UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
Report (Date of earliest event reported): June 17, 2010
GLOBALSTAR,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
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001-33117
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41-2116508
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(State
or Other Jurisdiction
of
Incorporation)
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(Commission
File
Number)
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(IRS
Employer
Identification
No.)
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461
South Milpitas Blvd. Milpitas, California
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95035
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (408) 933-4000
N/A
(Former
Name or Former Address, if Changed Since Last Report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
o Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
o Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
o Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
Item
8.01 Other Events.
Certain
sections of the Annual Report on Form 10-K for the fiscal year ended
December 31, 2009 (the “2009 Form 10-K”) of
Globalstar, Inc. (the “Company”) are hereby superseded to reflect the
Company’s adoption of Financial Accounting Standards Board updated guidance on
accounting for share loan facilities. This guidance was adopted by the Company
in January 2010 and required retrospective application. The impact of this
adoption is discussed in detail in Note 19 to the Company’s Consolidated
Financial Statements for the year ended December 31, 2009, which are
attached hereto as Exhibit 99.3.
The
attached exhibits contain the portions of the Company’s 2009 Form 10-K that
are affected by this adoption. Exhibit 99.1 reflects changes made to Item 6
— Selected Financial
Data. Exhibit 99.2 reflects changes made to Item 7 — Management’s Discussion and Analysis
of Financial Condition and Results of Operations. Exhibit 99.3
contains Item 8 — Financial
Statements and Supplementary Data, which includes the complete set of
consolidated financial statements from the Company’s 2009 Form 10-K as
recast for the retrospective application of this updated guidance. These recast
financial statements are now a part of the Company’s historical financial
statements.
The
information presented in Exhibits 99.1, 99.2, 99.3 and 99.4 to this current
report on Form 8-K updates the information set forth in Items 6, 7, and 8
of the 2009 Form 10-K for the year ended December 31, 2009 and in the
related consent of the Company’s independent registered public accounting firm.
None of the exhibits to this current report on Form 8-K reflects events
after the filing of the Company’s 2009 Form 10-K, and none of such exhibits
modifies or updates the disclosure in its 2009 Form 10-K other than to
reflect the changes relating to the retrospective adoption of the updated
guidance on share loan facilities. As the Company has not modified or updated
any other disclosures presented in its 2009 Form 10-K, all of such
disclosures only refer to conditions existing as of the date of the Company’s
2009 Form 10-K.
Item
9.01 Financial Statements and Exhibits.
(d) Exhibits.
Exhibit
Number
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Description
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99.1
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2009
Form 10-K, Item 6 — Selected Financial
Data
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99.2
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2009
Form 10-K, Item 7 — Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
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99.3
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2009
Form 10-K, Item 8 — Financial Statements and
Supplementary Data
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99.4
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Consent
of Crowe Horwath LLP, Independent Registered Public Accounting
Firm
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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 hereunto
duly authorized.
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GLOBALSTAR,
INC.
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/s/
Fuad Ahmad
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Fuad
Ahmad
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Senior
Vice President and
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Chief
Financial Officer
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Date:
June 17, 2010
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Unassociated Document
Exhibit
99.1
Item
6. Selected Financial Data
The
following table presents our selected historical consolidated financial
information and other data for the last five years, and as of December 31, 2009,
2008, 2007, 2006 and 2005. Our selected historical consolidated financial data
for the years ended December 31, 2006 and 2005 and as of December 31, 2007, 2006
and 2005 has been derived from our audited consolidated balance sheets as of
those dates, which are not included in this Report.
You
should read the selected historical consolidated financial data set forth below
together with our consolidated financial statements and the related notes and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” all included in Items 6 and 7 of this Report. The selected
historical consolidated financial data set forth below are not necessarily
indicative of the results of future operations.
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Year Ended December 31,
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2009
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2008
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2007
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2006
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2005
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(Dollars in thousands)
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Statement of Operations Data:
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Revenue:
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Service revenue
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$
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50,228
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$
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61,794
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$
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78,313
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$
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92,037
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$
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81,472
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Subscriber equipment sales (1)
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14,051
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24,261
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20,085
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44,634
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45,675
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Total revenue
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64,279
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86,055
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98,398
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136,671
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127,147
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Operating Expenses:
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Cost of services (exclusive of depreciation and amortization
shown separately below)
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36,204
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37,132
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27,775
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28,091
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25,432
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Cost of subscriber equipment sales:
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Cost
of subscriber equipment sales (2)
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9,881
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17,921
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13,863
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40,396
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38,742
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Cost of subscriber equipment sales – Impairment of
assets
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913
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405
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19,109
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1,943
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—
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Total cost of subscriber equipment sales
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10,794
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18,326
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32,972
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42,339
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38,742
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Marketing, general and administrative
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49,210
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61,351
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49,146
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43,899
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37,945
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Depreciation and amortization
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21,862
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26,956
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13,137
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6,679
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3,044
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Impairment of assets
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—
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—
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—
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—
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114
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Total operating expenses
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118,070
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143,765
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123,030
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121,008
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105,277
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Operating Income (Loss)
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(53,791
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(57,710
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(24,632
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15,663
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21,870
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Gain on extinguishment of debt
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—
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41,411
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—
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—
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—
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Interest income
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502
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4,713
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3,170
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1,172
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242
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Interest expense (3)
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(6,730
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(5,733
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(9,023
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(587
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)
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(269
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Derivative loss, net
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(15,585
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(3,259
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(3,232
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(2,716
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)
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—
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Other
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665
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(4,497
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)
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8,656
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(3,980
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)
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(622
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)
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Total other income (expense)
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(21,148
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)
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32,635
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(429
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)
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(6,111
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)
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(649
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)
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Income (loss) before income taxes
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(74,939
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(25,075
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(25,061
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)
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9,552
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21,221
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Income tax expense (benefit)
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(16
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(2,283
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2,864
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(14,071
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)
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2,502
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Net Income (Loss)
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$
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(74,923
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$
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(22,792
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$
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(27,925
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$
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23,623
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$
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18,719
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Balance Sheet Data:
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As of
December 31,
2009
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As of
December 31,
2008
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As of
December 31,
2007
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As of
December 31,
2006
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As of
December 31,
2005
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(In
Thousands)
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Cash
and cash equivalents
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$ |
67,881
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$ |
12,357
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$ |
37,554
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$ |
43,698
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$ |
20,270 |
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Restricted cash
(4)
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$ |
40,473
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$ |
57,884
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$ |
80,871
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$ |
52,581
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$ |
— |
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Total assets
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$ |
1,266,640 |
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$ |
816,878 |
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$ |
512,975
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$ |
331,701
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$ |
113,545 |
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Long-term debt
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$ |
463,551
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$ |
238,345
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$ |
50,000
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$ |
417
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$ |
631 |
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Redeemable common stock
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$ |
—
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$ |
—
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$ |
—
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$ |
4,949
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$ |
— |
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Ownership equity
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$ |
595,792 |
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$ |
445,397`
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$ |
405,544
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$ |
260,697
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$ |
71,430 |
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(1)
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Includes related party sales of
$0, $0, $59, $3,423 and $440 for the years ended December 31, 2009, 2008,
2007, 2006 and 2005,
respectively.
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(2)
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Includes costs of related party
sales of $0, $0, $46, $3,041 and $314 for the years ended December 31,
2009, 2008, 2007, 2006 and 2005,
respectively.
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(3)
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Includes related party amounts of
$0, $0, $83, $0 and $176 for the years ended December 31, 2009, 2008,
2007, 2006 and 2005,
respectively.
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(4)
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Restricted cash is comprised of
funds held in escrow by two financial institutions to secure our payment
obligations related to (i) our contract for the construction of the
second-generation satellite constellation and (ii) the next five
semi-annual interest payments on our 5.75% Notes and (iii) cash related to
the Axonn acquisition.
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This
Management Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our consolidated financial
statements and notes thereto in Item 8 of this Report.
Overview
We are a
provider of mobile voice and data communication services via satellite. Our
communications platform extends telecommunications beyond the boundaries of
terrestrial wireline and wireless telecommunications networks to serve our
customer’s desire for connectivity. Using in-orbit satellites and ground
stations, which we call gateways, we offer voice and data communications
services to government agencies, businesses and other customers in over 120
countries.
Material Trends and
Uncertainties. Our satellite communications business, by
providing critical mobile communications to our subscribers, serves principally
the following markets: government, public safety and disaster relief; recreation
and personal; oil and gas; maritime and fishing; natural resources, mining and
forestry; construction; utilities; and transportation. Our industry has been
growing as a result of:
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·
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favorable market reaction to new
pricing plans with lower service
charges;
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·
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awareness of the need for remote
communication
services;
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·
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increased
demand for communication services by disaster and relief agencies and
emergency first responders;
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·
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improved
voice and data transmission
quality;
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·
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a
general reduction in prices of user equipment;
and
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·
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innovative
data products and services.
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Nonetheless,
as further described under “Risk Factors,” we face a number of challenges and
uncertainties, including:
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·
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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.
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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 “Risk Factors” — Our satellites have a limited life and some have
failed, which causes our network to be compromised and which materially and
adversely affects our business, prospects and profitability.”
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·
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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 the late summer of 2010 and the fourth launch to be completed in
the late spring or early summer of
2011.
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·
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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.
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·
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Competition and pricing
pressures. We face increased competition from both the
expansion of terrestrial-based cellular phone systems and from other
mobile satellite service providers. For example, Inmarsat plans to
commence offering satellite services to handheld devices in the United
States in 2010, and several competitors, such as ICO Global and TerreStar,
are constructing or have launched geostationary satellites that provide
mobile satellite service. Increased numbers of competitors, and the
introduction of new services and products by competitors, increases
competition for subscribers and pressures all providers, including us, to
reduce prices. Increased competition may result in loss of subscribers,
decreased revenue, decreased gross margins, higher churn rates, and,
ultimately, decreased profitability and
cash.
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·
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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 76% of our total assets
at December 31, 2009 represented fixed assets. Although we plan to procure
and deploy our second- generation satellite constellation and upgrade our
gateways and other ground facilities, we may nevertheless become
vulnerable to the successful introduction of superior technology by our
competitors.
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·
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Capital Expenditures.
We have incurred significant capital expenditures from 2007
through 2009, and we expect to incur additional significant expenditures
through 2013 to complete and launch our second-generation constellation
and related upgrades.
|
|
·
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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 recent acquisition of Axonn’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.
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·
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SPOT
Satellite GPS Messenger Addressable
Market
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|
·
|
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 exchange rates). Our distributors set their own retail prices
for SPOT satellite GPS messenger equipment.
|
·
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SPOT
Satellite GPS Messenger
Distribution
|
We are
distributing and selling our SPOT satellite GPS messenger through a variety of
existing and new distribution channels. We have distribution relationships with
a number of “Big Box” retailers and other similar distribution channels
including Amazon.com, Bass Pro Shops, Best Buy, Pep Boys, Big 5 Sporting Goods,
Big Rock Sports, Cabela’s, Campmor, London Drugs, Gander Mountain, REI,
Sportsman’s Warehouse, Wal-Mart.com, West Marine, DBL Distributing, D.H.
Distributing, and CWR Electronics. We currently sell SPOT satellite GPS
messenger products through approximately 10,000 distribution points. We also
sell directly using our existing sales force into key vertical markets and
through our direct e-commerce website ( www.findmespot.com
).
SPOT
satellite GPS messenger products and services have been on the market for only
twenty-three months in North America and their commercial introduction and their
commercial success globally cannot be assured.
|
·
|
Fluctuations in currency
rates. A substantial portion of our revenue (33% and
40% for 2009 and 2008, respectively) is denominated in foreign currencies.
In addition, certain obligations under the contracts for our
second-generation constellation and related control network facility are
denominated in Euros. Any decline in the relative value of the U.S. dollar
may adversely affect our revenues and increase our capital expenditures.
See “Item 3. Quantitative and Qualitative Disclosures about Market Risk”
for additional information.
|
|
·
|
Ancillary Terrestrial
Component (ATC). ATC is the integration of a
satellite-based service with a terrestrial wireless service resulting in a
hybrid mobile satellite service. The ATC network would extend our services
to urban areas and inside buildings in both urban and rural areas where
satellite services currently are impractical. We believe we are at the
forefront of ATC development and we are the first market entrant through
our contract with Open Range described below. 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, 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 S-band 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 will have
the right to use a portion of our spectrum within the United States and, if Open
Range so elects, it can use the balance of our spectrum authorized for ATC
services, to provide these services. Open Range has options to expand this
relationship over the next six years, some of which are conditional upon Open
Range electing to use all of the licensed spectrum covered by the agreement.
Commercial availability is began in selected markets in the last quarter of
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 eventual geographic coverage of and the number
of customers on the Open Range system.
In
addition to our agreement with Open Range, we hope to exploit additional ATC
monetization strategies and opportunities in urban markets or in suburban areas
that are not the subject of our agreement with Open Range. Our system is
flexible enough to allow us to use different technologies and network
architectures in different geographic areas.
Service and Subscriber Equipment
Sales Revenues. The table below sets forth amounts and
percentages of our revenue by type of service and equipment sales for 2009, 2008
and 2007 (in thousands):
|
|
Year Ended
December 31, 2009
|
|
|
Year Ended
December 31, 2008
|
|
|
Year Ended
December 31, 2007
|
|
|
|
Revenue
|
|
|
% of
Total
Revenue
|
|
|
Revenue
|
|
|
% of
Total
Revenue
|
|
|
Revenue
|
|
|
% of
Total
Revenue
|
|
Service
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
(voice and data)
|
|
$ |
26,573 |
|
|
|
42 |
% |
|
$ |
41,883 |
|
|
|
49 |
% |
|
$ |
60,920 |
|
|
|
62 |
% |
Fixed
(voice and data)
|
|
|
2,331 |
|
|
|
4 |
|
|
|
3,506 |
|
|
|
4 |
|
|
|
5,369 |
|
|
|
5 |
|
Data
|
|
|
613 |
|
|
|
1 |
|
|
|
784 |
|
|
|
1 |
|
|
|
1,649 |
|
|
|
2 |
|
Simplex
|
|
|
13,430 |
|
|
|
21 |
|
|
|
6,362 |
|
|
|
7 |
|
|
|
2,407 |
|
|
|
2 |
|
Independent
gateway operators
|
|
|
1,191 |
|
|
|
2 |
|
|
|
3,098 |
|
|
|
4 |
|
|
|
4,465 |
|
|
|
5 |
|
Other (1)
|
|
|
6,090 |
|
|
|
8 |
|
|
|
6,161 |
|
|
|
7 |
|
|
|
3,503 |
|
|
|
4 |
|
Total
Service Revenue
|
|
|
50,228 |
|
|
|
78 |
|
|
|
61,794 |
|
|
|
72 |
|
|
|
78,313 |
|
|
|
80 |
|
Subscriber
Equipment Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
equipment
|
|
|
2,402 |
|
|
|
4 |
|
|
|
8,095 |
|
|
|
9 |
|
|
|
11,931 |
|
|
|
12 |
|
Fixed
equipment
|
|
|
183 |
|
|
|
— |
|
|
|
1,164 |
|
|
|
1 |
|
|
|
2,160 |
|
|
|
2 |
|
Data
and Simplex
|
|
|
7,619 |
|
|
|
12 |
|
|
|
10,170 |
|
|
|
12 |
|
|
|
1,946 |
|
|
|
2 |
|
Accessories/misc.
|
|
|
3,847 |
|
|
|
6 |
|
|
|
4,832 |
|
|
|
6 |
|
|
|
4,048 |
|
|
|
4 |
|
Total
Subscriber Equipment Sales
|
|
|
14,051 |
|
|
|
22 |
|
|
|
24,261 |
|
|
|
28 |
|
|
|
20,085 |
|
|
|
20 |
|
Total
Revenue
|
|
$ |
64,279 |
|
|
|
100 |
% |
|
$ |
86,055 |
|
|
|
100 |
% |
|
$ |
98,398 |
|
|
|
100 |
% |
(1)
|
Includes activation fees and
engineering service revenue.
|
Subscribers and ARPU for 2009, 2008
and 2007. The following table set forth our average number of
subscribers and ARPU for retail, IGO and Simplex customers for 2009, 2008 and
2007. The following numbers are subject to immaterial rounding inherent in
calculating averages.
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
% Net Change
|
|
Average
number of subscribers for the period:
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
111,784 |
|
|
|
118,580 |
|
|
|
(6 |
)% |
IGO
|
|
|
70,018 |
|
|
|
79,202 |
|
|
|
(12 |
) |
Simplex
|
|
|
189,819 |
|
|
|
118,072 |
|
|
|
61 |
|
ARPU
(monthly):
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
25.22 |
|
|
$ |
35.19 |
|
|
|
(28 |
)% |
IGO
|
|
$ |
1.42 |
|
|
$ |
3.26 |
|
|
|
(56 |
) |
Simplex
|
|
$ |
5.85 |
|
|
$ |
4.48 |
|
|
|
31 |
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
% Net
Change
|
|
Average
number of subscribers for the period:
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
118,580 |
|
|
|
122,709 |
|
|
|
(3 |
)% |
IGO
|
|
|
79,202 |
|
|
|
90,254 |
|
|
|
(12 |
) |
Simplex
|
|
|
118,072 |
|
|
|
64,034 |
|
|
|
84 |
|
ARPU
(monthly):
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
35.19 |
|
|
$ |
46.26 |
|
|
|
(24 |
)% |
IGO
|
|
$ |
3.26 |
|
|
$ |
4.12 |
|
|
|
(21 |
) |
Simplex
|
|
$ |
4.48 |
|
|
$ |
3.11 |
|
|
|
44 |
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
% Net
Change
|
|
Ending
number of subscribers:
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
106,974 |
|
|
|
115,371 |
|
|
|
(7 |
)% |
IGO
|
|
|
64,723 |
|
|
|
73,763 |
|
|
|
(12 |
) |
Simplex
|
|
|
218,897 |
|
|
|
155,196 |
|
|
|
41 |
|
Total
|
|
|
390,594 |
|
|
|
344,330 |
|
|
|
13 |
% |
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
|
% Net
Change
|
|
Ending
number of subscribers:
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
115,371 |
|
|
|
118,747 |
|
|
|
(3 |
)% |
IGO
|
|
|
73,763 |
|
|
|
87,930 |
|
|
|
(16 |
) |
Simplex
|
|
|
155,196 |
|
|
|
77,449 |
|
|
|
100 |
|
Total
|
|
|
344,330 |
|
|
|
284,126 |
|
|
|
21 |
% |
The total
number of net subscribers increased from approximately 344,000 at December 31,
2008 to approximately 391,000 at December 31, 2009. Although we experienced a
net increase in our total customer base of 13% from December 31, 2008 to
December 31, 2009, our total service revenue decreased for the same period. This
is due primarily to lower contributions from subscribers in addition to the
change in our subscriber mix.
Independent
Gateway Acquisition Strategy
Currently,
14 of the 27 gateways in our network are owned and operated by unaffiliated
companies, which we call independent gateway operators, some of whom operate
more than one gateway. Except for the new gateway in Nigeria, in which we hold a
30% equity interest, we have no financial interest in these independent gateway
operators other than arms’ length contracts for wholesale minutes of service.
Some of these independent gateway operators have been unable to grow their
businesses adequately due in part to limited resources. Old Globalstar initially
developed the independent gateway operator acquisition strategy to establish
operations in multiple territories with reduced demands on its capital. In
addition, there are territories in which for political or other reasons, it is
impractical for us to operate directly. We sell services to the independent
gateway operators on a wholesale basis and they resell them to their customers
on a retail basis.
We have
acquired, and intend to continue to pursue the acquisition of, independent
gateway operators when we believe we can do so on favorable terms and the
current independent operator has expressed a desire to sell its assets to us,
subject to capital availability. We believe that these acquisitions can enhance
our results of operations in three respects. First, we believe that, with our
greater financial and technical resources, we can grow our subscriber base and
revenue faster than some of the independent gateway operators. Second, we
realize greater margin on retail sales to individual subscribers than we do on
wholesale sales to independent gateway operators. Third, we believe expanding
the territory we serve directly will better position us to market our services
directly to multinational customers who require a global communications
provider.
However,
acquisitions of independent gateway operators do require us to commit capital,
as well as management resources and working capital to support the gateway
operations, and therefore increase our risk in operating in these territories
directly rather than through the independent gateway operators. In addition,
operating the acquired gateways increases our marketing, general and
administrative expenses. Our Facility Agreement limits to $25.0 million the
aggregate amount of cash we may invest in foreign acquisitions without the
consent of our lenders and requires us to satisfy certain conditions in
connection with any acquisition.
In March
2008, we acquired an independent gateway operator that owned three satellite
gateway ground stations in Brazil for $6.5 million, paid in shares of our common
stock. We also incurred transaction costs of $0.3 million related to this
acquisition. In June 2009, we entered into a business transfer agreement with LG
Dacom, the independent gateway operator in South Korea, to acquire its gateway
and other Globalstar assets for approximately $1 million in cash. No closing has
been set for the South Korean acquisition.
We are
unable to predict the timing or cost of further acquisitions because independent
gateway operations vary in size and value.
Performance
Indicators
Our
management reviews and analyzes several key performance indicators in order to
manage our business and assess the quality of and potential variability of our
earnings and cash flows. These key performance indicators include:
|
·
|
total
revenue, which is an indicator of our overall business
growth;
|
|
·
|
subscriber
growth and churn rate, which are both indicators of the satisfaction of
our customers;
|
|
·
|
average
monthly revenue per unit, or ARPU, which is an indicator of our pricing
and ability to obtain effectively long-term, high-value customers. We
calculate ARPU separately for each of our retail, IGO and Simplex
businesses;
|
|
·
|
operating
income, which is an indication of our
performance;
|
|
·
|
EBITDA,
which is an indicator of our financial performance;
and
|
|
·
|
capital
expenditures, which are an indicator of future revenue growth potential
and cash requirements.
|
Seasonality
Our
results of operations are subject to seasonal usage changes. April through
October are typically our peak months for service revenues and equipment sales.
Government customers in North America tend to use our services during summer
months, often in support of relief activities after events such as hurricanes,
forest fires and other natural disasters.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements requires us to make
estimates and judgments that affect our revenues and expenses for the periods
reported and the reported amounts of our assets and liabilities, including
contingent assets and liabilities, as of the date of the financial statements.
We evaluate our estimates and judgments, including those related to revenue
recognition, inventory, long-lived assets, income taxes, derivative instruments
and stock-based compensation, on an on-going basis. We base our estimates and
judgments on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from our estimates under different assumptions or conditions. We believe the
following accounting policies are most important to understanding our financial
results and condition and require complex or subjective judgments and
estimates.
Revenue
Recognition
We bill
monthly access fees to retail customers and resellers, representing the minimum
monthly charge for each line of service based on its associated rate plan on the
first day of each monthly bill cycle. We bill airtime minute fees in excess of
the monthly access fees in arrears on the first day of each monthly billing
cycle. To the extent that billing cycles fall during the course of a given month
and a portion of the monthly services has not been delivered at month end, we
prorate fees and defer fees associated with the undelivered portion of a given
month. Under certain annual plans, where customers prepay for minutes, we defer
revenue until the minutes are used or the prepaid time period expires. Unused
minutes accumulate until they expire, usually one year after activation. In
addition, we offer other annual plans under which the customer is charged an
annual fee to access our system. We recognize these fees on a straight-line
basis over the term of the plan. In some cases, we charge a per minute rate
whereby we recognize the revenue when each minute is used.
Occasionally
we have granted credits to customers which are expensed or charged against
deferred revenue when granted.
Subscriber
acquisition costs include items such as dealer commissions, internal sales
commissions and equipment subsidies and are expensed at the time of the related
sale.
We also
provide certain engineering services to assist customers in developing new
technologies related to our system. We record the revenues associated with these
services when the services are rendered, and we record the expenses when
incurred. We record revenues and costs associated with long term engineering
contracts on the percentage-of-completion basis of accounting.
We own
and operate our satellite constellation and earn a portion of our revenues
through the sale of airtime minutes on a wholesale basis to independent gateway
operators. We recognize revenue from services provided to independent gateway
operators based upon airtime minutes used by their customers and contractual fee
arrangements. If collection is uncertain, we recognize revenue when cash payment
is received.
During
the second quarter of 2007, we introduced an unlimited airtime usage service
plan (the Unlimited Loyalty plan) which allows existing and new customers to use
unlimited satellite voice minutes for anytime calls for a fixed monthly or
annual fee. The unlimited loyalty plan incorporates a declining price schedule
that reduces the fixed monthly fee at the completion of each calendar year
through the duration of the customer agreement, which ends on June 30, 2010.
Customers have an option to extend their customer agreement by one year at the
fixed price. We record revenue for this plan on a monthly basis based on a
straight line average derived by computing the total fees charged over the term
of the customer agreement and dividing it by the number of the months. If a
customer cancels prior to the ending date of the customer agreement, we
recognize the balance in deferred revenue.
We sell
SPOT satellite GPS messenger services as annual plans and bill them to the
customer at the time the customer activates the service. We defer revenue on
such annual service plans upon activation and recognize it ratably over the
service term.
At
December 31, 2009 and 2008, our deferred revenue aggregated approximately $22.5
million (with $2.6 million included in non-current liabilities) and $20.6
million (with $1.3 million included in non-current liabilities),
respectively.
Subscriber
equipment revenue represents the sale of fixed and mobile user terminals,
accessories and our SPOT satellite GPS messenger product. We recognize revenue
upon shipment provided title and risk of loss have passed to the customer,
persuasive evidence of an arrangement exists, the fee is fixed and determinable
and collection is probable.
Inventory
Inventory
consists of purchased products, including fixed and mobile user terminals,
accessories and gateway spare parts. We state inventory transactions at the
lower of cost or market. At the end of each quarter, we review product sales and
returns from the previous twelve months and write off any excess and obsolete
inventory. Cost is computed using the first-in, first-out (FIFO) method. We
record inventory allowances for inventories with a lower market value or that
are slow moving in the period of determination.
Globalstar
System, Property and Equipment
Our
Globalstar System assets include costs for the design, manufacture, test and
launch of a constellation of low earth orbit satellites, including eight
satellites previously held as ground spares which we launched in May and October
2007, which we refer to as the space segment, and primary and backup terrestrial
control centers and gateways, which we refer to as the ground segment. We
recognize a loss from an in-orbit failure of a satellite as an expense in the
period it is determined that the satellite is not recoverable. We regard these
recently launched satellites as part of the second-generation constellation
which will be supplemented by the second-generation satellites currently being
constructed. We estimate the second-generation satellites scheduled to be
launched in 2010 and 2011 will have an in-orbit life of 15 years.
We review
the carrying value of the Globalstar System for impairment whenever events or
changes in circumstances indicate that the recorded value of the space segment
and ground segment may not be recoverable. We look to current and future
undiscounted cash flows, excluding financing costs, as primary indicators of
recoverability. If we determine an impairment exists, we calculate any related
impairment loss based on fair value. We believe our two-way telecommunications
services, or duplex services, after the launch of our second-generation
constellation, and Simplex services will generate sufficient undiscounted cash
flow after our second-generation system becomes operational, to justify our
carrying value for our second-generation costs.
We began
depreciating the satellites previously recorded as spare satellites and
subsequently incorporated into the Globalstar System on the date each satellite
was placed into service (the “In-Service Date”) over an estimated life of eight
years.
Income
Taxes
Until
January 1, 2006, we and our U.S. operating subsidiaries were treated as
partnerships for U.S. tax purposes. Generally, taxable income or loss,
deductions and credits of a partnership are passed through to its partners.
Effective January 1, 2006, we elected to be taxed as a C corporation for U.S.
tax purposes and began accounting for income taxes as a
corporation.
As of
December 31, 2009 and 2008, we had gross deferred tax assets of approximately
$148.4 million and $122.6 million, respectively. We established a valuation
reserve of $148.4 million and $122.6 million as of December 31, 2009 and 2008
respectively due to our concern that it may be more likely than not that we may
not be able to utilize the deferred tax assets.
Derivative
Instruments
In June
2009, in connection with entering into the Facility Agreement, which provides
for interest at a variable rate, we 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 us
coverage for exposure resulting from escalating interest rates over the term of
the Facility Agreement. The interest rate cap provides limits on the 6-month
Libor rate (“Base Rate”) used to calculate the coupon interest on outstanding
amounts on the Facility Agreement of 4.00% from the date of issuance through
December 2012. Thereafter, the Base Rate is capped at 5.50% should the Base Rate
not exceed 6.5%. Should the Base Rate exceed 6.5%, our Base Rate will be 1% less
than the then 6-month Libor rate.
We
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 our Consolidated
Balance Sheet with a corresponding debt discount which is netted against the
face value of the 8.00% Notes. We are 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
gain (loss)” in the Consolidated Statements of Operations. We determine the fair
value of the compound embedded derivative on a quarterly basis 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, we recorded the warrants as Other Long Term Liabilities on our
Consolidated Balance Sheet with a corresponding debt discount which is netted
against the face value of the 8.00% Notes. We are 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 gain (loss)” in the Consolidated
Statements of Operations. We determine the fair value of the Warrant derivative
at each reporting date using a Monte Carlo simulation model based upon a
risk-neutral stock price model.
We
determined that the warrants issued in conjunction with the availability fee for
the Contingent Equity Agreement, were a liability and recorded it as a component
of Other Non-Current Liabilities, at issuance. The corresponding benefit is
recorded in prepaid and other current assets and is being amortized over the
one-year availability period. The fair value of the warrant liability will be
marked-to-market at the end of each reporting period, with any changes in value
reported as “Derivative gain (loss)” in our Consolidated Statements of
Operations. We determine the fair value of the Warrant derivative at each
reporting date using a risk-neutral binomial model. See Note 15 to our
Consolidated Financial Statements for further information.
Stock-Based
Compensation
U.S. GAAP
requires us to recognize compensation expense in the financial statements for
both employee and non-employee share-based awards based on the grant date fair
value of those awards. To measure compensation expense, we use complex models
which require estimates such as, forfeitures, vesting terms (calculated based on
market conditions associated with a certain award), volatility, risk free
interest rates. Additionally, stock-based compensation expense is recognized
over the requisite service periods of the awards on a straight-line basis, which
is generally commensurate with the vesting term.
Results
of Operations
Comparison
of Results of Operations for the Years Ended December 31, 2009 and
2008
Statements of Operations
|
|
Year Ended
December 31,
2009
|
|
|
Year Ended
December 31,
2008
|
|
|
%
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Service
revenue
|
|
$ |
50,228 |
|
|
$ |
61,794 |
|
|
|
(19 |
)% |
Subscriber
equipment sales
|
|
|
14,051 |
|
|
|
24,261 |
|
|
|
(42 |
) |
Total
Revenue
|
|
|
64,279 |
|
|
|
86,055 |
|
|
|
(25 |
) |
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization shown separately
below)
|
|
|
36,204 |
|
|
|
37,132 |
|
|
|
3 |
|
Cost
of subscriber equipment sales:
|
|
|
|
Cost
of subscriber equipment sales
|
|
|
9,881 |
|
|
|
17,921 |
|
|
|
45 |
|
Cost
of subscriber equipment sales – Impairment of
assets
|
|
|
913 |
|
|
|
405 |
|
|
|
(125 |
) |
Total
cost of subscriber equipment sales
|
|
|
10,794 |
|
|
|
18,326 |
|
|
|
41 |
|
Marketing,
general and administrative
|
|
|
49,210 |
|
|
|
61,351 |
|
|
|
20 |
|
Depreciation
and amortization
|
|
|
21,862 |
|
|
|
26,956 |
|
|
|
19 |
|
Total
Operating Expenses
|
|
|
118,070 |
|
|
|
143,765 |
|
|
|
18 |
|
Operating
loss
|
|
|
(53,791 |
) |
|
|
(57,710 |
) |
|
|
(7 |
) |
Gain
on extinguishment of debt
|
|
|
— |
|
|
|
41,411 |
|
|
|
N/A |
|
Interest
income
|
|
|
502 |
|
|
|
4,713 |
|
|
|
(89 |
) |
Interest
expense
|
|
|
(6,730 |
) |
|
|
(5,733 |
) |
|
|
(17 |
) |
Derivative
loss, net
|
|
|
(15,585 |
) |
|
|
(3,259 |
) |
|
|
(378 |
) |
Other
|
|
|
665 |
|
|
|
(4,497 |
) |
|
|
N/A |
|
Loss
Before Income Taxes
|
|
|
(74,939 |
) |
|
|
(25,075 |
) |
|
|
(199 |
) |
Income
tax benefit
|
|
|
(16 |
) |
|
|
(2,283 |
) |
|
|
(99 |
) |
Net
Loss
|
|
$ |
(74,923 |
) |
|
$ |
(22,792 |
) |
|
|
(229 |
) |
Revenue.
Total revenue decreased $21.8 million, or approximately 25%, to
$64.3 million for 2009, from $86.1 million for 2008. We attribute this decrease
mainly to lower service revenue which we believe stems from lower price service
plans introduced in order to maintain our subscriber base despite our two-way
communication issues and from reductions in sales of our duplex equipment. Our
retail ARPU during 2009 decreased by 28% to $25.22 from $35.19 in 2008. We added
approximately 46,000 net subscribers during 2009.
Service Revenue.
Service revenue decreased $11.6 million, or approximately 19%, to
$50.2 million for 2009, from $61.8 million for 2008. Although our subscriber
base grew 13% during 2009 to approximately 391,000, we experienced decreased
retail ARPU resulting in lower service revenue. The primary reason for this
decrease in our service revenue was the reduction of our prices in response to
our two-way communication issues.
Subscriber Equipment Sales.
Subscriber equipment sales decreased $10.2 million, or approximately
42%, to $14.1 million for 2009, from $24.3 million for 2008. We attribute this
decrease to reduced sales of our duplex products.
Operating
Expenses. Total operating expenses decreased $25.7 million,
or approximately 18%, to $118.1 million for 2009, from $143.8 million for 2008.
This decrease was due primarily to lower marketing, general and administrative
costs due in part to our reductions in headcount, lower cost of goods sold as a
result of lower equipment sales related to our duplex products and reduced
depreciation and amortization costs. These reductions were partially offset by
higher research and development expenses.
Cost of Services.
Our cost of services for 2009 and 2008 were $36.2 million and $37.1
million, respectively. Our cost of services is comprised primarily of network
operating costs, which are generally fixed in nature. The decrease in the cost
of services during 2009 is due primarily to lower contract labor and other
operating expenses partially offset by higher research and development expenses
related to our second-generation ground component development.
Cost of Subscriber Equipment
Sales. Cost of subscriber equipment sales decreased
approximately $7.5 million, or approximately 41%, to $10.8 million for 2009,
from $18.3 million for 2008. This decrease was due primarily to lower sales of
our duplex products.
Marketing, General and
Administrative. Marketing, general and administrative
expenses decreased $12.2 million, or approximately 20%, to $49.2 million for
2009, from $61.4 million for 2008. This decrease was due primarily to lower
marketing and advertising costs, reduced stock based compensation costs and
lower commissions related to the reduced revenue.
Depreciation and
Amortization. Depreciation and amortization expense decreased
approximately $5.1 million, or 19%, to $21.9 million for 2009, from $27.0
million for 2008. This decrease was due primarily to the first-generation
satellite constellation reaching fully-depreciated status at December 31,
2008.
Operating
Loss. Operating loss decreased approximately $3.9 million, to
$53.8 million for 2009, from $57.7 million for 2008. The decrease was due to
lower marketing, general and administrative costs due to various cost savings
measures including the reduction of headcount during 2009 and lower depreciation
and amortization costs due to our first generation satellite constellation being
fully depreciated in 2008.
Interest Income.
Interest income decreased by $4.2 million to $0.5 million for 2009,
from $4.7 million for 2008. This decrease was due to lower average cash balances
on hand and lower interest rates as compared to the prior year.
Interest Expense.
Interest expense increased by $1.0 million, to $6.7 million for 2009
from $5.7 million for 2008. This increase resulted from higher expenses due to
the amortization of our deferred financing costs related to our financing in
June 2009.
Derivative Loss, net.
For 2009, derivative loss was $15.6 million compared to $3.3 million
in 2008. This increased loss resulted from fair market value adjustments related
to the derivatives from our 8% Notes, the adjustment of the exercise price of
our warrants associated with our 8% Notes, which resulted in the number of
shares of common stock subject to the warrants increasing by 16.2 million due to
the issuance of stock as part of our acquisition of the assets of Axonn, and a
decrease in the fair value of our interest rate cap agreement as a result of a
decrease in market interest rates.
Other Income (Expense).
Other income (expense) generally consists of foreign exchange
transaction gains and losses. Other income increased by $5.2 million for 2009 as
compared to 2008 This change resulted primarily from an expense in 2008 due to
unfavorable exchange rate on the euro denominated escrow account for our
second-generation constellation procurement contract resulting from the
appreciation of the U.S dollar in 2008. The gain in 2009 was due primarily to
the favorable change in the exchange rate of the Canadian dollar.
Income Tax Benefit.
Income tax benefit for 2009 was approximately $16,000 compared to an
income tax benefit of approximately $2.3 million for 2008. The change between
periods was primarily a result of benefits from the conversion of our 5.75%
Notes into shares of our common stock during 2008.
Net Loss.
Our net loss increased approximately $52.1 million to a loss of
$74.9 million for 2009, from a net loss of $22.8 million for 2008. This increase
in net loss primarily resulted from a $41.4 million gain on the extinguishment
of debt in 2008, from our lower service and equipment sales revenue during 2009
when compared to 2008, decreases in interest income and increased derivative
losses as described above.
Comparison
of Results of Operations for the Years Ended December 31, 2008 and
2007
Statements of Operations
|
|
Year Ended
December 31,
2008
|
|
|
Year Ended
December 31,
2007
|
|
|
%
Change
|
|
|
|
(In thousands)
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Service
revenue
|
|
$ |
61,794 |
|
|
$ |
78,313 |
|
|
|
(21 |
)% |
Subscriber
equipment sales (1)
|
|
|
24,261 |
|
|
|
20,085 |
|
|
|
21 |
|
Total
Revenue
|
|
|
86,055 |
|
|
|
98,398 |
|
|
|
(13 |
) |
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization shown separately
below)
|
|
|
37,132 |
|
|
|
27,775 |
|
|
|
34 |
|
Cost
of subscriber equipment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of subscriber equipment sales (2)
|
|
|
17,921 |
|
|
|
13,863 |
|
|
|
29 |
|
Cost
of subscriber equipment sales – Impairment of
assets
|
|
|
405 |
|
|
|
19,109 |
|
|
|
(98 |
) |
Total
cost of subscriber equipment sales
|
|
|
18,326 |
|
|
|
32,972 |
|
|
|
(44 |
) |
Marketing,
general and administrative
|
|
|
61,351 |
|
|
|
49,146 |
|
|
|
25 |
|
Depreciation
and amortization
|
|
|
26,956 |
|
|
|
13,137 |
|
|
|
105 |
|
Total
Operating Expenses
|
|
|
143,765 |
|
|
|
123,030 |
|
|
|
17 |
|
Operating
loss
|
|
|
(57,710 |
) |
|
|
(24,632 |
) |
|
|
134 |
|
Gain
on extinguishment of debt
|
|
|
41,411 |
|
|
|
— |
|
|
|
N/A |
|
Interest
income
|
|
|
4,713 |
|
|
|
3,170 |
|
|
|
49 |
|
Interest
expense
|
|
|
(5,733 |
) |
|
|
(9,023 |
) |
|
|
(36 |
) |
Derivative
loss, net
|
|
|
(3,259 |
) |
|
|
(3,232 |
) |
|
|
1 |
|
Other
|
|
|
(4,497 |
) |
|
|
8,656 |
|
|
|
N/A |
|
Loss
Before Income Taxes
|
|
|
(25,075 |
) |
|
|
(25,061 |
) |
|
|
1 |
|
Income
tax expense (benefit)
|
|
|
(2,283 |
) |
|
|
2,864 |
|
|
|
N/A |
|
Net
Loss
|
|
$ |
(22,792 |
) |
|
$ |
(27,925 |
) |
|
|
(18 |
) |
(1)
|
Includes related party amounts of
$0 and $59 for 2008 and 2007, respectively.
|
|
|
(2)
|
Includes related party amounts of
$0 and $46 for 2008 and 2007,
respectively.
|
Revenue.
Total revenue decreased by $12.3 million, or approximately 13%, to
$86.1 million for 2008, from $98.4 million for 2007. This decrease is
attributable to lower service revenues as a result of our two-way communication
issues. Our service revenue was lower primarily due to price reductions aimed at
maintaining our subscriber base despite our two-way communication issues. Our
subscriber equipment sales increased during 2008 as compared to 2007 as a result
of the launch of our SPOT satellite GPS messenger product and services. Our
retail ARPU during 2008, decreased by 24% to $35.19 from $46.26 for 2007. We
added approximately 60,000 net subscribers in 2008 compared to 21,000 net
subscriber additions in 2007.
Service Revenue.
Service revenue decreased $16.5 million, or approximately 21%, to
$61.8 million for 2008, from $78.3 million for 2007. Although our subscriber
base grew 21% during 2008 to approximately 344,000, we experienced decreased
retail ARPU resulting in lower service revenue. The primary reason for this
decrease in our service revenue was the reduction of our prices in response to
our two-way communication issues.
Subscriber Equipment Sales.
Subscriber equipment sales increased by $4.2 million, or
approximately 21%, to $24.3 million for 2008, from $20.1 million for 2007. The
increase was due primarily to sales in 2008 of our SPOT satellite GPS messenger
product and services.
Operating
Expenses. Total operating expenses increased $20.7 million,
or approximately 17%, to $143.8 million for 2008, from $123.0 million for 2007.
This increase was due to higher cost of goods sold related to our new SPOT
satellite GPS messenger product, increased marketing, general and administrative
expenses due to our commencing sales of SPOT satellite products and services in
late 2007, as well as higher depreciation and amortization expenses related to
our eight spare satellites launched in 2007, all of which were partially offset
by a $19.1 million asset impairment charge recognized in 2007. In 2008, we
incurred a $0.4 million asset impairment charge.
Cost of Services.
Our cost of services for 2008 and 2007 were $37.1 million and $27.8
million, respectively. Our cost of services is comprised primarily of network
operating costs. Although our costs are generally fixed in nature, these costs
were higher in 2008 as a result of our recently acquired subsidiary in Brazil
and higher research and development expenses related to our second generation
ground component development.
Cost of Subscriber Equipment
Sales. Cost of subscriber equipment sales decreased
approximately $14.6 million, or approximately 44%, to $18.3 million for 2008,
from $33.0 million for 2007. This decrease was due primarily to the absence in
2008 of a $19.1 million impairment charge recorded in 2007 offset by higher
costs from the launch of our SPOT satellite GPS messenger product, which began
in November 2007.
Marketing, General and
Administrative. Marketing, general and administrative
expenses increased $12.2 million, or approximately 25%, to $61.4 million for
2008, from $49.1 million for 2007. This increase was due primarily to higher
sales and marketing costs related to our SPOT satellite GPS messenger product,
costs associated with the acquisition of our subsidiary in Brazil, and increased
labor and fringe costs.
Depreciation and
Amortization. Depreciation and amortization expense increased
approximately $13.8 million, or 105%, to $27.0 million for 2008, from $13.1
million for 2007. This increase was due primarily to the additional depreciation
associated with placing into service all of our spare satellites launched in
2007.
Operating Income
(Loss). Operating loss increased approximately $33.1 million,
to $57.7 million for 2008, from $24.6 million for 2007. The increase was due to
the higher operating costs described above and lower service
revenue.
Gain on Extinguishment of
Debt. We recognized $41.4 million in gains from the
conversions of 5.75% Notes into common stock during 2008.
Interest Income.
Interest income increased by $1.5 million to $4.7 million for 2008,
from $3.2 million for the same period in 2007. This increase was due to
increased average cash and restricted cash balances on hand.
Interest Expense.
Interest expense decreased by $3.3 million, to $5.8 million for 2008
from $9.0 million for 2007. This decrease was due primarily to the expensing, in
2007, of our deferred debt issuance costs of $8.1 million as a result of Thermo
Funding assuming all of the obligations of the administrative agent and the
lenders under our credit agreement with Wachovia Investment Holdings, LLC and
the other lenders parties thereto. In 2008, we expensed $1.9 million in deferred
financing costs.
Derivative Loss, net.
For 2008, interest rate derivative loss was $3.3 million compared to
$3.2 million in 2007. This increase was due to the unfavorable change in fair
value in our interest rate swap agreement which we terminated during the fourth
quarter of 2008.
Other Income (Expense).
Other income (expense) generally consists of foreign exchange
transaction gains and losses. Other income decreased by $13.2 million for 2008
as compared to 2007 due to an unfavorable exchange rate on the Euro denominated
escrow account and a decline in the Canadian dollar during 2008.
Income Tax Expense (Benefit).
Income tax benefit for 2008 was $2.3 million compared to expense of
$2.9 million during 2007. The change between periods was primarily a result of
benefits resulting from conversion of our 5.75% Notes into shares of common
stock during 2008.
Net Loss.
Our net loss decreased approximately $5.1 million to a loss of $22.8
million for 2008, from a net loss of $27.9 million for 2007. This decrease was
due to the gain on extinguishment of debt, partially offset by increases in
costs related to Brazil, higher depreciation and lower service
revenue.
Liquidity
and Capital Resources
The
following table shows our cash flows from operating, investing and financing
activities for 2009, 2008 and 2007 (in thousands):
Statements of Cash Flows
|
|
Year Ended
December 31,
2009
|
|
|
Year Ended
December 31,
2008
|
|
|
Year Ended
December 31,
2007
|
|
Net
cash used in operating activities
|
|
$ |
(18,423 |
) |
|
$ |
(30,585 |
) |
|
$ |
(7,669 |
) |
Net
cash used in investing activities
|
|
|
(311,692 |
) |
|
|
(258,581 |
) |
|
|
(183,378 |
) |
Net
cash from financing activities
|
|
|
386,756 |
|
|
|
252,533 |
|
|
|
193,489 |
|
Effect
of exchange rate changes on cash
|
|
|
(1,117 |
) |
|
|
11,436 |
|
|
|
(8,586 |
) |
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
$ |
55,524 |
|
|
$ |
(25,197 |
) |
|
$ |
(6,144 |
) |
At
January 1, 2010, our principal short-term liquidity needs were:
|
•
|
to make payments to procure our
second-generation satellite constellation and construct the Control
Network Facility, in a total amount not yet determined, but which will
include approximately €110.6 million payable to Thales Alenia Space by
December 31, 2010 under the purchase contract for our second-generation
satellites and €1.3 million payable to Thales Alenia Space by June 2010
under the contract for construction of the Control Network
Facility;
|
|
•
|
to make payments related to the
launch of our second-generation satellite constellation of approximately
$44.7 million payable to our Launch Provider by December 31,
2010;
|
|
•
|
to make payments related to the
construction of our second-generation ground component of approximately
$15.7 million by December 31, 2010;
and
|
|
•
|
to fund our working
capital.
|
During
2009, 2008 and 2007, our principal sources of liquidity were:
|
|
Year Ended
December 31,
2009
|
|
|
Year Ended
December 31,
2008
|
|
|
Year Ended
December 31,
2007
|
|
|
|
(Dollars in millions)
|
|
Cash
on-hand at beginning of period
|
|
$ |
12.4 |
|
|
$ |
37.6 |
|
|
$ |
43.7 |
|
Net
proceeds from 5.75% Notes
|
|
$ |
— |
|
|
$ |
145.1 |
|
|
$ |
— |
|
Net
proceeds from 8.00% Notes
|
|
$ |
51.3 |
|
|
$ |
— |
|
|
$ |
— |
|
Borrowings
under Thermo Funding credit agreement, net
|
|
$ |
35.0 |
|
|
$ |
116.1 |
|
|
$ |
50.0 |
|
Proceeds
from Thermo equity purchases
|
|
$ |
1.0 |
|
|
$ |
— |
|
|
$ |
152.7 |
|
Borrowings
under Facility Agreement
|
|
$ |
371.2 |
|
|
$ |
— |
|
|
$ |
— |
|
We plan
to fund our short-term liquidity requirements from the following
sources:
|
•
|
cash from our Facility Agreement
($215.1 million was available at December 31, 2009);
and
|
|
•
|
cash on hand at December 31,
2009.
|
Our
principal long-term liquidity needs are:
|
•
|
to pay the remaining costs of
procuring and deploying the remainder of our second-generation satellite
constellation and upgrading our gateways and other ground
facilities;
|
|
•
|
to fund our working capital,
including any growth in working capital required by growth in our
business;
|
|
•
|
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 and a $60.0 million
contingent equity account established in connection with the Facility Agreement
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 used in Operating Activities
Net cash
used in operating activities for 2009 decreased to a cash outflow of $18.4
million from an outflow of $30.6 million for 2008. This decrease was due
primarily to cost savings efforts in our general and administrative areas and
reduced inventory purchases.
Net cash
used in operating activities for 2008 increased to a cash outflow of $30.6
million from an outflow of $7.7 million for 2007. This increase was due
primarily to lower revenues, lower inventory turnover and higher operating
expenses during 2008 as compared to 2007.
Net
Cash used in Investing Activities
Cash used
in investing activities was $311.7 million for 2009, compared to $258.6 million
in 2008. This increase was primarily the result of increased payments related to
the construction of our second-generation satellite constellation.
Cash used
in investing activities was $258.6 million for 2008, compared to $183.4 million
in 2007. This increase was primarily the result of capital expenditures
associated with construction expenses for our second-generation satellite
constellation.
Net
Cash from Financing Activities
Net cash
provided by financing activities increased by $134.3 million to $386.8 million
in 2009 from $252.5 million in 2008. This is a direct result of our increased
borrowings, primarily from our Facility Agreement and 8% Notes, in
2009.
Net cash
provided by financing activities increased by $59.0 million to $252.5 million in
2008 from $193.5 million in 2007. The increase was primarily due to $116.1
million, net drawn on the credit agreement with Thermo Funding and the $145.1
million from the issuance of our 5.75% Notes.
Capital
Expenditures
We have
incurred significant capital expenditures from 2007 through 2009, and we expect
to incur additional significant expenditures through 2013 to complete and launch
our second-generation constellation and related upgrades.
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):
Contract
|
|
Currency
of
Payment
|
|
Payments
through
December
31,
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
Thales
Alenia Second Generation Constellation
|
|
EUR
|
|
€ |
358 |
|
|
€ |
110 |
|
|
€ |
88 |
|
|
€ |
123 |
|
|
€ |
679 |
(1)
|
Thales
Alenia Satellite Operations Control Centers
|
|
EUR
|
|
€ |
9 |
|
|
€ |
1 |
|
|
€ |
— |
|
|
€ |
— |
|
|
€ |
10 |
(1)
|
Arianespace
Launch Services
|
|
USD
|
|
$ |
157 |
|
|
$ |
45 |
|
|
$ |
14 |
|
|
$ |
— |
|
|
$ |
216 |
|
Hughes
second-generation ground component (including research and development
expense)
|
|
USD
|
|
$ |
35 |
|
|
$ |
15 |
|
|
$ |
37 |
|
|
$ |
16 |
|
|
$ |
103 |
|
Ericsson
|
|
USD
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
8 |
|
|
$ |
18 |
|
|
$ |
28 |
|
(1)
|
Of these amounts, all but €227
million is payable at a fixed exchange rate of €1.00 = $1.42. See Item 7A
for an analysis of our foreign currency
exposure.
|
Cash
Position and Indebtedness
As of
December 31, 2009, our total cash and cash equivalents were $67.9 million and we
had total indebtedness of $465.8 million, compared to total cash and cash
equivalents and total indebtedness at December 31, 2008 of $12.4 million and
$271.9 million, respectively.
Facility
Agreement
On June
5, 2009, we entered into a $586.3 million senior secured facility agreement (the
Facility Agreement) with a syndicate of bank lenders, including BNP Paribas,
Natixis, Société Générale, Caylon, Crédit Industriel et Commercial as arrangers
and BNP Paribas as the security agent and COFACE agent. Ninety-five percent of
our obligations under the agreement are guaranteed by COFACE, the French export
credit agency. The initial funding process of the Facility Agreement began on
June 29, 2009 and was completed on July 1, 2009. The new facility is comprised
of:
|
•
|
a $563.3 million tranche for
future payments to and to reimburse us for amounts we previously paid to
Thales Alenia Space for construction of our second-generation satellites.
Such reimbursed amounts will be used by us (a) to make payments to the
Launch Provider for launch services, Hughes for ground network equipment,
software and satellite interface chips and Ericsson for ground system
upgrades, (b) to provide up to $150 million for our working capital and
general corporate purposes and (c) to pay a portion of the insurance
premium to COFACE; and
|
|
•
|
a $23.0 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 as defined in the
agreement:
|
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
December 31, 2009, we were in compliance with the covenants of the Facility
Agreement.
Our
obligations under the Facility Agreement 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 make principal payments on the borrowings 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
15: Borrowings” of the Consolidated Financial Statements in this report for
descriptions of our other debt agreements.
Contractual
Obligations and Commitments
At
December 31, 2009, we have a remaining commitment to purchase a total of $58.5
million of mobile phones, services and other equipment under various commercial
agreements with Qualcomm. We expect to fund this remaining commitment from our
working capital, funds generated by our operations, and, if necessary,
additional capital from the issuance of equity or debt or a combination thereof.
In August 2009, we and Qualcomm amended our agreement to extend the term for
five additional months and defer delivery of mobile phones and related equipment
until January 2012.
In June
2009, we and Thales Alenia Space entered into an amended and restated contract
for the construction of our second-generation low-earth orbit satellites to
incorporate prior amendments, acceleration requests and make other non-material
changes to the contract entered into in November 2006. The total contract price,
including subsequent additions, is approximately €678.9 million.
In March
2007, we 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 our
second-generation satellite constellation. The total contract price for the
construction and associated services is €9.8 million consisting 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 final acceptance of the Control Network
Facility scheduled for April 2010.
In
September 2007, we and Arianespace (the Launch Provider) entered into an
agreement for the launch of our 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 we 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, we amended our agreement with the Launch Provider for the
launch of our second-generation satellites and certain pre and post-launch
services. Under the amended terms, we 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 December 31, 2009 and 2008, we had
approximately none and $47.3 million, respectively, in deferred payments
outstanding to the Launch Provider. In June 2009 we amended the agreement
further to, among other things, reduce the Launch Provider’s commitment for
optional launches from four to one.
In May
2008, we and Hughes Network Systems, LLC (Hughes) entered into an agreement
under which Hughes will design, supply and implement the Radio Access Network
(RAN) ground network equipment and software upgrades for installation at a
number of our satellite gateway ground stations and satellite interface chips to
be a part of the User Terminal Subsystem (UTS) in our various next-generation
devices. In January 2010, we 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. we have the option to purchase additional RANs and other software and
hardware improvements at pre-negotiated prices. In August 2009, we and Hughes
amended our agreement extending the performance schedule by 15 months and
revising certain payment milestones. Costs associated with certain projects
under this contract are being capitalized because we have determined that
technological feasibility has been achieved. As of December 31, 2009, we had
made payments of $35.0 million under this contract.
In
October 2008, we signed an agreement with Ericsson Federal Inc., a leading
global provider of technology and services to telecom operators. In December
2009, we amended this contract by $5.1 million for additional deliverables and
features. According to the $27.8 million contract, Ericsson will work with us to
develop, implement and maintain a ground interface, or core network, system that
will be installed at our satellite gateway ground stations.
Long-term
obligations at December 31, 2009, assuming borrowing of the entire $586 million
under our Facility Agreement, are as follows:
Contractual Obligations:
|
|
Less than
1 Year
|
|
|
1 – 3 Years
|
|
|
3 – 5 Years
|
|
|
More Than
5 Years
|
|
|
Total
|
|
|
|
(In millions)
|
|
Long-term
debt obligations (1)
(2)
|
|
$ |
2.3 |
|
|
$ |
126.2 |
|
|
$ |
135.8 |
|
|
$ |
421.0 |
|
|
$ |
685.3 |
|
Operating
lease obligations
|
|
|
1.6 |
|
|
|
2.9 |
|
|
|
0.3 |
|
|
|
— |
|
|
|
4.8 |
|
Purchase
obligations (3)
|
|
|
219.9 |
|
|
|
378.4 |
|
|
|
13.9 |
|
|
|
— |
|
|
|
612.2 |
|
Pension
obligations
|
|
|
0.3 |
|
|
|
2.6 |
|
|
|
1.7 |
|
|
|
— |
|
|
|
4.6 |
|
Total
|
|
$ |
224.1 |
|
|
$ |
510.1 |
|
|
$ |
151.7 |
|
|
$ |
421.0 |
|
|
$ |
1,306.9 |
|
Payments
due by period:
(1)
|
Does not include interest on debt
obligations. Approximately $586 million of our debt bears interest at a
floating rate and, accordingly, we are unable to predict interest costs in
future years.
|
(2)
|
All of the indebtedness may be
accelerated upon default of related covenants. See “Note 15: Borrowings”
of the Consolidated Financial Statements in this
report.
|
(3)
|
The purchase obligations for the
construction of our low-earth satellites and the Control Network facility
are converted to U.S. dollars using an exchange rate of €1.00 =
$1.42.
|
Off-Balance
Sheet Transactions
We have
no material off-balance sheet transactions.
Recently
Issued Accounting Pronouncements
See “Note
2: Summary of Accounting Policies” of the Consolidated Financial Statements in
this report.
Exhibit
99.3
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
Audited
consolidated financial statements of Globalstar, Inc.
|
|
|
Report
of Crowe Horwath LLP, independent registered public accounting
firm
|
|
2
|
Consolidated
balance sheets at December 31, 2009 and 2008
|
|
3
|
Consolidated
statements of loss for the years ended December 31, 2009, 2008 and
2007
|
|
4
|
Consolidated
statements of comprehensive loss for the years ended December 31, 2009,
2008 and 2007
|
|
5
|
Consolidated
statements of ownership equity for the years ended December 31, 2009, 2008
and 2007
|
|
6
|
Consolidated
statements of cash flows for the years ended December 31, 2009, 2008 and
2007
|
|
7
|
Notes
to consolidated financial statements
|
|
8
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Globalstar,
Inc.
We have
audited the accompanying consolidated balance sheets of Globalstar, Inc.
(“Globalstar”) as of December 31, 2009 and 2008, and the related consolidated
statements of loss, comprehensive loss, ownership equity, and cash flows for
each of the years in the three-year period ended December 31, 2009. We also have
audited Globalstar’s internal control over financial reporting as of December
31, 2009, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Globalstar’s management is responsible for these financial statements,
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying “Management’s Annual Report on Internal Control
over Financial Reporting.” Our responsibility is to express an opinion on these
financial statements and an opinion on the company’s internal control over
financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Globalstar as of December
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, Globalstar maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
As
discussed in Note 19 to the consolidated financial statements, the consolidated
financial statements have been adjusted for the retrospective application of
Financial Accounting Standards Board Accounting Standards Update No. 2009-15
Accounting for Own-Share
Lending Arrangements in Contemplation of Convertible Debt Issuance, which
became effective January 1, 2010 for the Company
/s/ Crowe
Horwath LLP
Oak
Brook, Illinois
March 12,
2010 except for Note 19, as to which the date is June 17, 2010
GLOBALSTAR,
INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except par value and share data)
|
|
December 31,
|
|
|
|
2009 (1)
|
|
|
2008 (1)
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
67,881 |
|
|
$ |
12,357 |
|
Accounts
receivable, net of allowance of $5,735 (2009), and $5,205
(2008)
|
|
|
9,392 |
|
|
|
10,075 |
|
Inventory
|
|
|
61,719 |
|
|
|
55,105 |
|
Advances
for inventory
|
|
|
9,332 |
|
|
|
9,314 |
|
Prepaid
expenses and other current assets
|
|
|
5,404 |
|
|
|
5,565 |
|
Total
current assets
|
|
|
153,728 |
|
|
|
92,416 |
|
Property
and equipment, net
|
|
|
964,921 |
|
|
|
644,031 |
|
Other
assets:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
40,473 |
|
|
|
57,884 |
|
Deferred
financing costs
|
|
|
69,647 |
|
|
|
8,302 |
|
Other
assets, net
|
|
|
37,871 |
|
|
|
14,245 |
|
Total
assets
|
|
$ |
1,266,640 |
|
|
$ |
816,878 |
|
LIABILITIES
AND OWNERSHIP EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
76,661 |
|
|
$ |
28,370 |
|
Accrued
expenses
|
|
|
30,520 |
|
|
|
29,998 |
|
Payables
to affiliates
|
|
|
541 |
|
|
|
3,344 |
|
Deferred
revenue
|
|
|
19,911 |
|
|
|
19,354 |
|
Current
portion of long term debt
|
|
|
2,259 |
|
|
|
33,575 |
|
Total
current liabilities
|
|
|
129,892 |
|
|
|
114,641 |
|
Borrowings
under revolving credit facility
|
|
|
— |
|
|
|
66,050 |
|
Long
term debt
|
|
|
463,551 |
|
|
|
172,295 |
|
Employee
benefit obligations, net of current portion
|
|
|
4,499 |
|
|
|
4,782 |
|
Derivative
liabilities
|
|
|
49,755 |
|
|
|
— |
|
Other
non-current liabilities
|
|
|
23,151 |
|
|
|
13,713 |
|
Total
non-current liabilities
|
|
|
540,956 |
|
|
|
256,840 |
|
Ownership
equity:
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.0001 par value: 100,000,000 shares authorized; issued and
outstanding – none at December 31, 2009 and
2008:
|
|
|
|
|
|
|
|
|
Series
A Preferred Convertible Stock, $0.0001 par value: one share authorized and
none issued and outstanding at December 31, 2009; none authorized, issued
or outstanding at December 31, 2008
|
|
|
— |
|
|
|
— |
|
Voting
Common Stock, $0.0001 par value; 865,000,000 and 800,000,000 shares
authorized at December 31, 2009 and December 31, 2008, respectively,
274,384,000 shares issued and outstanding at December 31, 2009;
136,606,000 shares issued and outstanding at December 31,
2008
|
|
|
27 |
|
|
|
14 |
|
Nonvoting
Common Stock, $0.0001 par value; 135,000,000 shares authorized, 16,750,000
shares issued and outstanding at December 31, 2009; none authorized,
issued or outstanding at December 31, 2008
|
|
|
2 |
|
|
|
— |
|
Additional
paid-in capital
|
|
|
700,814 |
|
|
|
480,097 |
|
Accumulated
other comprehensive loss
|
|
|
(1,718 |
) |
|
|
(6,304 |
) |
Retained
deficit
|
|
|
(103,333 |
) |
|
|
(28,410 |
) |
Total
ownership equity
|
|
|
595,792 |
|
|
|
445,397 |
|
Total
liabilities and ownership equity
|
|
$ |
1,266,640 |
|
|
$ |
816,878 |
|
(1) As
revised, see Note 19
See notes
to consolidated financial statements.
GLOBALSTAR,
INC.
CONSOLIDATED
STATEMENTS OF LOSS
(In
thousands, except per share data)
|
|
Year Ended December 31,
|
|
|
|
2009 (1)
|
|
|
2008 (1)
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Service
revenue
|
|
$ |
50,228 |
|
|
$ |
61,794 |
|
|
$ |
78,313 |
|
Subscriber
equipment sales
|
|
|
14,051 |
|
|
|
24,261 |
|
|
|
20,085 |
|
Total
revenue
|
|
|
64,279 |
|
|
|
86,055 |
|
|
|
98,398 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization shown separately
below)
|
|
|
36,204 |
|
|
|
37,132 |
|
|
|
27,775 |
|
Cost
of subscriber equipment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of subscriber equipment sales
|
|
|
9,881 |
|
|
|
17,921 |
|
|
|
13,863 |
|
Cost
of subscriber equipment sales – impairment of
assets
|
|
|
913 |
|
|
|
405 |
|
|
|
19,109 |
|
Total
cost of subscriber equipment sales
|
|
|
10,794 |
|
|
|
18,326 |
|
|
|
32,972 |
|
Marketing,
general, and administrative
|
|
|
49,210 |
|
|
|
61,351 |
|
|
|
49,146 |
|
Depreciation
and amortization
|
|
|
21,862 |
|
|
|
26,956 |
|
|
|
13,137 |
|
Total
operating expenses
|
|
|
118,070 |
|
|
|
143,765 |
|
|
|
123,030 |
|
Operating
loss
|
|
|
(53,791 |
) |
|
|
(57,710 |
) |
|
|
(24,632 |
) |
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on extinguishment of debt
|
|
|
— |
|
|
|
41,411 |
|
|
|
— |
|
Interest
income
|
|
|
502 |
|
|
|
4,713 |
|
|
|
3,170 |
|
Interest
expense
|
|
|
(6,730 |
) |
|
|
(5,733 |
) |
|
|
(9,023 |
) |
Derivative
loss, net
|
|
|
(15,585 |
) |
|
|
(3,259 |
) |
|
|
(3,232 |
) |
Other
income (expense)
|
|
|
665 |
|
|
|
(4,497 |
) |
|
|
8,656 |
|
Total
other income (expense)
|
|
|
(21,148 |
) |
|
|
32,635 |
|
|
|
(429 |
) |
Loss
before income taxes
|
|
|
(74,939 |
) |
|
|
(25,075 |
) |
|
|
(25,061 |
) |
Income
tax expense (benefit)
|
|
|
(16 |
) |
|
|
(2,283 |
) |
|
|
2,864 |
|
Net
loss
|
|
$ |
(74,923 |
) |
|
$ |
(22,792 |
) |
|
$ |
(27,925 |
) |
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.58 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.36 |
) |
Diluted
|
|
|
(0.58 |
) |
|
|
(0.27 |
) |
|
|
(0.36 |
) |
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
128,130 |
|
|
|
85,478 |
|
|
|
77,169 |
|
Diluted
|
|
|
128,130 |
|
|
|
85,478 |
|
|
|
77,169 |
|
(1) As
revised, see Note 19
See notes
to consolidated financial statements.
GLOBALSTAR,
INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(In
thousands)
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008 (1)
|
|
|
2007
|
|
Net
loss
|
|
$ |
(74,923 |
) |
|
$ |
(22,792 |
) |
|
$ |
(27,925 |
) |
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment
|
|
|
407 |
|
|
|
(3,516 |
) |
|
|
402 |
|
Net
foreign currency translation adjustment
|
|
|
4,179 |
|
|
|
(6,199 |
) |
|
|
4,175 |
|
Total
comprehensive loss
|
|
$ |
(70,337 |
) |
|
$ |
(32,507 |
) |
|
$ |
(23,348 |
) |
(1) As
revised, see Note 19
See notes
to consolidated financial statements.
GLOBALSTAR,
INC.
CONSOLIDATED
STATEMENTS OF OWNERSHIP EQUITY
(In
thousands, as revised see Note 19)
|
|
Common
Shares
|
|
|
Common
Stock
Amount
|
|
|
Preferred
Shares
|
|
|
Preferred
Stock
Amount
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Retained
Earnings
(Deficit)
|
|
|
Total
|
|
Balances – December
31, 2006
|
|
|
72,545 |
|
|
$ |
7 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
238,919 |
|
|
$ |
(1,166 |
) |
|
$ |
22,937 |
|
|
$ |
260,697 |
|
Adoption
of FIN 48
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(630 |
) |
|
|
(630 |
) |
Issuance
of common stock related to GAT settlement (including
interest)
|
|
|
154 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
123 |
|
|
|
— |
|
|
|
— |
|
|
|
123 |
|
Issuance
of common stock in connection with Thermo agreement
|
|
|
9,443 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
152,656 |
|
|
|
— |
|
|
|
— |
|
|
|
152,657 |
|
Issuance
of restricted stock awards and recognition of stock-based
compensation
|
|
|
1,179 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,430 |
|
|
|
— |
|
|
|
— |
|
|
|
10,430 |
|
Issuance
of common stock related to GdeV acquisition
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
246 |
|
|
|
— |
|
|
|
— |
|
|
|
246 |
|
Contribution
of services
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
420 |
|
|
|
— |
|
|
|
— |
|
|
|
420 |
|
Conversion
of redeemable common stock related to GAT settlement
|
|
|
347 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,949 |
|
|
|
— |
|
|
|
— |
|
|
|
4,949 |
|
Other
comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,577 |
|
|
|
— |
|
|
|
4,577 |
|
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(27,925 |
) |
|
|
(27,925 |
) |
Balances – December
31, 2007
|
|
|
83,693 |
|
|
$ |
8 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
407,743 |
|
|
$ |
3,411 |
|
|
$ |
(5,618 |
) |
|
$ |
405,544 |
|
Conversion
of Notes
|
|
|
25,811 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
6,524 |
|
|
|
— |
|
|
|
— |
|
|
|
6,527 |
|
Issuance
of restricted stock awards and recognition of stock-based
compensation
|
|
|
2,051 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12,608 |
|
|
|
— |
|
|
|
— |
|
|
|
12,608 |
|
Issuance
of common stock in relation to Brazil acquisition
|
|
|
883 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,000 |
|
|
|
— |
|
|
|
— |
|
|
|
6,000 |
|
Contribution
of services
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
449 |
|
|
|
— |
|
|
|
— |
|
|
|
449 |
|
Issuance
of common stock under the Share Loan Facility, net
|
|
|
24,168 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
520 |
|
|
|
— |
|
|
|
— |
|
|
|
523 |
|
Issuance
of convertible notes, net of deferred taxes of $22,417 and issuance costs
of $1,762
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,978 |
|
|
|
— |
|
|
|
— |
|
|
|
29,978 |
|
Adoption
of accounting guidance related to share loan agreement
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16,275 |
|
|
|
— |
|
|
|
— |
|
|
|
16,275 |
|
Other
comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,715 |
) |
|
|
— |
|
|
|
(9,715 |
) |
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(22,792 |
) |
|
|
(22,792 |
) |
Balances – December
31, 2008
|
|
|
136,606 |
|
|
$ |
14 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
480,097 |
|
|
$ |
(6,304 |
) |
|
$ |
(28,410 |
) |
|
$ |
445,397 |
|
Issuance
of restricted stock awards and recognition of stock-based
compensation
|
|
|
7,112 |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
10,341 |
|
|
|
— |
|
|
|
— |
|
|
|
10,341 |
|
Conversion
of Revolving Credit Facility to Common Shares
|
|
|
10,000 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
7,799 |
|
|
|
— |
|
|
|
— |
|
|
|
7,800 |
|
Conversion
of Term Loan and Revolving Credit Facility to Preferred Series A Stock
(net of offering costs)
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
180,052 |
|
|
|
— |
|
|
|
— |
|
|
|
180,052 |
|
Conversion
of Preferred Series A Stock to Common Shares
|
|
|
126,174 |
|
|
|
13 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
Issuance
of common stock to Thermo
|
|
|
1,391 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
Contribution
of services
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
337 |
|
|
|
— |
|
|
|
— |
|
|
|
337 |
|
Warrants
issued associated with Subordinated loan
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,215 |
|
|
|
— |
|
|
|
— |
|
|
|
5,215 |
|
Common
stock issued in connection with conversions of 8% Notes
|
|
|
10,175 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
10,473 |
|
|
|
— |
|
|
|
— |
|
|
|
10,474 |
|
Issuance
of common stock in connection with interest payments related to 8%
Notes
|
|
|
246 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Return
of common stock under share loan facility
|
|
|
(6,868 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Issuance
of stock in connection with acquisition
|
|
|
6,298 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,500 |
|
|
|
— |
|
|
|
— |
|
|
|
5,500 |
|
Other
comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,586 |
|
|
|
— |
|
|
|
4,586 |
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(74,923 |
) |
|
|
(74,923 |
) |
Balances – December
31, 2009
|
|
|
291,134 |
(1) |
|
$ |
29 |
(1) |
|
|
— |
|
|
$ |
— |
|
|
$ |
700,814 |
|
|
$ |
(1,718 |
) |
|
$ |
(103,333 |
) |
|
$ |
595,792 |
|
(1) Includes 274,384 and 16,750 shares of
voting common stock and non-voting common stock,
respectively.
See notes
to consolidated financial statements.
GLOBALSTAR,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008 (1)
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(74,923 |
) |
|
$ |
(22,792 |
) |
|
$ |
(27,925 |
) |
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
21,862 |
|
|
|
26,956 |
|
|
|
13,137 |
|
Stock-based
compensation expense
|
|
|
9,947 |
|
|
|
12,482 |
|
|
|
9,570 |
|
Change
in fair value of derivative instruments and derivative
liabilities
|
|
|
15,585 |
|
|
|
3,259 |
|
|
|
3,232 |
|
Gain
on conversion of convertible notes
|
|
|
— |
|
|
|
(41,411 |
) |
|
|
— |
|
Provision
for bad debts
|
|
|
824 |
|
|
|
1,818 |
|
|
|
1,774 |
|
Interest
income on restricted cash
|
|
|
(115 |
) |
|
|
(4,015 |
) |
|
|
(2,310 |
) |
Equity
losses in investee
|
|
|
1,928 |
|
|
|
249 |
|
|
|
— |
|
Amortization
of deferred financing costs
|
|
|
4,056 |
|
|
|
2,913 |
|
|
|
8,109 |
|
Impairment
of assets
|
|
|
913 |
|
|
|
405 |
|
|
|
19,109 |
|
Non-cash
expenses related to debt conversion
|
|
|
— |
|
|
|
508 |
|
|
|
— |
|
Other
|
|
|
669 |
|
|
|
(870 |
) |
|
|
64 |
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,405 |
|
|
|
(128 |
) |
|
|
6,416 |
|
Inventory
|
|
|
4,189 |
|
|
|
(12,416 |
) |
|
|
(36,445 |
) |
Advances
for inventory
|
|
|
(132 |
) |
|
|
(1,695 |
) |
|
|
7,912 |
|
Prepaid
expenses and other current assets
|
|
|
895 |
|
|
|
2,137 |
|
|
|
(971 |
) |
Other
assets
|
|
|
(4,704 |
) |
|
|
(1,805 |
) |
|
|
(44 |
) |
Accounts
payable
|
|
|
(8,584 |
) |
|
|
6,825 |
|
|
|
2,494 |
|
Payables
to affiliates
|
|
|
(2,967 |
) |
|
|
2,261 |
|
|
|
(5,075 |
) |
Accrued
expenses and employee benefit obligations
|
|
|
8,348 |
|
|
|
(5,123 |
) |
|
|
(2,503 |
) |
Other
non-current liabilities
|
|
|
796 |
|
|
|
(965 |
) |
|
|
(503 |
) |
Deferred
revenue
|
|
|
1,585 |
|
|
|
822 |
|
|
|
(3,710 |
) |
Net
cash used in operating activities
|
|
|
(18,423 |
) |
|
|
(30,585 |
) |
|
|
(7,669 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Spare
and second-generation satellites and launch costs
|
|
|
(300,615 |
) |
|
|
(268,433 |
) |
|
|
(165,377 |
) |
Second-generation
ground
|
|
|
(21,212 |
) |
|
|
(5,697 |
) |
|
|
— |
|
Property
and equipment additions
|
|
|
(2,271 |
) |
|
|
(11,956 |
) |
|
|
(4,612 |
) |
Proceeds
from sale of property and equipment
|
|
|
— |
|
|
|
141 |
|
|
|
263 |
|
Payment
for intangible assets
|
|
|
— |
|
|
|
— |
|
|
|
(1,657 |
) |
Investment
in businesses
|
|
|
(1,823 |
) |
|
|
(2,620 |
) |
|
|
— |
|
Cash
acquired on purchase of subsidiary
|
|
|
— |
|
|
|
1,839 |
|
|
|
— |
|
Restricted
cash
|
|
|
14,229 |
|
|
|
28,145 |
|
|
|
(11,995 |
) |
Net
cash used in investing activities
|
|
|
(311,692 |
) |
|
|
(258,581 |
) |
|
|
(183,378 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Thermo under the irrevocable standby stock purchase
agreement
|
|
|
— |
|
|
|
— |
|
|
|
152,657 |
|
Borrowings
from long term debt
|
|
|
— |
|
|
|
100,000 |
|
|
|
— |
|
Proceeds
from revolving credit loan, net
|
|
|
7,750 |
|
|
|
16,050 |
|
|
|
50,000 |
|
Borrowings
from 5.75% Notes
|
|
|
— |
|
|
|
150,000 |
|
|
|
— |
|
Payments
on notes payable
|
|
|
— |
|
|
|
— |
|
|
|
(477 |
) |
Borrowings
from 8.00% Notes
|
|
|
55,000 |
|
|
|
— |
|
|
|
— |
|
Borrowings
from Facility Agreement
|
|
|
371,219 |
|
|
|
— |
|
|
|
— |
|
Borrowings
from subordinated loan agreement
|
|
|
25,000 |
|
|
|
— |
|
|
|
— |
|
Borrowings
under short-term loan
|
|
|
2,259 |
|
|
|
— |
|
|
|
— |
|
Deferred
financing cost payments
|
|
|
(63,047 |
) |
|
|
(4,893 |
) |
|
|
(2,503 |
) |
Payments
for interest rate cap instrument
|
|
|
(12,425 |
) |
|
|
— |
|
|
|
— |
|
Payments
related to interest rate swap derivative margin account
|
|
|
— |
|
|
|
(9,144 |
) |
|
|
(6,188 |
) |
Issuance
of common stock
|
|
|
1,000 |
|
|
|
520 |
|
|
|
— |
|
Net
cash from financing activities
|
|
|
386,756 |
|
|
|
252,533 |
|
|
|
193,489 |
|
Effect
of exchange rate changes on cash
|
|
|
(1,117 |
) |
|
|
11,436 |
|
|
|
(8,586 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
55,524 |
|
|
|
(25,197 |
) |
|
|
(6,144 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
12,357 |
|
|
|
37,554 |
|
|
|
43,698 |
|
Cash
and cash equivalents, end of period
|
|
$ |
67,881 |
|
|
$ |
12,357 |
|
|
$ |
37,554 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
15,379 |
|
|
$ |
15,987 |
|
|
$ |
3,526 |
|
Income
taxes
|
|
$ |
308 |
|
|
$ |
1,001 |
|
|
$ |
173 |
|
Supplemental
disclosure of non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Thermo LOC, term loan and accrued interest from debt to
equity
|
|
$ |
180,177 |
|
|
|
— |
|
|
|
— |
|
Accrued
launch costs and second-generation satellites costs
|
|
$ |
58,055 |
|
|
$ |
14,762 |
|
|
$ |
3,583 |
|
Conversion
of note receivable to equity in investee company
|
|
$ |
7,500 |
|
|
|
— |
|
|
|
— |
|
Vendor
financing of second-generation Globalstar System
|
|
|
— |
|
|
$ |
57,200 |
|
|
|
— |
|
Accrual
of interest for spare and second-generation satellites and launch
costs
|
|
$ |
7,185 |
|
|
$ |
15,964 |
|
|
$ |
196 |
|
Capitalized
interest paid in common stock and 8% Notes
|
|
$ |
7,257 |
|
|
|
— |
|
|
|
— |
|
Conversion
of Convertible Senior Notes into common stock
|
|
$ |
10,738 |
|
|
$ |
78,196 |
|
|
|
— |
|
(1) As
revised, see Note 19
See notes
to consolidated financial statements.
GLOBALSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
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 LLC (“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 Executive 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.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates in Preparation of Financial Statements
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Actual results could differ from
estimates. Certain reclassifications have been made to prior year consolidated
financial statements to conform to current year presentation.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Globalstar and all its
subsidiaries. All significant inter-company transactions and balances have been
eliminated in the consolidation.
Cash
and Cash Equivalents
Cash and
cash equivalents consist of cash on hand and highly liquid investments with
original maturities of three months or less.
Restricted
Cash
Restricted
cash is comprised of funds held in escrow by two financial institutions to
secure the Company’s payment obligations related to its contract for the
construction of its second-generation satellite constellation and the remaining
scheduled semi-annual interest payments on the 5.75 % Notes through April 1,
2011.
Derivatives
The
Company enters into financing arrangements that are hybrid instruments that
contain embedded derivative features. The Company accounts for these arrangement
in accordance with the Financial Accounting Standards Board (“FASB”) ASC
815-10-50, “Accounting for Derivative Instruments and Hedging Activities,”
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock,” as well as related interpretations of these
standards. In accordance with this guidance, derivative instruments are
recognized as either assets or liabilities in the statement of financial
position and are measured at fair value with gains or losses recognized in
earnings. Embedded derivatives that are not clearly and closely related to the
host contract are bifurcated and recognized at fair value with changes in fair
value recognized as either a gain or loss in earnings if they can be reliably
measured. The Company determines the fair value of derivative instruments based
on available market data using appropriate valuation models.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and restricted
cash. Cash and cash equivalents and restricted cash consist primarily of highly
liquid short-term investments deposited with financial institutions that are of
high credit quality.
Accounts
Receivable
Accounts
receivable are uncollateralized, without interest and consist primarily of
on-going service revenue and equipment receivables. The Company performs
on-going credit evaluations of its customers and records specific allowances for
bad debts based on factors such as current trends, the length of time the
receivables are past due and historical collection experience. Accounts
receivable are considered past due in accordance with the contractual terms of
the arrangements. Accounts receivable balances that are determined likely to be
uncollectible are included in the allowance for doubtful accounts. After all
attempts to collect a receivable have failed, the receivable is written off
against the allowance.
The
following is a summary of the activity in the allowance for doubtful accounts
(in thousands):
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of period
|
|
$ |
5,205 |
|
|
$ |
4,177 |
|
|
$ |
3,609 |
|
Provision,
net of recoveries
|
|
|
824 |
|
|
|
1,818 |
|
|
|
1,774 |
|
Write-offs
|
|
|
(294 |
) |
|
|
(790 |
) |
|
|
(1,206 |
) |
Balance
at end of period
|
|
$ |
5,735 |
|
|
$ |
5,205 |
|
|
$ |
4,177 |
|
Inventory
Inventory
consists of purchased products, including fixed and mobile user terminals,
accessories and gateway spare parts. Inventory is stated at the lower of cost or
market value. Cost is computed using the first-in, first-out (FIFO) method which
determines the acquisition cost on a FIFO basis. Inventory allowances are
recorded for inventories with a lower market value or which are slow moving.
Unsaleable inventory is written off. During 2009, 2008 and 2007, the Company
recorded $0.9 million, $0.4 million and $19.1 million, respectively, in
impairment charges on its inventory representing a write-down of its first
generation phone and accessory inventory, respectively. This charge was
recognized after assessment of the Company’s inventory quantities and its recent
and projected equipment sales.
Property
and Equipment
Property
and equipment is stated at acquisition cost, less accumulated depreciation and
impairment. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, as follows:
Globalstar
System:
|
|
|
Space
component
|
|
Up
to periods of 8 years from commencement of service
|
Ground
component
|
|
Up
to periods of 8 years from commencement of service
|
Furniture,
fixtures & equipment
|
|
3
to 10 years
|
Leasehold
improvements
|
|
Shorter
of lease term or the estimated useful lives of the improvements, generally
5 years
|
The
Globalstar System includes costs for the design, manufacture, test, and launch
of a constellation of low earth orbit satellites, including in-orbit spare
satellites (the “Space Component”), and primary and backup control centers and
gateways (the “Ground Component”).
The
Company records losses from the in-orbit failure of a satellite in the period it
is determined that the satellite is not recoverable.
The
Company reviews the carrying value of the Globalstar System for impairment every
fourth quarter or whenever events or changes in circumstances indicate that the
recorded value of the Space Component and Ground Component may not be
recoverable. Globalstar looks to current and future undiscounted cash flows,
excluding financing costs, as primary indicators of recoverability. If
impairment is determined to exist, any related impairment loss is calculated
based on fair value.
The
Globalstar System includes costs for the design, manufacture, test, and launch
of a constellation of low earth orbit satellites, including satellites put into
service which were previously recorded as spare satellites and held as ground
spares until the Company launched four satellites each in May and October 2007.
The spare satellites and associated launch costs included costs that were
considered construction-in-progress and were transferred to Globalstar System
when placed into service. The Company began depreciating costs for each
particular satellite over an estimated life of eight years from the date it was
placed into service.
Deferred
Financing Costs
These
costs represent costs incurred in obtaining long-term debt, credit facilities
and long term convertible senior notes. These costs are classified as long-term
other assets and are amortized as additional interest expense over the term of
the corresponding debt, credit facilities or the first put option date for the
long term convertible notes. As of December 31, 2009 and 2008, the Company had
net deferred financing costs of $69.6 million and $8.3 million, respectively.
The Company incurred an additional $73.6 million in financing costs during 2009.
Approximately $6.5 million and $0.4 million of deferred financing costs were
recorded as interest expense for the years ended December 31, 2009 and 2008,
respectively.
Asset
Retirement Obligation
The
Company capitalized, as part of the carrying amount, the estimated costs
associated with the eventual retirement of five gateways owned by the Company.
As of December 31, 2009 and 2008, the Company had accrued approximately $0.8
million and $0.7 million, respectively, for asset retirement obligations. The
Company believes this estimate will be sufficient to satisfy the Company’s
obligation under leases to remove the gateway equipment and restore the sites to
their original condition.
Revenue
Recognition and Deferred Revenues
Monthly
access fees billed to retail customers and resellers, representing the minimum
monthly charge for each line of service based on its associated rate plan, are
billed on the first day of each monthly bill cycle. Airtime minute fees in
excess of the monthly access fees are billed in arrears on the first day of each
monthly billing cycle. To the extent that billing cycles fall during the course
of a given month and a portion of the monthly services has not been delivered at
month end, fees are prorated and fees associated with the undelivered portion of
a given month are deferred. Under certain annual plans, where customers prepay
for minutes, revenue is deferred until the minutes are used or the prepaid time
period expires. Unused minutes are accumulated until they expire, usually one
year after activation. In addition, the Company offers other annual plans
whereby the customer is charged an annual fee to access our system. These fees
are recognized on a straight-line basis over the term of the plan. In some
cases, the Company charges a per minute rate whereby it recognizes the revenue
when each minute is used.
Occasionally
the Company has granted to customers credits which are expensed or charged
against deferred revenue when granted.
Subscriber
acquisition costs include items such as dealer commissions, internal sales
commissions and equipment subsidies and are expensed at the time of the related
sale.
The
Company also provides certain engineering services to assist customers in
developing new applications related to our system. The revenues associated with
these services are recorded when the services are rendered, and the expenses are
recorded when incurred. The Company records revenues and costs associated with
long term engineering contracts on the percentage-of-completion method of
accounting.
The
Company owns and operates its satellite constellation and earns a portion of its
revenues through the sale of airtime minutes on a wholesale basis to independent
gateway operators. Revenue from services provided to independent gateway
operators is recognized based upon airtime minutes used by customers of
independent gateway operators and contractual fee arrangements. Where collection
is uncertain, revenue is recognized when cash payment is received.
During
the second quarter of 2007, the Company introduced an unlimited airtime usage
service plan (called the Unlimited Loyalty plan) which allows existing and new
customers to use unlimited satellite voice minutes for anytime calls for a fixed
monthly or annual fee. The unlimited loyalty plan incorporates a declining price
schedule that reduces fixed monthly fee at the completion of each calendar year
through the duration of the customer agreement, which ends on June 30, 2010.
Customers have an option to extend their customer agreement by one year at a
discounted fixed price. The Company records revenue for this plan on a monthly
basis based on a straight line average derived by computing the total fees
charged over the term of the customer agreement (including the optional year)
and dividing it by the number of the months. If a customer cancels prior to the
ending date of the customer agreement, the balance in deferred revenue is
recognized as revenue.
The
Company sells SPOT satellite GPS messenger services as annual plans and bills
the customer at the time the customer activates the service. The Company defers
revenue on such annual service plans upon activation and recognizes it ratably
over service term.
Subscriber
equipment revenue represents the sale of fixed and mobile user terminals,
accessories and SPOT satellite GPS messenger product. The Company recognizes
revenue upon shipment provided title and risk of loss have passed to the
customer, persuasive evidence of an arrangement exists, the fee is fixed and
determinable and collection is probable.
At times,
the Company will sell subscriber equipment through multi-element contracts that
bundle subscriber equipment with services. When the Company sells subscriber
equipment and services in bundled arrangements and determines that it has
separate units of accounting, the Company will allocate the bundled contract
price among the various contract deliverables based on each deliverable’s
relative fair value. The Company will determine vendor specific objective
evidence of fair value by assessing sales prices of subscriber equipment and
services when they are sold to customers on a stand-alone basis.
At
December 31, 2009 and 2008, the Company’s deferred revenue aggregated
approximately $22.4 million (of which $2.5 million was included in non-current
liabilities) and $20.6 million (of which $1.3 million was included in
non-current liabilities), respectively.
The
Company does not record sales and use tax and other taxes collected from its
customers in revenue.
Research
and Development Expenses
Research
and development costs were $4.3 million, $3.2 million and $2.9 million for 2009,
2008 and 2007, respectively, and are expensed as incurred as cost of
services.
Advertising
Expenses
Advertising
expenses were $3.4 million, $5.4 million and $1.5 million for 2009, 2008 and
2007, respectively, and are expensed as incurred as part of marketing, general
and administrative expenses.
Foreign
Currency
Foreign
currency assets and liabilities are remeasured into U.S. dollars at current
exchange rates and revenue and expenses are translated at the average exchange
rates in effect during each period. For 2009, 2008 and 2007, the foreign
currency translation adjustments were $4.2 million, $(6.2) million and $4.2
million, respectively.
Foreign
currency transaction gains and (losses) are included in net income. Foreign
currency transaction gains (losses) were $1.7 million, $(4.5) million and $8.2
million for 2009, 2008 and 2007, respectively. These were classified as other
income or expense on the statement of operations.
Income
Taxes
Until
January 1, 2006, the Company and its U.S. operating subsidiary were treated as
partnerships for U.S. tax purposes (Note 8). Generally, taxable income or loss,
deductions and credits of the partnership are passed through to its partners.
Effective January 1, 2006, the Company elected to be taxed as a C corporation
for U.S. tax purposes and began accounting for income taxes as a
corporation.
As of
December 31, 2009 and 2008, the Company had gross deferred tax assets of
approximately $148.4 million and $122.6 million, respectively. The Company
established a valuation reserve of $148.4 million and $122.6` million as of
December 31, 2009 and 2008, respectively, due to its concern that it may be more
likely than not that the Company may not be able to utilize the deferred tax
assets.
Stock-Based
Compensation
The
Company is required to recognize compensation expense in the financial
statements for both employee and non-employee share-based awards based on the
grant date fair value of those awards. Additionally, stock-based compensation
expense includes an estimate for pre-vesting forfeitures and is recognized over
the requisite service periods of the awards on a straight-line basis, which is
generally commensurate with the vesting term.
Segments
Globalstar
operates in one segment, providing voice and data communication services via
satellite. As a result, all segment-related financial information is included in
the consolidated financial statements.
Comprehensive
Income (Loss)
All
components of comprehensive income (loss), including the minimum pension
liability adjustment and foreign currency translation adjustment, are reported
in the financial statements in the period in which they are recognized.
Comprehensive income (loss) is defined as the change in equity during a period
from transactions and other events and circumstances from non-owner
sources.
Earnings
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):
|
|
Year Ended December 31, 2009
|
|
|
|
Income
(Numerator)
|
|
|
Weighted-Average
Shares
Outstanding
(Denominator)
|
|
|
Per-Share
Amount
|
|
Basic
and dilutive loss per common share
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(74,923 |
) |
|
|
128,130 |
|
|
$ |
(0.58 |
) |
|
|
Year Ended December 31, 2008
|
|
|
|
Income
(Numerator)
|
|
|
Weighted-Average
Shares
Outstanding
(Denominator)
|
|
|
Per-Share
Amount
|
|
Basic
and dilutive loss per common share
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(22,792 |
) |
|
|
85,478 |
|
|
$ |
(0.27 |
) |
|
|
Year Ended December 31, 2007
|
|
|
|
Income
(Numerator)
|
|
|
Weighted-Average
Shares
Outstanding
(Denominator)
|
|
|
Per-Share
Amount
|
|
Basic
and dilutive loss per common share
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(27,925 |
) |
|
|
77,169 |
|
|
$ |
(0.36 |
) |
For 2009,
2008 and 2007, 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 15 for potentially dilutive
shares.
At
December 31, 2009 and 2008, 17.3 million and 24.2 million, respectively, in
Borrowed Shares related to our Share Lending Agreement (See Note 19) remained
outstanding. The Company does not consider the Borrowed Shares outstanding for
the purposes of computing and reporting its earnings per share.
Issued
Accounting Pronouncements Recently Adopted
Effective
January 1, 2010, the Company adopted the Financial Accounting Standards Board’s
(“FASB’s”) recently issued guidance on accounting for share loan facilities (see
Note 19).
Effective
June 30, 2009, the Company adopted the requirements of FASB ASC 855 (previously
FASB SFAS No. 165, “Subsequent
Events”) for subsequent events, which established standards for the
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are available to be issued. These standards are
largely the same guidance on subsequent events which previously existed only in
auditing literature.
Effective
April 1, 2009, the Company adopted the disclosure requirements of FASB ASC
820-10-50 (previously FSP FAS 107-1 and APB 28-1, “Interim Disclosures About Fair
Value of Financial Instruments” ). These disclosures have been provided
in Note 13, “Derivatives.”
Effective
January 1, 2009, the Company adopted the fair value measurement and disclosure
requirements of FASB ASC 820 (previously SFAS No. 157, “ Fair Value Measurements” )
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The adoption of ASC 820 did not have an impact on the
Consolidated Financial Statements.
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% Convertible Senior
Notes (the 5.75% Notes), which are discussed in more detail in Note 15 to the
Consolidated Financial Statements, 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.
This
guidance was effective for fiscal years beginning after December 15, 2008 and
required retrospective application. During the first quarter of 2009, the
Company adopted this guidance. All prior year information has been revised to
present the retrospective adoption of this guidance. The adoption of this
guidance is described further below and in more detail in Note 19 to the
Company’s consolidated financial statements contained in a Current Report on
Form 8-K dated August 21, 2009.
The
adoption of this guidance changed the Company’s full-year 2008 Consolidated
Statements 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. The Company capitalized the interest associated with
the accretion of debt discount recorded in connection with this adoption, which
resulted in an increase to property and equipment.
Issued
Accounting Pronouncements Not Yet Adopted
In
January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06.
This ASU amends the ASC guidance on Fair Value Measurements and Disclosures. The
ASU requires new disclosures regarding the transfer of items from Levels 1 and
2, new disclosure on the activity within Level 3 fair value measurements and
increased disclosure regarding the inputs and valuation techniques for Level 2
and 3 measurements. The adoption of the ASU will increase disclosure but should
have no impact on the Company’s financial position, results of operations, and
cash flows.
In
October 2009, the FASB issued ASU No. 2009-14, which provides new standards for
the accounting for certain revenue arrangements that include software elements.
These new standards amend the scope of pre-existing software revenue guidance by
removing from the guidance non-software components of tangible products and
certain software components of tangible products. These new standards are
effective for Globalstar beginning in the first quarter of fiscal year 2011,
however early adoption is permitted. The Company does not expect these new
standards to significantly impact its Consolidated Financial
Statements.
In
October 2009, the FASB issued ASU No. 2009-13, which eliminates the use of the
residual method and incorporates the use of an estimated selling price to
allocate arrangement consideration. In addition, the revenue recognition
guidance amends the scope to exclude tangible products that contain software and
non-software components that function together to deliver the product’s
essential functionality. The amendments to the accounting standards related to
revenue recognition are effective for fiscal years beginning after June 15,
2010. Upon adoption, the Company may apply the guidance retrospectively or
prospectively for new or materially modified arrangements. The Company is
currently evaluating the financial impact that this accounting standard will
have on its Consolidated Financial Statements.
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 its voting common stock. Of these
amounts, $500,000 in cash is held in an escrow account to cover expenses related
to the voluntary replacement of first production models of our 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 may be 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 will be 100% or $10.8 million; consequently, the Company
accrued the fair value of that expected earnout or approximately $6.0 million.
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. 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
|
|
|
2,424 |
|
Property
and equipment
|
|
|
931 |
|
Intangible
assets and goodwill
|
|
|
10,776 |
|
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. This allocation is preliminary due to the
acquisition being completed late in the Company’s fiscal year and the Company
will be unable to complete the valuation 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):
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Globalstar
System:
|
|
|
|
|
|
|
Space
component
|
|
$ |
132,982 |
|
|
$ |
132,982 |
|
Ground
component
|
|
|
31,623 |
|
|
|
26,154 |
|
Construction
in progress:
|
|
|
|
|
|
|
|
|
Second-generation
satellites, ground and related launch costs
|
|
|
852,466 |
|
|
|
518,297 |
|
Other
|
|
|
1,223 |
|
|
|
958 |
|
Furniture
and office equipment
|
|
|
20,316 |
|
|
|
16,872 |
|
Land
and buildings
|
|
|
4,308 |
|
|
|
3,810 |
|
Leasehold
improvements
|
|
|
823 |
|
|
|
687 |
|
|
|
|
1,043,741 |
|
|
|
699,760 |
|
Accumulated
depreciation
|
|
|
(78,820 |
) |
|
|
(55,729 |
) |
|
|
$ |
964,921 |
|
|
$ |
644,031 |
|
Property
and equipment consists of an in-orbit satellite constellation, ground equipment,
second-generation satellites under construction and related launch costs,
second-generation ground component and support equipment located in various
countries around the world.
In June
2009, Globalstar and Thales Alenia Space entered into an amended and restated
contract for the construction of second-generation low-earth orbit satellites to
incorporate prior amendments, acceleration requests and make other non-material
changes to the contract entered into in November 2006. The total contract price,
including subsequent additions, is approximately €678.9 million. Upon closing of
the Facility Agreement (See Note 15 “Borrowings”), amounts in the escrow account
became unrestricted and were reclassed to cash and cash
equivalents.
In March
2007, the Company and Thales Alenia Space entered into an agreement for the
construction of the Satellite Operations Control Centers, Telemetry Command
Units and In Orbit Test Equipment (collectively, the Control Network Facility)
for the Company’s second-generation satellite constellation. The total contract
price for the construction and associated services is €9.8 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 in the first quarter of 2010.
In
September 2007, the Company and Arianespace (the Launch Provider) entered into
an agreement for the launch of the Company’s second-generation satellites and
certain pre and post-launch services. Pursuant to the agreement, the Launch
Provider agreed to make four launches of six satellites each, and the Company
had the option to require the Launch Provider to make four additional launches
of six satellites each. The total contract price for the first four launches is
approximately $216.1 million. In July 2008, the Company amended its agreement
with the Launch Provider for the launch of the Company’s second-generation
satellites and certain pre and post-launch services. Under the amended terms,
the Company could defer payment on up to 75% of certain amounts due to the
Launch Provider. The deferred payments incurred annual interest at 8.5% to 12%
and became payable one month from the corresponding launch date. As of December
31, 2009 and 2008, the Company had approximately none and $47.3 million,
respectively, in deferred payments outstanding to the Launch Provider. In June
2009, the Company and the Launch Provider again amended their agreement reducing
the number of optional launches from four to one and modifying the agreement in
certain other respects including terminating the deferred payment provisions.
Notwithstanding the one optional launch, the Company is free to contract
separately with the Launch Provider or another provider of launch services after
the Launch Provider’s firm launch commitments are fulfilled.
In May
2008, the Company and Hughes Network Systems, LLC (Hughes) entered into an
agreement under which Hughes will design, supply and implement the Radio Access
Network (RAN) ground network equipment and software upgrades for installation at
a number of the Company’s satellite gateway ground stations and satellite
interface chips to be a part of the User Terminal Subsystem (UTS) in various
next-generation Globalstar devices. 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 December 31, 2009, the Company
had made payments of $35.0 million under this contract and expensed $5.7 million
of these payments, capitalized $21.8 million under second-generation satellites,
ground and related launch costs and $7.5 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
December 31, 2009 and 2008, capitalized interest recorded was $75.1 million and
$39.2 million, respectively. Interest capitalized during 2009 and 2008 was $35.9
million and $38.1 million, respectively. Depreciation expense for 2009 and 2008
was $21.8 million and $26.8 million, respectively.
5.
ACCRUED EXPENSES
Accrued
expenses consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Accrued
interest
|
|
$ |
7,434 |
|
|
$ |
14,957 |
|
Accrued
compensation and benefits
|
|
|
3,404 |
|
|
|
3,413 |
|
Accrued
property and other taxes
|
|
|
3,939 |
|
|
|
3,182 |
|
Customer
deposits
|
|
|
2,581 |
|
|
|
2,666 |
|
Accrued
professional fees
|
|
|
1,641 |
|
|
|
1,168 |
|
Accrued
acquisition costs
|
|
|
1,910 |
|
|
|
— |
|
Accrued
commissions
|
|
|
391 |
|
|
|
448 |
|
Accrued
telecom
|
|
|
478 |
|
|
|
433 |
|
Warranty
reserve
|
|
|
150 |
|
|
|
101 |
|
Accrued
second-generation construction and spare satellite launch
costs
|
|
|
4,109 |
|
|
|
35 |
|
Other
accrued expenses
|
|
|
4,483 |
|
|
|
3,595 |
|
|
|
$ |
30,520 |
|
|
$ |
29,998 |
|
Other
accrued expenses primarily include outsourced logistics services, storage,
maintenance, and roaming charges.
Warranty
terms extend from 90 days on equipment accessories to one year for fixed and
mobile user terminals. An accrual is made when it is estimable and probable that
a loss has been incurred based on historical experience. Warranty costs are
accrued based on historical trends in warranty charges as a percentage of gross
product shipments. A provision for estimated future warranty costs is recorded
as cost of sales when products are shipped. The resulting accrual is reviewed
regularly and periodically adjusted to reflect changes in warranty cost
estimates. The following is a summary of the activity in the warranty reserve
account (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of period
|
|
$ |
101 |
|
|
$ |
235 |
|
|
$ |
879 |
|
Provision
|
|
|
96 |
|
|
|
67 |
|
|
|
(177 |
) |
Utilization
|
|
|
(47 |
) |
|
|
(201 |
) |
|
|
(467 |
) |
Balance
at end of period
|
|
$ |
150 |
|
|
$ |
101 |
|
|
$ |
235 |
|
6.
PAYABLES TO AFFILIATES
Payables
to affiliates relate to normal purchase transactions, excluding interest, and
were $0.5 million and $3.3 million at December 31, 2009 and 2008,
respectively.
Thermo
incurs certain general and administrative expenses on behalf of the Company,
which are charged to the Company. For 2009, 2008 and 2007, total expenses were
approximately $146,000, $219,000 and $182,000, respectively. For 2009, 2008 and
2007, the Company also recorded $337,000, $449,000 and $420,000, respectively,
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.
7.
PENSIONS AND OTHER EMPLOYEE BENEFITS
Pensions
Until
June 1, 2004, substantially all Old and New Globalstar employees and retirees
who participated and/or met the vesting criteria for the plan were participants
in the Retirement Plan of Space Systems/Loral (the “Loral Plan”), a defined
benefit pension plan. The accrual of benefits in the Old Globalstar segment of
the Loral Plan was curtailed, or frozen, by the administrator of the Loral Plan
as of October 23, 2003. Prior to October 23, 2003, benefits for the Loral Plan
were generally based upon contributions, length of service with the Company and
age of the participant. On June 1, 2004, the assets and frozen pension
obligations of the Globalstar Segment of the Loral Plan were transferred into a
new Globalstar Retirement Plan (the “Globalstar Plan”). The Globalstar Plan
remains frozen and participants are not currently accruing benefits beyond those
accrued as of October 23, 2003. Globalstar’s funding policy is to fund the
Globalstar Plan in accordance with the Internal Revenue Code and
regulations.
Components
of the net periodic pension cost of the Company’s contributory defined benefit
pension plan for the years ended December 31, were as follows (in
thousands):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Interest
and service cost
|
|
$ |
805 |
|
|
$ |
759 |
|
|
$ |
761 |
|
Expected
return on plan assets
|
|
|
(634 |
) |
|
|
(843 |
) |
|
|
(802 |
) |
Actuarial
loss, net
|
|
|
296 |
|
|
|
16 |
|
|
|
62 |
|
Net
periodic pension cost (income)
|
|
$ |
467 |
|
|
$ |
(68 |
) |
|
$ |
21 |
|
As of the
measurement date (December 31), the status of the Company’s defined benefit
pension plan was as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
Benefit
obligation, beginning of year
|
|
$ |
13,453 |
|
|
$ |
13,183 |
|
Interest
and service cost
|
|
|
805 |
|
|
|
759 |
|
Actuarial
(gain) loss
|
|
|
983 |
|
|
|
248 |
|
Benefits
paid
|
|
|
(807 |
) |
|
|
(737 |
) |
Benefit
obligation, end of year
|
|
$ |
14,434 |
|
|
$ |
13,453 |
|
Fair
value of plan assets, beginning of year
|
|
$ |
8,671 |
|
|
$ |
11,404 |
|
Actual
return (loss) on plan assets
|
|
|
1,728 |
|
|
|
(2,441 |
) |
Employer
contributions
|
|
|
343 |
|
|
|
444 |
|
Benefits
paid
|
|
|
(807 |
) |
|
|
(736 |
) |
Fair
value of plan assets, end of year
|
|
$ |
9,935 |
|
|
$ |
8,671 |
|
Funded
status, end of year
|
|
$ |
(4,499 |
) |
|
$ |
(4,782 |
) |
Unrecognized
net actuarial loss
|
|
|
4,773 |
|
|
|
5,180 |
|
Net
amount recognized
|
|
$ |
274 |
|
|
$ |
398 |
|
Amounts
recognized on the balance sheet consist of:
|
|
|
|
|
|
|
|
|
Accrued
pension liability
|
|
$ |
(4,499 |
) |
|
$ |
(4,782 |
) |
Accumulated
other comprehensive loss
|
|
|
4,773 |
|
|
|
5,180 |
|
Net
amount recognized
|
|
$ |
274 |
|
|
$ |
398 |
|
At
December 31, 2009, and 2008, the fair value of plan assets less benefit
obligation was recognized as a non-current liability on the Company’s balance
sheet in the amount of $4.5 million and $4.8 million, respectively.
The
assumptions used to determine the benefit obligations at December 31 were as
follows:
|
|
2009
|
|
|
2008
|
|
Discount
rate
|
|
|
5.60 |
% |
|
|
5.75 |
% |
Rate
of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
The
principal actuarial assumptions to determine net period benefit cost for the
years ended December 31 were as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
5.75 |
% |
Expected
rate of return on plan assets
|
|
|
7.50 |
% |
|
|
7.50 |
% |
|
|
7.50 |
% |
Rate
of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
The
assumptions, investment policies and strategies for the Globalstar Plan are
determined by the Globalstar Plan Committee. Prior to June 1, 2004, the
assumptions, investment policies and strategies for the Globalstar segment of
the Loral Plan were determined by the Loral Plan Committee. The expected
long-term rate of return on pension plan assets is selected by taking into
account the expected duration of the projected benefit obligation for the plans,
the asset mix of the plans and the fact that the plan assets are actively
managed to mitigate risk.
The plan
assets are invested in various mutual funds which have quoted prices. The
defined benefit pension plan asset allocation as of the measurement date
(December 31) and the target asset allocation, presented as a percentage of
total plan assets were as follows:
|
|
2009
|
|
|
2008
|
|
|
Target
Allocation
|
|
Debt
securities
|
|
|
40 |
% |
|
|
50 |
% |
|
|
35% – 50 |
% |
Equity
securities
|
|
|
57 |
% |
|
|
47 |
% |
|
|
50% – 60 |
% |
Other
investments
|
|
|
3 |
% |
|
|
3 |
% |
|
|
0% – 5 |
% |
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
The
benefit payments to retirees are expected to be paid as follows (in
thousands):
Years
Ending December 31,
|
|
|
|
2010
|
|
$ |
792 |
|
2011
|
|
|
822 |
|
2012
|
|
|
843 |
|
2013
|
|
|
862 |
|
2014
|
|
|
879 |
|
2015 – 2019
|
|
$ |
4,487 |
|
For 2009
and 2008, the Company contributed $343,000 and $444,000, respectively, to the
Globalstar Plan. The Company expects to contribute a total of approximately
$278,000 to the Globalstar Plan in 2010.
Other
Employee Plans
The
Company has established various other employee benefit plans, which include an
employee incentive program, and other employee/management incentive compensation
plans. The employee/management compensation plans are based upon annual
performance measures and other criteria and are paid in shares of the Company’s
common stock. The total expenses related to these plans for the years ended
December 31, 2009, 2008 and 2007 were $9.9 million, $12.5 million and $9.6
million, respectively.
On August
1, 2001, Old Globalstar adopted a defined contribution employee savings plan, or
“401(k),” which provided that Old Globalstar would match the contributions of
participating employees up to a designated level. Prior to August 1, 2001, Old
Globalstar’s employees participated in the Loral 401(k) plan. This plan was
continued by New Globalstar. Under this plan, the matching contributions were
approximately $395,000, $508,000 and $341,000 for 2009, 2008 and 2007,
respectively.
8.
TAXES
Until
January 1, 2006, the Company and its U.S. operating subsidiaries were treated as
partnerships for U.S. tax purposes. Generally, taxable income or loss,
deductions and credits of the partnership are passed through to its partners.
Effective January 1, 2006, the Company elected to be taxed as a C corporation
for U.S. tax purposes, and the Company and its U.S. operating subsidiaries began
accounting for income taxes as a corporation.
The
Company recognizes deferred tax assets and liabilities for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis, operating losses and tax credit carry-forwards. The Company measures
deferred tax assets and liabilities using tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The Company recognizes the effect on deferred tax assets
and liabilities of a change in tax rates in income in the period that includes
the enactment date.
The
Company also recognizes valuation allowances to reduce deferred tax assets to
the amount that is more likely than not to be realized. In assessing the
likelihood of realization, management considers: (i) future reversals of
existing taxable temporary differences; (ii) future taxable income exclusive of
reversing temporary differences and carry-forwards; (iii) taxable income in
prior carry-back year(s) if carry-back is permitted under applicable tax law;
and (iv) tax planning strategies.
The
components of income tax expense (benefit) were as follows (in
thousands):
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
tax (benefit)
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
State
tax
|
|
|
85 |
|
|
|
21 |
|
|
|
98 |
|
Foreign
tax
|
|
|
(101 |
) |
|
|
(1,302 |
) |
|
|
3,320 |
|
Total
|
|
|
(16 |
) |
|
|
(1,281 |
) |
|
|
3,418 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
and state tax (benefit)
|
|
|
— |
|
|
|
(2,763 |
) |
|
|
— |
|
Foreign
tax (benefit)
|
|
|
0 |
|
|
|
1,761 |
|
|
|
(554 |
) |
Total
|
|
|
0 |
|
|
|
(1,002 |
) |
|
|
(554 |
) |
Income
tax expense (benefit)
|
|
$ |
(16 |
) |
|
$ |
(2,283 |
) |
|
$ |
2,864 |
|
U.S. and
foreign components of income (loss) before income taxes are presented below (in
thousands):
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
U.S.
income (loss)
|
|
$ |
(69,490 |
) |
|
$ |
(6,628 |
)
|
|
$ |
(17,545 |
) |
Foreign
income (loss)
|
|
|
(5,449 |
) |
|
|
(18,447 |
) |
|
|
(7,516 |
) |
Total
income (loss) before income taxes
|
|
$ |
(74,939 |
) |
|
$ |
(25,075 |
) |
|
$ |
(25,061 |
) |
As of
December 31, 2009, the Company had cumulative U.S. and foreign net operating
loss carry-forwards for income tax reporting purposes of approximately $300.7
million and $ 63.2 million, respectively. As of December 31, 2008, the Company
had cumulative U.S. and foreign net operating loss carry-forwards for income tax
reporting purposes of approximately $ 196.0 million and $52.8 million,
respectively. The net operating loss carry-forwards expire on various dates
beginning in 2010. A small amount of the net operating loss carryforwards do not
expire which are some of the foreign carryforwards.
The
Company has not provided for United States income taxes and foreign withholding
taxes on approximately $2.9 million of undistributed earnings from certain
foreign subsidiaries indefinitely invested outside the United States. Should the
Company decide to repatriate these foreign earnings, the Company would have to
adjust the income tax provision in the period in which management believes the
Company would repatriate the earnings.
Commencing
in May 2008, the Company issued $150.0 million of 5.75% Notes. During the fourth
quarter of 2008, some of these note holders converted or exchanged their 5.75%
Notes for common stock, which resulted in a taxable gain in the U.S. of
approximately $71.8 million. On January 1, 2009, the Company adopted 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 5.75% Notes
during the fourth quarter of 2008 against additional-paid-in-capital and reduced
its deferred tax asset at December 31, 2008. The adoption resulted in the
Company’s recording of a gain from the exchanges and conversions of the 5.75%
Notes.
The
components of net deferred income tax assets were as follows (in
thousands):
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Federal
and foreign net operating loss and credit carry-forwards
|
|
$ |
134,756 |
|
|
$ |
75,121 |
|
Property
and equipment and other long term
|
|
|
3,786 |
|
|
|
35,286 |
|
Accruals
and reserves
|
|
|
9,855 |
|
|
|
12,214 |
|
Deferred
tax assets before valuation allowance
|
|
|
148,397 |
|
|
|
122,621 |
|
Valuation
allowance
|
|
|
(148,397 |
) |
|
|
(122,621 |
) |
Net
deferred income tax assets
|
|
$ |
— |
|
|
$ |
— |
|
The
change in the valuation allowance during 2009 and 2008 was $25.8 million and
$0.2 million, respectively.
The
actual provision for income taxes differs from the statutory U.S. federal income
tax rate as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Provision
at U.S. statutory rate of 35%
|
|
$ |
(26,227 |
) |
|
$ |
(6,106 |
) |
|
$ |
(8,762 |
) |
Nontaxable
partnership interest
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
State
income taxes, net of federal benefit
|
|
|
(4,086 |
) |
|
|
60 |
|
|
|
(1,053 |
) |
Incorporation
of U.S. company
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Change
in valuation allowance
|
|
|
25,776 |
|
|
|
1,698 |
|
|
|
7,195 |
|
Effect
of foreign income tax at various rates
|
|
|
594 |
|
|
|
759 |
|
|
|
1,664 |
|
Permanent
differences
|
|
|
579 |
|
|
|
1,322 |
|
|
|
1,072 |
|
Other
(including amounts related to prior year tax matters)
|
|
|
3,348 |
|
|
|
(16 |
) |
|
|
2,748 |
|
Total
|
|
$ |
(16 |
) |
|
$ |
(2,283 |
) |
|
$ |
2,864 |
|
Tax
Audits
The
Company operates in various U.S. and foreign tax jurisdictions. The process of
determining its anticipated tax liabilities involves many calculations and
estimates which are inherently complex. The Company believes that it has
complied in all material respects with its obligations to pay taxes in these
jurisdictions. However, its position is subject to review and possible challenge
by the taxing authorities of these jurisdictions. If the applicable taxing
authorities were to challenge successfully its current tax positions, or if
there were changes in the manner in which we conduct its activities, the Company
could become subject to material unanticipated tax liabilities. It may also
become subject to additional tax liabilities as a result of changes in tax laws,
which could in certain circumstances have a retroactive effect.
A tax
authority has 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 Internal Revenue Service
(“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 intends to pursue the matter through applicable IRS and
judicial procedures as appropriate.
As a
result of the Company not yet realizing any current tax benefits related to the
deductions from the proposed adjustments, the Company would not incur any
current additional tax as a result of any adjustment. However, if there is any
adjustment to the basis of the assets, this could reduce the Company’s net
operating losses and allowed deductions in future years which could negatively
impact its future cash flow. The potential impact of such a possibility has been
considered in the Company’s analysis and it has adjusted its gross deferred tax
asset before valuation allowance to a tax position that is more likely than not
to be sustained.
Except
for the IRS audit noted above, neither the Company nor any of its subsidiaries
are currently under audit by the Internal Revenue Service (“IRS”) or by any
state jurisdiction in the United States. The Company’s corporate U.S. tax
returns for 2006 and 2007 and its U.S. partnership tax returns filed for years
prior to 2006 remain 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. The state impact of any federal changes
remains subject to examination by various states for a period of up to one year
after formal notification to the states.
In the
Company’s international tax jurisdictions, numerous tax years remain subject to
examination by tax authorities, including tax returns for 2001 and subsequent
years in most of the Company’s international tax jurisdictions.
The
reconciliation of the Company’s unrecognized tax benefits is as follows (in
thousands):
|
|
2009
|
|
Gross unrecognized tax benefits at January 1, 2009
|
|
$ |
80,791 |
|
Gross
increases (decrease) based on tax positions related to current
year
|
|
|
(2,011 |
) |
Reductions
to tax positions related to prior years Audit settlements paid during
2009
|
|
|
0 |
|
Gross
unrecognized tax benefits at December 31, 2009
|
|
$ |
78,780 |
|
The total
unrecognized tax benefit of $78.7 million at December 31, 2009 included $6.3
million which, if recognized, could potentially reduce the effective income tax
rate in future periods.
In
connection with the FIN 48 adjustment, at December 31, 2009 and 2008, the
Company recorded interest and penalties of $1.2 million and $0.8 million,
respectively.
It is
anticipated that the amount of unrecognized tax benefit reflected at December
31, 2009 will not materially change in the next 12 months; any changes are not
anticipated to have a significant impact on the results of operations, financial
position or cash flows of the Company.
The
Company is subject to income taxes in the U.S. and numerous foreign
jurisdictions. Significant judgment is required in evaluating its tax positions
and determining its provision for income taxes. During the ordinary course of
business, there are many transactions and calculations for which the ultimate
tax determination is uncertain.
9.
GEOGRAPHIC INFORMATION
The
revenue by geographic location is presented net of eliminations for intercompany
sales, and is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Service:
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
29,994 |
|
|
$ |
32,092 |
|
|
$ |
43,214 |
|
Canada
|
|
|
12,774 |
|
|
|
19,500 |
|
|
|
26,445 |
|
Central
and South America
|
|
|
4,778 |
|
|
|
5,947 |
|
|
|
2,883 |
|
Europe
|
|
|
2,338 |
|
|
|
3,521 |
|
|
|
4,692 |
|
Others
|
|
|
344 |
|
|
|
734 |
|
|
|
1,079 |
|
Total
service revenue
|
|
|
50,228 |
|
|
|
61,794 |
|
|
|
78,313 |
|
Subscriber
equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
5,395 |
|
|
|
12,513 |
|
|
|
7,303 |
|
Canada
|
|
|
2,815 |
|
|
|
6,886 |
|
|
|
5,656 |
|
Central
and South America
|
|
|
1,584 |
|
|
|
2,601 |
|
|
|
1,161 |
|
Europe
|
|
|
800 |
|
|
|
1,895 |
|
|
|
5,334 |
|
Others
|
|
|
3,457 |
|
|
|
366 |
|
|
|
631 |
|
Total
subscriber equipment revenue
|
|
|
14,051 |
|
|
|
24,261 |
|
|
|
20,085 |
|
Total
revenue
|
|
$ |
64,279 |
|
|
$ |
86,055 |
|
|
$ |
98,398 |
|
The
long-lived assets (property and equipment) by geographic location are as follows
(in thousands):
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Long-lived
assets:
|
|
|
|
|
|
|
United
States
|
|
$ |
955,105 |
|
|
$ |
633,624 |
|
Central
and South America
|
|
|
6,879 |
|
|
|
7,082 |
|
Canada
|
|
|
650 |
|
|
|
919 |
|
Europe
|
|
|
26 |
|
|
|
130 |
|
Others
|
|
|
2,261 |
|
|
|
2,276 |
|
Total
long-lived assets
|
|
$ |
964,921 |
|
|
$ |
644,031 |
|
10.
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 December 31, 2009 and 2008, total advances to Qualcomm for
inventory were $9.2 million. As of each of December 31, 2009 and 2008, the
Company had outstanding commitment balances of approximately $49.4 million. On
October 28, 2008, the Company amended its agreement with Qualcomm to extend the
term for 12 months and defer delivery of mobile phones and related equipment
until April 2010 through July 2011.
On August
16, 2006, the Company entered into an amended and restated credit agreement with
Wachovia Investment Holdings, LLC, as administrative agent and swingline lender,
and Wachovia Bank, National Association, as issuing lender, which was
subsequently amended on September 29 and October 26, 2006. On December 17, 2007,
Thermo was assigned all the rights (except indemnification rights) and assumed
all the obligations of the administrative agent and the lenders under the
amended and restated credit agreement, and the credit agreement was again
amended and restated. In connection with fulfilling the conditions precedent to
funding under the Company’s Facility Agreement, in June 2009, Thermo converted
the loans outstanding under the credit agreement into equity and terminated the
credit agreement. In addition, Thermo and its affiliates deposited $60.0 million
in a contingent equity account to fulfill a condition precedent for borrowing
under the Facility Agreement, purchased $11.4 million of the Company’s 8% Notes,
provided a $2.3 million short-term loan to the Company, and loaned $25.0 million
to the Company to fund its debt service reserve account (See Note 15
“Borrowings”).
During
2009 and 2008, the Company purchased approximately $3.7 million and $7.7
million, respectively, of services and equipment from a company whose
non-executive chairman serves as a member of the Company’s board of
directors.
Purchases
and other transactions with affiliates
Total
purchases and other transactions from affiliates, excluding interest and capital
transactions, were $4.0 million and $7.9 million for 2009 and 2008,
respectively.
11.
COMMITMENTS AND CONTINGENCIES
Future
Minimum Lease Obligations
Globalstar
currently has several operating leases for facilities throughout the United
States and around the world, including California, Florida, Texas, Canada,
Ireland, France, Venezuela, Brazil, Panama, and Singapore. The leases expire on
various dates through August 2015. The following table presents the future
minimum lease payments (in thousands):
Years Ending December 31,
|
|
|
|
2010
|
|
$ |
1,619 |
|
2011
|
|
|
1,071 |
|
2012
|
|
|
1,035 |
|
2013
|
|
|
748 |
|
2014
|
|
|
192 |
|
Thereafter
|
|
|
116 |
|
Total
minimum lease payments
|
|
$ |
4,781 |
|
Rent
expense for 2009, 2008 and 2007 were approximately $1.8 million, $1.6 million
and $1.4 million, respectively.
Contractual
Obligations
The
Company has purchase commitments with Thales, Arianespace, Ericsson, Hughes and
other venders totaling approximately $219.8 million, $184.4 million, $110.7
million, $83.4 million and $13.9 million in 2010, 2011, 2012, 2013, 2014 and
thereafter, respectively. The Company expects to fund its long-term capital
needs with any remaining funds available under its Facility Agreement, cash
flow, which it expects will be generated primarily from sales of its Simplex
products and services, including its SPOT satellite GPS messenger products and
services, and the incurrence of additional indebtedness, additional equity
financings or a combination of these potential sources of funds.
Litigation
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. After a hearing on February 18,
2010, the judge approved the settlement.
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 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 L-Band
Decision. On November 9, 2007, the FCC released a Second
Order on Reconsideration, Second Report and Order and Notice of Proposed
Rulemaking. In the Report and Order (“R&O”) portion of the decision, the FCC
effectively decreased the L-band spectrum available to the Company while
increasing the L-band spectrum available to Iridium Communications by 2.625 MHz.
On February 5, 2008, the Company filed a notice of appeal of the FCC’s decision
in the U.S. Court of Appeals for the D.C. Circuit. Briefs were filed and oral
argument was held on February 17, 2009. On May 1, 2009, the court issued a
decision denying the Company’s appeal and affirming the FCC’s decision.
Globalstar has not undertaken any further appeals.
Appeal of FCC ATC Decision.
On October 31, 2008, the FCC issued an Order granting the Company
modified Ancillary Terrestrial Component (“ATC”) authority. The modified
authority allows the Company and Open Range Communications, Inc. to implement
their plan to roll out ATC service in rural areas of the United States. On
December 1, 2008, Iridium Communications filed a petition with the U.S. Court of
Appeals for the District of Columbia Circuit for review of the FCC’s Order. On
the same day, CTIA-The Wireless Association petitioned the FCC to reconsider its
Order. The court has granted the FCC’s motion to hold the appeal in abeyance
pending the FCC’s decision on reconsideration.
Sorensen Research & Development
Trust v. Axonn LLC, et al. On July 2, 2008, the Company’s
subsidiary, Spot LLC, received a notice of patent infringement from Sorensen
Research and Development. Sorensen asserts that the process used to manufacture
the SPOT satellite GPS messenger violates a U.S. patent held by Sorensen. The
manufacturer, Axonn LLC, has assumed responsibility for managing the case under
an indemnity agreement with the Company and Spot LLC. Axonn was unable to
negotiate a mutually acceptable settlement with Sorensen, and on January 14,
2009, Sorensen filed a complaint against Axonn, Spot LLC and the Company in the
U.S. District Court for the Southern District of California. The Company and
Axonn filed an answer and counterclaim and a motion to stay the proceeding
pending completion of the re-examination of the subject patent. The court
granted the motion for stay on July 29, 2009. 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. If Axonn fails to
perform this obligation, however, the Company’s recourse is generally limited to
seeking recovery from its stock held in escrow or reducing the earnout payments
that may otherwise be owed to Axonn under the acquisition
agreement.
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 the court approved the settlement. The Company has
recorded a liability for this settlement; however, the amount is not
material.
12.
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. In January 2008, the Company’s
Board of Directors approved the addition of approximately 1.7 million shares of
the Company’s common stock to the shares available for issuance under the Equity
Plan. The Company’s stockholders approved the Amended and Restated Equity Plan
on May 13, 2008, which added an additional 3.0 million shares of the Company’s
common stock to the shares available for issuance under the Equity Plan. In
January and August 2009, the Company’s Board of Directors approved an additional
2.7 million shares and 10.0 million shares, respectively, of the Company’s
common stock to the shares available for issuance under the Equity Plan. At
December 31, 2009, the number of shares of common stock that remained available
for issuance under the Equity Plan was approximately 6.6 million. Equity awards
granted to employees in 2008 and 2009 under the Equity Plan consisted of
primarily restricted stock awards and restricted stock units. Equity awards
generally vest over a period of 2-5 years from the date of grant. The fair value
of the restricted stock awards and restricted stock units is based upon the fair
value of the Company’s common stock on the date of grant.
The
effect of recording stock based compensation expense for 2009, 2008 and 2007 was
as follows (in millions):
For the year ended December 31, 2009
|
|
Stock
options
|
|
|
RSUs
|
|
|
Total
|
|
Cost
of services (includes research and development)
|
|
$ |
— |
|
|
$ |
2.2 |
|
|
$ |
2.2 |
|
Marketing,
general and administrative
|
|
|
2.9 |
|
|
|
4.8 |
|
|
|
7.7
|
|
Total
compensation expense
|
|
|
2.9
|
|
|
|
7.0
|
|
|
|
9.9
|
|
Income
tax benefit
|
|
|
(0.3 |
) |
|
|
(0.7 |
) |
|
|
(1.0 |
) |
Total
compensation expense, net of tax
|
|
$ |
2.6 |
|
|
$ |
6.3 |
|
|
$ |
8.9 |
|
For the year ended December 31, 2008
|
|
Stock
options
|
|
|
RSUs
|
|
|
Total
|
|
Cost
of services (includes research and development)
|
|
$ |
— |
|
|
$ |
2.9 |
|
|
$ |
2.9 |
|
Marketing,
general and administrative
|
|
|
0.3 |
|
|
|
9.3 |
|
|
|
9.6
|
|
Total
compensation expense
|
|
|
0.3
|
|
|
|
12.2
|
|
|
|
12.5
|
|
Income
tax benefit
|
|
|
(0.1 |
) |
|
|
(0.6 |
) |
|
|
(0.7 |
) |
Total
compensation expense, net of tax
|
|
$ |
0.2 |
|
|
$ |
11.6 |
|
|
$ |
11.8 |
|
For the year ended December 31,
2007
|
|
Stock
options
|
|
|
RSUs
|
|
|
Total
|
|
Cost
of services (includes research and development)
|
|
$ |
N/A |
|
|
$ |
1.9 |
|
|
$ |
1.9 |
|
Marketing,
general and administrative
|
|
|
N/A |
|
|
|
7.7 |
|
|
|
7.7 |
|
Total
compensation expense
|
|
|
N/A |
|
|
|
9.6 |
|
|
|
9.6 |
|
Income
tax benefit
|
|
|
N/A |
|
|
|
(0.4 |
) |
|
|
(0.4 |
) |
Total
compensation expense, net of tax
|
|
$ |
N/A |
|
|
$ |
9.2 |
|
|
$ |
9.2 |
|
At
December 31, 2009 and 2008, the amount related to non-vested shares expected to
be amortized over the remaining vesting period was $14.5 million and $13.7
million, respectively. At December 31, 2009 and 2008, the weighted average
remaining vesting term of the non-vested shares was 2.1 years and 1.2 years,
respectively.
The fair
value of stock based awards was estimated using either a Black-Scholes model or
a Binomial Lattice model, both of which requires the use of employee exercise
behavior data and the use of assumptions including expected volatility,
risk-free interest rate, turnover rates and dividends. The table below
summarizes the range of assumptions used to determine the fair value the stock
based awards and the related weighted average fair values:
Years
Ended
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Options
|
|
|
RSUs
|
|
|
Options
|
|
|
RSUs
|
|
|
Options
|
|
|
RSUs
|
|
Expected
volatility
|
|
|
60% – 120 |
% |
|
|
N/A |
|
|
|
60% – 120 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Risk-free
interest rate
|
|
<1
|
% |
|
<1
|
% |
|
|
1% – 3 |
% |
|
|
1% – 3 |
% |
|
|
N/A |
|
|
|
1% – 3 |
% |
Turnover
rate
|
|
|
0% – 9 |
% |
|
|
0% – 9 |
% |
|
|
0% – 7 |
% |
|
|
0% – 7 |
% |
|
|
N/A |
|
|
|
0% – 7 |
% |
Dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
N/A |
|
|
|
— |
|
Expected
life of options (years)
|
|
|
2 – 10 |
|
|
|
1 – 3 |
|
|
|
2 – 10 |
|
|
|
1 – 3 |
|
|
|
N/A |
|
|
|
1 – 3 |
|
The
Company adjusts its estimates of expected equity awards forfeitures based upon
its review of recent forfeiture activity and expected future employee turnover.
The effect of adjusting the forfeiture rate for all expense is recognized in the
period in which the forfeiture estimate is changed. The effect of forfeiture
adjustments for the year ended December 31, 2009 and 2008 was $1.5 million and
$1.4 million, respectively. The effect of changes to the forfeiture estimates
during the year ended December 31, 2007 was insignificant.
Effective
August 10, 2007 (the “Effective Date”), the board of directors, upon
recommendation of the Compensation Committee, approved the concurrent
termination of the Company’s Executive Incentive Compensation Plan and awards of
restricted stock or restricted stock units under the Company’s 2006 Equity
Incentive Plan to five executive officers (the “Participants”). Each award
agreement provides that the recipient will receive awards of restricted common
stock (or, for the non-U.S. Participant, restricted stock units, which upon
vesting, each entitle him to one share of Globalstar common stock). Total
benefits per Participant (valued at the grant date) are approximately $6.0
million, which represents an increase of approximately $1.5 million in potential
compensation compared to the maximum potential benefits under the Executive
Incentive Compensation Plan. However, the new award agreements extend the
vesting period by up to two years through 2011 and provide for payment in shares
of common stock instead of cash, thereby enabling the Company to conserve its
cash for capital expenditures for the procurement and launch of its
second-generation satellite constellation and related ground station upgrades.
At December 31, 2009, the amount related to non-vested share awards related to
the Company’s Executive Incentive Compensation Plan expected to be amortized
over the remaining vesting period was $3.9 million.
A summary
of the nonvested shares under the Company’s restricted stock and restricted unit
awards and changes during the years, is presented below:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Issued Nonvested
Restricted Stock
Awards and
Restricted Stock
Units
|
|
Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
Per Share
|
|
|
Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
Per Share
|
|
|
Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
Per Share
|
|
Outstanding
at January 1
|
|
|
2,483,412 |
|
|
$ |
8.92 |
|
|
|
1,618,743 |
|
|
$ |
15.00 |
|
|
|
221,873 |
|
|
$ |
15.00 |
|
Granted
|
|
|
9,076,652 |
|
|
|
0.88 |
|
|
|
2,297,173 |
|
|
|
4.12 |
|
|
|
1,470,138 |
|
|
|
10.29 |
|
Vested
|
|
|
(7,818,773 |
) |
|
|
0.79 |
|
|
|
(1,387,668 |
) |
|
|
3.44 |
|
|
|
(50,095 |
) |
|
|
9.97 |
|
Forfeited
|
|
|
(179,562 |
) |
|
|
8.77 |
|
|
|
(44,836 |
) |
|
|
9.71 |
|
|
|
(23,173 |
) |
|
|
14.41 |
|
Outstanding
at December 31
|
|
|
3,561,729 |
|
|
$ |
6.29 |
|
|
|
2,483,412 |
|
|
$ |
8.92 |
|
|
|
1,618,743 |
|
|
$ |
11.06 |
|
13.
DERIVATIVES
In July
2006, in connection with entering into its credit agreement with Wachovia, which
provided for interest at a variable rate (See Note 15 “Borrowings”), the Company
entered into a five-year interest rate swap agreement. The interest rate swap
agreement reflected a $100.0 million notional amount at a fixed interest rate of
5.64%. The interest rate swap agreement did not qualify for hedge accounting
treatment. The decline in fair value for 2008 was charged to “Derivative loss,
net” in the accompanying Consolidated Statements of Operations. The interest
rate swap agreement was terminated on December 10, 2008, by the Company making a
payment of approximately $9.2 million.
In June
2009, in connection with entering into the Facility Agreement (See Note 15
“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 Sheet with a corresponding debt discount which is netted against the
face value of the 8.00% Notes (See Note 15 “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 15 “Borrowings”), the Company recorded the warrants as
Other Non-Current Liabilities on its Consolidated Balance Sheet with a
corresponding debt discount which is netted against the face value of the 8.00%
Notes. 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 15 “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 as of
December 31, 2009 and 2008, and their impact on the Company’s Consolidated
Statements of Operations for 2009 and 2008 (in thousands):
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
|
Balance
Sheet
Location
|
|
|
Fair
Value
|
|
Interest
rate cap derivative
|
|
Other
assets, net
|
|
$ |
6,801 |
|
|
|
N/A |
|
|
|
N/A |
|
Compound
embedded conversion option
|
|
Derivative
liabilities
|
|
|
(14,235 |
) |
|
|
N/A |
|
|
|
N/A |
|
Warrants
issued with 8.00% Notes
|
|
Derivative
liabilities
|
|
|
(27,711 |
) |
|
|
N/A |
|
|
|
N/A |
|
Warrants
issued in conjunction with contingent equity agreement
|
|
Derivative
liabilities
|
|
|
(7,809 |
) |
|
|
N/A |
|
|
|
N/A |
|
Total
|
|
|
|
$ |
(42,954 |
) |
|
|
|
|
|
$ |
N/A |
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Location of
Gain (loss)
recognized in
Statement of
Operations
|
|
|
Amount of
Gain (loss)
recognized on
Statement of
Operations
|
|
|
Location of
Gain (loss)
recognized in
Statement of
Operations
|
|
|
Amount of
Gain (loss)
recognized on
Statement of
Operations
|
|
Interest
rate swap derivative
|
|
N/A |
|
|
|
N/A |
|
|
Derivative
loss, net
|
|
|
$ |
(3,259 |
) |
Interest
rate cap derivative
|
|
Derivative
loss, net
|
|
|
|
(5,624 |
) |
|
N/A
|
|
|
|
N/A |
|
Compound
embedded conversion option
|
|
Derivative
loss, net
|
|
|
|
2,997 |
|
|
N/A
|
|
|
|
N/A |
|
Warrants
issued with 8.00% Notes
|
|
Derivative
loss, net
|
|
|
|
(14,920 |
) |
|
N/A
|
|
|
|
N/A |
|
Warrants
issued in conjunction with contingent equity agreement
|
|
Derivative
loss, net
|
|
|
|
1,962 |
|
|
N/A
|
|
|
|
N/A |
|
Total
|
|
|
|
|
|
$ |
(15,585 |
) |
|
|
|
|
|
$ |
(3,259 |
) |
14.
OTHER COMPREHENSIVE LOSS
The
components of other comprehensive loss were as follows (in
thousands):
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Accumulated
minimum pension liability adjustment
|
|
$ |
(4,773 |
) |
|
$ |
(5,180 |
) |
Accumulated
net foreign currency translation adjustment
|
|
|
3,055 |
|
|
|
(1,124 |
) |
Total
accumulated other comprehensive loss
|
|
$ |
(1,718 |
) |
|
$ |
(6,304 |
) |
15.
BORROWINGS
Current
portion of long term debt
The
current portion of long term debt at December 31, 2009 consisted of a loan of
$2.3 million from Thermo which is payable within one year at an annual interest
rate of 12%. The current portion of long term debt at December 31, 2008
consisted of $33.6 million due to the Company’s vendors under vendor financing
agreements. Details of vendor financing agreements are described later in this
Note.
Long
Term Debt:
Long term
debt consists of the following (in thousands):
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
Amended
and Restated Credit Agreement:
|
|
|
|
|
|
|
Term
Loan
|
|
$ |
— |
|
|
$ |
100,000 |
|
Revolving
credit loans
|
|
|
— |
|
|
|
66,050 |
|
Total
Borrowings under Amended and Restated Credit Agreement
|
|
|
— |
|
|
|
166,050 |
|
5.75%
Convertible Senior Notes due 2028
|
|
|
53,359 |
|
|
|
48,670 |
|
8.00%
Convertible Senior Unsecured Notes
|
|
|
17,396 |
|
|
|
— |
|
Vendor
Financing (long term portion)
|
|
|
— |
|
|
|
23,625 |
|
Facility
Agreement
|
|
|
371,219 |
|
|
|
— |
|
Subordinated
loan
|
|
|
21,577 |
|
|
|
— |
|
Total
long term debt
|
|
$ |
463,551 |
|
|
$ |
238,345 |
|
Borrowings
under Facility Agreement
On June
5, 2009, the Company entered into a $586.3 million senior secured facility
agreement (the “Facility Agreement”) with a syndicate of bank lenders, including
BNP Paribas, Natixis, Société Générale, Caylon, Crédit Industriel et Commercial
as arrangers and BNP Paribas as the security agent and COFACE agent. Ninety-five
percent of the Company’s obligations under the agreement are guaranteed by
COFACE, the French export credit agency. The initial funding process of the
Facility Agreement began on June 29, 2009 and was completed on July 1, 2009. The
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 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 December 31, 2009,
the Company was in compliance with the covenants of the Facility
Agreement.
Subordinated
Loan Agreement
On June
25, 2009, the Company entered into a Loan Agreement with Thermo whereby Thermo
agreed to lend the Company $25 million for the purpose of funding the debt
service reserve account required under the Facility Agreement. This loan is
subordinated to, and the debt service reserve account is pledged to secure, all
of the Company’s obligations under the Facility Agreement. The loan accrues
interest at 12% per annum, which will be capitalized and added to the
outstanding principal in lieu of cash payments. The Company will make payments
to Thermo only when permitted under the Facility Agreement. The loan becomes due
and payable six months after the obligations under the Facility Agreement have
been paid in full, the Company has a change in control or any acceleration of
the maturity of the loans under the Facility Agreement occurs. As additional
consideration for the loan, the Company issued Thermo a warrant to purchase
4,205,608 shares of common stock at $0.01 per share with a five-year exercise
period. No common stock is issuable upon such exercise if such issuance would
cause Thermo and its affiliates to own more than 70% of the Company’s
outstanding voting stock.
Thermo
borrowed $20 million of the $25 million loaned to the Company under the Loan
Agreement from two Company vendors and also agreed to reimburse another Company
vendor if its guarantee of a portion of the debt service reserve account were
called. The debt service reserve account is included in restricted cash. The
Company agreed to grant one of these vendors a one-time option to convert its
debt into equity of the Company on the same terms as Thermo at the first call
(if any) by the Company for funds under the Contingent Equity Agreement
(described below).
The
Company determined that the warrant was an equity instrument and recorded it as
a part of its stockholders’ equity with a corresponding debt discount of $5.2
million, which is netted against the face value of the loan. The Company 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. On
each of June 19, 2010 and 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 subject to the reset provision one year after initial issuance of the
warrants. 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 and will be
subject to another reset on June 19, 2010 should the common stock price be lower
than $0.87 per common share. 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.
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 it 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.
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 December 31, 2009,
approximately $10.7 million of the 8.00% Notes had been converted resulting in
the issuance of approximately 10.4 million shares of common stock. At December
31, 2009, $44.3 million in 8.00% Notes remained outstanding.
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 either excluded from bifurcation as a result of
being clearly and closely related to the 8.00% Notes or were not indexed to the
Company’s common stock and could not be classified in stockholders’ equity if
freestanding. The Company recorded this compound embedded derivative liability
as a component of Other Non-Current Liabilities on its Consolidated Balance
Sheet with a corresponding debt discount which is netted with the face value of
the 8.00% Notes. The Company 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 Sheet 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 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 Warrants derivative using a Monte Carlo simulation model based upon a
risk-neutral stock price model.
The
Company allocated the proceeds received from the 8.00% Notes among the
conversion rights and features, the detachable Warrants and the remainder to the
underlying debt. The Company netted the debt discount associated with the
conversion rights and features and Warrants against the face value of the 8.00%
Notes to determine the carrying amount of the 8.00% Notes. The accretion of debt
discount will increase the carrying amount of the debt over the term of the
8.00% Notes. The Company allocated the proceeds at issuance as follows (in
thousands):
Fair
value of compound embedded derivative
|
|
$ |
23,542 |
|
Fair
value of Warrants
|
|
|
12,791 |
|
Debt
|
|
|
18,667 |
|
Face
Value of 8.00% Notes
|
|
$ |
55,000 |
|
Amended
and restated credit agreement
On August
16, 2006, the Company entered into an amended and restated credit agreement with
Wachovia Investment Holdings, LLC, as administrative agent and swingline lender,
and Wachovia Bank, National Association, as issuing lender, which was
subsequently amended on September 29 and October 26, 2006. On December 17, 2007,
Thermo was assigned all the rights (except indemnification rights) and assumed
all the obligations of the administrative agent and the lenders under the
amended and restated credit agreement and the credit agreement was again amended
and restated. On December 18, 2008, the Company entered into a First Amendment
to Second Amended and Restated Credit Agreement with Thermo, as lender and
administrative agent, to increase the amount available to Globalstar under the
revolving credit facility from $50.0 million to $100.0 million. In May 2009,
$7.5 million outstanding under the $200 million credit agreement was converted
into 10 million shares of the Company’s common stock. As of December 31, 2008,
the Company had drawn $66.1 million of the revolving credit facility and the
entire $100.0 million delayed draw term loan facility was
outstanding.
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 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 13 “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 December 31, 2009 and 2008, the balance in the escrow
account was $6.2 million and $14.4 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 December 31, 2009 and 2008.
Common
Stock Offering and Share Lending Agreement
Concurrently
with the offering of the 5.75% Notes, the Company entered into a share lending
agreement (the “Share Lending Agreement”) with Merrill Lynch International (the
Borrower), pursuant to which the Company agreed to lend up to 36,144,570 shares
of common stock (the Borrowed Shares) to the Borrower, subject to certain
adjustments, for a period ending on the earliest of (i) at the Company’s option,
at any time after the entire principal amount of the 5.75% Notes ceases to be
outstanding, (ii) the written agreement of the Company and the Borrower to
terminate, (iii) the occurrence of a Borrower default, at the option of Lender,
and (iv) the occurrence of a Lender default, at the option of the Borrower.
Pursuant to the Share Lending Agreement, upon the termination of the share loan,
the Borrower must return the Borrowed Shares to the Company. Upon the conversion
of 5.75% Notes (in whole or in part), a number of Borrowed Shares proportional
to the conversion rate for such notes must be returned to the Company. At the
Company’s election, the Borrower may deliver cash equal to the market value of
the corresponding Borrowed Shares instead of returning to the Company the
Borrowed Shares otherwise required by conversions of 5.75%
Notes.
Pursuant
to and upon the terms of the Share Lending Agreement, the Company will issue and
lend the Borrowed Shares to the Borrower as a share loan. The Borrowing Agent
also is acting as an underwriter with respect to the Borrowed Shares, which are
being offered to the public. The Borrowed Shares included approximately 32.0
million shares of common stock initially loaned by the Company to the Borrower
on separate occasions, delivered pursuant to the Share Lending Agreement and the
Underwriting Agreement, and an additional 4.1 million shares of common stock
that, from time to time, may be borrowed from the Company by the Borrower
pursuant to the Share Lending Agreement and the Underwriting Agreement and
subsequently offered and sold at prevailing market prices at the time of sale or
negotiated prices. The Borrowed Shares are free trading shares. At December 31,
2009, approximately 17.3 million Borrowed Shares remained
outstanding.
The
Company did not receive any proceeds from the sale of the Borrowed Shares
pursuant to the Share Lending Agreement, and it will not reserve any proceeds
from any future sale. The Borrower has received all of the proceeds from the
sale of Borrowed Shares pursuant to the Share Lending Agreement and will receive
all of the proceeds from any future sale. At the Company’s election, the
Borrower may remit cash equal to the market value of the corresponding Borrowed
Shares instead of returning the Borrowed Shares due back to the Company as a
result of conversions by 5.75% Note holders.
The
Borrowed Shares are treated as issued and outstanding for corporate law
purposes, and accordingly, the holders of the Borrowed Shares will have all of
the rights of a holder of the Company’s outstanding shares, including the right
to vote the shares on all matters submitted to a vote of the Company’s
stockholders and the right to receive any dividends or other distributions that
the Company may pay or makes on its outstanding shares of common stock. However,
under the Share Lending Agreement, the Borrower has agreed:
|
•
|
To pay, within one business day
after the relevant payment date, to the Company an amount equal to any
cash dividends that the Company pays on the Borrowed Shares;
and
|
|
•
|
To pay or deliver to the Company,
upon termination of the loan of Borrowed Shares, any other distribution,
in liquidation or otherwise, that the Company makes on the Borrowed
Shares.
|
To the
extent the Borrowed Shares the Company initially lent under the share lending
agreement and offered in the common stock offering have not been sold or
returned to it, the Borrower has agreed that it will not vote any such Borrowed
Shares. The Borrower has also agreed under the Share Lending Agreement that it
will not transfer or dispose of any Borrowed Shares, other than to its
affiliates, unless the transfer or disposition is pursuant to a registration
statement that is effective under the Securities Act. However, investors that
purchase the shares from the Borrower (and any subsequent transferees of such
purchasers) will be entitled to the same voting rights with respect to those
shares as any other holder of the Company’s common stock.
On
December 18, 2008, the Company entered into Amendment No. 1 to the Share Lending
Agreement with the Borrower and the Borrowing Agent. Pursuant to Amendment No.1,
the Company has the option to request the Borrower to deliver cash instead of
returning Borrowed Shares upon any termination of loans at the Borrower’s
option, at the termination date of the Share Lending Agreement or when the
outstanding loaned shares exceed the maximum number of shares permitted under
the Share Lending Agreement. The consent of the Borrower is required for any
cash settlement, which consent may not be unreasonably withheld, subject to the
Borrower’s determination of applicable legal, regulatory or self-regulatory
requirements or other internal policies. Any loans settled in shares of Company
common stock will be subject to a return fee based on the stock price as agreed
by the Company and the Borrower. The return fee will not be less than $0.005 per
share or exceed $0.05 per share.
The
Company evaluated the various embedded derivatives within the Indenture for
bifurcation from the 5.75% Notes. Based upon its detailed assessment, the
Company concluded that these embedded derivatives were either (i) excluded from
bifurcation as a result of being clearly and closely related to the 5.75% Notes
or are indexed to the Company’s common stock and would be classified in
stockholders’ equity if freestanding or (ii) the fair value of the embedded
derivatives was estimated to be immaterial.
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 December 31,
2009 and 2008, the remaining term for amortization associated with debt discount
was approximately 39 and 51 months, respectively. The annual effective interest
rate utilized for the amortization of debt discount during 2009 and 2008 was
9.14%. The interest cost associated with the coupon rate on the 5.75% Notes plus
the corresponding debt discount amortized during 2009 and 2008, was $8.8 million
and $11.7 million, respectively, all of which was capitalized. The carrying
amount of the equity and liability component, as of December 31, 2009 and 2008,
is presented below (in thousands)
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
Equity
|
|
$
|
54,675
|
|
|
$
|
54,675
|
|
Liability:
|
|
|
|
|
|
|
|
|
Principal
|
|
|
71,804
|
|
|
|
71,804
|
|
Unamortized
debt discount
|
|
|
(18,445
|
)
|
|
|
(23,134
|
)
|
Net
carrying amount of liability
|
|
$
|
53,359
|
|
|
$
|
48,670
|
|
Vendor
Financing
In July
2008 the Company amended the agreement with the Launch Provider for the launch
of the Company’s second-generation satellites and certain pre and post-launch
services. Under the amended terms, the Company could defer payment on up to 75%
of certain amounts due to the Launch Provider. The deferred payments incurred
annual interest at 8.5% to 12%. In June 2009, the Company and the Launch
Provider again amended their agreement modifying the agreement in certain
respects including cancelling the deferred payment provisions. The Company paid
all deferred amounts to the vendor in July 2009.
In
September 2008 the Company amended its agreement with Hughes for the
construction of its RAN ground network equipment and software upgrades for
installation at a number of the Company’s satellite gateway ground stations and
satellite interface chips to be a part of the UTS in various next-generation
Globalstar devices. Under the amended terms, the Company deferred certain
payments due under the contract in 2008 and 2009 to December 2009. The deferred
payments incurred annual interest at 10%. In June 2009, the Company and Hughes
further amended their agreement modifying the agreement in certain respects
including cancelling the deferred payment provisions. The Company paid all
deferred amounts to the vendor in July 2009.
16.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company measures the financial assets and liabilities listed below on a
recurring basis and reports on a fair value basis. The Company classifies its
fair value measurements in one of the following three categories:
Level 1:
Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or
liabilities;
Level 2: Quoted
prices in markets that are not active or inputs which are observable, either
directly or indirectly, for substantially the full term of the asset or
liability;
The
Company uses observable pricing inputs including benchmark yields, reported
trades, and broker/dealer quotes. The financial assets in Level 2 include the
interest rate cap derivative instrument.
Level 3: Prices
or valuation techniques that require inputs that are both significant to the
fair value measurement and unobservable (i.e., supported by little or no market
activity).
The
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 15); (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 $0.87.
The
Company had no financial instruments measured on a recurring basis at December
31, 2008. The following table presents the financial instruments that are
carried at fair value as of December 31, 2009:
|
|
|
|
|
Fair Value Measurements at December 31, 2009 using
|
|
(In Thousands)
|
|
December
31,
2008
|
|
|
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
|
|
$ |
N/A |
|
|
$ |
— |
|
|
$ |
6,801 |
|
|
$ |
— |
|
|
$ |
6,801 |
|
Total
other assets measured at fair value
|
|
|
N/A |
|
|
|
— |
|
|
$ |
6,801 |
|
|
|
— |
|
|
|
6,801 |
|
Other
non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound
embedded conversion option
|
|
|
N/A |
|
|
|
— |
|
|
|
— |
|
|
|
(14,235
|
) |
|
|
(14,235
|
) |
Warrants
issued with 8.00% Notes
|
|
|
N/A |
|
|
|
— |
|
|
|
— |
|
|
|
(27,711
|
) |
|
|
(27,711
|
) |
Warrants
issued with contingent equity agreements
|
|
|
N/A |
|
|
|
— |
|
|
|
— |
|
|
|
(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 2009 as follows
(in thousands):
Balance
at December 31, 2008
|
|
$
|
—
|
|
Issuance
of compound embedded conversion option and warrant
liabilities
|
|
|
(42,333
|
)
|
Derivative
adjustment related to conversions
|
|
|
2,539
|
|
Unrealized
loss, included in derivative loss, net on the income
statement
|
|
|
(9,961
|
)
|
Balance
at December 31, 2009
|
|
$
|
(49,755
|
)
|
17.
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
Quarter Ended
|
|
|
|
March 31,
2009
|
|
|
June 30,
2009
|
|
|
September 30,
2009
|
|
|
December 31,
2009
|
|
|
|
(In
thousands, except per share amounts)
|
|
Total
revenue
|
|
$ |
15,163 |
|
|
$ |
15,716 |
|
|
$ |
17,521 |
|
|
$ |
15,879 |
|
Net
loss
|
|
$ |
(21,758 |
) |
|
$ |
(13,762 |
) |
|
$ |
(5,519 |
) |
|
$ |
(33,884 |
) |
Basic
loss per common share
|
|
$ |
(0.20 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.22 |
) |
Diluted
loss per common share
|
|
$ |
(0.20 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.22 |
) |
Shares
used in basic per share calculations
|
|
|
111,308 |
|
|
|
116,580 |
|
|
|
127.527 |
|
|
|
155,151 |
|
Shares
used in diluted per share calculations
|
|
|
111,308 |
|
|
|
116,580 |
|
|
|
127,527 |
|
|
|
155,151 |
|
|
|
Quarter Ended
|
|
|
|
March 31,
2008
|
|
|
June 30,
2008
|
|
|
September 30,
2008
|
|
|
December 31,
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
Total
revenue
|
|
$ |
22,134 |
|
|
$ |
22,999 |
|
|
$ |
22,525 |
|
|
$ |
18,397 |
|
Net
income (loss)
|
|
$ |
(6,635 |
) |
|
$ |
(7,177 |
) |
|
$ |
(26,019 |
) |
|
$ |
17,039 |
|
Basic
earnings (loss) per common share
|
|
$ |
(0.08 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.31 |
) |
|
$ |
0.20 |
|
Diluted
earnings (loss) per common share
|
|
$ |
(0.08 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.31 |
) |
|
$ |
0.20 |
|
Shares
used in basic per share calculations
|
|
|
82,448 |
|
|
|
84,029 |
|
|
|
84,631 |
|
|
|
86,422 |
|
Shares
used in diluted per share calculations
|
|
|
82,448 |
|
|
|
84,029 |
|
|
|
84,631 |
|
|
|
86,422 |
|
18.
SUBSEQUENT EVENTS
On
January 19, 2010, Thermo Funding Company LLC (Thermo) and the Company agreed to
covert its short-term debt of $2,259,531 (plus accrued interest) into 2,525,750
shares of nonvoting common stock.
After
this transaction, Thermo owned approximately 69.8% of the Company’s outstanding
equity and 67.7% of its voting power. Additionally, Thermo owns Warrants and
8.00% Notes that may be converted into or exercised for additional shares of
common stock.
19.
RETROSPECTIVE ADOPTION OF ACCOUNTING STANDARDS UPDATE NO. 2009-15
Accounting
for Own-Share Lending Arrangements in Contemplation of Convertible Debt
Issuance
Effective
January 1, 2010, the Company adopted the 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 its second generation
satellite constellation and, therefore, included in property and equipment, net
on the 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 15,
the Company 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 Statements of Operations
for the years ended December 31, 2009 and 2008 and the
Consolidated Balance Sheets as of December 31, 2009 and 2008 to reflect the
adoption of this updated guidance. In addition, the Company revised Notes 2, 4,
8, 9, 15, 16 and 17 to reflect the retrospective adoption.
The
following table illustrates the impact of this adoption on the Company’s
Consolidated Balance Sheets as of December 31, 2009 and 2008 and the
Consolidated Statements of Operations for the years ended December 31, 2009 and
2008:
|
|
For the Year Ended December 31, 2009
|
|
|
|
As Originally
Reported
|
|
|
Effect
of Change
|
|
|
As Revised
|
|
|
|
(In thousands)
|
|
Weighted
average shares outstanding – basic
|
|
|
145,430
|
|
|
|
(17,300
|
)
|
|
|
128,130
|
|
Weighted
average shares outstanding – diluted
|
|
|
145,430
|
|
|
|
(17,300
|
)
|
|
|
128,130
|
|
Basic
loss per share
|
|
$
|
(0.52
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.58
|
)
|
Diluted
loss per share
|
|
$
|
(0.52
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.58
|
)
|
|
|
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
|
)
|
|
|
For the Year Ended December 31, 2008
|
|
|
|
As Originally
Reported
|
|
|
Effect
of Change
|
|
|
As Revised
|
|
|
|
(In thousands)
|
|
Gain
on extinguishment of debt
|
|
$
|
49,042
|
|
|
$
|
7,631
|
|
|
$
|
41,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
15,161
|
|
|
$
|
7,631
|
|
|
$
|
22,792
|
|
Weighted
average shares outstanding – basic
|
|
|
86,405
|
|
|
|
(927
|
)
|
|
|
85,478
|
|
Weighted
average shares outstanding – diluted
|
|
|
86,405
|
|
|
|
(927
|
)
|
|
|
85,478
|
|
Basic
loss per share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.27
|
)
|
Diluted
loss per share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.27
|
)
|
|
|
As of December 31, 2008
|
|
|
|
As Originally
Reported
|
|
|
Effect
of Change
|
|
|
As Revised
|
|
|
|
(In thousands)
|
|
Property
and equipment, net
|
|
$
|
642,264
|
|
|
$
|
1,767
|
|
|
$
|
644,031
|
|
Deferred
financing costs
|
|
$
|
1,425
|
|
|
$
|
6,877
|
|
|
$
|
8,302
|
|
Additional
paid-in capital
|
|
$
|
463,822
|
|
|
$
|
16,275
|
|
|
$
|
480,097
|
|
Retained
deficit
|
|
$
|
(20,779
|
)
|
|
$
|
(7,631
|
)
|
|
$
|
(28,410
|
)
|
Upon
adoption of the FASB’s updated guidance on accounting for own-share lending
arrangements, 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 in Note 15, $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 years ended
December 31, 2009 and 2008, approximately $1.4 million and $1.8 million of
deferred financing costs were amortized and included in capitalized interest. At
December 31, 2009, $5.5 million of the deferred financing costs remained
unamortized and approximately 17.3 million Borrowed Shares valued at
approximately $15.1 million remained outstanding.
If 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 the 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 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.
Exhibit
99.4
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in the registration statements on
Form S-8 (No. 333-165444, 333-156884, 333-138590, 333-161510, 333-145283,
333-150871 and 333-149747) of Globalstar, Inc. of our report dated
March 12, 2010 (except for Note 19, as to which the date is June 17, 2010),
with respect to the consolidated financial statements of Globalstar, Inc.,
and the effectiveness of internal control over financial reporting, which report
appears in this Current Report on Form 8-K of
Globalstar, Inc.
|
Crowe
Horwath LLP
|
Oak
Brook, Illinois
|
|
June
17, 2010
|
|