements from the date of acquisition. The results of Axonn prior to
the acquisition are not material.
4. Property and
Equipment
Property
and equipment consist of the following (in thousands):
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
As Adjusted –
Note 1
|
|
|
Globalstar
System:
|
|
|
|
|
|
|
|
Space
component
|
|
$ |
132,982 |
|
|
$ |
132,982 |
|
|
Ground
component
|
|
|
30,991 |
|
|
|
31,623 |
|
|
Construction
in progress:
|
|
|
|
|
|
|
|
|
|
Second-generation
satellites, ground and related launch costs
|
|
|
924,315 |
|
|
|
852,466 |
|
|
Other
|
|
|
3,016 |
|
|
|
1,223 |
|
|
Furniture
and office equipment
|
|
|
22,035 |
|
|
|
20,316 |
|
|
Land
and buildings
|
|
|
4,214 |
|
|
|
4,308 |
|
|
Leasehold
improvements
|
|
|
830 |
|
|
|
823 |
|
|
|
|
|
1,118,383 |
|
|
|
1,043,741 |
|
|
Accumulated
depreciation
|
|
|
(88,658
|
) |
|
|
(78,820
|
) |
|
|
|
$ |
1,029,725 |
|
|
$ |
964,921 |
|
Property
and equipment consists of an in-orbit satellite constellation (including eight
spare satellites launched in 2007), 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 second-generation low-earth orbit satellites to
incorporate prior amendments and acceleration requests and to 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.
Upon closing of the Facility Agreement (See Note 13 “Borrowings”), amounts in
the escrow account became unrestricted and were reclassified 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 €9.8 million, consisting
primarily of €4.1 million for the Satellite Operations Control Centers, €3.6
million for the Telemetry Command Units and €2.1 million for the In Orbit Test
Equipment, with payments to be made on a quarterly basis through completion of
the Control Network Facility. The completion of the facility is now scheduled to
occur during the third 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 June 30,
2010 and December 31, 2009, the Company had no 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 (a) 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
(b) satellite interface chips to be a part of the User Terminal Subsystem (UTS)
in various next-generation Globalstar devices. In January 2010, the Company
issued an authorization to proceed on $2.7 million of new features which will
result in a revised total contract purchase price of approximately $103.5
million, payable in various increments over a period of 57 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. Capitalization of costs has begun based
upon reaching technological feasibility of the project. As of June 30, 2010, the
Company had made payments of $42.6 million under this contract and expensed $5.5
million of these payments, capitalized $32.1 million under second-generation
satellites, ground and related launch costs and $5.0 million is 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. In
December 2009, the Company amended this contract to increase its obligations by
$5.1 million for additional deliverables and features. According to the $27.8
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
June 30, 2010 and December 31, 2009, capitalized interest recorded was $97.2
million and $75.1 million, respectively. Interest capitalized during the three
months ended June 30, 2010 and 2009 was $11.9 million and $6.8 million,
respectively. Interest capitalized during the six months ended June 30, 2010 and
2009 was $23.1 million and $13.5 million, respectively.
Depreciation
and amortization expense for the three months ended June 30, 2010 and 2009 was
$6.0 million and $5.5 million, respectively. Depreciation and amortization
expense for the six months ended June 30, 2010 and 2009 was $11.9 million and
$10.9 million, respectively.
5. Payables
to Affiliates
Payables
to affiliates relate to normal purchase transactions, excluding interest, and
were $0.7 million and $0.5 million at June 30, 2010 and December 31, 2009,
respectively.
Thermo
incurs certain general and administrative expenses on behalf of the Company,
which are charged to the Company. For the three months ended June 30, 2010 and
2009, total expenses were approximately $30,000 and $44,000, respectively. For
the six months ended June 30, 2010 and 2009, total expenses were approximately
$81,000 and $87,000, respectively. For the three and six months ended June 30,
2010, the Company also recorded $42,000 and $84,000, respectively, of non-cash
expenses related to services provided by an executive officer of Thermo (who is
also a Director of the Company) who received no cash compensation from the
Company, which was accounted for as a contribution to capital. For the six
months ended June 30, 2009, the Company also recorded $253,000 of non-cash
expenses related to services provided by two executive officers of Thermo (who
are also Directors of the Company) who receive no cash compensation from the
Company, which were accounted for as a contribution to capital. The Thermo
expense charges are based on actual amounts incurred or upon allocated employee
time. Management believes the allocations are reasonable.
6. 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 June 30, 2010 and December 31, 2009, total advances to
Qualcomm for inventory were $9.2 million. As of June 30, 2010 and December 31,
2009, the Company had outstanding commitment balances of approximately $48.9
million and $49.4 million, respectively. On February 12, 2010, the Company
amended its agreement with Qualcomm to extend the term and defer delivery of
mobile phones and related equipment until June 2011 through February
2013.
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% Notes,
provided a $2.3 million short-term loan to the Company (which was subsequently
converted to nonvoting common stock), and loaned $25.0 million to the Company to
fund its debt service reserve account (See Note 13 “Borrowings”).
During
the three months ended June 30, 2010 and 2009, the Company purchased
approximately $0.6 million and $0.7 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 six month
periods ended June 30, 2010 and 2009 were approximately $1.3 million and $2.2
million, respectively.
7. 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
13) 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.
For the
period ending December 31, 2009, the net deferred tax assets were $0. For the
period ended June 30, 2010, the deferred tax assets continue to be fully
reserved.
The
Internal Revenue Service ("IRS") previously notified the Company that the
Company (formerly known as Globalstar LLC), one of its subsidiaries, and its
predecessor, Globalstar L.P., were under audit for the taxable years ending
December 31, 2005, December 31, 2004, and June 29, 2004, respectively. During
the taxable years at issue, the Company, its predecessor, and its subsidiary
were treated as partnerships for U.S. income tax purposes. In December 2009, the
IRS issued Notices of Final Partnership Administrative Adjustments related to
each of the taxable years at issue. The Company disagrees with the proposed
adjustments and is pursuing the matter through applicable IRS and judicial
procedures as appropriate.
During
April 2010, the Company received notification from the IRS that the Company's
2007 and 2008 returns were selected for examination. The field work
for this audit has commenced. The Company is not aware of any taxes
that it may be required to pay as a result of the examination.
Except
for the IRS audits noted above, neither the Company nor any of its subsidiaries
is currently under audit by the IRS or by any state jurisdiction in the United
States. But, the Company's corporate U.S. tax return for 2006 and subsequent
years and its U.S. partnership tax returns filed for years prior to 2006 remain
open and subject to examination by tax authorities. State income tax returns are
generally subject to examination for a period of three to five years after
filing of the respective return.
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.
Except
for the matters noted above, the Company is not aware of any audits or other
pending tax matters.
8. Comprehensive
Loss
Comprehensive
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
components of comprehensive loss were as follows (in thousands):
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net
loss
|
|
$ |
(19,249 |
) |
|
$ |
(13,762 |
) |
|
$ |
(54,891 |
) |
|
$ |
(35,520 |
) |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(635 |
) |
|
|
1,490 |
|
|
|
432 |
|
|
|
1,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
$ |
(19,884 |
) |
|
$ |
(12,272 |
) |
|
$ |
(54,459 |
) |
|
$ |
(33,936 |
) |
9. 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, 0.5 million restricted stock awards and restricted stock units
were granted during the three month period ended June 30, 2010. No grants were
made during the three month period ended June 30, 2009. Including
grants to both employees and executives, 1.3 million and less than 0.1 million
restricted stock awards and restricted stock units were granted during the six
month periods ended June 30, 2010 and 2009, respectively. The Company also
granted options to purchase approximately 0.5 million shares of common stock
during the six months ended June 30, 2010 compared to no options granted in the
six months ended June 30, 2009. In March 2010, 2.5 million shares of the
Company’s common stock were added to the shares available for issuance under the
Equity Plan.
10. 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. On February 22, 2010, the judge
entered an Order and Final Judgment approving the settlement. Because no appeal
from that Order was filed within the 30-days allowed for an appeal, the
settlement became final March 23, 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. A joint
notice of settlement was filed with the court on March 9, 2010. The court heard
the motion for settlement on March 29, 2010 and the parties subsequently
submitted a first amendment to the stipulated class settlement agreement on
April 2, 2010. The court granted preliminary approval, and the Company has
proceeded to implement the settlement. The Company has recorded a liability for
this settlement; however, the amount is not material.
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 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. The Company cannot determine when
the FCC might act on the petitions for 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, 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. In connection with the Company’s acquisition
of Axonn’s assets in December 2009, Axonn agreed to continue to be responsible
for this case, subject to certain limitations. The Company, Axonn and Sorensen
have settled the case. The amount is not material.
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. On February 11,
2010, the Company and Ymax agreed to settle the dispute on mutually acceptable
terms, and on February 17, 2010 the court approved the settlement. The Company
has recorded a liability for this settlement; however, the amount is not
material.
11. Geographic
Information
Revenue
by geographic location, presented net of eliminations for intercompany sales,
was as follows for the three and six month periods ended June 30, 2010 and
2009 (in thousands):
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Service:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
8,086 |
|
|
$ |
7,414 |
|
|
$ |
15,763 |
|
|
$ |
13,896 |
|
|
Canada
|
|
|
2,925 |
|
|
|
3,119 |
|
|
|
5,821 |
|
|
|
5,956 |
|
|
Europe
|
|
|
793 |
|
|
|
656 |
|
|
|
1,505 |
|
|
|
1,246 |
|
|
Central
and South America
|
|
|
1,007 |
|
|
|
1,288 |
|
|
|
2,084 |
|
|
|
2,435 |
|
|
Others
|
|
|
97 |
|
|
|
85 |
|
|
|
189 |
|
|
|
160 |
|
|
Total
service revenue
|
|
|
12,908 |
|
|
|
12,562 |
|
|
|
25,362 |
|
|
|
23,693 |
|
|
Subscriber
equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
3,193 |
|
|
|
1,405 |
|
|
|
5,355 |
|
|
|
2,928 |
|
|
Canada
|
|
|
849 |
|
|
|
725 |
|
|
|
1,373 |
|
|
|
2,102 |
|
|
Europe
|
|
|
423 |
|
|
|
247 |
|
|
|
600 |
|
|
|
468 |
|
|
Central
and South America
|
|
|
245 |
|
|
|
653 |
|
|
|
497 |
|
|
|
977 |
|
|
Others
|
|
|
4 |
|
|
|
124 |
|
|
|
6 |
|
|
|
711 |
|
|
Total
subscriber equipment revenue
|
|
|
4,714 |
|
|
|
3,154 |
|
|
|
7,831 |
|
|
|
7,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
17,622 |
|
|
$ |
15,716 |
|
|
$ |
33,193 |
|
|
$ |
30,879 |
|
12. Derivative
Instruments
In June
2009, in connection with entering into the Facility Agreement (See Note 13
“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 six-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 six-month Libor rate. The Company paid an approximately $12.4
million upfront fee for the interest rate cap agreements. The interest rate cap
did not qualify for hedge accounting treatment, and changes in the fair value of
the agreements are included in “Derivative loss, net” in the accompanying
Consolidated Statement of Operations.
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 Sheets with a corresponding debt discount which is netted against the
face value of the 8.00% Notes (See Note 13 “Borrowings”). The Company is
accreting 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 loss, net” 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 13 “Borrowings”), the Company recorded the warrants as
Other Non-Current Liabilities on its Consolidated Balance Sheets with a
corresponding debt discount which is netted against the face value of the 8.00%
Notes. The Company is accreting 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 loss, net” 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 13 “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 non-current
assets and is being amortized over the one-year availability period. 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 loss, net”
in the Consolidated Statements of Operations. The Company determined the fair
value of the Warrant derivative using a risk-neutral binomial
model.
None of
the derivative instruments described above was designated as a hedge. The
following tables disclose the fair value of the derivative instruments and their
impact on the Company’s Consolidated Statements of Operations (in
thousands):
|
|
|
June 30, 2010
|
|
December 31, 2009
|
|
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
|
Interest
rate cap derivative
|
|
Other
assets, net
|
|
$ |
1,516 |
|
Other
assets, net
|
|
$ |
6,801 |
|
|
Compound
embedded conversion option
|
|
Derivative
liabilities
|
|
|
(24,182 |
) |
Derivative
liabilities
|
|
|
(14,235 |
) |
|
Warrants
issued with 8.00% Notes
|
|
Derivative
liabilities
|
|
|
(34,445 |
) |
Derivative
liabilities
|
|
|
(27,711 |
) |
|
Warrants
issued with contingent equity agreement
|
|
Derivative
liabilities
|
|
|
(7,991 |
) |
Derivative
liabilities
|
|
|
(7,809 |
) |
|
Total
|
|
|
|
$ |
(65,102 |
) |
|
|
$ |
(42,954 |
) |
|
|
|
Three months ended June 30,
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
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 cap derivative
|
|
Derivative
loss, net
|
|
|
(2,117
|
) |
Derivative
loss, net
|
|
|
(4,094 |
) |
|
Compound
embedded conversion option
|
|
Derivative
loss, net
|
|
|
(3,589 |
) |
Derivative
loss, net
|
|
|
2,270 |
|
|
Warrants
issued with 8.00% Notes
|
|
Derivative
loss, net
|
|
|
(697 |
) |
Derivative
loss, net
|
|
|
1,027 |
|
|
Warrants
issued with contingent equity agreement
|
|
Derivative
loss, net
|
|
|
(1,670 |
) |
Derivative
loss, net
|
|
|
— |
|
|
Total
|
|
|
|
$ |
(8,073
|
) |
|
|
$ |
(797 |
) |
|
|
|
Six months ended June 30,
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
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 cap derivative
|
|
Derivative
loss, net
|
|
|
(5,285
|
) |
Derivative
loss, net
|
|
|
(4,094 |
) |
|
Compound
embedded conversion option
|
|
Derivative
loss, net
|
|
|
(11,109 |
) |
Derivative
loss, net
|
|
|
2,270 |
|
|
Warrants
issued with 8.00% Notes
|
|
Derivative
loss, net
|
|
|
(13,028 |
) |
Derivative
loss, net
|
|
|
1,027 |
|
|
Warrants
issued with contingent equity agreement
|
|
Derivative
loss, net
|
|
|
(3,613 |
) |
Derivative
loss, net
|
|
|
— |
|
|
Total
|
|
|
|
$ |
(33,035 |
) |
|
|
$ |
(797 |
) |
13. Borrowings
Current
portion of long term debt:
The
current portion of long term debt at December 31, 2009 consisted of a loan of
approximately $2.3 million from Thermo. In January 2010, Thermo converted its
short term debt of approximately $2.3 million (plus accrued interest) into
2,525,750 shares of nonvoting common stock.
Long
Term Debt:
Long term
debt consists of the following (in thousands):
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
5.75% Convertible Senior Notes
due 2028
|
|
$ |
55,833 |
|
|
$ |
53,359 |
|
|
8.00% Convertible Senior
Unsecured Notes
|
|
|
19,277 |
|
|
|
17,396 |
|
|
Facility Agreement
|
|
|
522,243 |
|
|
|
371,219 |
|
|
Subordinated loan
|
|
|
23,434 |
|
|
|
21,577 |
|
|
Total long term debt
|
|
$ |
620,787 |
|
|
$ |
463,551 |
|
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
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 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, as defined in the Agreement,
incurred by the Company to no more than $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 June 30, 2010, 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 is
accreting 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 its 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. The number of
shares subject to the warrants issuable is calculated by taking the outstanding
funds available in the contingent equity account multiplied by 10% divided by
the Company’s common stock price on valuation dates. The common stock price is
subject to a reset provision on certain valuation dates subsequent to issuance
whereby the common stock price used in the calculation will be the lower of the
Company’s common stock price on the issuance date and the valuation dates. The
Company issued Thermo a warrant to purchase 4,379,562 shares of Common Stock for
this fee at origination of the agreement and on December 31, 2009 issued an
additional warrant to purchase an additional 2,516,990 shares of common stock
due to the reset provisions in the agreement. On December 31, 2009, the common
stock price used to calculate the first tranche of warrants issued on June 19,
2009 was reset to $0.87. The price was subject to another reset on June 19, 2010
if the common stock price was lower than $0.87 per common share; due to the
price at that date being $1.74, there was no reset of this tranche.
On June
19, 2010, warrants covering 3,448,276 additional shares (equal to 10% of the
outstanding balance in the contingent equity account divided by the Company’s
common stock price on that date) were issued and will be subject to the reset
provision one year after initial issuance of the warrants. On June 19, 2011,
additional warrants covering a number of shares equal to 10% of the outstanding
balance in the contingent equity account divided by the Company’s common stock
price on that date will be issued and will be subject to the reset provision one
year after initial issuance of the warrants.
No voting
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 this liability as a component of
other non-current liabilities, at issuance. The corresponding benefit is
recorded in other assets, net and will be amortized over the one year of the
availability period. As of June 19, 2010, the warrants issued on June
19, 2009 and on December 31, 2009 were no longer variable and the related $11.9
million liability was reclassified to equity.
8.00%
Convertible Senior Notes
On June
19, 2009, the Company sold $55 million in aggregate principal amount of 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
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 began on December 19, 2009 and
will end on June 19, 2014.
In
December 2009, the Company issued stock at $0.87 per share, which is below the
initial set price of $1.80 per share, in connection with its acquisition of the
assets of Axonn. Given this transaction and the related provisions in the
warrant agreements, the holders of the Warrants received additional warrants to
purchase 16.2 million shares of common stock. Additionally, the conversion price
of the 8.00% Notes, which are convertible into shares of common stock, was reset
to $1.78 per share of common stock.
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 current base conversion price for
the 8.00% Notes is $1.78 per share or 562.2 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 June 30, 2010,
approximately $12.5 million of the 8.00% Notes had been converted resulting in
the issuance of approximately 11.7 million shares of common stock. At June 30,
2010 and December 31, 2009, $45.8 million and $44.3 million in 8.00% Notes
remained outstanding, respectively.
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
stockholders 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 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
Sheets with a corresponding debt discount which is netted with the face value of
the 8.00% Notes.
The
Company is accreting 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 is being marked-to-market at the end of each reporting
period, with any changes in value reported as “Derivative loss, net” 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 Sheets with a corresponding debt discount which is netted
with the face value of the 8.00% Notes. The Company is accreting 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 is marked-to-market at the end of each reporting
period, with any changes in value reported as “Derivative loss, net” 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 the 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.
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. In December 2009, the one share of Series A Preferred was converted
into 109,424,034 shares of voting common stock and 16,750,000 shares of
non-voting common stock.
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.
The
delayed draw term loan under the Wachovia facility bore an annual commitment fee
of 2.0% until drawn or terminated. Commitment fees related to the loans,
incurred during 2009 and 2008 were not material. 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 12
“Derivatives”).
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 June 30, 2010 and December 31, 2009, the balance in the
escrow account was $4.1 million and $6.2 million, respectively. 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 certain events occurring on or
prior to April 1, 2013 constituting a “make whole fundamental change” (as
defined below) will be entitled to an increase in the conversion rate as
specified in the indenture governing the 5.75% Notes. The number of additional
shares by which the applicable base conversion rate will be increased will be
determined by reference to the applicable table below and is based on the date
on which the make whole fundamental change becomes effective (the effective
date) and the price (the stock price) paid, or deemed paid, per share of the
Company’s common stock in the make whole fundamental change, subject to
adjustment as described below. If the holders of common stock receive only cash
in a make whole fundamental change, the stock price will be the cash amount paid
per share of the Company’s common stock. Otherwise, the stock price will be the
average of the closing sale prices of the Company’s common stock for each of the
10 consecutive trading days prior to, but excluding, the relevant effective
date.
The
events that constitute a make whole fundamental change are as
follows:
• Any “person” or “group” (as such terms
are used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
“beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a person shall be deemed to have beneficial ownership of all shares
that such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
voting stock representing 50% of more (or if such person is Thermo Capital
Partners LLC, 70% or more) of the total voting power of all outstanding voting
stock of the Company;
• The Company consolidates with, or
merges with or into, another person or the Company sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any person;
• The adoption of a plan of liquidation
or dissolution of the Company; or
• The Company’s common stock (or other
common stock into which the Notes are then convertible) is not listed on a
United States national securities exchange or approved for quotation and trading
on a national automated dealer quotation system or established automated
over-the-counter trading market in the United States.
The stock
prices set forth in the first column of the Make Whole Table below will be
adjusted as of any date on which the base conversion rate of the notes is
otherwise adjusted. The adjusted stock prices will equal the stock prices
applicable immediately prior to the adjusted multiplied by a fraction, the
numerator of which is the base conversion rate immediately prior to the
adjustment giving rise to the stock price adjustment and the denominator of
which is the base conversion rate as so adjusted. The base conversion rate
adjustment amounts set forth in the table below will be adjusted in the same
manner as the base conversion rate.
| |
|
|
Effective Date
Make Whole Premium (Increase in Applicable Base Conversion Rate)
|
|
|
Stock Price
on Effective
Date
|
|
|
April 15,
2008
|
|
|
April 1,
2009
|
|
|
April 1,
2010
|
|
|
April 1,
2011
|
|
|
April 1,
2012
|
|
|
April 1,
2013
|
|
| $ |
4.15 |
|
|
|
74.7818 |
|
|
|
74.7818 |
|
|
|
74.7818 |
|
|
|
74.7818 |
|
|
|
74.7818 |
|
|
|
74.7818 |
|
| $ |
5.00 |
|
|
|
74.7818 |
|
|
|
64.8342 |
|
|
|
51.4077 |
|
|
|
38.9804 |
|
|
|
29.2910 |
|
|
|
33.8180 |
|
| $ |
6.00 |
|
|
|
74.7818 |
|
|
|
63.9801 |
|
|
|
51.4158 |
|
|
|
38.2260 |
|
|
|
24.0003 |
|
|
|
0.4847 |
|
| $ |
7.00 |
|
|
|
63.9283 |
|
|
|
53.8295 |
|
|
|
42.6844 |
|
|
|
30.6779 |
|
|
|
17.2388 |
|
|
|
0.0000 |
|
| $ |
8.00 |
|
|
|
55.1934 |
|
|
|
46.3816 |
|
|
|
36.6610 |
|
|
|
26.0029 |
|
|
|
14.2808 |
|
|
|
0.0000 |
|
| $ |
10.00 |
|
|
|
42.8698 |
|
|
|
36.0342 |
|
|
|
28.5164 |
|
|
|
20.1806 |
|
|
|
11.0823 |
|
|
|
0.0000 |
|
| $ |
20.00 |
|
|
|
18.5313 |
|
|
|
15.7624 |
|
|
|
12.4774 |
|
|
|
8.8928 |
|
|
|
4.9445 |
|
|
|
0.0000 |
|
| $ |
30.00 |
|
|
|
10.5642 |
|
|
|
8.8990 |
|
|
|
7.1438 |
|
|
|
5.1356 |
|
|
|
2.8997 |
|
|
|
0.0000 |
|
| $ |
40.00 |
|
|
|
6.6227 |
|
|
|
5.5262 |
|
|
|
4.4811 |
|
|
|
3.2576 |
|
|
|
1.8772 |
|
|
|
0.0000 |
|
| $ |
50.00 |
|
|
|
4.1965 |
|
|
|
3.5475 |
|
|
|
2.8790 |
|
|
|
2.1317 |
|
|
|
1.2635 |
|
|
|
0.0000 |
|
| $ |
75.00 |
|
|
|
1.4038 |
|
|
|
1.1810 |
|
|
|
0.9358 |
|
|
|
0.6740 |
|
|
|
0.4466 |
|
|
|
0.0000 |
|
| $ |
100.00 |
|
|
|
0.4174 |
|
|
|
0.2992 |
|
|
|
0.1899 |
|
|
|
0.0985 |
|
|
|
0.0663 |
|
|
|
0.0000 |
|
The
actual stock price and effective date may not be set forth in the table above,
in which case:
• If the actual stock price on the
effective date is between two stock prices in the table or the actual effective
date is between two effective dates in the table, the amount of the base
conversion rate adjustment will be determined by straight-line interpolation
between the adjustment amounts set forth for the higher and lower stock prices
and the earlier and later effective dates, as applicable, based on a 365-day
year;
• If the actual stock price on the
effective date exceeds $100.00 per share of the Company’s common stock (subject
to adjustment), no adjustment to the base conversion rate will be made;
and
• If the actual stock price on the
effective date is less than $4.15 per share of the Company’s common stock
(subject to adjustment), no adjustment to the base conversion rate will be
made.
Notwithstanding
the foregoing, the base conversion rate will not exceed 240.9638 shares of
common stock per $1,000 principal amount of 5.75% Notes, subject to adjustment
in the same manner as the base conversion rate.
Except as
described above with respect to holders of 5.75% Notes who convert their 5.75%
Notes prior to April 1, 2013, 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 June 30, 2010 and December 31,
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 issued and
lent the Borrowed Shares to the Borrower as a share loan. The Borrowing Agent
acted 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. Upon adoption of
the FASB’s updated guidance on accounting for own-share lending arrangements
(Note 1), the share loan agreement was valued at $16.3 million and was
classified as deferred financing costs to be amortized utilizing the effective
interest rate method over a period of five years. The fair value of the Share
Loan was estimated using significant unobservable inputs as the difference
between the fair value of the shares loaned to the Borrower and the present
value of the shares to be returned and other consideration provided to the
Company, pursuant to the Share Lending Agreement. A Black-Scholes Option Pricing
model was used to estimate the value of the note holders’ right to convert the
5.75% Notes into shares of common stock under certain scenarios. A risk neutral
binomial model was also used to simulate possible stock price outcomes and the
probabilities thereof. In the fourth quarter of 2008, in accordance with the
conversion of a portion of the 5.75% Notes as described above, $7.6 million of
the unamortized deferred financing costs were written off reducing the gain from
extinguishment of debt in the Consolidated Statement of Operations for that
period. For the three months ended June 30, 2010 and 2009, approximately $0.4
million and $0.3 million of deferred financing costs were amortized and included
in the capitalized interest. For each of the six months ended June 30, 2010 and
2009, approximately $0.7 million of deferred financing costs were amortized and
included in the capitalized interest. At June 30, 2010, $4.7 million of the
deferred financing costs remain unamortized and approximately 17.3 million
Borrowed Shares valued at approximately $26.6 million remained
outstanding.
On the
date on which the Borrower is required to return Borrowed Shares, the purchase
of Common Stock by the Borrower in an amount equal to all or any portion of the
number of Borrowed Shares to be delivered to the Company shall (i) be prohibited
by any law, rules or regulation of any governmental authority to which it is or
would be subject, (ii) violate, or would upon such purchase likely violate, any
order or prohibition of any court, tribunal or other governmental authority,
(iii) require the prior consent of any court, tribunal or governmental authority
prior to any such repurchase or (iv) subject the Borrower, in the commercially
reasonable judgment of the Borrower, to any liability or potential liability
under any applicable federal securities laws (other than share transfers
pursuant to the Share Lending Agreement and Section 16(b) of the Exchange Act or
illiquidity in the market for Common Stock, each of (i), (ii), (iii) and (iv), a
“Legal Obstacle”), then, in each case, the Borrower shall immediately notify the
Company of the Legal Obstacle and the basis therefore, whereupon the Borrower’s
obligation to deliver Loaned Shares to the Company shall be suspended until such
time as no Legal Obstacle with respect to such obligations shall exist (a
“Repayment Suspension”). Following the occurrence of and during the continuation
of any Repayment Suspension, the Borrower shall use its reasonable best efforts
to remove or cure the Legal Obstacle as soon as practicable; provided that, the Company
shall promptly reimburse all costs and expenses (including legal counsel to the
Borrower) incurred or, at the Borrower’s election, provide reasonably adequate
surety or guarantee for any such costs and expenses that may be incurred by the
Borrower, in each case in removing or curing such Legal Obstacle. If the
Borrower is unable to remove or cure the Legal Obstacle within a reasonable
period of time under the circumstances, the Borrower shall pay the Company, in
lieu of the delivery of Borrowed Shares otherwise required to be delivered, an
amount in immediately available funds equal to the product of the Closing
Price as of the Business Day immediately preceding the date the Borrower makes
such payment and the number of Borrowed Shares otherwise required to be
delivered.
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.
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 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.
In May
2008, the FASB issued guidance regarding accounting for convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement). The guidance requires the liability and equity components of
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) to be separately accounted for in a manner
that reflects the issuer’s nonconvertible debt borrowing rate. As such, the
initial debt proceeds from the sale of the Company’s 5.75% Notes
are required to be allocated between a liability component and an equity
component as of the debt issuance date. The resulting debt discount is amortized
over the instrument’s expected life as additional non-cash interest
expense.
Upon
adoption of the accounting guidance the Company recorded a decrease in 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
2008 by reducing the net loss by approximately $52.9 million. At June 30, 2010
and 2009, the remaining term for amortization associated with debt discount was
approximately 33 and 45 months, respectively. The annual effective interest rate
utilized for the amortization of debt discount during the three and six months
ended June 30, 2010 and 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 months ended June 30, 2010 and 2009, was $2.3 million and $2.2
million, respectively, all of which was capitalized. The interest cost
associated with the coupon rate on the 5.75% Notes plus the corresponding debt
discount amortized during the six months ended June 30, 2010 and 2009, was $4.5
million and $4.4 million, respectively, all of which was capitalized. The
carrying amount of the equity and liability component, as of June 30, 2010 and
December 31, 2009, is presented below (in thousands)
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
Equity
|
|
$ |
54,675 |
|
|
$ |
54,675 |
|
|
Liability:
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
71,804 |
|
|
|
71,804 |
|
|
Unamortized
debt discount
|
|
|
(15,971 |
) |
|
|
(18,445 |
) |
|
Net
carrying amount of liability
|
|
$ |
55,833 |
|
|
$ |
53,359 |
|
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.
14. Fair
Value of Financial Instruments
The
Company measures its financial assets and liabilities on a recurring basis and
reports on a fair value basis ( Note 12 “Derivatives”). 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
derivative 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 Company utilizes valuation models that rely
exclusively on Level 3 inputs including, among other things: (i) the underlying
features of each item, including reset features, make whole premiums, etc. (see
Note 13); (ii) stock price volatility ranges from 34% – 117%; (iii)
risk-free interest rates ranges from 0.47% – 3.85%; (iv) dividend
yield of 0%; (v) conversion prices of $1.78; and (vi) market price at the
valuation date of $1.54.
The
following table presents the financial instruments that are carried at fair
value as of June 30, 2010 and December 31, 2009 (In
thousands):
|
|
|
Fair Value Measurements at June 30, 2010 using
|
|
|
|
|
Quoted
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Instruments
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total Balance
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate cap derivative
|
|
$ |
— |
|
|
$ |
1,516 |
|
|
$ |
— |
|
|
$ |
1,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other assets measured at fair value
|
|
|
— |
|
|
$ |
1,516 |
|
|
|
— |
|
|
|
1,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound
embedded conversion option
|
|
|
— |
|
|
|
— |
|
|
|
(24,182
|
) |
|
|
(24,182
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued with 8.00% Notes
|
|
|
— |
|
|
|
— |
|
|
|
(34,445
|
) |
|
|
(34,445
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued with contingent equity agreements
|
|
|
— |
|
|
|
— |
|
|
|
(7,991
|
) |
|
|
(7,991
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-current liabilities measured at fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(66,618
|
) |
|
$ |
(66,618
|
) |
|
|
|
Fair Value Measurements at December 31, 2009 using
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Balance
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate cap derivative
|
|
$
|
—
|
|
|
$
|
6,801
|
|
|
$
|
—
|
|
|
$
|
6,801
|
|
|
Total
other assets measured at fair value
|
|
|
—
|
|
|
$
|
6,801
|
|
|
|
—
|
|
|
|
6,801
|
|
|
Other
non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound
embedded conversion option
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,235
|
)
|
|
|
(14,235
|
)
|
|
Warrants
issued with 8.00% Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,711
|
)
|
|
|
(27,711
|
)
|
|
Warrants
issued with contingent equity agreements
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,809
|
)
|
|
|
(7,809
|
)
|
|
Total
non-current liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(49,755
|
)
|
|
$
|
(49,755
|
)
|
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
six months ended June 30, 2010 as follows (in thousands):
|
Balance
at March 31, 2010
|
|
$
|
(70,387
|
)
|
|
Issuance
of contingent equity warrant liability
|
|
|
(8,510
|
)
|
|
Derivative
adjustment related to conversions and exercises
|
|
|
5,842
|
|
|
Contingent
equity liability reclassed to equity
|
|
|
11,940
|
|
|
Unrealized
loss, included in derivative loss, net on the income
statement
|
|
|
(5,503
|
)
|
|
Balance
at June 30, 2010
|
|
$
|
(66,618
|
)
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$
|
(49,755
|
)
|
|
Issuance
of contingent equity warrant liability
|
|
|
(8,510
|
)
|
|
Derivative
adjustment related to conversions and exercises
|
|
|
7,004
|
|
|
Contingent
equity liability reclassed to equity
|
|
|
11,940
|
|
|
Unrealized
loss, included in derivative loss, net on the income
statement
|
|
|
(27,297
|
)
|
|
Balance
at June 30, 2010
|
|
$
|
(66,618
|
)
|
The
following table presents 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 months
ended June 30, 2009 as follows (amounts in thousands):
|
Balance
at March 31, 2009
|
|
$ |
— |
|
|
Issuance
of compound embedded conversion option and warrants
liabilities
|
|
|
(42,333 |
) |
|
Unrealized
gain, included in derivative loss, net
|
|
|
3,297 |
|
|
Balance
at June 30, 2009
|
|
$ |
(39,036 |
) |
15. Subsequent
Events
Executive
Officer Changes
Upon the
filing of this Report, Fuad Ahmad will cease to be Chief Financial Officer, but
he will remain with the Company as Senior Vice President of Corporate
Development and Strategy. On July 12, 2010, the
Board of Directors elected Dirk J. Wild to become Chief Financial Officer
effective upon filing this Report.
Dirk J.
Wild (age 42) has been Senior Vice President of Finance since July
2010. He has served in several positions with The Shaw Group Inc., a
global provider of technology, engineering, procurement and facilities
management services since 2001, including as Senior Vice President
Administration from December 2007 to June 2010, Interim Chief Financial Officer
from May 2007 to October 2007, and Senior Vice President and Chief Accounting
Officer from October 2004 to December 2007. Mr. Wild is a Certified
Public Accountant (Louisiana).
Mr. Wild
does not have any family relationship with any director or executive officer of
Globalstar and has not been directly or indirectly involved in any transactions
with the Company.
Headquarter
Relocation
On July
13, 2010, the Company announced that it will be re-locating its corporate
headquarters to Covington, LA. In addition, Globalstar’s product
development center, the company’s international customer care operations, call
center and other global business functions including finance, accounting, sales,
marketing and corporate communications will move to
Louisiana.
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 anticipated capital spending (including for
future satellite procurements and launches), 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 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, commercial acceptance of our
new Simplex products, including our SPOT satellite GPS messenger TM
products, problems relating to the ground-based facilities operated by us or by
independent gateway operators, worldwide economic, geopolitical and business
conditions and risks associated with doing business on a global basis 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 described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009.
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, 2009, as amended by our Current Report on Form 8-K filed
June 17, 2010.
Overview
Globalstar,
Inc. (we, us or the Company) is a leading provider of mobile voice and data
communications services via satellite. By providing wireless services in areas
not served or underserved by terrestrial wireless and wireline networks, we seek
to address our customers’ increasing desire for connectivity. Currently, using
44 in-orbit satellites and 27 ground stations, which we refer to as gateways, we
offer voice and data communications services in over 120 countries. We also sell
communication services on a wholesale basis to independent companies which
operate 13 of these gateways which we refer to as independent gateway operators
or IGOs.
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 “Risk Factors” in our Annual Report on Form 10-K
filed on March 12, 2010, 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 most have degraded, which causes our network to be compromised and
which materially and adversely affects our business, prospects and
profitability” in our Annual Report on Form 10-K filed March 12,
2010.
• Launch
delays. A
major earthquake in Italy in April 2009 damaged Thales’ satellite component
fabrication facility in L’Aquila, Italy. Although none of our satellites or
components were damaged, the delivery of some of our satellites has been
delayed. 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. We currently expect the first of four launches of six
second-generation satellites each to take place in October 2010 and the fourth
launch to be completed in the summer 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 and our access to
capital.
•
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 commenced offering satellite services to
handheld devices in the United States in 2010, and several competitors, such as
ICO Global (currently reorganizing under Chapter 11 of the U.S. Bankruptcy Code
and now called DBSD North America) 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 77%
of our total assets at June 30, 2010 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
June 30, 2010, 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. Prior to our
acquisition of Axxon’s assets, virtually all engineering, research and
development costs of these new products have been 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 TM . 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. 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 almost
three years in North America and substantially less time in foreign markets. The
long-term commercial success of the products and services globally cannot be
assured.
•
Fluctuations
in currency rates.
A substantial portion of our revenue (36% for the three and six
month periods ended June 30, 2010) 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 are the first market entrant through our contract with Open
Range described below. In addition, we are considering a range of additional
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.
In
October 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. In December 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 has 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 three years, some of which are conditional upon
Open Range electing to use all of the licensed spectrum covered by the
agreement. Commercial availability began in selected markets in November 2009.
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 availability of continued financing, 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.
In April
2008, the FCC extended the portion of our spectrum for which we have ATC
authorization from 11MHz to a total of 19.275 MHz, 7.775 MHz of which is in the
L-band and 11.5 MHz is in the S-band. Pursuant to the FCC’s decision, by certain
dates in 2010 and 2011, we must meet, or secure from the FCC a waiver, of
certain of the FCC’s applicable authorization, or “gating” requirements. In
December 2009, we asked the FCC to delay these dates by 16 months predicated on
the delay in delivery of our second generation satellites because of the
earthquake in L’Aquila, Italy discussed above. We have responded to various FCC
requests for additional information, and the FCC has provided a second extension
of our time frame for Open Range to use our spectrum until September 15, 2010,
while the FCC continues its consideration of our December 2009
request. If the FCC does not rule in our favor on the full extension,
or does not provide additional temporary extensions, it may require Open Range
to suspend utilization of our spectrum.
Service and Subscriber 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 six month periods ended June 30, 2010 and 2009 (In
thousands).
|
|
|
Three months ended
June 30, 2010
|
|
|
Three months ended
June 30, 2009
|
|
|
Six months ended
June 30, 2010
|
|
|
Six months ended
June 30, 2009
|
|
|
|
|
Revenue
|
|
|
% of Total
Revenue
|
|
|
Revenue
|
|
|
% of Total
Revenue
|
|
|
Revenue
|
|
|
% of Total
Revenue
|
|
|
Revenue
|
|
|
% of Total
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
|
|
$ |
5,501 |
|
|
|
31 |
% |
|
$ |
6,780 |
|
|
|
43
|
% |
|
$ |
10,902 |
|
|
|
33
|
% |
|
$ |
13,286 |
|
|
|
43
|
% |
|
Fixed
|
|
|
433 |
|
|
|
2 |
|
|
|
636 |
|
|
|
4 |
|
|
|
897 |
|
|
|
3 |
|
|
|
1,250 |
|
|
|
4 |
|
|
Data
|
|
|
144 |
|
|
|
1 |
|
|
|
144 |
|
|
|
1 |
|
|
|
290 |
|
|
|
1 |
|
|
|
290 |
|
|
|
1 |
|
|
Simplex
|
|
|
4,871 |
|
|
|
28 |
|
|
|
2,998 |
|
|
|
19 |
|
|
|
9,174 |
|
|
|
27 |
|
|
|
5,562 |
|
|
|
18 |
|
|
IGO
|
|
|
356 |
|
|
|
2 |
|
|
|
469 |
|
|
|
3 |
|
|
|
572 |
|
|
|
2 |
|
|
|
836 |
|
|
|
3 |
|
|
Other(1)
|
|
|
1,603 |
|
|
|
9 |
|
|
|
1,535 |
|
|
|
10 |
|
|
|
3,527 |
|
|
|
10 |
|
|
|
2,469 |
|
|
|
8 |
|
|
Total
Service Revenue
|
|
|
12,908 |
|
|
|
73 |
|
|
|
12,562 |
|
|
|
80 |
|
|
|
25,362 |
|
|
|
76 |
|
|
|
23,693 |
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriber
Equipment Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
|
|
|
477 |
|
|
|
3 |
|
|
|
606 |
|
|
|
4 |
|
|
|
808 |
|
|
|
3 |
|
|
|
1,619 |
|
|
|
5 |
|
|
Fixed
|
|
|
42 |
|
|
|
— |
|
|
|
36 |
|
|
|
— |
|
|
|
79 |
|
|
|
— |
|
|
|
113 |
|
|
|
— |
|
|
Data
and Simplex
|
|
|
4,031 |
|
|
|
23 |
|
|
|
2,445 |
|
|
|
16 |
|
|
|
6,918 |
|
|
|
21 |
|
|
|
4,296 |
|
|
|
14 |
|
|
Accessories/Misc.
|
|
|
164 |
|
|
|
1 |
|
|
|
67 |
|
|
|
— |
|
|
|
26 |
|
|
|
— |
|
|
|
1,158 |
|
|
|
4 |
|
|
Total
Subscriber Equipment Sales
|
|
|
4,714 |
|
|
|
27 |
|
|
|
3,154 |
|
|
|
20 |
|
|
|
7,831 |
|
|
|
24 |
|
|
|
7,186 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
$ |
17,622 |
|
|
|
100 |
% |
|
$ |
15,716 |
|
|
|
100
|
% |
|
$ |
33,193 |
|
|
|
100
|
% |
|
$ |
30,879 |
|
|
|
100
|
% |
|
(1)
|
Includes
engineering services and activation
fees
|
Subscribers and ARPU for the three
and six months ended June 30, 2010 and 2009. The following table set
forth our average number of subscribers and ARPU for retail, IGO and Simplex
customers for the three and six months ended June 30, 2010 and 2009. The
following numbers are subject to immaterial rounding inherent in calculating
averages.
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Net
Change
|
|
|
2010
|
|
|
2009
|
|
|
% Net
Change
|
|
|
Average
number of subscribers for the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
105,830 |
|
|
|
112,922 |
|
|
|
(6
|
)% |
|
|
105,884 |
|
|
|
113,693 |
|
|
|
(7 |
)
% |
|
IGO
|
|
|
62,389 |
|
|
|
71,378 |
|
|
|
(13
|
) |
|
|
63,135 |
|
|
|
72,381 |
|
|
|
(13
|
) |
|
Simplex
|
|
|
234,947 |
|
|
|
179,877 |
|
|
|
31 |
|
|
|
228,743 |
|
|
|
171,393 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARPU
(monthly):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
23.11 |
|
|
$ |
25.80 |
|
|
|
(10
|
) |
|
$ |
23.23 |
|
|
$ |
24.44 |
|
|
|
(5
|
) |
|
IGO
|
|
$ |
1.90 |
|
|
$ |
2.19 |
|
|
|
(13
|
) |
|
$ |
1.51 |
|
|
$ |
1.93 |
|
|
|
(22
|
) |
|
Simplex
|
|
$ |
6.85 |
|
|
$ |
5.53 |
|
|
|
24
|
% |
|
$ |
6.65 |
|
|
$ |
5.40 |
|
|
|
23
|
% |
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
% Net Change
|
|
|
Ending
number of subscribers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
106,682 |
|
|
|
112,113 |
|
|
|
(5
|
)% |
|
IGO
|
|
|
60,978 |
|
|
|
69,491 |
|
|
|
(12
|
) |
|
Simplex
|
|
|
244,635 |
|
|
|
189,879 |
|
|
|
29 |
|
|
Total
|
|
|
412,295 |
|
|
|
371,483 |
|
|
|
11
|
% |
The total
number of net subscribers increased from approximately 371,000 at June 30,
2009 to approximately 412,000 at June 30, 2010. As a result of the net
increase in our total customer base of 11% from June 30, 2009 to
June 30, 2010, our total service revenue increased for the same period.
This is due primarily to increases in our Simplex business which experienced
increases in ARPU and customer base. These gains in our Simplex business are
being offset as we are still experiencing communication issues in our duplex
business, which we expect to continue until our second generation satellite
constellation is fully operational in 2011.
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. 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 June
2009, we entered into a business transfer agreement (BTA Agreement) with LG
Dacom, the independent gateway operator in Korea, to acquire its gateway and
other Globalstar assets for approximately $1 million in cash. In January 2010,
we entered into a joint venture agreement with Arion Communications Co. This
joint venture assumed the BTA Agreement and completed the Korean acquisition in
the second quarter of 2010. 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, 2009, except as described in Note 13 to the Unaudited Interim
Consolidated Financial Statements in Part I Item I of this Report, which
describes our accounting policy for measuring the fair value of our Share
Lending Agreement in accordance with ASU 2009-15.
Recently
Issued Accounting Pronouncements
See Note
1 to the Unaudited Interim Consolidated Financial Statements in Part I Item I of
this Report for information on the new accounting standards relevant to
us.
Results
of Operations
Comparison
of Results of Operations for the Three Months Ended June 30, 2010 and 2009
(in thousands):
|
|
|
Three months ended
June 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Service
revenue
|
|
$ |
12,908 |
|
|
$ |
12,562 |
|
|
|
3
|
% |
|
Subscriber
equipment sales
|
|
|
4,714 |
|
|
|
3,154 |
|
|
|
49 |
|
|
Total
revenue
|
|
|
17,622 |
|
|
|
15,716 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization shown separately
below)
|
|
|
6,974 |
|
|
|
7,961 |
|
|
|
12 |
|
|
Cost
of subscriber equipment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of subscriber equipment sales
|
|
|
3,477 |
|
|
|
2,832 |
|
|
|
(23
|
) |
|
Cost
of subscriber equipment sales — Impairment of assets
|
|
|
60 |
|
|
|
648 |
|
|
|
91 |
|
|
Total
cost of subscriber equipment sales
|
|
|
3,537 |
|
|
|
3,480 |
|
|
|
(2
|
) |
|
Marketing,
general and administrative
|
|
|
10,122 |
|
|
|
11,408 |
|
|
|
11 |
|
|
Depreciation
and amortization
|
|
|
5,973 |
|
|
|
5,468 |
|
|
|
(9
|
) |
|
Total
operating expenses
|
|
|
26,606 |
|
|
|
28,317 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(8,984
|
) |
|
|
(12,601
|
) |
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
157 |
|
|
|
56 |
|
|
|
180 |
|
|
Interest
expense
|
|
|
(1,182
|
) |
|
|
(3,141
|
) |
|
|
62 |
|
|
Derivative
loss
|
|
|
(8,073
|
) |
|
|
(797 |
) |
|
|
(913 |
) |
|
Other
income (expense)
|
|
|
(1,132 |
) |
|
|
2,529 |
|
|
|
N/A |
|
|
Total
other income (expense)
|
|
|
(10,230
|
) |
|
|
(1,353 |
) |
|
|
(656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(19,214
|
) |
|
|
(13,954
|
) |
|
|
(38 |
) |
|
Income
tax (benefit) expense
|
|
|
35 |
|
|
|
(192 |
) |
|
|
N/A |
|
|
Net
loss
|
|
$ |
(19,249 |
) |
|
$ |
(13,762 |
) |
|
|
(40 |
)% |
Revenue. Total
revenue increased by approximately $1.9 million, or 12%, to $17.6 million for
the three months ended June 30, 2010, from $15.7 million for the three
months ended June 30, 2009. The primary reason for the increase is the
focus on equipment sales related to our Simplex products. The increase in our
Simplex sales was partially offset by decreases in service revenue and equipment
sales in our duplex business. Our duplex business is being affected by our
two-way communication issues and, despite our efforts to maintain our duplex
subscriber base by lowering prices for our duplex products, our duplex
subscriber base decreased 6% during the three months ended June 30, 2010
compared to the corresponding period in 2009.
Our ARPU
for Simplex during the three months ended June 30, 2010, increased by 24% to
$6.85 from $5.53 for the same period in 2009. This increase resulted from a
shift in product mix to our higher priced SPOT satellite GPS messenger products
compared to other Simplex products. During the twelve-month period from June 30,
2009 to June 30, 2010 our overall net subscribers increased by approximately
41,000.
Service Revenue. Service
revenue increased $0.3 million, or approximately 3%, to $12.9 million
for the three months ended June 30, 2010, from $12.6 million for the
same period in 2009. This increase is attributed to growth in our Simplex
subscriber base and our Simplex ARPU increasing at 31% and 24%, respectively. In
particular, increased service revenue was generated from our SPOT Satellite GPS
messenger services as a result of additional SPOT service subscribers and prior
year SPOT service subscribers’ renewing their annual subscriptions. These gains
in Simplex were partially offset by a decrease in our duplex business resulting
from our two-way communication issues and, in response, reductions of our prices
for duplex services.
Subscriber Equipment Sales.
Subscriber equipment sales increased by approximately $1.5 million, or 49%,
to $4.7 million for the three months ended June 30, 2010, from
$3.2 million for the same period in 2009. The increase was due primarily to
a 64% increase in sales of our Simplex products and services during the three
months ended June 30, 2010 when compared to the three months ended June 30,
2009.
Operating
Expenses. Total operating expenses decreased $1.7 million, or
approximately 6%, to $26.6 million for the three months ended June 30,
2010, from $28.3 million for the same period in 2009. This decrease was due to
reductions in our headcount, lower marketing and advertising costs and various
other operating expense reductions throughout the Company.
Cost of Services. Our cost of
services for the three months ended June 30, 2010 and 2009, was
$7.0 million and $8.0 million, respectively. Our cost of services
comprises primarily of network operating costs. This decrease was due primarily
to an adjustment to stock-based compensation expense related to restricted stock
unit grants that were forfeited when an executive left the Company in January
2010.
Cost of Subscriber Equipment Sales.
Cost of subscriber equipment sales increased approximately
$0.1 million, or 2%, to $3.5 million for the three months ended
June 30, 2009. This increase was due primarily to increased sales of our
simplex products. This was partially offset by a decrease in the impairment of
assets in the three months ended June 30, 2010 when compared to the three months
ended June 30, 2009 due to the first generation equipment being mostly reserved
against by the end of June 30, 2009.
Marketing, General and
Administrative. Marketing, general and administrative expenses decreased
approximately $1.3 million, or 11%, to $10.1 million for the three
months ended June 30, 2010, from $11.4 million for the same period in
2009. This decrease was due primarily to an adjustment to stock-based
compensation expense related to restricted stock unit grants that were forfeited
when an executive left the Company in January 2010. Also, stock based
compensation was lower in the three months ended June 30, 2010 when compared to
the three months ended June 30, 2009 due to our primary stock compensation plan
becoming fully vested in March 2010. Additionally, other employee related
expenses decreased due to the reduction in headcount since June
2009.
Depreciation and
Amortization. Depreciation and amortization expense increased
approximately $0.5 million for the three months ended June 30, 2010
from the same period in 2009. The increase relates to the amortization of the
intangible assets acquired from Axonn in December 2009.
Operating
Loss. Operating loss decreased approximately
$3.6 million, to $9.0 million, for the three months ended
June 30, 2010, from $12.6 million for the same period in 2009. This
decrease resulted primarily from the 12% increase in revenue in the three months
ended June 30, 2010, when compared to the three months ended June 30, 2009, the
lower cost of services and the decreased marketing, general and administrative
expenses described above.
Interest Income. Interest
income increased by approximately $0.1million, to $0.2 million, for the
three months ended June 30, 2010, from $0.1 million for the same
period in 2009 due to higher average cash balances on hand.
Interest Expense. Interest
expense decreased by $1.9 million, to $1.2 million, for the three months ended
June 30, 2010, from $3.1 million for the same period in 2009. This decrease
resulted from higher expenses due to our deferred financing costs related to our
financing in June 2009.
Derivative loss. Derivative
losses increased by $7.3 million for the three months ended June 30, 2010
to a loss of $8.1 million, as compared to a loss of $0.8 million during the same
period in 2009. These losses are due primarily to the fair market value
adjustment to our derivative liabilities such as those embedded in our 8% Notes,
warrants issued in conjunction with our 8% Notes, warrants issued to Thermo for
our contingent equity agreement and subordinated loan agreement and the fair
value adjustment of our interest rate cap agreements. Higher stock prices raise
the fair value of the derivative liabilities and our stock price has risen 13%
at June 30, 2010 compared to March 31, 2010. This increase in the
derivative liabilities is considered a loss on our Statement of Operations;
however, these expenses related to derivatives are non-cash and do not affect
our liquidity.
Other Income (Expense). Other
income (expense) generally consists of foreign exchange transaction gains and
losses. Other income (expense) decreased by $3.7 million for the three
months ended June 30, 2010, as compared to the same period in 2009, due
primarily to the unfavorable change in the exchange rate of the Canadian dollar
during the three months ended June 30, 2010.
Income Tax Expense. Income
tax expense for the three months ended June 30, 2010 was less than
$0.1 million compared to a benefit of $0.2 million during the
same period in 2009.
Net Loss.
Our net loss increased approximately $5.4 million, to a loss of
$19.2 million, for the three months ended June 30, 2010, from a net
loss of $13.8 million for the same period in 2009. This increase in our net
loss despite our improved operating performance is driven primarily by the
derivative losses described above.
Comparison
of Results of Operations for the Six Months Ended June 30, 2010 and 2009
(in thousands):
|
|
|
Six months ended
June 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Service
revenue
|
|
$ |
25,362 |
|
|
$ |
23,693 |
|
|
|
7 |
% |
|
Subscriber
equipment sales
|
|
|
7,831 |
|
|
|
7,186 |
|
|
|
9 |
|
|
Total
revenue
|
|
|
33,193 |
|
|
|
30,879 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization shown separately
below)
|
|
|
14,592 |
|
|
|
18,369 |
|
|
|
21 |
|
|
Cost
of subscriber equipment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of subscriber equipment sales
|
|
|
5,989 |
|
|
|
5,827 |
|
|
|
(3 |
) |
|
Cost
of subscriber equipment sales — Impairment of assets
|
|
|
60 |
|
|
|
648 |
|
|
|
91 |
|
|
Total
cost of subscriber equipment sales
|
|
|
6,049 |
|
|
|
6,475 |
|
|
|
7 |
|
|
Marketing,
general and administrative
|
|
|
18,334 |
|
|
|
25,385 |
|
|
|
28 |
|
|
Depreciation
and amortization
|
|
|
11,863 |
|
|
|
10,892 |
|
|
|
(9 |
) |
|
Total
operating expenses
|
|
|
50,838 |
|
|
|
61,121 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(17,645 |
) |
|
|
(30,242 |
) |
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
339 |
|
|
|
184 |
|
|
|
84 |
|
|
Interest
expense
|
|
|
(2,592 |
) |
|
|
(3,381 |
) |
|
|
23 |
|
|
Derivative
loss
|
|
|
(33,035 |
) |
|
|
(797 |
) |
|
|
(4,045 |
) |
|
Other
income (expense)
|
|
|
(1,859 |
) |
|
|
(1,446 |
) |
|
|
(28 |
) |
|
Total
other income (expense)
|
|
|
(37,147 |
) |
|
|
(5,440 |
) |
|
|
(583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
loss before income taxes
|
|
|
(54,792 |
) |
|
|
(35,682 |
) |
|
|
(54 |
) |
|
Income
tax (benefit) expense
|
|
|
99 |
|
|
|
(162 |
) |
|
|
N/A |
|
|
Net
loss
|
|
$ |
(54,891 |
) |
|
$ |
(35,520 |
) |
|
|
(55 |
)% |
Revenue. Total
revenue increased by $2.3 million, or approximately 7%, from $30.9 million for
the six months ended June 30, 2009 to $33.2 million for the six months
ended June 30, 2010. We attribute this increase to higher service and
equipment revenues as a result of gains in our Simplex subscriber base and
increases in our ARPU for Simplex products. The increase in our Simplex sales
was partially offset by decreases in service revenue and equipment sales in our
duplex business. Our duplex business is being affected by our two-way
communication issues and, despite our efforts to maintain our duplex subscriber
base by lowering prices for our duplex products, our duplex subscriber base
decreased 5% at June 30, 2010 compared to June 30, 2009. In contrast, our
Simplex subscriber base increased by 29% for the same period.
Our ARPU
for Simplex during the six months ended June 30, 2010, increased by 23% to $6.65
from $5.40 for the same period in 2009. This increase resulted from a shift in
product mix to our higher priced SPOT Satellite GPS messenger products compared
to other Simplex products.
Service Revenue. Service
revenue increased $1.7 million, or approximately 7%, from $23.7 million for the
six months ended June 30, 2009 to $25.4 million for the six months ended
June 30, 2010. This increase is attributed to our Simplex subscriber base
and our Simplex ARPU increasing at 33% and 23%, respectively. In particular,
increased service revenue was generated from our SPOT Satellite GPS messenger
services as a result of additional SPOT service subscribers and prior year SPOT
service subscribers’ renewing their annual subscriptions. These gains in Simplex
were partially offset by a decrease in our duplex business resulting from our
two-way communication issues and, in response, reductions of our prices for
duplex services.
Subscriber Equipment Sales.
Subscriber equipment sales increased by approximately $0.6 million, or
approximately 9%, from $7.2 million for the six months ended June 30, 2009
to $7.8 million for the six months ended June 30, 2010. The increase was
due primarily to a 63% increase in sales of our Simplex products and services
during the six months ended June 30, 2010 when compared to the six months
ended June 30, 2009.
Operating
Expenses. Total operating expenses decreased $10.3 million, or
approximately 17%, from $61.1 million for the six months ended June 30,
2009 to $50.8 million for the six months ended June 30, 2010. This decrease
was due primarily to an adjustment to stock-based compensation expense related
to restricted stock unit grants that were forfeited when two executives left the
Company in January 2010, 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 six months ended June 30, 2010 and 2009 was $14.6 million
and $18.4 million, respectively. Our cost of services is comprised
primarily of network operating costs, which are generally fixed in nature. This
decrease was due primarily to an adjustment to stock-based compensation expense
related to restricted stock unit grants that were forfeited when an executive
left the Company in January 2010.
Cost of Subscriber Equipment Sales.
Cost of subscriber equipment sales decreased $0.4 million, or
approximately 7%, from $6.5 million for the six months ended June 30, 2009
to $6.1 million for the six months ended June 30, 2010. This
decrease was due primarily to a decrease in the impairment of assets in the six
months ended June 30, 2010 when compared to the six months ended June 30, 2009
due to the first generation equipment being mostly reserved against by the end
of June 30, 2009.
Marketing, General and
Administrative. Marketing, general and administrative expenses decreased
$7.1 million, or approximately 28%, from $25.4 million for the six months ended
June 30, 2009 to $18.3 million for the six months ended June 30, 2010.
This decrease was due primarily to an adjustment to stock-based compensation
expense related to restricted stock unit grants that were forfeited when an
executive left the Company in January 2010, to reductions in our contract labor,
lower marketing and advertising costs and to decreases in payroll and related
expenses as our average headcount decreased in the six months ended June 30,
2010, when compared to the same period in 2009.
Depreciation and Amortization.
Depreciation and amortization expense increased approximately $1.0
million, or approximately 9%, from $10.9 million for the six months ended
June 30, 2009 to $11.9 million for the six months ended June 30, 2010.
The increase relates to the amortization of the intangible assets acquired from
Axonn in December 2009.
Operating Loss.
Our operating loss of $17.6 million for the six months ended
June 30, 2010 decreased approximately $12.6 million from an operating loss
of $30.2 million for the six months ended June 30, 2009. This decrease
resulted primarily from the 7% increase in revenue in the six months
ended June 30, 2010, when compared to the six months ended June 30, 2009, the
lower cost of services and the decreased marketing, general and the
administrative expenses described above.
Interest Income. Interest
income increased by $0.1 million for the six months ended June 30, 2010 to
$0.3 million due to higher average cash balances on hand when compared to the
same period in 2009.
Interest Expense. Interest
expense decreased by $0.8 million, to $2.6 million for the six months ended
June 30, 2010 from $3.4 million for the six months ended June 30,
2009. This decrease resulted from higher expenses due to our deferred financing
costs related to financings prior to our recapitalization in June
2009.
Derivative loss. Derivative
loss increased by $32.2 million for the six months ended June 30, 2010, as
compared to the same period in 2009. These losses are due primarily to the fair
value adjustment to our derivative liabilities such as those embedded in our 8%
Notes, warrants issued in conjunction with our 8% Notes, warrants issued to
Thermo for our contingent equity agreement and subordinated loan agreement and
the fair value adjustment of our interest rate cap agreements. Higher stock
prices raise the fair market value of the derivative liabilities and our stock
price has risen 77% at June 30, 2010 compared to December 31, 2009.
This increase in the derivative liabilities is considered a loss on our
Statement of Operations; however, these expenses related to derivatives are
non-cash costs and do not affect our liquidity.
Other Income (Expense). Other
income (expense) generally consists of foreign exchange transaction gains and
losses. Other expense decreased by $0.4 million for the six months ended
June 30, 2010 as compared to the same period in 2009 due primarily to the
unfavorable change in the exchange rate of the Canadian dollar during the six
months ended June 30, 2010.
Income Tax (Benefit) Expense.
Income tax expense for the six months ended June 30, 2010 was $0.1
million compared to a benefit of $0.2 million during the same period in
2009.
Net Loss.
Our net loss increased approximately $19.4 million to a loss of $54.9
million for the six months ended June 30, 2010 from a net loss of $35.5
million for the six months ended June 30, 2009. This increase in our net
loss, despite our improved operating performance, is driven primarily by the
derivative losses described above.
Liquidity
and Capital Resources
The
following table shows our cash flows from operating, investing, and financing
activities for the six months ended June 30, 2010 and 2009:
|
|
|
Six Months Ended
June 30, 2010
|
|
|
Six Months Ended
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
Net
cash from operating activities
|
|
$ |
(6,232 |
) |
|
$ |
13,068 |
|
|
Net
cash from investing activities
|
|
|
(130,777
|
) |
|
|
(48,530
|
) |
|
Net
cash from financing activities
|
|
|
155,409 |
|
|
|
37,419 |
|
|
Effect
of exchange rate changes on cash
|
|
|
907 |
|
|
|
1,723 |
|
|
Net
increase in cash and cash equivalents
|
|
$ |
19,307 |
|
|
$ |
3,680 |
|
Currently,
our principal sources of liquidity are our Facility Agreement (described below)
and our existing cash.
At
July 1, 2010, 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
€121.3 million payable to Thales Alenia Space by June 2011 under the
purchase contract for our second-generation satellites and €0.9 million
payable to Thales Alenia Space by June 2011 under the contract for
construction of the Control Network Facility,
respectively;
|
|
|
·
|
to
make payments related to our launch for the second-generation satellite
constellation in the amount of $57.1 million payable to our Launch
Provider by June 30, 2011;
|
|
|
·
|
to
make payments related to the construction of our second-generation ground
component in the amount of $28.2 million by June 30, 2011;
and
|
|
|
·
|
to
fund our working capital.
|
During
the six months ended June 30, 2010 and the year ended December 31,
2009, our principal sources of liquidity were:
|
Dollars in millions
|
|
Six Months Ended
June 30, 2010
|
|
|
Year Ended
December 31, 2009
|
|
|
Cash
on-hand at beginning of period
|
|
$ |
67.9 |
|
|
$ |
12.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under Facility Agreement
|
|
$ |
151.0 |
|
|
$ |
371.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from 8.00% convertible senior unsecured notes
|
|
$ |
— |
|
|
$ |
51.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from exercise of warrants
|
|
$ |
4.4 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Thermo equity purchases
|
|
$ |
— |
|
|
$ |
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under Thermo Funding credit agreement and other debt, net
|
|
$ |
— |
|
|
$ |
35.0 |
|
We plan
to fund our short-term liquidity requirements from the following
sources:
|
|
·
|
cash
from our Facility Agreement ($64.1 was available at June 30, 2010);
and
|
|
|
·
|
excess
cash on hand at June 30, 2010.
|
Our
principal long-term liquidity needs are:
|
|
·
|
to
pay the costs of procuring and deploying 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;
|
|
|
·
|
to
fund the cash requirements of our independent gateway operator acquisition
strategy, in an amount not determinable at this time;
and
|
|
|
·
|
to
fund repayment of our indebtedness when
due.
|
Sources
of long-term liquidity may include, if necessary, a $34.3 million debt service
reserve account and related $12.5 million guarantee, a $60.0 million contingent
equity account established in connection with the Facility Agreement, the
exercise of warrants and additional debt and equity financings which have not
yet been arranged. 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 at least the next 12 months.
Net
Cash from Operating Activities
Net cash
from operating activities during the six months ended June 30, 2010
decreased to a cash outflow of $6.2 million from an inflow of
$13.1 million in the same period in 2009. This decrease was due primarily
to unfavorable changes in operating assets and liabilities partially offset by
higher revenues during the six months ended June 30, 2010, as compared to
the same period in 2009.
Net
Cash from Investing Activities
Cash used
in investing activities was $130.8 million during the six months ended
June 30, 2010, compared to $48.5 million during the same period in
2009. This increase in cash used for the six months ended June 30, 2010 when
compared to the six months ended June 30, 20009 was primarily the result of
increased payments related to the construction of our second generation
constellation during the six months ended June 30, 2010.
Net
Cash from Financing Activities
Net cash
provided by financing activities increased by $118.0 million to
$155.4 million during the six months ended June 30, 2010, from
$37.4 million during the same period in 2009. The increase was due
primarily to our need to fund the construction of our second generation
satellite constellation and related ground facilities. We funded these
activities by borrowing under our Facility Agreement. We spent approximately
$129 million on these projects during the six months ended June 30, 2010
compared to approximately $78 million in the six months ended June 30, 2009. We
also made approximately $34 million in non-recurring debt
financing payments in the six months ended June 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 $1.3 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 expenditures incurred through June 30, 2010. 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
June 30,
|
|
|
Estimated Future Payments
|
|
|
Contract
|
|
of Payment
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Thales
Alenia Second Generation Constellation
|
|
EUR
|
|
€ |
408 |
|
|
€ |
61 |
|
|
€ |
88 |
|
|
€ |
56 |
|
|
€ |
66 |
|
|
€ |
679 |
(1) |
|
Thales
Alenia Satellite Operations Control Centers
|
|
EUR
|
|
€ |
9 |
|
|
€ |
1 |
|
|
€ |
— |
|
|
€ |
— |
|
|
€ |
— |
|
|
€ |
10 |
(1) |
|
Arianespace
Launch Services
|
|
USD
|
|
$ |
189 |
|
|
$ |
13 |
|
|
$ |
14 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
216 |
|
|
Launch
Insurance
|
|
USD
|
|
$ |
1 |
|
|
$ |
11 |
|
|
$ |
28 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
40 |
|
|
Hughes
second-generation ground component (including research and development
expense)
|
|
USD
|
|
$ |
43 |
|
|
$ |
8 |
|
|
$ |
37 |
|
|
$ |
16 |
|
|
$ |
— |
|
|
$ |
104 |
|
|
Ericsson
|
|
USD
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
8 |
|
|
$ |
15 |
|
|
$ |
3 |
|
|
$ |
28 |
|
(1) Of these amounts, all but €227 million
is payable at a fixed exchange rate of €1.00 = $1.42.
Cash
Position and Indebtedness
As of
June 30, 2010, our total cash and cash equivalents were $87.2 million and
we had total indebtedness of $620.8 million compared to total cash and cash
equivalents and total indebtedness at December 31, 2009 of $67.9 million
and $465.8 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 COFACE
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 Arianespace for launch services, Hughes
Networks Systems LLC for ground network equipment, software and satellite
interface chips and Ericsson Federal Inc. 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
June 30, 2010, 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
13 of our Unaudited Interim Consolidated Financial Statements for descriptions
of our other debt agreements.
Contractual
Obligations and Commitments
There have been no significant changes
to our contractual obligations and commitments since December 31,
2009.
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.
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 June 30, 2010, 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
|
(a)
|
Evaluation
of disclosure controls and
procedures.
|
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 June 30, 2010, 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 June 30, 2010 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 six months ended
June 30, 2010.
|
(b)
|
Changes
in internal control over financial
reporting.
|
As of
June 30, 2010, 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 June 30, 2010, 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
10 of the Notes to 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 in this Report and all of the
other reports that we file from time to time with the Securities and Exchange
Commission (“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 in this Report may
adversely affect our business in ways we do not currently anticipate. Our
financial condition or results of operations also could be materially adversely
affected by any of these risks. With the exception of the risk outlined below,
there have been no material changes to the risk factors disclosed in Part I.
Item 1A.”Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2009, as filed with the SEC on March 12, 2010.
The
failure to attract and retain skilled personnel could impair our
operations.
In July
2010, we announced our intention to relocate substantial portions of our
operations to a facility in Louisiana. This may lead to significant personnel
turnover in all areas of our business. Our performance is substantially
dependent on the performance of our senior management and key scientific and
technical personnel. The employment of these individuals and our
other personnel is terminable at will with short or no notice. The
loss of the services of any member of our senior management, scientific or
technical staff may significantly delay or prevent the achievement of business
objectives by diverting management’s attention to transition matters and
identification of suitable replacements, and could have a material adverse
effect on our business, operating results and financial condition.
Item
6. Exhibits
|
Number
|
|
Description
|
|
4.1
|
|
Form
of Amendment to Warrant to Purchase Common Stock (Exhibit 4.1 to Current
Report on Form 8-K filed June 4, 2010)
|
|
31.1
|
|
Section
302 Certification of the Chief Executive Officer
|
|
31.2
|
|
Section
302 Certification of the Chief Financial Officer
|
|
32.1
|
|
Section
906 Certifications
|
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.
|
|
GLOBALSTAR,
INC.
|
|
|
|
|
|
By:
|
/s/Peter J. Dalton
|
|
Date:
August 6, 2010
|
|
Peter
J. Dalton
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
By:
|
/s/ Fuad Ahmad
|
|
Date:
August 6, 2010
|
|
Fuad
Ahmad
|
|
|
|
Senior
Vice President and Chief Financial
Officer
|