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Globalstar 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

x

 

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

 

 

 

For the quarterly period ended September 30, 2007

 

 

 

OR

 

 

 

o

 

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

 

For the transition period from                    to

 

Commission file number 001-33117

 

GLOBALSTAR, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

41-2116508

(State or Other Jurisdiction of

 

(I.R.S. Employer Identification No.)

Incorporation or Organization)

 

 

 

461 South Milpitas Blvd.
Milpitas, California 95035

(Address of principal executive offices and zip code)

 

(408) 933-4000

Registrant’s telephone number, including area code

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x.        No  o.

 

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

 

Large accelerated filer  o     Accelerated filer  o     Non-accelerated filer  x

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 8, 2007, there were 82,671,224 shares of $0.0001 par value Common Stock outstanding.

 

 



 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

PART I - Financial Information

 

3

 

 

 

 

 

 

 

Item 1. Financial Statements

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2007 and 2006 (unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 (unaudited)

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)

 

5

 

 

 

 

 

 

 

Notes to Unaudited Interim Consolidated Financial Statements

 

6

 

 

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

40

 

 

 

 

 

 

 

Item 4. Controls and Procedures

 

41

 

 

 

 

 

PART II - Other Information

 

42

 

 

 

 

 

 

 

Item 1. Legal Proceedings

 

42

 

 

 

 

 

 

 

Item 1A. Risk Factors

 

42

 

 

 

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

56

 

 

 

 

 

 

 

Item 6. Exhibits

 

56

 

 

 

 

 

 

 

Signatures

 

57

 

2



 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GLOBALSTAR, INC.
CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share data)
(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,
2007

 

September 30,
2006

 

September 30,
2007

 

September 30,
2006

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Service revenue

 

$

21,263

 

$

27,649

 

$

58,713

 

$

69,851

 

Subscriber equipment sales

 

4,425

 

11,046

 

15,966

 

37,585

 

Total revenue

 

25,688

 

38,695

 

74,679

 

107,436

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization shown separately below)

 

7,307

 

6,695

 

20,428

 

20,583

 

Cost of subscriber equipment sales

 

3,390

 

10,902

 

11,398

 

36,671

 

Marketing, general, and administrative

 

12,069

 

10,543

 

34,185

 

31,234

 

Depreciation and amortization

 

3,264

 

1,726

 

8,225

 

4,424

 

Impairment of assets

 

 

 

17,255

 

 

Total operating expenses

 

26,030

 

29,866

 

91,491

 

92,912

 

Operating income (loss)

 

(342

)

8,829

 

(16,812

)

14,524

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

734

 

80

 

2,253

 

446

 

Interest expense

 

(341

)

(148

)

(1,037

)

(256

)

Interest rate derivative loss

 

(2,297

)

(2,919

)

(751

)

(2,919

)

Other

 

3,827

 

(84

)

4,874

 

(1,844

)

Total other income (expense)

 

1,923

 

(3,071

)

5,339

 

(4,573

)

Income (loss) before income taxes

 

1,581

 

5,758

 

(11,473

)

9,951

 

Income tax expense (benefit)

 

929

 

3,057

 

118

 

(14,402

)

Net income (loss)

 

$

652

 

$

2,701

 

$

(11,591

)

$

24,353

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

$

0.04

 

$

(0.15

)

$

0.39

 

Diluted

 

$

0.01

 

$

0.04

 

$

(0.15

)

$

0.39

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

78,000,148

 

62,875,494

 

75,613,583

 

62,267,130

 

Diluted

 

79,043,868

 

63,205,206

 

75,613,583

 

62,596,842

 

 

See accompanying notes to unaudited interim consolidated financial statements.

 

3



 

GLOBALSTAR, INC.
CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)
(Unaudited)

 

 

 

September 30,
2007

 

December 31,
2006

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

36,339

 

$

43,698

 

Accounts receivable, net of allowance of $3,197 (2007) and $3,609 (2006)

 

14,998

 

19,543

 

Inventory

 

46,288

 

33,754

 

Advances for inventory

 

10,747

 

15,550

 

Deferred tax assets

 

2,330

 

1,495

 

Prepaid expenses and other current assets

 

3,061

 

2,512

 

Total current assets

 

113,763

 

116,552

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Spare satellites and launch costs

 

88,234

 

87,813

 

Second-generation satellites

 

120,277

 

26,328

 

Globalstar System, net

 

41,345

 

15,576

 

Other property and equipment, net

 

8,642

 

7,005

 

 

 

258,498

 

136,722

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Restricted cash

 

58,281

 

52,581

 

Deferred tax assets

 

19,291

 

18,763

 

Other assets, net

 

8,061

 

7,083

 

Total assets

 

$

457,894

 

$

331,701

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable, current portion

 

$

263

 

$

285

 

Accounts payable

 

3,027

 

11,468

 

Accrued expenses

 

15,879

 

17,224

 

Payables to affiliates

 

5,678

 

6,019

 

Deferred revenue

 

21,301

 

24,720

 

Total current liabilities

 

46,148

 

59,716

 

 

 

 

 

 

 

Notes payable, net of current portion

 

167

 

417

 

Employee benefit obligations, net of current portion

 

2,123

 

2,079

 

Long term tax payable

 

499

 

 

Other non-current liabilities

 

4,715

 

3,843

 

Total non-current liabilities

 

7,504

 

6,339

 

 

 

 

 

 

 

Redeemable common stock; 259,845 and 347,451 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively

 

3,700

 

4,949

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred Stock, $0.0001 par value; 100,000,000 shares authorized, issued and outstanding — none

 

 

 

Common stock, $0.0001 par value; 800,000,000 shares authorized, 82,412,127 shares issued and outstanding at September 30, 2007 and 72,544,543 shares issued and outstanding at December 31, 2006

 

8

 

7

 

Additional paid-in capital

 

387,004

 

238,919

 

Accumulated other comprehensive income (loss)

 

2,815

 

(1,166

)

Retained earnings

 

10,715

 

22,937

 

Total shareholders’ equity

 

400,542

 

260,697

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

457,894

 

$

331,701

 

 

See accompanying notes to unaudited interim consolidated financial statements.

 

4



 

GLOBALSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,
2007

 

September 30,
2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(11,591

)

$

24,353

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

Deferred income taxes

 

(510

)

(17,372

)

Depreciation and amortization

 

8,225

 

4,424

 

Interest rate derivative (gain)

 

751

 

2,919

 

Stock-based compensation expense

 

5,409

 

 

Loss (gain) on disposal of fixed assets

 

(137

)

1

 

Provision for bad debts

 

425

 

898

 

Interest income on restricted cash

 

(1,557

)

 

Contribution of services

 

315

 

108

 

Impairment of assets

 

17,255

 

 

Amortization of deferred financing costs

 

332

 

 

Changes in operating assets and liabilities, net of acquisition:

 

 

 

 

 

Accounts receivable

 

5,132

 

(1,776

)

Inventory

 

(25,447

)

(11,171

)

Advances for inventory

 

6,607

 

(5,816

)

Prepaid expenses and other current assets

 

(429

)

585

 

Other assets

 

327

 

(545

)

Accounts payable

 

(8,549

)

2,081

 

Payables to affiliates

 

128

 

5,281

 

Accrued expenses and employee benefit obligations

 

(4,036

)

3,814

 

Other non-current liabilities

 

(109

)

 

Deferred revenue

 

(4,152

)

5,044

 

Net cash from operating activities

 

(11,611

)

12,828

 

Cash flows from investing activities:

 

 

 

 

 

Spare and second-generation satellites and launch costs

 

(125,850

)

(56,163

)

Property and equipment additions

 

(2,702

)

(3,795

)

Proceeds from sale of property and equipment

 

263

 

 

Payment for intangible assets

 

(214

)

 

Payment for business acquisition

 

 

(191

)

Net cash from investing activities

 

(128,503

)

(60,149

)

Cash flows from financing activities:

 

 

 

 

 

Borrowings under revolving credit facility

 

 

23,302

 

Payment of principal on notes payable

 

(273

)

(22

)

Proceeds from Thermo under the irrevocable standby stock purchase agreement

 

140,255

 

15,000

 

Proceeds from subscription receivable

 

 

13,000

 

Deferred financing cost payments

 

(1,533

)

(6,355

)

Net cash from financing activities

 

138,449

 

44,925

 

Effect of exchange rate changes on cash

 

(5,694

)

(164

)

Net increase (decrease) in cash and cash equivalents

 

(7,359

)

(2,560

)

Cash and cash equivalents, beginning of period

 

43,698

 

20,270

 

Cash and cash equivalents, end of period

 

$

36,339

 

$

17,710

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

2,301

 

$

1,023

 

Income taxes

 

$

84

 

$

105

 

Supplemental disclosure of non-cash financing and investing activities:

 

 

 

 

 

Conversion of redeemable common stock to common stock

 

$

1,249

 

$

 

Accrued launch costs and second-generation satellites costs

 

$

347

 

$

7,443

 

Distribution payable to member

 

$

 

$

686

 

Issuance of redeemable common stock in conjunction with acquisition

 

$

 

$

5,198

 

Capitalization of interest for spare and second-generation satellites and launch costs

 

$

 

$

920

 

 

See accompanying notes to unaudited interim consolidated financial statements.

 

5



 

GLOBALSTAR, INC.

 

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1: The Company and Summary of Significant Accounting Policies

 

Nature of Operations

 

Globalstar, Inc. (“Globalstar” or the “Company”) was formed as a Delaware limited liability company in November 2003, and was converted into a Delaware corporation on March 17, 2006.

 

Globalstar is a leading provider of mobile voice and data communications services via satellite. Globalstar’s network, originally owned by Globalstar, L.P. (“Old Globalstar”), was designed, built and launched in the late 1990s by a technology partnership led by Loral Space and Communications (“Loral”) and QUALCOMM Incorporated (“QUALCOMM”). On February 15, 2002, Old Globalstar and three of its subsidiaries filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. In 2004, Thermo Capital Partners L.L.C. (“Thermo”) became Globalstar’s principal owner, and Globalstar completed the acquisition of the business and assets of Old Globalstar.

 

Globalstar offers satellite services to commercial and recreational users in more than 120 countries around the world. The Company’s voice and data products include mobile and fixed satellite telephones, Simplex and duplex satellite data modems and flexible service packages. Many land based and maritime industries benefit from Globalstar with increased productivity from remote areas beyond cellular and landline service. Globalstar’s customers include those in the following industries: oil and gas, government, mining, forestry, commercial fishing, utilities, military, transportation, heavy construction, emergency preparedness, and business continuity, as well as individual recreational users.

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. These unaudited interim consolidated financial statements include the accounts of Globalstar and its majority owned or otherwise controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidation. In the opinion of management, such information includes all adjustments, consisting of normal recurring adjustments, that are necessary for a fair presentation of the Company’s consolidated financial position, results of operations, and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the full year or any future period. Globalstar’s results of operations are subject to seasonal usage changes. The months of April through October are typically peak months for service revenues and equipment sales. Government customers in North America tend to use Globalstar’s services during summer months, often in support of relief activities after events such as hurricanes, forest fires and other natural disasters.

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, allowance for doubtful accounts, inventory valuation, deferred tax assets, property and equipment, warranty obligations and contingencies and litigation. Actual results could differ from these estimates.

 

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The consolidated balance sheet as of December 31, 2006 was derived from the Company’s audited consolidated financial statements for the year ended December 31, 2006, but does not include all disclosures required by GAAP.

 

Globalstar operates in one segment, providing voice and data communication services via satellite. As a result, all segment-related financial information required by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures About Segments of an Enterprise and Related Information,” or SFAS 131, is included in the consolidated financial statements.

 

6



 

Other income (expense) includes foreign exchange transaction gains of $3.8 million and $4.9 million for the three and nine months ended September 30, 2007, respectively, and losses of $0.1 million and $1.8 million for the three and nine months ended September 30, 2006, respectively.

 

Impairment of assets

 

During the three and nine months ended September 30, 2007, the Company recognized $0 and $17.3 million, respectively, impairment charge on its inventory representing a write-down on its first-generation phone and accessory inventory. This charge was recognized after assessment of the Company’s inventory quantities and its recent and projected equipment sales. There was no such charge in the same period in 2006.

 

Property and Equipment

 

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; as each of these satellites are put into service, the Company will incorporate the costs related to the satellite into the Globalstar System and depreciate the costs for each particular satellite over an estimated life of eight years from its “In-Service Date.”

 

7



 

Recent Accounting Pronouncements

 

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions.  This Interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 were effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. The Company adopted the provisions of FIN 48 on January 1, 2007. See Note 9 for the impact of the adoption on the Company’s financial statements.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements.  SFAS 157 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS 157 on its financial position, cash flows, and results of operations.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS 159 on its financial position, cash flows, and results of operations.

 

Note 2: Basic and Diluted Earnings Per Share

 

The Company applies the provisions of Statement of Financial Accounting Standard No. 128, “Earnings Per Share” (“SFAS 128”), which requires companies 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 earnings per share (in thousands, except share and per share data):

 

 

 

Three Months Ended September 30, 2007

 

Nine Months Ended September 30, 2007

 

 

 

Income
(Numerator)

 

Weighted
Average Shares
Outstanding
(Denominator)

 

Per-Share
Amount

 

Income
(Numerator)

 

Weighted
Average Shares
Outstanding
(Denominator)

 

Per-Share
Amount

 

Basic earnings (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

652

 

78,000,148

 

$

0.01

 

$

(11,591

)

75,613,583

 

$

(0.15

)

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Options to Director

 

 

 

87,604

 

 

 

 

 

 

 

 

GAT acquisition

 

 

 

535,880

 

 

 

 

 

 

 

 

Unvested restricted stock

 

 

 

420,236

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

$

652

 

79,043,868

 

$

0.01

 

$

(11,591

)

75,613,583

 

$

(0.15

)

 

8



 

Unvested restricted stock of 218,415 and 1,560,696 shares of Common Stock, respectively, were excluded from the computation of diluted shares outstanding for both the three and nine months ended September 30, 2007 as their inclusion would have been anti-dilutive.

 

 

 

Three Months Ended September 30, 2006

 

Nine Months Ended September 30, 2006

 

 

 

Income
(Numerator)

 

Weighted
Average Shares
Outstanding
(Denominator)

 

Per-Share
Amount

 

Income
(Numerator)

 

Weighted
Average Shares
Outstanding
(Denominator)

 

Per-Share
Amount

 

Basic earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,701

 

62,875,494

 

$

0.04

 

$

24,353

 

62,267,130

 

$

0.39

 

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options to director

 

 

100,206

 

 

 

 

100,206

 

 

 

GAT acquisition

 

 

229,506

 

 

 

 

229,506

 

 

 

Diluted earnings per common share

 

$

2,701

 

63,205,206

 

$

0.04

 

$

24,353

 

62,596,842

 

$

0.39

 

 

Note 3: Globalstar Americas Telecommunications, LTD

 

Effective January 1, 2006, the Company consummated an agreement dated December 30, 2005 to purchase all of the issued and outstanding stock of Globalstar Americas Holding Limited (“GAH”), Globalstar Americas Telecommunications Limited (“GAT”), and Astral Technologies Investment Limited (“Astral”), collectively, the “GA Companies.” The GA Companies owned assets, contract rights, and licenses necessary and sufficient to operate a satellite communications business in Panama, Nicaragua, Honduras, El Salvador, Guatemala, and Belize (collectively, the “Territory”). The Company believes the purchase of the GA Companies will further enhance Globalstar’s presence and coverage in Central America and consolidation efforts. The stipulated purchase price for the GA Companies is $5,250,500 payable substantially 100% in Globalstar Common Stock. Additionally, the Company had a $1.0 million receivable from GA Companies as of the acquisition date that was treated as a component to the total purchase price. At the time of closing of the purchase of the GA Companies, the selling stockholders received 91,986 membership units, which subsequently were converted into the same number of shares of Common Stock of the Company as a result of the Company’s conversion from a limited liability company to a corporation.

 

Under the terms of the acquisition agreement, the Company was obligated either to redeem the original stock issued to the selling stockholders in January 2006 for $5.2 million in cash or to pay the selling stockholders, in cash or in stock, the difference between $5.2 million and the market value of that stock multiplied by the 5-day average closing price of the Company stock for the period ending November 22, 2006. In accordance with a supplemental agreement dated December 21, 2006 with certain selling stockholders, the Company elected to make payment in Common Stock and issued 259,845 shares of additional Common Stock to certain selling stockholders. Under this supplemental agreement this stock was valued at approximately $3.7 million. However, it was not registered and therefore was not marketable. Accordingly, this supplemental agreement also provided that, in order to compensate the selling stockholders for the inability to sell these shares, every month the Company will pay interest on $3.7 million at the monthly New York prime rate until these shares become marketable, but not later than December 31, 2007. During the three and nine months ended September 30, 2007, the related interest expense incurred was approximately $75,000 and $228,000, respectively.

 

The Company has the right to register, before December 22, 2007, the 259,845 shares of Common Stock delivered in December 2006. If it does so and the Company has met in full its obligation to pay interest on $3.7 million, the interest obligation ceases as of the date this registration statement becomes effective. The Company also has the right to register additional shares of sufficient value on the effective date of the registration statement to pay the interest obligation in Common Stock. In addition, if the per share market value of the Company’s Common Stock on December 22, 2007 multiplied by 259,845 is less than $3.7 million minus the sum of interest payments made on the $3.7 million on or before December 28, 2007, the Company will be required to pay the shortfall to these selling stockholders. However, if the Company shall have also registered sufficient additional stock to pay the interest obligation and distributes it to the selling stockholders, they are obligated to accept the tender, return to the Company the interest previously paid in cash, and all obligations of the Company under the acquisition agreement and the supplemental agreement will be deemed to have been satisfied.

 

9



 

During December 2006, the Company reached a settlement with the remaining selling stockholder and issued 15,109 shares of Common Stock to such stockholder. The 15,109 shares issued during December 2006 and the original 4,380 shares issued in January 2006 to this selling stockholder were not considered redeemable as of December 31, 2006.

 

In accordance with the supplemental agreement, on January 31, 2007, the remaining 87,606 shares of Common Stock associated with the original 91,986 shares distributed in January 2006, were not considered redeemable. As of September 30, 2007, 259,845 shares of redeemable Common Stock were outstanding.

 

Note 4: Property and Equipment

 

Property and equipment consist of the following (in thousands):

 

 

 

September 30,
2007

 

December 31,
2006

 

Globalstar System:

 

 

 

 

 

Space segment

 

$

37,556

 

$

5,832

 

Ground segment

 

21,404

 

21,033

 

Second-generation satellites

 

120,277

 

26,328

 

Spare satellites and launch costs

 

88,234

 

87,813

 

Furniture and office equipment

 

12,555

 

9,631

 

Land

 

1,991

 

2,089

 

Leasehold improvements

 

1,592

 

1,477

 

Construction in progress

 

1,238

 

16

 

Buildings

 

484

 

484

 

 

 

285,331

 

154,703

 

Accumulated depreciation

 

(26,833

)

(17,981

)

 

 

$

258,498

 

$

136,722

 

 

Property and equipment consists of an in-orbit satellite constellation, ground equipment, spare satellites and launch costs, second-generation satellites and support equipment located in various countries around the world. On November 30, 2006, the Company entered into a contract with Thales Alenia Space (formerly known as Alcatel Alenia Space France) to construct 48 low-earth orbit satellites. The total contract price is approximately €662.6 million (approximately $923.1 million at a weighted average conversion rate of €1.00 = $1.3932 at September 30, 2007) including approximately €146.3 million which will be paid by the Company in U.S. dollars at a fixed conversion rate of €1.00 = $1.294. The contract requires Thales Alenia Space to commence delivery of satellites in the third quarter of 2009, with deliveries continuing until 2013 unless Globalstar elects to accelerate delivery. At September 30, 2007, $58.3 million was held in escrow to secure the Company’s payment obligations related to its contract for the construction of its second-generation satellite constellation. Funds which the Company escrows to support this contract are not available for other corporate purposes. At the Company’s request, Thales Alenia Space has presented a four-part sequential plan for accelerating delivery of the initial 24 satellites by up to four months. The expected cost of this acceleration will range from approximately €6.7 million to €13.4 million ($9.6 million to $19.1 million at € 1.00 = $1.4272). In September 2007, the Company accepted the first portion of this plan with an additional cost of €1.9 million ($2.7 million at €1.00 = $1.4272). The Company cannot assure you that any of the remaining acceleration will occur.

 

As of September 30, 2007 and December 31, 2006, capitalized interest included within spare and second-generation satellites and launch costs was $0.9 million. No interest was capitalized during the three and nine months ended September 30, 2007. Depreciation expense for the three and nine months ended September 30, 2007 was $3.2 million and $8.1 million, respectively, and $1.7 million and $4.3 million for the three and nine months ended September 30, 2006, respectively.

 

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. This agreement complements the second-generation satellite construction contract between Globalstar and Thales Alenia Space for the construction of 48 low-earth orbit satellites and allows Thales Alenia Space to coordinate all aspects of the second-generation satellite constellation project, including the transition of first-generation software and hardware to equipment for the second generation. The total contract price for the construction and associated services is €9.0 million (approximately $12.8 million at a conversion rate of €1.00 = $1.4272) consisting of €4.0 million for the Satellite Operations Control Centers, €3.0 million for the Telemetry Command Units and €2.0 million for the In Orbit Test Equipment, with payments to be made on a quarterly basis through completion of the Control Network Facility in late 2009. Globalstar has the option to terminate the contract if excusable delays affecting Thales Alenia Space’s ability to perform the contract total six consecutive months or at its convenience. If Globalstar terminates the

 

10



 

contract, it must pay Thales Alenia Space the lesser of its unpaid costs for work performed by Thales Alenia Space and its subcontractors or payments for the next two quarters following termination. If Thales Alenia Space has not completed the Control Network Facility acceptance review within 60 days of the due date, Globalstar will be entitled to certain liquidated damages. Failure to complete the Control Network Facility acceptance review on or before six months after the due date results in a default by Thales Alenia Space, entitling Globalstar to a refund of all payments, except for liquidated damage amounts previously paid or with respect to items where final delivery has occurred. The Control Network Facility, when accepted, will be covered by a limited one-year warranty. The contract contains customary arbitration and indemnification provisions.

 

On September 5, 2007, the Company and Arianespace 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, Arianespace will make four launches of six satellites each, and the Company has the option to require Arianespace to make four additional launches of six satellites each. The total contract price for the first four launches is $210.0 million. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital Expenditures” for a schedule of the payments to Arianespace. The anticipated time period for the first four launches ranges from as early as the third quarter of 2009 through the end of 2010 and the optional launches are available from spring 2010 through the end of 2014. Prolonged delays due to postponements by the Company or Arianespace may result in adjustments to the payment schedule.

 

To augment its existing satellite constellation, the Company successfully launched its eight spare satellites in two separate launches of four satellites each on May 29, 2007 and October 21, 2007. The Company no longer has any ground spare satellites remaining to be launched.

 

Note 5: Accrued Expenses

 

Accrued expenses consist of the following (in thousands):

 

 

 

September 30,
2007

 

December 31,
2006

 

Accrued property and other taxes

 

$

4,542

 

$

3,176

 

Accrued compensation and benefits

 

2,929

 

5,757

 

Customer deposits

 

2,848

 

1,489

 

Accrued professional fees

 

848

 

1,493

 

Accrued marketing costs

 

606

 

11

 

Commitment fees related to delayed draw term loan and revolving credit facility

 

588

 

731

 

Accrued telecom costs

 

508

 

342

 

Accrued commissions

 

419

 

610

 

Warranty reserve

 

210

 

879

 

Accrued expenses related to spare satellite launch costs

 

205

 

51

 

Employee benefit obligation – current portion

 

 

443

 

Other accrued expenses

 

2,176

 

2,242

 

 

 

$

15,879

 

$

17,224

 

 

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. Warranties are accounted for in accordance with SFAS No. 5, “Accounting for Contingencies,” such that 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):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,
2007

 

September 30,
2006

 

September 30,
2007

 

September 30,
2006

 

 

 

 

 

 

 

 

 

 

 

Balance, at the beginning of period

 

$

359

 

$

1,288

 

$

879

 

$

977

 

Provision

 

(114

)

321

 

(285

)

1,323

 

Utilization

 

(35

)

(385

)

(384

)

(1,076

)

Balance, at the end of period

 

$

210

 

$

1,224

 

$

210

 

$

1,224

 

 

11



 

Note 6: Payables to Affiliates

 

Payables to affiliates relate to normal purchase transactions and are comprised of the following (in thousands):

 

 

 

September 30,2007

 

December 31, 2006

 

 

 

 

 

 

 

QUALCOMM

 

$

5,520

 

$

5,847

 

Thermo Capital Partners

 

158

 

172

 

 

 

$

5,678

 

$

6,019

 

 

Thermo incurs certain general and administrative expenses on behalf of the Company, which are reimbursed by the Company. Total expenses were approximately $45,000 and $143,000 for the three and nine months ended September 30, 2007, respectively, and $0 and $20,000, respectively, for the three and nine months ended September 30, 2006. For the three and nine months ended September 30, 2007, the Company also recorded $141,000 and $315,000, respectively, of expenses related to services provided by officers of Thermo, which were accounted for as a contribution to capital. Similar expenses for the three and nine months ended September 30, 2006, were $36,000 and $108,000, respectively. The Thermo expense charges are based on actual amounts incurred or upon allocated employee time. Management believes the allocations are reasonable.

 

Note 7: Other Related Party Transactions

 

During 2005, Globalstar issued separate purchase orders for additional phone equipment and accessories under the terms of previously executed commercial agreements with QUALCOMM that aggregate to a total commitment balance of approximately $158.5 million. Approximately $107.7 million of the $158.5 million consists of a new generation of phones and fixed user terminals, car kits and accessories, which QUALCOMM began delivering in October 2006. The remaining $50.8 million consists of phones and accessories under the original commercial agreement and was 100% fulfilled as of December 31, 2006.

 

Within the terms of the commercial agreements, the Company paid QUALCOMM approximately 15% to 25% of the total order as advances for inventory. As of September 30, 2007 and December 31, 2006, total advances to QUALCOMM for inventory were $10.7 million and $15.3 million, respectively. Under the new agreements, Globalstar did not receive any additional discounts from QUALCOMM. The total orders placed with QUALCOMM as of September 30, 2007 and December 31, 2006 were approximately $189.1 million and $186.7 million, respectively, with outstanding commitment balances of approximately $60.7 million and $86.7 million, respectively.

 

See Notes 11 and 16 for details on financing transactions with an affiliate of Thermo.

 

Purchases from Affiliates

 

Total purchases from affiliates are as follows (in thousands):

 

 

 

Three months ended 
September 30,

 

Nine months ended
 September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

QUALCOMM

 

$

9,794

 

$

13,933

 

$

32,486

 

$

49,574

 

Other affiliates

 

6,326

 

69

 

13,690

 

88

 

Total

 

$

16,120

 

$

14,002

 

$

46,176

 

$

49,662

 

 

Revenues from Affiliates

 

Total usage revenues from affiliates were $113,000 and $425,000 for the three and nine months ended September 30, 2007, respectively, and $800,000 and $1,300,000 for the three and nine months ended September 30, 2006, respectively. Total equipment revenues from affiliates were $18,000 and $59,000 for the three and nine months ended September 30, 2007, respectively, and $1,100,000 and $3,400,000 for the three and nine months ended September 30, 2006, respectively.

 

12



 

Note 8: Pension and Other Employee Benefit Plans

 

Components of the net periodic benefit cost of the Company’s contributory defined benefit pension plan were as follows (in thousands):

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

$

190

 

$

184

 

$

570

 

$

551

 

Expected return on plan assets

 

(200

)

(174

)

(600

)

(523

)

Actuarial loss, net

 

15

 

23

 

45

 

68

 

Net periodic benefit cost

 

$

5

 

$

33

 

$

15

 

$

96

 

 

Note 9: Income Taxes

 

On January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

 

The application of FIN 48 resulted in a cumulative adjustment of $0.6 million which decreased retained earnings. This decrease was a result of an unrecognized tax benefit of approximately $72.5 million which was substantially offset by the application of a valuation allowance. The unrecognized tax benefit did not change significantly during the nine months ended September 30, 2007. In addition, future changes in the unrecognized tax benefit may not have an impact on the effective tax rate due to the existence of the valuation allowances on most of the Company’s deferred tax assets.

 

Prior to 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 were passed through to its partners. Effective January 1, 2006, the Company elected to be taxed as a C corporation in the United States.

 

The Company is not 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 U.S. partnership tax returns filed for years before 2006 remain subject to examination by tax authorities. As a partnership, the Company did not pay entity level taxes during the years before 2006; accordingly, the Company would not expect an examination of these years to expose the Company to additional significant liability or exposure. 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 at least 2001 and subsequent years in most of the Company’s major international tax jurisdictions.

 

Prior to the Company’s adoption of FIN 48, its policy was to classify interest and penalties as an operating expense in arriving at pretax income. The Company has computed interest on the difference between the tax position recognized in accordance with FIN 48 and the amount previously taken or expected to be taken in its tax returns. Upon adoption of FIN 48, the Company has elected an accounting policy to also classify accrued interest and penalties related to unrecognized tax benefits in its income tax provision. As of January 1, 2007, the Company had recorded a liability of $0.6 million that included approximately $60,000 and $50,000 for the payment of interest and penalties, respectively.

 

Given that the Company is not currently under audit by the IRS in the United States or in any of its major international tax jurisdictions, the Company does not believe that it is likely that the amount of the unrecognized benefit with respect to certain of its unrecognized tax positions will significantly increase or decrease within the next 12 months.

 

Note 10: Comprehensive Income

 

SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for reporting and displaying comprehensive income and its components in shareholders’ equity. Comprehensive income (loss) includes all changes in equity during a period from non-owner sources. The change in accumulated other comprehensive income for all periods presented resulted from foreign currency translation adjustments and minimum pension liability adjustment.

 

13



 

The following are the components of comprehensive income (loss) (in thousands):

 

 

 

Three months ended 
September 30,

 

Nine months ended 
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income (loss)

 

$

652

 

$

2,701

 

$

(11,591

)

$

24,353

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

1,488

 

134

 

4,184

 

1,866

 

Minimum pension liability adjustment

 

 

 

(203

)

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

2,140

 

$

2,835

 

$

(7,610

)

$

26,219

 

 

Note 11: Globalstar Financing Transactions

 

As required by the lender under the Company’s credit agreement discussed below, the Company executed an agreement with Thermo Funding Company LLC (“Thermo Funding Company”), an affiliate of Thermo, to provide Globalstar up to an additional $200.0 million of equity via an irrevocable standby stock purchase agreement. The irrevocable standby purchase agreement allows the Company to put up to 12,371,136 shares of its Common Stock to Thermo Funding Company at a predetermined price of approximately $16.17 per share when the Company requires additional liquidity or upon the occurrence of certain other specified events. Thermo Funding Company also may elect to purchase the shares at any time. Minority stockholders of Globalstar as of June 15, 2006 who are accredited investors and who received at least thirty-six shares of Globalstar Common Stock as a result of the Old Globalstar bankruptcy will be provided an opportunity to participate in this financing. The following table sets forth information with respect to shares purchased by Thermo Funding Company pursuant to the agreement through September 30, 2007:

 

Date of Purchase

 

Number of Shares

 

Purchase Price (in millions)

 

June 30, 2006

 

927,840

 

$

15.0

 

 

 

 

 

 

 

December 5, 2006

 

2,000,000

 

32.3

 

 

 

 

 

 

 

February 5, 2007

 

1,500,000

 

24.3

 

 

 

 

 

 

 

April 30, 2007

 

1,546,073

 

25.0

 

 

 

 

 

 

 

May 9, 2007

 

618,429

 

10.0

 

 

 

 

 

 

 

July 31, 2007

 

2,164,502

 

35.0

 

 

 

 

 

 

 

September 7, 2007

 

1,236,858

 

20.0

 

 

 

 

 

 

 

September 27, 2007

 

1,607,916

 

26.0

 

 

 

 

 

 

 

 

Total

 

11,601,618

 

$

187.6

 

 

In November 2007, Thermo Funding Company purchased the remaining shares of Common Stock subject to the agreement and fully satisfied its commitment. See Note 16 for details.

 

On August 16, 2006, the Company entered into an amended and restated credit agreement with Wachovia Investment Holdings, L.L.C., as administrative agent and swingline lender, and Wachovia Bank, National Association, as issuing lender, which was subsequently amended on September 29, 2006 and October 26, 2006. The amended and restated credit agreement provides for a $50.0 million revolving credit facility and a $100.0 million delayed draw term loan facility. The delayed draw term loan may be drawn after January 1, 2008 and prior to August 16, 2009, but only if, after giving effect to the delayed draw term loan and thereafter at the end of each quarter while the delayed draw term loan is outstanding, the Company’s consolidated senior secured leverage ratio does not exceed 3.5 to 1.0. The Company’s ability to borrow under the credit agreement is conditioned on the absence of any material adverse change in the Company’s results of operations or financial condition from August 16, 2006 to the date of the borrowing. In addition to the $50.0 million revolving and $100.0 million delayed draw term loan facilities, the amended and restated credit agreement permits the Company to incur additional term loans on an equally and ratably secured, pari passu basis in an aggregate amount of up to $150.0 million (plus the amount of any reduction in the delayed draw term loan facility or prepayment of the delayed draw term loan described above resulting from sales of common stock or any additional term loans) from the lenders under the credit agreement or other banks, financial institutions or investment funds approved by the Company and the administrative agent. The Company has not received any commitments for these additional term loans. These additional term loans may be incurred only if no event of default then exists, if the Company is in compliance with all of the financial covenants of the credit agreement, and if, after giving effect thereto, the Company’s consolidated total leverage ratio does not exceed 5.5 to 1.0.

 

14



 

All revolving credit loans will mature on June 30, 2010 and all term loans will mature on June 30, 2011. Revolving credit loans will bear interest at LIBOR plus 4.25% to 4.75% or the greater of the prime rate or Federal Funds rate plus 3.25% to 3.75%. The delayed draw term loan will bear interest at LIBOR plus 6.0% or the greater of the prime rate or Federal Funds rate plus 5.0%. The delayed draw term loan facility bears an annual commitment fee of 2.0% until drawn or terminated and the revolving credit facility has an annual commitment fee of 0.5% on the undrawn balance. Commitment fees incurred during the three and nine months ended September 30, 2007 were $588,000 and $1,720,000, respectively. Additional term loans will bear interest at rates to be negotiated. To hedge a portion of the interest rate risk with respect to the delayed draw term loans, the Company entered into a five-year interest rate swap agreement (see Notes 15 and 16). The loans may be prepaid without penalty at any time. The Company’s indebtedness under the agreement is guaranteed by its principal domestic subsidiaries and is secured by a first lien on its and their property. The agreement contains covenants limiting the Company’s ability to dispose of assets, change its business, merge, make acquisitions, incur indebtedness or liens, pay dividends, make investments or engage in certain transactions with its affiliates. Additionally, the agreement contains covenants requiring Globalstar to maintain certain financial and operating covenants and restricting capital expenditures. The Company was in compliance with all related covenants at September 30, 2007.

 

As of September 30, 2007, there were no drawings under the $50.0 million revolving credit facility. For each of the three and nine months ended September 30, 2007, the weighted average annualized interest rate on the outstanding revolving credit loans was 0%, because there was no outstanding debt during the periods.

 

In November 2007, Thermo Funding Company agreed to assume the lenders’ obligations under the credit agreement. See Note 16.

 

Note 12: Equity Incentive Plan

 

On July 12, 2006, the Company’s board of directors adopted and a majority of the Company’s stockholders approved the Globalstar, Inc. 2006 Equity Incentive Plan (“Equity Plan”), which became effective upon the registration of the Company’s Common Stock under the Securities Act of 1933 in November 2006. The purpose of the Equity Plan is to make available incentives that will assist the Company in attracting, retaining and motivating employees, directors and consultants whose contributions are essential to its success. The Company may provide these incentives through the grant of stock options, stock appreciation rights, restricted stock purchase rights, restricted stock bonuses, restricted stock units, performance shares or performance units. The Equity Plan is administered by the Compensation Committee of the board of directors. On November 9, 2006, the Company registered under the Securities Act 1,200,000 shares of its Common Stock for issuance under the Equity Plan and, on November 10, 2006, the Compensation Committee authorized granting restricted stock and restricted stock unit awards for an aggregate of approximately 295,000 shares of Common Stock to substantially all the Company’s employees. Since this initial grant, the Company has granted additional restricted stock and restricted stock unit awards to its employees as a part of its equity incentive plans. The Company’s equity incentive plans are broad-based, long-term retention programs intended to attract and retain talented employees and align stockholder and employee interests. The fair value of these grants is measured based upon the market price of the underlying Common Stock at the date of the grant.

 

As per the terms of the restricted stock awards and the restricted stock units, 25% of the shares granted vest within six months of the grant date and the remainder vest on November 9, 2009, subject to certain acceleration clauses upon satisfactory completion of Company wide goals.

 

Approximately 1,335,000 and 1,393,000 restricted stock awards and restricted stock units were granted during the three and nine months ended September 30, 2007, respectively. In January 2007, the Company’s board of directors approved an additional 600,000 shares of the Company’s Common Stock for issuance under the Equity Plan. On August 9, 2007, the Company registered under the Securities Act the additional 600,000 shares of Common Stock for issuance under the Equity Plan.

 

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.

 

15



 

In January 2005, the Company promised one of its board members an option to purchase up to 120,000 shares at a price of approximately $2.67 per share (as adjusted for a six-for-one stock split). This option vested fully in March 2006. The grant date intrinsic value and fair value of this award were approximately nil and $40,000, respectively. The intrinsic value at September 30, 2007 was approximately $559,000. There have been no other stock option grants. In August 2007, the Compensation Committee approved compensating the Company’s independent directors for their services with restricted stock awards in lieu of cash compensation. The dollar value of such compensation is fixed and the number of restricted stock awards to be issued is based upon value of the Company’s Common Stock on the issuance date.

 

Note 13: Litigation

 

The Company is involved in certain litigation matters as discussed below.

 

On February 9, 2007, the first of three purported class action lawsuits was filed against the Company, its Chief Executive Officer (“CEO”) and its Chief Financial Officer (“CFO”) in the Southern District of New York alleging that the Company’s registration statement related to its initial public offering (“IPO”) 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. On August 15, 2007, the lead plaintiff filed its Securities Class Action Consolidated Amended Complaint. The Amended Complaint reasserts claims against the Company and the Company’s CEO and CFO, and adds as defendants the three co-lead underwriters of the IPO, Wachovia Capital Markets, LLC, JPMorgan Securities, Inc. and Jefferies & Company, Inc. It cites a drop in the trading price of the Company’s Common Stock that followed its filing, on February 5, 2007, of a Current Report on Form 8-K relating in part to changes in the condition of its satellite constellation. It seeks, on behalf of a class of purchasers of the Company’s Common Stock who purchased shares in the IPO or traceable to the IPO from November 2, 2006 through February 6, 2007, recovery of damages under Sections 11 and 15 of the Securities Act of 1933, and rescission under Section 12(a)(2) of the Securities Act of 1933. The Company intends to defend the matter vigorously.

 

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). 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. Plaintiffs allege that members of the proposed class suffered damages from March 2003 to the present because Globalstar did not perform according to its representations with respect to coverage and reliability. Plaintiffs claim that the amount in controversy exceeds $5.0 million but do not allege any particular actual damages incurred. Plaintiffs amended their complaint on June 29, 2007, and the Company filed a motion to dismiss the complaint on July 6, 2007. On September 25, 2007, the court issued an order granting in part and denying in part the Company’s motion. Subsequently, on October 17, 2007, the plaintiffs filed their Second Amended Complaint.

 

On April 24, 2007, Mr. Jean-Pierre Barrette filed a motion for Authorization to Institute a Class Action in Quebec, Canada, Superior Court against Globalstar Canada. Mr. Barrette asserts claims based on Quebec law related to his alleged problems with Globalstar Canada’s service. The Company moved to disqualify Mr. Barrette because of his association with the law firm representing plaintiffs and to transfer the case to the district of Montreal. The court recently granted the Company’s motion for a change of venue, and plaintiff’s counsel substituted a new designated representative of the purported class.

 

From time to time, the Company is involved in various other  litigation matters involving ordinary and routine claims incidental to its 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.

 

16



 

Note 14: Geographic Information

 

Revenue by geographic location, presented net of eliminations for intercompany sales, was as follows for the three and nine months ended September 30, 2007 and 2006 (in thousands):

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Service:

 

 

 

 

 

 

 

 

 

United States

 

$

11,922

 

$

15,528

 

$

32,175

 

$

35,288

 

Canada

 

7,047

 

9,345

 

20,391

 

25,880

 

Europe

 

1,431

 

1,453

 

3,498

 

4,215

 

Central and South America

 

559

 

911

 

1,788

 

2,976

 

Others

 

304

 

412

 

861

 

1,492

 

Total service revenue

 

21,263

 

27,649

 

58,713

 

69,851

 

Subscriber equipment:

 

 

 

 

 

 

 

 

 

United States

 

1,298

 

6,133

 

6,351

 

18,710

 

Canada

 

1,522

 

1,796

 

4,259

 

6,746

 

Europe

 

1,163

 

634

 

4,066

 

3,924

 

Central and South America

 

255

 

941

 

714

 

3,146

 

Others

 

187

 

1,542

 

576

 

5,059

 

Total subscriber equipment revenue

 

4,425

 

11,046

 

15,966

 

37,585

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

25,688

 

$

38,695

 

$

74,679

 

$

107,436

 

 

Note 15: Interest Rate Derivative

 

In July 2006, in connection with entering into its credit agreement, which provides for interest at a variable rate (Note 11), 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 fair value of the interest rate swap agreement was $3.5 million and $2.7 million at September 30, 2007 and December 31, 2006, respectively, which is reflected in the Company’s Consolidated Balance Sheet in “Other non-current liabilities.” The loss in fair value for the three and nine months ended September 30, 2007, of approximately $2.3 million and $0.8 million, respectively, was charged to “Interest rate derivative loss” in the accompanying Consolidated Statements of Income. See Note 16 as it relates to the Company’s amended and restated credit agreement with Wachovia Investment Holdings, LLC and the interest rate swap agreement.

 

Note 16: Subsequent Events

 

On October 16, 2007, the Company entered into a Gateway Purchase Contract with Globaltouch (West Africa) Limited pursuant to which Globalstar will construct, install and test a gateway for Globaltouch in Kaduna, Nigeria. The purchase price for the gateway is approximately $8.4 million, payable in installments, with final payment upon acceptance by Globaltouch. Payment is secured by a letter of credit.  Simultaneously with the purchase contract, the parties also entered into a Satellite Services Agreement providing for Globalstar’s selling satellite communication services to Globaltouch on a wholesale basis. Globalstar agreed to purchase 30% of the ordinary shares of Globaltouch for approximately $1.8 million, also payable in installments. Globalstar will have the right to appoint two of the directors of Globaltouch.

 

On October 21, 2007, the Company successfully launched its four remaining spare satellites into orbit.

 

On October 31, 2007, the Company entered into an agreement with Open Range Communications, Inc. that, subject to the conditions described below, permits Open Range to deploy service in certain rural geographic markets in the United States under the Company’s Ancillary Terrestrial Component (ATC) authority. Open Range will use the Company’s spectrum to offer dual mode mobile satellite based and terrestrial wireless WiMAX services to over 500 rural American communities.  Commercial availability is expected to begin in selected markets in late 2008. The initial term of the agreement of up to 30 years is co-extensive with the Company's ATC authority and is subject to renewal options exercisable by Open Range. Based on Open Range’s business plan used in support of its $268.0 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 maximum value for this agreement of between $0.30 - $0.40/MHz/POP. Upon the fulfillment of all contingencies, Open Range’s down payment will be $3.6 million and annual payments in the first six years of the agreement will range from approximately $1.2 million to $10.3 million, assuming Open Range has the ability to use all of the licensed spectrum covered by the agreement. The amount of the payments made to the Company will depend on a number of factors, including the eventual geographic coverage of and the number of customers on the Open Range system. The Company has also agreed to make a $5.0 million preferred equity investment in Open Range, $1.0 million of which was made available on November 1, 2007. The agreement is contingent on various conditions, including receiving authority from the Federal Communications Commission (“FCC”) to use an expanded portion of the Company’s licensed spectrum for ATC services and such other FCC and other governmental approvals as may be required for the agreement, and Open Range’s completion of its equity and debt financing.

 

17



 

On November 2, 2007, Thermo Funding Company satisfied its remaining commitment under the irrevocable standby stock purchase agreement by purchasing 769,518 shares of the Company’s Common Stock at a price of approximately $16.17 per share for an aggregate purchase price of approximately $12.4 million.

 

On November 7, 2007, the Company, Wachovia Investment Holdings, LLC, as administrative agent, and the lenders under the Company’s amended and restated credit agreement agreed that the requirements of the minimum liquidity covenant of the credit agreement would be suspended until the earliest of December 17, 2007 and the date on which Thermo Funding Company assumes all of the obligations and is assigned all of the rights (other than indemnification rights) of the administrative agent and the lenders under the credit agreement. Thermo Funding Company has agreed to complete the assignment and assumption by December 17, 2007. If Thermo Funding Company fails to do so, all commitments of the lenders to extend credit under the credit agreement will terminate.  The Company further agreed that it would not borrow any funds under the credit agreement until the assignment and assumption is completed. This agreement resulted from the Company’s disclosure to the administrative agent and the lenders that required periodic payments under the Company’s contract for the procurement of its second-generation satellite constellation which would prevent the Company from maintaining the minimum liquidity levels required by the credit agreement. Assignment or termination of the credit agreement will terminate the Company’s swap agreement discussed in Note 15, and the Company may be required to pay an amount reflecting any negative market value of the swap on that date. If the swap agreement had been terminated on September 30, 2007, the Company would have been required to make a payment of approximately $3.5 million.

 

On November 9, 2007, the FCC released a Report and Order and Notice of Proposed Rulemaking dealing both with Globalstar’s June 2006 petition for rulemaking to expand its ATC-authorized spectrum to greater than 11 MHz and with the current L-band sharing arrangement between Globalstar and Iridium. The two proceedings are interrelated because, the FCC noted, the agency has reservations about the feasibility of Globalstar’s operating a terrestrial ATC service in the portions of its spectrum that it shares with other terrestrial wireless or mobile satellite operators. In the ATC Notice of Proposed Rulemaking (“NPRM”) portion of the decision, the FCC requested comment on whether Globalstar should be authorized to provide ATC over an aggregate 19.275 MHz of its licensed spectrum, including the portion of its S-band between 2483.5 and 2495 MHz and in the portion of the L-band that it does not share with Iridium. The FCC did not propose to allow ATC in the 2496-2500 MHz portion of the S-band which Globalstar shares with the Broadband Radio Service (“BRS”) or the 2495-2496 MHz guard band between Globalstar and BRS. Globalstar intends to demonstrate that it can operate in the entire 11.5 MHz below 2495 MHz without causing interference to any other in-band or adjacent service.  In the Report and Order (“R&O”) portion of the decision, the FCC effectively decreased the L-band spectrum available to Globalstar while increasing the L-band spectrum available to Iridium by 2.625 MHz. Globalstar does not believe that this change in the existing band plan is supported by the record in the proceeding and is evaluating its options.

 

18



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

In addition to current and historical information, this Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to our future operations, prospects, potential products, services, developments and business strategies.  These statements can, in some cases, be identified by the use of terms such as “may,” “will,” “should,” “could,” “would,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” the negative of such terms or other comparable terminology.  Forward-looking statements, such as the statements regarding our ability to develop and expand our business, our ability to manage costs, our ability to exploit and respond to technological innovation, the effects of laws and regulations (including tax laws and regulations) and legal and regulatory changes, the opportunities for strategic business combinations and the effects of consolidation in our industry on us and our competitors, our anticipated future revenues, our anticipated capital spending (including for future satellite procurements and launches), our anticipated financial resources, our expectations about the future operational performance of our satellites (including their projected operational lives), the expected strength of and growth prospects for our existing customers and the markets that we serve, and other statements contained in this report regarding matters that are not historical facts, involve predictions. These and similar statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by the statements. Such risks and uncertainties include, among others, those listed in Part II, Item 1A “Risk Factors” of this Report.  We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Report to reflect actual results or future events or circumstances.

 

This “Management’s Discussion and Analysis of Financial Condition” should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition” and information included in our Annual Report on Form 10-K for the year ended December 31, 2006.

 

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.

 

In early 2002, Old Globalstar and three of its subsidiaries filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. We were formed in Delaware in November 2003 for the purpose of acquiring substantially all the assets of Old Globalstar and its subsidiaries. With Bankruptcy Court approval, we acquired Old Globalstar’s assets and assumed certain of its liabilities in a two-step transaction, with the first step completed on December 5, 2003, and the second step on April 14, 2004 (the “Reorganization”). On January 1, 2006, we elected to be taxed as a C corporation, and on March 17, 2006, we converted from a Delaware limited liability company to a Delaware corporation.

 

Material Trends and Uncertainties.   Our satellite communications business, by providing critical mobile communications to our subscribers, serves principally the following markets: government, public safety and disaster relief; recreation and personal; oil and gas; maritime and fishing; natural resources, mining and forestry; construction; utilities; and transportation. Our industry has been growing as a result of:

 

                  favorable market reaction to new pricing plans with lower service charges;

 

                  awareness of the need for remote communication services;

 

                  increased demand for communication services by disaster and relief agencies and emergency first responders;

 

                  improved voice and data transmission quality; and

 

                  a general reduction in prices of user equipment.

 

In addition, our industry as a whole has benefited from the improved financial condition of most industry participants following their financial reorganizations.

 

19



 

Nonetheless, as further described under “Risk Factors,” we face a number of challenges and uncertainties, including:

 

                  Constellation life and health. Our current satellite constellation is aging. We successfully launched four of our eight spare satellites in May 2007 and the remaining four in October 2007. A number of our satellites 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. If the S-band antenna on a satellite ceases to be commercially functional, two-way communication is impossible over that satellite, but not necessarily over the constellation as a whole. Subscriber service will continue to be available, but at certain times in any given location it may take longer to establish calls and the average duration of calls may be impacted adversely. There are periods of time each day during which no two-way voice and data service is available at any particular location. The root cause of our two-way communication issues is unknown, although we believe it may result from irradiation of the satellites in orbit caused by the space environment at the altitude that our satellites operate.

 

The two-way communication issues do not affect adversely our one-way Simplex data transmission services, including our new SPOTTM services, which utilize only the L-band uplink from a subscriber’s Simplex terminal to the satellites.

 

To date, we have managed the two-way communication issue in various technical ways, including moving less impaired satellites to key orbital positions and launching eight spare satellites. Nonetheless, we have been unable to correct our two-way communication issues.

 

Based on our most recent analysis, we now believe that, if the two-way communication issues continue or worsen, and if we are unsuccessful in developing additional technical solutions, the interruptions of two-way communications services will increase, and by some time in 2008 substantially all of our satellites launched between 1998 and 2000, but not those satellites launched in 2007, will cease to be able to support two-way communications services. Simplex data services, including our new SPOT services, will not be affected.

 

We are working on plans, including new products and services and pricing programs to attempt to reduce the effects of the two-way communication issues upon our customers and operations. At our request, Thales Alenia Space has presented a four part sequential plan for accelerating delivery of the initial 24 satellites of our second-generation constellation by up to four months. In September 2007, we accepted the first portion of this plan. See “Part II, Item 1A. Risk Factors—Our satellites have a limited life and may fail prematurely, which would cause our network to be compromised and materially and adversely affect our business, prospects and profitability.”

 

                  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 around 2008, and several competitors, such as ICO Global Communications Company, are constructing geostationary satellites that may provide mobile satellite service. Increased numbers of competitors, and the introduction of new services and products by competitors, increases competition for subscribers and pressures all providers, including us, to reduce prices. Increased competition may result in loss of subscribers, decreased revenue, decreased gross margins, higher churn rates, and, ultimately, decreased profitability and cash.

 

                  Technological changes. It is difficult for us to respond promptly to major technological innovations by our competitors because substantially modifying or replacing our basic technology, satellites or gateways is time-consuming and very expensive. Approximately 56% of our total assets at September 30, 2007 represented fixed assets. Although we plan to procure and deploy our second-generation satellite constellation and upgrade our gateways and other ground facilities, we may nevertheless become vulnerable to the successful introduction of superior technology by our competitors.

 

                  Capital expenditures. We have incurred significant capital expenditures during 2006 and 2007 and we expect to incur additional significant expenditures into 2014 under the following commitments:

 

20



 

                  Launching our eight spare satellites to augment our current constellation will cost approximately $124.0 million exclusive of capitalized interest and internal costs, of which $117.4 million (exclusive of $0.9 million of capitalized interest and internal costs) had been paid or accrued by September 30, 2007. We plan to fund the balance of this cost from the proceeds of the final sale of our Common Stock to Thermo Funding Company pursuant to its irrevocable standby stock purchase agreement described under “Liquidity and Capital Resources—Irrevocable Standby Stock Purchase Agreement.”

 

                  We estimate that  procuring and deploying our second-generation satellite constellation and upgrading our gateways and other ground facilities will cost approximately $1.2 billion, which we expect will be reflected in capital expenditures into 2014. The following obligations are included in this amount:

 

                  On November 30, 2006, we entered into a €662.6 million (approximately $923.1 million at a weighted average conversion rate of €1.00 = $1.3932 at September 30, 2007, including approximately €146.3 million which will be paid by us in U.S. dollars at a fixed conversion rate of €1.00 = $1.294), contract with Thales Alenia Space for the construction of our second-generation constellation. We have made payments in the amount of approximately €80.2 million (approximately $103.9 million) through September 30, 2007 under this contract. At our request, Thales Alenia Space has presented to us a four part sequential plan for accelerating delivery of the initial 24 satellites by up to four months. The expected cost of this acceleration will range from approximately €6.7 million to €13.4 million ($9.6 million to $19.1 million at € 1.00 = $1.4272). In September 2007, we accepted the first portion of this plan with an additional cost of €1.9 million ($2.7 million at €1.00 = $1.4272). We cannot assure you that any of the remaining acceleration will occur. 

 

                  In March 2007, we entered into a €9.0 million (approximately $12.8 million at a conversion rate of €1.00 = $1.4272) agreement with Thales Alenia Space 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. We have made payments in the amount of approximately €2.9 million (approximately $3.9 million) through September 30, 2007.

 

                  On September 5, 2007, we entered into a contract with Arianespace for the launch of our second-generation satellites and certain pre and post-launch services. Pursuant to the contract, Arianespace will make four launches of six satellites each, and we have the option to require Arianespace to make four additional launches of six satellites each. The total contract price for the first four launches is $210.0 million. We have made payments in the amount of approximately $10.5 million through September 30, 2007.

 

                  We have begun construction of a gateway in Singapore at a total cost of approximately $4.0 million. This gateway is expected to be fully operational by July 2008.

 

See “Liquidity and Capital Resources” for a discussion of our requirements for funding these capital expenditures.

 

21



 

                  Introduction of new products. We work continuously with the manufacturers of the products we sell to offer our customers innovative and improved products. Virtually all engineering, research and development costs of these new products are paid by the manufacturers. However, to the extent the costs are reflected in increased inventory costs to us, and we are unable to raise our prices to our subscribers correspondingly, our margins and profitability would be reduced.

 

                  Fluctuations in interest and currency rates. Debt under our credit agreement bears interest at a floating rate. Therefore, increases in interest rates will increase our interest costs if debt is outstanding. A substantial portion of our revenue (38% for the nine months ended September 30, 2007) is denominated in foreign currencies. In addition, a substantial majority of our 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.

 

Simplex Products (Personal Tracking Services and Emergency Messaging.) In the fourth quarter of 2007, we are introducing various handheld solutions, including the SPOT™ Satellite Messenger (which was introduced in early November 2007), 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, we expect this new Globalstar device to provide consumers with the capability to geographically trace or map the location of individuals. The product will also enable users to transmit messages to a specific preprogrammed email address, phone or data device, including a request for assistance in the event of an emergency.

 

                  SPOT Addressable Market

 

We believe the addressable market for our SPOT product in North America alone is approximately 50 million units. Our objective is to capture 2-3% of that market by the end of 2010. The reach of our Simplex System, on which our SPOT product relies, covers approximately 50% of the world population. We intend to market our SPOT product aggressively in our overseas markets including South and Central America, Western Europe, and through independent gateway operators in their respective territories.

 

                          SPOT Pricing

 

The pricing for SPOT for both service and equipment is intended to be extremely competitive. Annual service fees currently range from $99.99 for our basic level plan to $149.98 for additional tracking capability. We expect the equipment will be sold to end users at $169.99 per unit.

 

                          SPOT Distribution

 

We intend to distribute and sell our new SPOT satellite messenger through a variety of existing and new distribution channels. We are in the process of signing distribution agreements with a number of “Big Box” retailers and other similar distribution channels. To date we have signed distribution agreements with Big Rock Sports, Bass Pro Shops, Cabela’s, REI, Joe’s Sport, Outdoor and More, Big 5 Sporting Goods, Boater’s World, Wynit, Rescue Source 3 and Sportsman’s Warehouse. Our objective is to be in approximately 5,000 retail and/or wholesale outlets by the end of the second quarter in 2008 and 10,000 in 2009. To date, we have secured firm orders to ship approximately 20,000 SPOT units to these distributors since the November product launch. We also intend to sell directly using our existing salesforce into key vertical markets and through our direct e-commerce website (www.findmespot.com).

 

SPOT is at the beginning of its commercial introduction and its commercial success cannot be assured.

 

During the third quarter, our integrators continued to introduce new and innovative products using our Simplex services.  Guardian Mobility Corporation introduced a new group of satellite data modems known as the Tracer 3 Product Family.  The data modems are designed to communicate via our Simplex network and are capable of providing data monitoring and GPS-based asset tracking information to customers from remote regions.  The Tracer 3 Product Family joined Guardian Mobility’s suite of Simplex data products, which includes its Skytrax family of general aviation automated flight following solutions.  In addition, Numerex Orbit One, another of our integrators, announced the introduction of its SX-1, as the world’s smallest asset tracking modem.

 

Ancillary Terrestrial Component (ATC).   ATC is the integration of a satellite-based service with a terrestrial wireless service resulting in a hybrid mobile satellite service. The ATC network would extend our services to urban areas and inside buildings in both urban and rural areas where satellite services currently are impractical. We believe we are at the forefront of ATC development and are actively working to be among the first market entrants. To that end, we are considering a range of options for rollout of our ATC services. We are exploring selective opportunities with a variety of media and communication companies to capture the full potential of our spectrum and U.S. ATC license.

 

On October 31, 2007,  we entered into an agreement with Open Range Communications, Inc. that, subject to the conditions described below, permits Open Range to deploy service in certain rural geographic markets in the United States under our ATC authority.  Open Range will use our spectrum to offer dual mode mobile satellite based and terrestrial wireless WiMAX services to over 500 rural American communities. Commercial availability is expected to begin in selected markets in late 2008. 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. Based on Open Range’s business plan used in support of its $268.0 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 maximum value for this agreement between $0.30 - $0.40/MHz/POP.

 

22



 

Upon the fulfillment of all contingencies, Open Range’s down payment will be $3.6 million and annual payments in the first six years of the agreement will range from approximately $1.2 million to $10.3 million, assuming Open Range has the ability to use all of the licensed spectrum covered by the agreement. The amount of the payments made to us will depend on a number of factors, including the eventual geographic coverage of and the number of customers on the Open Range system. We have also agreed to make a $5.0 million preferred equity investment in Open Range, $1.0 million of which was made available on November 1, 2007. Under the agreement Open Range will have the right to use our spectrum within the United States in the 1.6 and 2.4 MHz bands to provide terrestrial wireless broadband services. Open Range will deploy portable broadband services via a WiMAX architecture within the targeted communities. In addition, Open Range has an option to expand this relationship over the next six years. The agreement is contingent on various conditions, including receiving authority from the FCC to use an expanded portion of our licensed spectrum for ATC services and such other FCC and other governmental approvals as may be required for the agreement, and Open Range’s completion of its equity and debt financing.

 

On November 9, 2007, the FCC released a Report and Order and Notice of Proposed Rulemaking dealing both with our June 2006 petition for rulemaking to expand its ATC-authorized spectrum to greater than 11 MHz and with the current L-band sharing arrangement between Globalstar and Iridium. The two proceedings are interrelated because, the FCC noted, the agency has reservations about the feasibility of our operating a terrestrial ATC service in the portions of our spectrum that we share with other terrestrial wireless or mobile satellite operators. In the ATC Notice of Proposed Rulemaking (“NPRM”) portion of the decision, the FCC requested comment on whether we should be authorized to provide ATC over an aggregate 19.275 MHz of our licensed spectrum, including the portion of our S-band between 2483.5 and 2495 MHz and in the portion of the L-band that we do not share with Iridium. The FCC did not propose to allow ATC in the 2496-2500 MHz portion of the S-band which we share with the Broadband Radio Service (“BRS”) or the 2495-2496 MHz guard band between Globalstar and BRS. We intend to demonstrate that we can operate in the entire 11.5 MHz below 2495 MHz without causing interference to any other in-band or adjacent service.  In the Report and Order (“R&O”) portion of the decision, the FCC effectively decreased the L-band spectrum available to us while increasing the L-band spectrum available to Iridium by 2.625 MHz. We do not believe that this change in the existing band plan is supported by the record in the proceeding, and are evaluating our options.

 

Service Revenues.   We earn revenues primarily from the sale of satellite communications services to direct customers, resellers and independent gateway operators. These services include mobile and fixed voice and data services and asset tracking and monitoring services. We generated approximately 83% and 79% of our consolidated revenues from the sale of our satellite communication services for the three and nine months ended September 30, 2007, respectively, compared to 71% and 65% for the same periods in 2006.

 

Subscriber Equipment Sales Revenue.   We also sell related voice and data equipment to our customers. We generated approximately 17% and 21% of our consolidated revenues from subscriber equipment sales in the three and nine months ended September 30, 2007, respectively, compared to 29% and 35% for the same periods in 2006.

 

The table below sets forth amounts and percentages of our revenue by type of service and subscriber equipment sales for the three and nine months ended September 30, 2007 and 2006.

 

 

 

Three Months ended
September 30, 2007

 

Three Months ended
September 30, 2006

 

Nine Months ended
September 30, 2007

 

Nine Months ended
September 30, 2006

 

 

 

Revenue

 

% of Total Rev

 

Revenue

 

% of Total Rev

 

Revenue

 

% of Total Rev

 

Revenue

 

% of Total Rev

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobile

 

$

16,482

 

64

%

$

22,414

 

58

%

$

46,409

 

62

%

$

54,345

 

51

%

Fixed

 

1,389

 

6

%

2,102

 

5

%

4,383

 

6

%

5,908

 

5

%

Data

 

380

 

2

%

444

 

1

%

1,160

 

2

%

1,122

 

1

%

Simplex

 

570

 

2

%

491

 

1

%

1,730

 

2

%

1,218

 

1

%

IGO

 

1,340

 

5

%

1,991

 

5

%

3,145

 

4

%

5,883

 

5

%

Other(1)

 

1,102

 

4

%

207

 

1

%

1,886

 

3

%

1,375

 

1

%

Total Service Revenue

 

21,263

 

83

%

27,649

 

71

%

58,713

 

79

%

69,851

 

65

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscriber Equipment Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobile

 

2,854

 

11

%

6,036

 

16

%

9,731

 

13

%

19,001

 

18

%

Fixed

 

380

 

1

%

1,706

 

4

%

1,977

 

2

%

4,821

 

4

%

Data

 

174

 

1

%

615

 

2

%

540

 

1

%

1,812

 

2

%

Accessories/Misc

 

1,017

 

4

%

2,689

 

7

%

3,718

 

5

%

11,951

 

11

%

Total Subscriber Equipment Sales

 

4,425

 

17

%

11,046

 

29

%

15,966

 

21

%

37,585

 

35

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

25,688

 

100

%

$

38,695

 

100

%

$

74,679

 

100

%

107,436

 

100

%

 


(1)            Includes engineering services and activation fees

 

Operating Income (Loss). We realized an operating loss of $16.8 million for the nine months ended September 30, 2007 compared to an operating income of $14.5 million for the same period in 2006. This decrease can be attributed primarily to a $17.3 million charge for impairment of assets caused by a write down of our first-generation product inventory recognized in the quarter ended June 30, 2007. We recognized this impairment charge after an assessment of our inventory and current and projected sales. Lower service revenue and a decline in equipment sales as a result of degradation of our two-way communication service during the nine months ended September 30, 2007 compared to the same period last year also contributed to the decline in operating results.  The degradation of our two-way communication service was the result of a constellation reconfiguration we were completing in the first quarter of 2007 to accommodate inclusion of eight spare satellites, four of which were launched in May 2007 and the remaining four in October 2007, and the two-way communication issues described earlier. Lower usage also resulted in lower retail Average Revenue Per Unit (ARPU) on our monthly service plans. Moreover, concerns over the long term viability of, and service issues related to, our first generation constellation’s voice service contributed to lower subscriber equipment sales for the quarter and the nine months ended September 30, 2007.

 

23



 

Independent Gateway Acquisition Strategy

 

Currently, 16 of the 25 gateways in our network are owned and operated by unaffiliated companies, which we call independent gateway operators, some of whom operate more than one gateway. We have no financial interest in these independent gateway operators other than arms’ length contracts for wholesale minutes of service. Some of these independent gateway operators have been unable to grow their businesses adequately due in part to limited resources. Old Globalstar initially developed the independent gateway operator acquisition strategy to establish operations in multiple territories with reduced demands on its capital. In addition, there are territories in which for political or other reasons, it is impractical for us to operate directly. We sell services to the independent gateway operators on a wholesale basis and they resell them to their customers on a retail basis.

 

We have acquired, and intend to continue to pursue the acquisition of, independent gateway operators when we believe we can do so on favorable terms, subject to capital availability. We believe that these acquisitions can enhance our results of operations in three respects. First, we believe that, with our greater financial and technical resources, we can grow our subscriber base and revenue faster than some of the independent gateway operators. Second, we realize greater margin on retail sales to individual subscribers than we do on wholesale sales to independent gateway operators. Third, we believe expanding the territory we serve directly will better position us to market our services directly to multinational customers who require a global communications provider. However, acquisitions of independent gateway operators do require us to commit capital for acquisition of their assets, as well as management resources and working capital to support the gateway operations, and therefore increase our risk in operating in these territories directly rather than through the independent gateway operators. In addition, operating the acquired gateways increases our marketing, general and administrative expenses. Our credit agreement limits to $25.0 million (in cash) the aggregate amount we may invest in foreign acquisitions without the consent of our lenders.

 

In February 2005, we purchased the Venezuela gateway for $1.6 million in cash to be paid over four years. Effective January 1, 2006, we acquired the Central American gateway and other real property assets for $5.2 million, paid principally in shares of our common stock. We are continuing negotiations to acquire the independent gateway operator with three gateways in Brazil for $6.5 million in Common Stock less outstanding amounts due to us from the gateway operator. We are unable to predict the timing or cost of further acquisitions since 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;

 

       ARPU, which is an indicator of our pricing and ability to obtain effectively long-term, high-value customers;

 

       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.

 

24



 

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, pension obligations, 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

 

Customer activation fees are deferred and recognized over four to five year periods, which approximates the estimated average life of the customer relationship. We periodically evaluate the estimated customer relationship life. Historically, changes in the estimated life have not been material to our financial statements.

 

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 our 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, we offer an annual plan called the Emergency Plan under which the customer is charged an annual fee to access our system and for each minute used. The annual fee for an Emergency Plan is recognized as revenue on a straight-line basis over the term of the plan.

 

Occasionally we have granted customer concessions in the form of customer credits. These concessions are expensed 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. The revenues associated with these services are recorded when the services are rendered, and the expenses are recorded when incurred.

 

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. Revenue from services provided to independent gateway operators is recognized based upon airtime minutes used by their customers and contractual fee arrangements. If collection is uncertain, revenue is recognized when cash payment is received.

 

We introduced annual plans (sometimes called Liberty plans) in August 2004 and broadened their availablity during the second quarter of 2005. These plans grew substantially in 2005 and 2006. These plans require users to pre-pay usage charges for the entire plan period, generally 12 months, which results in the deferral of certain of our revenues. Under our revenue recognition policy for annual plans, we defer revenue until the earlier of when the minutes are used or when these minutes expire. Any unused minutes are recognized as revenue at the expiration of a plan. Most of our customers have not used all the minutes that are available to them or have not used them at the pace anticipated, which has caused us to defer portion of our service revenue.

 

25



 

During the second quarter of 2007, we 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 fee. The unlimited loyalty plan incorporates a declining monthly 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 monthly 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, the balance in deferred revenue is recognized as revenue. At September 30, 2007 and December 31, 2006, our deferred revenue aggregated approximately $21.3 million and $24.7 million, respectively.

 

Subscriber equipment revenue represents the sale of fixed and mobile user terminals and accessories. Revenue is recognized 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.

 

In December 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliveries) are sufficiently separable and there exists sufficient evidence of their fair values to account separately for some or all of the deliveries (that is, there are separate units of accounting). In other arrangements, some or all of the deliveries are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. EITF Issue No. 00-21 addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF Issue No. 00-21 does not change otherwise applicable revenue recognition criteria.

 

Inventory

 

Inventory consists of purchased products, including fixed and mobile user terminals, accessories and gateway spare parts. Inventory acquired on December 5, 2003, through the Old Globalstar bankruptcy proceedings, was stated at fair value at the date of our acquisition. Subsequent inventory transactions are stated at the lower of cost or market. At the end of each quarter, product sales and returns from the previous twelve months are reviewed and any excess and obsolete inventory is written off. Cost is computed using the first-in, first-out (FIFO) method. Inventory allowances for inventories with a lower market value or that are slow moving are recorded 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 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. Loss from an in-orbit failure of a satellite is recognized as an expense in the period it is determined that the satellite is not recoverable.

 

The carrying value of the Globalstar System is reviewed for impairment whenever events or changes in circumstances indicate that the recorded value of the space segment and ground segment, taken as a whole, may not be recoverable. We look to current and future undiscounted cash flows, excluding financing costs, as primary indicators of recoverability. If an impairment is determined to exist, any related impairment loss is calculated based on fair value.

 

The satellites previously recorded as spare satellites and subsequently incorporated into the Globalstar System on the date the satellite is placed into service (the “In-Service Date”) will be depreciated over an estimated life of eight years beginning on the satellite’s “In-Service Date.”

 

Property and equipment acquired by us on December 5, 2003 in the Old Globalstar bankruptcy proceedings was recorded based on our allocation of acquisition cost. Because the acquisition cost of these assets was substantially below their historic cost or replacement cost, current depreciation and amortization costs have been reduced substantially for GAAP purposes, thereby increasing net income or decreasing net loss. As we increase our capital expenditures, especially to procure and launch our second-generation satellite constellation, we expect GAAP depreciation to increase substantially. Depreciation is provided using the straight-line method over the estimated useful lives. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the improvement or the term of the lease. We perform ongoing evaluations of the estimated useful lives of our property and equipment for depreciation purposes. The estimated useful lives are determined and continually evaluated based on the period over which services are expected to be rendered by the asset. Maintenance and repair items are expensed as incurred.

 

26



 

Income Taxes

 

Until January 1, 2006, we were treated as a partnership for U.S. tax purposes. Generally, our taxable income or loss, deductions and credits were passed through to our members. We did have some corporate subsidiaries that required a tax provision or benefit using the asset and liability method of accounting for income taxes as prescribed by Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Effective January 1, 2006, we elected to be taxed as a C corporation in the United States. When an enterprise changes its tax status from non-taxable to taxable, under SFAS No. 109 the effect of recognizing deferred tax assets and liabilities is included in income from continuing operations in the period of change. As a result, we recognized a gross deferred tax asset of $204.2 million and a gross deferred tax liability of $0.1 million on January 1, 2006. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. In evaluating the need for a valuation allowance, we take into account various factors including the expected level of future taxable income and available tax planning strategies. We determined that it was more likely than not that we would not recognize the entire deferred tax asset; therefore, we established a valuation allowance of $182.7 million, resulting in recognition of a net deferred tax benefit of $21.4 million. We monitor the situation to ensure that, if and when we are more likely than not to be able to utilize more of the deferred tax asset, we will be able to reduce the valuation allowance accordingly. On January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). See Note 9 to our unaudited interim consolidated financial statements for the impact of this adoption on our financial statements.

 

Spare Satellites, Launch Costs and Second-Generation Satellites

 

Old Globalstar purchased eight additional satellites in 1998 for $148.0 million (including performance incentives of up to $16.0 million) to serve as on-ground spares. Costs of $147.0 million (including a portion of the performance incentives) were previously recognized for these spare satellites. Prior to December 5, 2003, Old Globalstar recorded an impairment of these assets, and at December 5, 2003 they were carried at $0.9 million. The eight spare satellites were launched successfully in two separate launches of four satellites each in May 2007 and October 2007. Depreciation of these assets will begin when the satellites are placed in service and begin to handle call traffic. As of September 30, 2007 and December 31, 2006, these assets were recorded at $88.2 million and $87.8 million, respectively. The amount relating to spare satellites that were placed into service during the nine months ended September 30, 2007 (approximately $31.1 million), was classified within the Globalstar System as part of the space segment. These satellites are being depreciated over an estimated useful life of eight years.

 

On November 30, 2006, we entered into a contract with Thales Alenia Space to construct 48 low-earth orbit satellites. The total contract price will be approximately €662.6 million (approximately $923.1 million at a weighted average conversion rate of €1.00 = $1.3932 at September 30, 2007 including approximately €146.3 million which will be paid by us in U.S. dollars at a fixed conversion rate of €1.00 = $1.294). The contract requires Thales Alenia Space to commence delivery of satellites in the third quarter of 2009, with deliveries continuing until 2013 unless we elect to accelerate delivery. If we elect to accelerate delivery of the second phase of satellites, it is contemplated that all of the satellites will be delivered by the third quarter of 2010. As of September 30, 2007 and December 31, 2006, capitalized interest included within spare and second-generation satellites and launch costs was $0.9 million. At our request, Thales Alenia Space has presented a four part sequential plan to us for accelerating delivery of the initial 24 satellites by up to four months. The expected cost of this acceleration will range from approximately €6.7 million to €13.4 million ($9.6 million to $19.1 million at € 1.00 = $1.4272). In September 2007, we accepted the first portion of this plan with an additional cost of €1.9 million ($2.7 million at €1.00 = $1.4272). We cannot assure you that any of the remaining acceleration will occur.

 

In March, 2007, we entered into an agreement with Thales Alenia Space 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. This agreement complements the second-generation satellite construction contract with Thales Alenia Space for the construction of 48 low-earth orbit satellites and allows Thales Alenia Space to coordinate all aspects of the second-generation satellite constellation project, including the transition of first-generation software and hardware to equipment for the second generation. The total contract price for the construction and associated services is €9.0 million (approximately $12.8 million at a conversion rate of €1.00 = $1.4272) consisting of €4.0 million for the Satellite Operations Control Centers, €3.0 million for the Telemetry Command Units and €2.0 million for the In Orbit Test Equipment, with payments to be made on a quarterly basis through completion of the Control Network Facility in late 2009.

 

On September 5, 2007, we entered into a contract with Arianespace for the launch of our second generation satellites and certain pre and post-launch services. Pursuant to the contract, Arianespace will make four launches of six satellites each, and we have the option to require Arianespace to make four additional launches of six satellites each. The total contract price for the first four launches is $210.0 million. The total cost for the launches under this contract is included in our estimate of approximately $1.2 billion to procure and deploy our second-generation satellite constellation and related gateway upgrades.

 

The depreciation on these assets will begin once the assets are completed and placed into service.

 

27



 

Pension Obligations

 

We have a company-sponsored retirement plan covering certain current and past U.S.-based employees. Until June 1, 2004, substantially all of Old Globalstar’s and our employees and retirees who participated and/or met the vesting criteria for the plan were participants in the Retirement Plan of Space Systems/Loral, Inc. (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 compensation, length of service with the company and age of the participant. On June 1, 2004, the assets and frozen pension obligations of the segment attributable to our employees 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. Our funding policy is to fund the Globalstar Plan in accordance with the Internal Revenue Code and regulations.

 

We account for our defined benefit pension and life insurance benefit plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”, (“SFAS 87”), SFAS No. 106, “Employer’s Accounting for Postretirement Benefits Other than Pensions”, (“SFAS 106”) and SFAS No. 158, “Employers’ Accounting Defined Benefit Pension and Other Postretirement Plans”, (“SFAS 158”) which require that amounts recognized in financial statements be determined on an actuarial basis. We adopted the recognition and disclosure provisions of SFAS No. 158 on December 31, 2006 and this adoption did not have any impact on our results of operation. Pension benefits associated with these plans are generally based on each participant’s years of service, compensation, and age at retirement or termination. Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of expense and liability measurement. We utilize the services of a third party to perform these actuarial calculations.

 

We determine the discount rate used to measure plan liabilities as of the December 31 measurement date for the U.S. pension plan. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. In estimating this rate, we look at rates of return on fixed-income investments of similar duration to the liabilities in the plan that receive high, investment grade ratings by recognized ratings agencies. Using these methodologies, we determined a discount rate of 5.75% to be appropriate as of December 31, 2006, which is an increase of 0.25 percentage points from the rate used as of December 31, 2005. An increase of 1.0% in the discount rate would have decreased our plan liabilities as of December 31, 2006 by $0.1 million and a decrease of 1.0% could have increased our plan liabilities by $0.1 million.

 

A significant element in determining our pension expense in accordance with SFAS No. 87 is the expected return on plan assets, which is based on historical results for similar allocations among asset classes. For the U.S. pension plan, our assumption for the expected return on plan assets was 7.5% for 2006.

 

The difference between the expected return and the actual return on plan assets is deferred and, under certain circumstances, amortized over future years of service. Therefore, the net deferral of past asset gains (losses) ultimately affects future pension expense. This is also true of changes to actuarial assumptions. As of December 31, 2006, we had net unrecognized pension actuarial losses of $2.0 million. These amounts represent potential future pension and postretirement expenses that would be amortized over average future service periods.

 

Derivative Instrument

 

We utilize a derivative instrument in the form of an interest rate swap agreement to minimize our risk from interest rate fluctuations related to our variable rate credit agreement. We use the interest rate swap agreement to manage risk and not for trading or other speculative purposes. At the end of each accounting period, we record the derivative instrument on our balance sheet as either an asset or a liability measured at fair value. The interest rate swap agreement does not qualify for hedge accounting treatment. Changes in the fair value of the interest rate swap agreement are recognized as “Interest rate derivative gain (loss)” over the life of the agreement. The cancellation of the amended and restated credit agreement will automatically terminate the interest rate swap agreement. We will be required to pay any negative fair market value associated with the interest rate swap agreement upon its termination. The agreement had a negative value of approximately $3.5 million at September 30, 2007.

 

Stock-Based Compensation

 

Effective January 1, 2006, as a result of our initial public offering, we adopted the provisions of Statement of Financial Accounting Standards 123(R), “Share-Based Payment” (“SFAS 123(R)”), and related interpretations, or SFAS 123(R), to account for stock-based compensation using the modified prospective transition method and therefore have not restated our prior period results. Among other things, SFAS 123(R) requires that compensation expense be recognized in the financial statements for both employee and non-employee share-based awards based on the grant date fair value of those awards. At January 1, 2006, the option of one board member to purchase up to 120,000 shares of Common Stock at $2.67 per share was the only outstanding equity award. Compensation cost related to the remaining portion of this award for which the requisite service had not been rendered was insignificant. Therefore, the adoption of SFAS 123(R) did not have a significant impact on our financial position or results of operations.

 

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.

 

28



 

Results of Operations

 

Comparison of Results of Operations for the Three Months Ended September 30, 2007 and 2006 (in thousands):

 

 

 

Three months ended
September 30,

 

 

 

 

 

2007

 

2006

 

% Change

 

Revenue:

 

 

 

 

 

 

 

Service revenue

 

$

21,263

 

$

27,649

 

(23

)%

Subscriber equipment sales

 

4,425

 

11,046

 

(60

)

Total revenue

 

25,688

 

38,695

 

(34

)

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization shown separately below)

 

7,307

 

6,695

 

9

 

Cost of subscriber equipment sales

 

3,390

 

10,902

 

(69

)

Marketing, general and administrative

 

12,069

 

10,543

 

14

 

Depreciation and amortization

 

3,264

 

1,726

 

89

 

Total operating expenses

 

26,030

 

29,866

 

(13

)

 

 

 

 

 

 

 

 

Operating income (loss)

 

(342

)

8,829

 

N/A

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

734

 

80

 

818

 

Interest expense

 

(341

)

(148

)

130

 

Interest rate derivative loss

 

(2,297

)

(2,919

)

(21

)

Other income (expense)

 

3,827

 

(84

)

N/A

 

Total other income (expense)

 

1,923

 

(3,071

)

N/A

 

 

 

 

 

 

 

 

 

Income before income taxes

 

1,581

 

5,758

 

(73

)

Income tax expense

 

929

 

3,057

 

(70

)

Net income

 

$

652

 

$

2,701

 

(76

)%

 

Revenue.  Total revenue decreased by $13.0 million, or approximately 34%, to $25.7 million for the three months ended September 30, 2007, from $38.7 million for the three months ended September 30, 2006. This decrease is attributable primarily to lower equipment sales which, we believe, stem from our two-way communications issues. In addition, our service revenue was lower due to our efforts to reduce prices in order to maintain our subscriber base despite two-way communication issues affecting our two-way service during the first nine months of 2007. This contributed to a reduction in our retail ARPU during the three months ended September 30, 2007, which decreased by 30% to $48.41 from $69.40 for the three months ended September 30, 2006.

 

Service Revenue. Service revenue decreased $6.3 million, or approximately 23%, to $21.3 million for the three months ended September 30, 2007, from $27.6 million for the three months ended September 30, 2006. Although our subscriber base grew 12% to approximately 285,000 (including direct subscribers and those served through independent gateways) over the twelve-month period from September 30, 2006 to September 30, 2007, we experienced decreased retail ARPU.  We believe that the two-way communication issues we reported in February 2007 and related price reductions were the primary reasons for this reduction.

 

Subscriber Equipment Sales. Subscriber equipment sales decreased by $6.6 million, or approximately 60%, to $4.4 million for the three months ended September 30, 2007, from $11.0 million for the three months ended September 30, 2006. This decrease is attributable to our two-way communications issues.

 

Operating Expenses. Total operating expenses decreased $3.9 million, or approximately 13%, to $26.0 million for the three months ended September 30, 2007, from $29.9 million for the three months ended September 30, 2006. This decrease was due primarily to lower cost of subscriber equipment consistent with lower subscriber equipment sales for the quarter ended September 30, 2007. The decrease was offset partially with higher non-cash executive incentive compensation expense and higher depreciation expense as a result of reducing the remaining useful life of our satellite system and related assets.