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Globalstar 10-Q 2009
Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)
   
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended September 30, 2009
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                

Commission file number 001-33117

GLOBALSTAR, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
41-2116508
(State or Other Jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
   

461 South Milpitas Blvd.
Milpitas, California 95035
(Address of principal executive offices and zip code)

(408) 933-4000
Registrant’s telephone number, including area code

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨ No ¨

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

Large accelerated filer ¨
 
Accelerated filer x
     
Non-accelerated filer ¨
 
Smaller reporting company ¨
(Do not check if a smaller reporting company)
   

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

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date. As of October 30, 2009, 153,242,370 shares of Common Stock, par value $0.0001 per share and no shares of Nonvoting Common Stock, par value $0.0001 per share, were outstanding.
 


 
 

 

TABLE OF CONTENTS

       
Page
         
PART I - Financial Information
   
         
 
Item 1.  
Financial Statements
 
3
         
   
Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008 (unaudited)
 
3
         
   
Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008 (unaudited)
 
4
         
   
Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (unaudited)
 
5
         
   
Notes to Unaudited Interim Consolidated Financial Statements
 
6
         
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
23
         
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
36
         
 
Item 4. 
Controls and Procedures
 
37
         
PART II - Other Information
   
         
 
Item 1.
Legal Proceedings
 
  37
         
 
Item 1A. Risk Factors
 
 38
         
 
Item 4.
Submission of Matters to a Vote of Security Holders
 
51
         
 
Item 6.
Exhibits
 
52
         
 
Signatures
 
53

 
2

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GLOBALSTAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
2009
   
September 30,
2008
   
September 30,
2009
   
September 30,
2008
 
         
As Adjusted –
Note 1
         
As Adjusted –
Note 1
 
                         
Revenue:
                       
Service revenue
  $ 13,260     $ 16,150     $ 36,953     $ 48,833  
Equipment sales
    4,261       6,375       11,447       18,825  
Total revenue
    17,521       22,525       48,400       67,658  
Operating expenses:
                               
Cost of services (exclusive of depreciation and amortization shown separately below)
    9,403       10,452       27,772       26,534  
Cost of equipment sales:
                               
Cost of equipment sales
    1,987       4,942       7,814       14,050  
Cost of equipment sales — Impairment of assets
    7             655       404  
Total cost of equipment sales
    1,994       4,942       8,469       14,454  
Marketing, general, and administrative
    12,328       17,372       37,713       48,602  
Depreciation and amortization
    5,473       7,196       16,365       19,135  
Total operating expenses
    29,198       39,962       90,319       108,725  
Operating loss
    (11,677 )     (17,437 )     (41,919 )     (41,067 )
Other income (expense):
                               
Interest income
    181       1,474       365       4,407  
Interest expense
    (1,763 )     (1,201 )     (5,144 )     (2,499 )
Derivative gain (loss)
    5,993       (229 )     5,196       (25 )
Other
    1,839       (6,587 )     393       1,587  
Total other income (expense)
    6,250       (6,543 )     810       3,470  
Loss before income taxes
    (5,427 )     (23,980 )     (41,109 )     (37,597 )
Income tax expense (benefit)
    92       2,039       (70     2,234  
Net loss
  $ (5,519 )   $ (26,019 )   $ (41,039 )   $ (39,831 )
Loss per common share:
                               
Basic
  $ (0.04 )   $ (0.31 )   $ (0.30 )   $ (0.48 )
Diluted
    (0.04 )     (0.31 )     (0.30 )     (0.48 )
Weighted-average shares outstanding:
                               
Basic
    144,827       84,631       135,831       83,711  
Diluted
    144,827       84,631       135,831       83,711  

See accompanying notes to unaudited interim consolidated financial statements.

 
3

 

GLOBALSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and Preferred Stock share data)
(Unaudited)

   
September 30,
2009
   
December 31,
2008
 
         
As Adjusted –
Note 1
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 131,699     $ 12,357  
Accounts receivable, net of allowance of $5,429 (2009) and $5,205 (2008)
    10,468       10,075  
Inventory
    59,006       55,105  
Advances for inventory
    9,332       9,314  
Prepaid expenses and other current assets
    5,806       5,565  
Total current assets
    216,311       92,416  
                 
Property and equipment, net
    863,099       642,264  
Other assets:
               
Restricted cash
    42,538       57,884  
Deferred financing costs
    65,297       2,132  
Other assets, net
    30,688       13,538  
Total assets
  $ 1,217,933     $ 808,234  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 50,272     $ 28,370  
Accrued expenses
    24,229       29,998  
Payables to affiliates
    983       3,344  
Deferred revenue
    19,249       19,354  
Current portion of long term debt
    2,259       33,575  
Total current liabilities
    96,992       114,641  
                 
Borrowings under revolving credit facility
          66,050  
Long term debt
    461,474       172,295  
Employee benefit obligations, net of current portion
    4,735       4,782  
Other non-current liabilities
    48,230       13,713  
Total non-current liabilities
    514,439       256,840  
                 
Stockholders’ equity:
               
Preferred Stock, $0.0001 par value; 100,000,000 shares authorized, issued and outstanding — one at September 30, 2009; none at December 31, 2008:
               
Series A Preferred Convertible Stock, $0.0001 par value: 1 share authorized, issued and outstanding at September 30, 2009; none authorized, issued or outstanding at December 31, 2008
           
Voting Common Stock, $0.0001 par value; 800,000 and 865,000 shares authorized at December 31, 2008 and September 30, 2009, respectively, 152,555 shares issued and outstanding at September 30, 2009; 136,606 shares issued and outstanding at December 31, 2008
    15       14  
Nonvoting Common Stock, $0.0001 par value; 135,000 shares authorized, no shares issued and outstanding at September 30, 2009; none authorized, issued or outstanding at December 31, 2008
           
Additional paid-in capital
    671,421       463,822  
Accumulated other comprehensive loss
    (3,116 )     (6,304 )
Retained deficit
    (61,818 )     (20,779 )
Total stockholders’ equity
    606,502       436,753  
                 
Total liabilities and stockholders’ equity
  $ 1,217,933     $ 808,234  

See accompanying notes to unaudited interim consolidated financial statements.

 
4

 

GLOBALSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Nine Months Ended
 
   
September 30, 2009
   
September 30, 2008
 
         
As Adjusted –
 Note 1
 
Cash flows from operating activities:
           
             
Net loss
  $ (41,039 )   $ (39,831 )
Adjustments to reconcile net loss to net cash from operating activities:
               
Deferred income taxes
          1,800  
Depreciation and amortization
    16,365       19,135  
Change in fair value of derivative instruments and derivative liabilities
    (5,196 )     25  
Stock-based compensation expense
    8,042       10,318  
Loss on disposal of fixed assets
    53       59  
Provision for bad debts
    563       1,871  
Interest income on restricted cash
    (115 )     (3,526 )
Contribution of services
    295       337  
Cost of equipment sales - impairment of assets
    654       404  
Amortization of deferred financing costs
    3,583       514  
Loss on debt to equity conversion
    305        
Loss in equity method investee
    1,001       105  
Changes in operating assets and liabilities, net of acquisition:
               
Accounts receivable
    (598 )     (4,931 )
Inventory
    1,331       (13,871 )
Advances for inventory
    1,075       (74 )
Prepaid expenses and other current assets
    493       1,219  
Other assets
    (8,389 )     (1,290 )
Accounts payable
    (7,116 )     1,665  
Payables to affiliates
    (2,485 )     1,722  
Accrued expenses and employee benefit obligations
    661       (3,504 )
Other non-current liabilities
    1,734       1,075  
Deferred revenue
    1,315       804  
Net cash from operating activities
    (27,468 )     (25,974 )
Cash flows from investing activities:
               
Spare and second-generation satellites and launch costs
    (232,850 )     (199,525 )
Second-generation ground
    (17,476 )     (5,294 )
Property and equipment additions
    (1,807 )     (4,551 )
Proceeds from sale of property and equipment
          141  
Purchase of other investment
    (145 )     (2,000 )
Cash acquired on purchase of subsidiary
          1,839  
Restricted cash
    12,165       (18,298 )
Net cash from investing activities
    (240,113 )     (227,688 )
Cash flows from financing activities:
               
Borrowings from long-term convertible senior notes
          150,000  
Borrowings from long term debt
          100,000  
Borrowings from revolving credit loan
    7,750       35,000  
Borrowings from $55M Convertible Senior Notes
    55,000        
Borrowings from Facility Agreement
    371,219        
Borrowings under subordinated loan agreement
    25,000        
Borrowings under short term loan
    2,260        
Repayment of revolving credit loan
          (50,000 )
Proceeds from equity contributions
    1,000        
Deferred financing cost payments
    (62,748 )     (4,880 )
Payments for the interest rate cap instrument
    (12,425 )      
Reduction in derivative margin account balance requirements
          159  
Net cash from financing activities
    387,056       230,279  
Effect of exchange rate changes on cash
    (133 )     (1,234 )
Net increase (decrease) in cash and cash equivalents
    119,342       (24,617 )
Cash and cash equivalents, beginning of period
    12,357       37,554  
Cash and cash equivalents, end of period
  $ 131,699     $ 12,937  
Supplemental disclosure of cash flow information:
               
Cash paid for:
               
Interest
  $ 11,628     $ 5,502  
Income taxes
  $ 92     $ 994  
Supplemental disclosure of non-cash financing and investing activities:
               
Conversion of debt to Series A Convertible Preferred Stock
  $ 180,177     $  
Accrued launch costs and second-generation satellites costs
  $ 28,539     $ 27,481  
Capitalization of accrued interest for spare and second-generation satellites and launch costs
  $ 8,662     $ 10,460  
Vendor financing of second-generation satellites
  $     $ 48,215  
Subordinated loan
  $ 25,778     $  
Conversion of debt to Common Stock
  $ 7,500     $  
Non cash effect of debt discount on convertible notes
  $     $ 20,084  
Accretion of debt discount and amortization of prepaid finance costs
  $ 5,627     $  
Conversion of convertible notes into common stock
  $ 5,033     $  

See accompanying notes to unaudited interim consolidated financial statements.

 
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., together with its affiliates (“Thermo”), became Globalstar’s principal owner, and Globalstar completed the acquisition of the business and assets of Old Globalstar. Thermo remains Globalstar’s largest stockholder.  Globalstar’s Chairman controls Thermo and its affiliates. Two other members of Globalstar’s Board of Directors are also directors, officers or minority equity owners of various Thermo entities.

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

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. These unaudited interim consolidated financial statements include the accounts of Globalstar and its majority owned or otherwise controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidation. In the opinion of management, such information includes all adjustments, consisting of normal recurring adjustments, that are necessary for a fair presentation of the Company’s consolidated financial position, results of operations, and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full year or any future period.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, allowance for doubtful accounts, inventory valuation, deferred tax assets, property and equipment, interest rate cap, warrants and embedded conversion option classified as a liability, warranty obligations and contingencies and litigation. Actual results could differ from these estimates.
 
During the quarter ended September 30, 2009, the Company changed its estimates of the costs necessary to complete an engineering services project it is contracted to perform. The Company accounts for this contract under the percentage-of-completion method. The contract calls for the Company to install certain equipment that allows for Simplex and duplex service capabilities at an independent gateway operator, which the Company holds an equity interest in. During the third quarter of 2009, the Company substantially completed the installation of Simplex capabilities at the gateway, at a cost that was below the Companys initial estimates. Based on its revised estimates for this project, the Company recognized approximately $2.2 million of revenue and $2.0 million of gross profit during the three months ended September 30, 2009.

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as amended. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Certain reclassifications have been made to prior year consolidated financial statements to conform to current year presentation.

Globalstar operates in one segment, providing voice and data communication services via satellite.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new standards setting forth a single source of authoritative generally accepted accounting principles (“GAAP”) for all non-governmental entities. The Accounting Standards Codification (“ASC”), changes the referencing and organization of accounting guidance, but is not intended to change existing GAAP. Accordingly, the ASC does not have any impact on the Company’s consolidated financial statements, except that the references to accounting standards have been updated to refer to the ASC.

 
6

 

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-15. The ASU amends the ASC guidance on accounting for share loan facilities. The Company is evaluating the impact of the adoption of this ASU on its financial position, results of operations, and cash flows.

In October 2009, the FASB issued ASU No. 2009-14, which provides new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. These new standards are effective for Globalstar beginning in the first quarter of fiscal year 2011, however early adoption is permitted. The Company does not expect these new standards to significantly impact its consolidated financial statements.
 
In October 2009, the FASB issued ASU No. 2009-13, which eliminates the use of the residual method and incorporates the use of an estimated selling price to allocate arrangement consideration. In addition, the revenue recognition guidance amends the scope to exclude tangible products that contain software and non-software components that function together to deliver the product’s essential functionality. The amendments to the accounting standards related to revenue recognition are effective for fiscal years beginning after June 15, 2010. Upon adoption, the Company may apply the guidance retrospectively or prospectively for new or materially modified arrangements. The Company is currently evaluating the financial impact that this accounting standard will have on its Consolidated Financial Statements.
 
Effective June 30, 2009, the Company adopted the requirements of FASB ASC 855 (previously FASB SFAS No. 165, “Subsequent Events”) for subsequent events, which established standards for the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued. These standards are largely the same guidance on subsequent events which previously existed only in auditing literature. The requirements include disclosure of the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued.

Effective April 1, 2009, the Company adopted the disclosure requirements of FASB ASC 820-10-50 (previously FSP FAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments"). These disclosures have been provided in Note 11, “Derivative Instruments.”

Effective January 1, 2009, the Company adopted the fair value measurement and disclosure requirements of FASB ASC 820 (previously SFAS No. 157, “Fair Value Measurements") for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The January 1, 2009 adoption did not have an impact on the Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted the requirements of FASB ASC 470-20 (previously FSP Accounting Principles Board Opinion (APB) No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”) for convertible debt instruments that have cash settlement features. These requirements included separation of the liability and equity components of the instruments. The debt is recognized at the present value of its cash flows discounted using the issuer’s nonconvertible debt borrowing rate at the time of issuance with the resulting debt discount being amortized over the expected life of the debt. The equity component is recognized as the difference between the proceeds from the issuance of the convertible debt instrument and the fair value of the liability. The adoption required retrospective application to all periods presented, and did not grandfather existing instruments.

The adoption of FASB ASC 470-20 changed the Company’s full-year 2008 Consolidated Statements of Operations because the gains associated with conversions and exchanges of 5.75% Convertible Senior Notes (the “5.75% Notes”) in 2008 were recorded in stockholders’ equity prior to adoption of this standard. The adoption also changed the Company’s Consolidated Statement of Operations for the three and nine months ended September 30, 2008 because the Company issued the 5.75% Notes in April 2008. The Company capitalized the interest associated with the accretion of debt discount recorded in connection with this adoption, which resulted in an increase to property and equipment. The following tables present the effects of the adoption on the Company’s affected Balance Sheet items as of September 30, 2008 and December 31, 2008:

 
7

 

   
As of September 30, 2008
 
   
As Originally
   
Effect of
   
As
 
   
Reported
   
Change
   
Adjusted
 
   
(in thousands)
 
Balance Sheet:
                 
Property and equipment, net
  $ 435,218     $ 4,094     $ 439,312  
Other assets
    15,174       (1,507 )     13,667  
Long-term debt
    150,000       (50,581 )     99,419  
Other non-current liabilities
    54,583       22,417       77,000  
Additional paid-in capital
    424,443       30,505       454,948  
Retained deficit
  $ (45,704 )   $ 257     $ (45,447 )

   
As of December 31, 2008
 
   
As Originally
   
Effect of
   
As
 
   
Reported
   
Change
   
Adjusted
 
   
(in thousands)
 
Balance Sheet:
                 
Property and equipment, net
  $ 636,362     $ 5,902     $ 642,264  
Other assets
    16,376       (706 )     15,670  
Long-term debt
    195,429       (23,134 )     172,295  
Additional paid-in capital
    488,343       (24,521 )     463,822  
Retained deficit
  $ (73,630 )   $ 52,851     $ (20,779 )

Note 2: Basic and Diluted Loss Per Share

The Company computes basic earnings per share based on the weighted-average number of shares of Common Stock outstanding during the period. The Company includes Common Stock equivalents in the calculation of diluted earnings per share only when the effect of their inclusion would be dilutive.

The following table sets forth the computations of basic and diluted loss per share (in thousands, except per share data):

   
Three Months Ended September 30, 2009
   
Nine Months Ended September 30, 2009
 
   
Income 
(Numerator)
   
Weighted 
Average Shares 
Outstanding 
(Denominator)
   
Per-Share 
Amount
   
Income 
(Numerator)
   
Weighted 
Average Shares 
Outstanding 
(Denominator)
   
Per-Share 
Amount
 
Basic and Dilutive loss per common share
                                   
Net loss
  $ (5,519 )     144,827     $ (0.04 )   $ (41,039 )     135,831     $ (0.30 )
 
   
Three Months Ended September 30, 2008 (As Adjusted –
Note 1)
   
Nine Months Ended September 30, 2008 (As Adjusted –
Note 1)
 
   
Income 
(Numerator)
   
Weighted 
Average Shares 
Outstanding 
(Denominator)
   
Per-Share 
Amount
   
Income 
(Numerator)
   
Weighted 
Average Shares 
Outstanding 
(Denominator)
   
Per-Share 
Amount
 
Basic and Dilutive loss per common share
                                   
Net loss
  $ (26,019 )     84,631     $ (0.31 )   $ (39,831 )     83,711     $ (0.48 )

For the three and nine month periods ended September 30, 2009 and 2008, diluted net loss per share of Common Stock is the same as basic net loss per share of Common Stock, because the effects of potentially dilutive securities are anti-dilutive.

The Company included the outstanding shares issued under the Share Lending Agreement (17.3 million shares outstanding at September 30, 2009) in the computation of earnings per share (See Note 12 “Borrowings”).


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

   
September 30,
2009
   
December 31,
2008
 
         
As Adjusted –
Note 1
 
Globalstar System:
           
Space component
  $ 132,982     $ 132,982  
Ground component
    27,704       26,154  
Construction in progress:
               
Second-generation satellites, ground and related launch costs
    750,509       516,530  
Other
    979       958  
Furniture and office equipment
    19,223       16,872  
Land and buildings
    4,255       3,810  
Leasehold improvements
    791       687  
      936,443       697,993  
Accumulated depreciation
    (73,344 )     (55,729 )
    $ 863,099     $ 642,264  

 
8

 

Property and equipment consists of an in-orbit satellite constellation, ground equipment, second-generation satellites under construction and related launch costs, second-generation ground component and support equipment located in various countries around the world.

In June 2009, Globalstar and Thales Alenia Space entered into an amended and restated contract for the construction of 48 low-earth orbit second-generation satellites to incorporate prior amendments, acceleration requests and make other non-material changes to the contract entered into in November 2006.  The total contract price, including subsequent additions, is approximately €678.9 million (approximately $940.1 million at a weighted average conversion rate of €1.00 = $1.385) including approximately €146.8 million which was paid by the Company in U.S. dollars at an average conversion rate of €1.00 = $1.294. Upon closing of the Facility Agreement (See Note 12 “Borrowings”), amounts in the escrow account became unrestricted and were reclassed to cash and cash equivalents.

In March 2007, the Company and Thales Alenia Space entered into an agreement for the construction of the Satellite Operations Control Centers, Telemetry Command Units and In Orbit Test Equipment (collectively, the “Control Network Facility”) for the Company’s second-generation satellite constellation. The total contract price for the construction and associated services is €9.2 million (approximately $13.2 million at a weighted average conversion rate of €1.00 = $1.44) consisting of €4.1 million for the Satellite Operations Control Centers, €3.1 million for the Telemetry Command Units and €2.0 million for the In Orbit Test Equipment, with payments to be made on a quarterly basis through completion of the Control Network Facility in the first quarter of 2010.

In September 2007, the Company and Arianespace (the “Launch Provider”) entered into an agreement for the launch of the Company’s second-generation satellites and certain pre and post-launch services. Pursuant to the agreement, the Launch Provider agreed to make four launches of six satellites each, and the Company had the option to require the Launch Provider to make four additional launches of six satellites each. The total contract price for the first four launches is approximately $216.1 million. In July 2008, the Company amended its agreement with the Launch Provider for the launch of the Company’s second-generation satellites and certain pre and post-launch services. Under the amended terms, the Company could defer payment on up to 75% of certain amounts due to the Launch Provider. The deferred payments incurred annual interest at 8.5% to 12% and became payable one month from the corresponding launch date. As of September 30, 2009 and December 31, 2008, the Company had approximately none and $47.3 million, respectively, in deferred payments outstanding to the Launch Provider. In June 2009, the Company and the Launch Provider again amended their agreement reducing the number of optional launches from four to one and modifying the agreement in certain other respects including terminating the deferred payment provisions. Notwithstanding the one optional launch, the Company is free to contract separately with the Launch Provider or another provider of launch services after the Launch Provider’s firm launch commitments are fulfilled.

In May 2008, the Company and Hughes Network Systems, LLC (“Hughes”) entered into an agreement under which Hughes will design, supply and implement the Radio Access Network (“RAN”) ground network equipment and software upgrades for installation at a number of the Company’s satellite gateway ground stations and satellite interface chips to be a part of the User Terminal Subsystem (UTS) in various next-generation Globalstar devices. The total contract purchase price of approximately $100.8 million is payable in various increments over a period of 40 months. The Company has the option to purchase additional RANs and other software and hardware improvements at pre-negotiated prices. In August 2009, the Company and Hughes amended their agreement extending the performance schedule by 15 months and revising certain payment milestones.  Costs associated with certain projects under this contract will be capitalized once the Company has determined that technological feasibility has been achieved on these projects. As of September 30, 2009, the Company had made payments of $35.0 million under this contract and expensed $5.7 million of these payments and capitalized $19.3 million under second-generation satellites, ground and related launch costs and $10.0 million has been classified as a prepayment in other assets, net.

In October 2008, the Company signed an agreement with Ericsson Federal Inc., a leading global provider of technology and services to telecom operators. According to the $22.7 million contract, Ericsson will work with the Company to develop, implement and maintain a ground interface, or core network, system that will be installed at the Company’s satellite gateway ground stations.

 
9

 

As of September 30, 2009 and December 31, 2008, capitalized interest recorded was $59.1 million and $37.4 million, respectively. Interest capitalized during the three and nine months ended September 30, 2009 was $9.8 million and $22.6 million, respectively, and $5.4 million and $13.7 million for the three and nine months ended September 30, 2008, respectively. Depreciation expense for the three and nine months ended September 30, 2009 was $5.5 million and $16.3 million, respectively, and $7.2 million and $19.0 million for the three and nine months ended September 30, 2008, respectively.

Note 4: Payables to Affiliates

Payables to affiliates relate to normal purchase transactions, excluding interest, and were $0.8 million at September 30, 2009 and December 31, 2008.
 
Thermo incurs certain general and administrative expenses on behalf of the Company, which are charged to the Company. For the three and nine month periods ended September 30, 2009, total expenses were approximately $21,000 and $109,000, respectively, and $57,000 and $167,000 for the three and nine month periods ended September 30, 2008, respectively.

For the three and nine month periods ended September 30, 2009, the Company also recorded approximately $42,000 and $295,000, respectively, of non-cash expenses related to services provided by two executive officers of Thermo and the Company who receive no compensation from the Company, which were accounted for as a contribution to capital. The Company recorded $112,000 and $337,000 for the three and nine month periods ended September 30, 2008, respectively, in similar charges. The Thermo expense charges are based on actual amounts incurred or upon allocated employee time. Management believes the allocations are reasonable.

Note 5: Other Related Party Transactions

Since 2005, Globalstar has issued separate purchase orders for additional phone equipment and accessories under the terms of previously executed commercial agreements with Qualcomm. Within the terms of the commercial agreements, the Company paid Qualcomm approximately 7.5% to 25% of the total order as advances for inventory.  As of September 30, 2009 and December 31, 2008, total advances to Qualcomm for inventory were $9.2 million. As of September 30, 2009 and December 31, 2008, the Company had outstanding commitment balances of approximately $58.5 million and $49.4 million, respectively. On October 28, 2008, the Company amended its agreement with Qualcomm to extend the term for 12 months and defer delivery of mobile phones and related equipment until April 2010 through July 2011.

On August 16, 2006, the Company entered into an amended and restated credit agreement with Wachovia Investment Holdings, LLC, as administrative agent and swingline lender, and Wachovia Bank, National Association, as issuing lender, which was subsequently amended on September 29 and October 26, 2006. On December 17, 2007, Thermo was assigned all the rights (except indemnification rights) and assumed all the obligations of the administrative agent and the lenders under the amended and restated credit agreement, and the credit agreement was again amended and restated. In connection with fulfilling the conditions precedent to funding under the Company’s Facility Agreement, in June 2009, Thermo converted the loans outstanding under the credit agreement into equity and terminated the credit agreement. In addition, Thermo and its affiliates deposited $60.0 million in a contingent equity account to fulfill a condition precedent for borrowing under the Facility Agreement, purchased $11.4 million of the Company’s 8% convertible senior unsecured notes, provided a $2.2 million short-term loan to the Company, and loaned $25.0 million to the Company to fund its debt service reserve account (See Note 12 “Borrowings”).

During the three and nine month periods ended September 30, 2009, the Company purchased approximately $1.0 million and $3.2 million, respectively, of services and equipment from a company whose non-executive chairman serves as a member of the Company’s board of directors. Corresponding purchases made during the three month and nine month periods ended September 30, 2008 were $2.3 million and $6.4 million, respectively.

Purchases and other transactions with Affiliates

Total purchases and other transactions from affiliates, excluding interest and capital transactions, were $1.1 million and $3.4 million for the three and nine months ended September 30, 2009, respectively. Total purchases and other transactions from affiliates, excluding interest and capital transactions, were $2.4 million and $8.0 million for the three and nine months ended September 30, 2008, respectively.

Note 6: Income Taxes

On January 1, 2009, the Company adopted FASB ASC 470-20, which was effective retrospectively. Prior to this adoption, the Company had recorded the net tax effect of the conversions and exchanges of the Company’s 5.75%  Notes (See Note 12 “Borrowings”) during the fourth quarter of 2008 against additional-paid-in-capital and reduced its deferred tax assets at December 31, 2008. This adoption  resulted in the Company recording a gain from the exchanges and conversions of the Notes and reversing the charge taken to additional-paid-in-capital and deferred tax assets. The Company established a valuation allowance to reduce the deferred tax assets to an amount that is more likely than not to be realized. As of December 31, 2008, the Company had established valuation allowances of approximately $125.5 million. Accordingly, at September 30, 2009 and December 31, 2008, net deferred tax assets were $0.

 
10

 

The Company has been notified that one of its subsidiaries and its predecessor, Globalstar L.P., are currently under audit for the 2004 and 2005 tax years. During the audit period, the Company and its subsidiaries were taxed as partnerships. Neither the Company nor any of its subsidiaries, except for the one noted above, are currently under audit by the Internal Revenue Service or by any state jurisdiction in the United States with respect to income taxes. The Company’s corporate U.S. tax returns for 2006 and 2007 and U.S. partnership tax returns filed for years before 2006 remain subject to examination by tax authorities. In the Company’s international tax jurisdictions, numerous tax years remain subject to examination by tax authorities, including tax returns for 2001 and subsequent years in most of the Company’s major international tax jurisdictions.

Note 7: Comprehensive Loss

Comprehensive income (loss) includes all changes in equity during a period from non-owner sources. The change in accumulated other comprehensive income for all periods presented resulted from foreign currency translation adjustments.

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

   
Three months ended 
September 30,
   
Nine months ended 
September 30,
 
   
2009
   
2008 (1)
   
2009
   
2008 (1)
 
Net loss
  $ (5,519 )   $ (26,019 )   $ (41,039 )   $ (39,831 )
Other comprehensive income (loss):
                               
Foreign currency translation adjustments
    1,604       (488     3,188       (1,944 )
                                 
Total comprehensive loss
  $ (3,915 )   $ (26,507 )   $ (37,851 )   $ (41,775 )

(1)
As adjusted

Note 8: Equity Incentive Plan

The Company’s 2006 Equity Incentive Plan (the “Equity Plan”) is a broad based, long-term retention program intended to attract and retain talented employees and align stockholder and employee interests. Including grants to both employees and executives, 8.5 million and 8.6 million restricted stock awards and restricted stock units were granted during the three and nine month periods ended September 30, 2009, respectively. Approximately 0.1 million and 2.1 million restricted stock awards and restricted stock units (including grants to both employees and executives) were granted during the three and nine months ended September 30, 2008, respectively. In January and August 2009, 2.7 million shares and 10.0 million shares, respectively, of the Company’s Common Stock were added to the shares available for issuance under the Equity Plan.
 
The Company also granted options to purchase 3.6 million shares of common stock for the nine months ended September 30, 2009 compared to options to purchase 1.3 million shares of common stock for the same period in the prior year. The Company recognized approximately $1.1 million in expense related to these grants in the nine months ended September 30, 2009.

Note 9: Litigation and Other Contingencies

From time to time, the Company is involved in various litigation matters involving ordinary and routine claims incidental to our business. Management currently believes that the outcome of these proceedings, either individually or in the aggregate, will not have a material adverse effect on the Company’s business, results of operations or financial condition. The Company is involved in certain litigation matters as discussed below.

IPO Securities Litigation.  On February 9, 2007, the first of three purported class action lawsuits was filed against the Company, its then-current CEO and CFO in the Southern District of New York alleging that the Company’s registration statement related to its initial public offering in November 2006 contained material misstatements and omissions. The Court consolidated the three cases as Ladmen Partners, Inc. v. Globalstar, Inc., et al., Case No. 1:07-CV-0976 (LAP), and appointed Connecticut Laborers’ Pension Fund as lead plaintiff. The parties and the Company’s insurer have agreed to a settlement of the litigation for $1.5 million to be paid by the insurer, which received the presiding judge’s preliminary approval on September 18, 2009. A hearing on final approval of the settlement is scheduled for February 18, 2010.

 
11

 

Walsh and Kesler v. Globalstar, Inc. (formerly Stickrath v. Globalstar, Inc.)  On April 7, 2007, Kenneth Stickrath and Sharan Stickrath filed a purported class action complaint against the Company in the U.S. District Court for the Northern District of California, Case No. 07-cv-01941. The complaint is based on alleged violations of California Business & Professions Code § 17200 and California Civil Code § 1750, et seq., the Consumers’ Legal Remedies Act. In July 2008, the Company filed a motion to deny class certification and a motion for summary judgment. The court deferred action on the class certification issue but granted the motion for summary judgment on December 22, 2008. The court did not, however, dismiss the case with prejudice but rather allowed counsel for plaintiffs to amend the complaint and substitute one or more new class representatives. On January 16, 2009, counsel for the plaintiffs filed a Third Amended Class Action Complaint substituting Messrs. Walsh and Kesler as the named plaintiffs. The Company filed its answer on February 2, 2009.

Appeal of FCC S-Band Sharing Decision.  This case is Sprint Nextel Corporation’s petition in the U.S. Court of Appeals for the District of Columbia Circuit for review of, among others, the FCC’s April 27, 2006, decision regarding sharing of the 2495-2500 MHz portion of the Company’s radiofrequency spectrum. This is known as “The S-band Sharing Proceeding.” The Court of Appeals has granted the FCC’s motion to hold the case in abeyance while the FCC considers the petitions for reconsideration pending before it. The Court has also granted the Company’s motion to intervene as a party in the case. The Company cannot determine when the FCC might act on the petitions for reconsideration.

Appeal of FCC L-Band Decision.  On November 9, 2007, the FCC released a Second Order on Reconsideration, Second Report and Order and Notice of Proposed Rulemaking. In the Report and Order (“R&O”) portion of the decision, the FCC effectively decreased the L-band spectrum available to the Company while increasing the L-band spectrum available to Iridium Communications by 2.625 MHz. On February 5, 2008, the Company filed a notice of appeal of the FCC’s decision in the U.S. Court of Appeals for the D.C. Circuit. Briefs were filed and oral argument was held on February 17, 2009. On May 1, 2009, the court issued a decision denying the Company’s appeal and affirming the FCC’s decision.

Appeal of FCC ATC Decision.  On October 31, 2008, the FCC issued an Order granting the Company modified Ancillary Terrestrial Component (“ATC”) authority. The modified authority allows the Company and Open Range Communications, Inc. to implement their plan to roll out ATC service in rural areas of the United States. On December 1, 2008, Iridium Communications filed a petition with the U.S. Court of Appeals for the District of Columbia Circuit for review of the FCC’s Order. On the same day, CTIA-The Wireless Association petitioned the FCC to reconsider its Order. The court has granted the FCC’s motion to hold the appeal in abeyance pending the FCC’s decision on reconsideration.

Sorensen Research & Development Trust v. Axonn LLC, et al..  On July 2, 2008, the Company’s subsidiary, Spot LLC, received a notice of patent infringement from Sorensen Research and Development. Sorensen asserts that the process used to manufacture the Spot Satellite GPS Messenger violates a U.S. patent held by Sorensen. The manufacturer, Axonn LLC, has assumed responsibility for managing the case under an indemnity agreement with the Company and Spot LLC. Axonn was unable to negotiate a mutually acceptable settlement with Sorensen, and on January 14, 2009, Sorensen filed a complaint against Axonn, Spot LLC and the Company in the U.S. District Court for the Southern District of California. The Company and Axonn filed an answer and counterclaim and a motion to stay the proceeding pending completion of the re-examination of the subject patent. The court granted the motion for stay on July 29, 2009.

YMax Communications Corp. v. Globalstar, Inc. and Spot LLC.  On May 6, 2009, YMax Communications Corp. filed a patent infringement complaint against the Company and its subsidiary, Spot LLC, in the Delaware U.S. District Court (Civ. Action No. 09-329) alleging that the SPOT Satellite GPS Messenger service infringes a patent for which YMax is the exclusive licensee. The complaint followed an exchange of correspondence between the Company and YMax in which the Company endeavored to explain why the SPOT service does not infringe the YMax patent. Globalstar filed its answer to the complaint on June 26, 2009. The parties are in the process of responding to document requests from each other.  The Company does not believe that the complaint has merit and intends to defend itself vigorously.

 
12

 
 
Note 10: Geographic Information

Revenue by geographic location, presented net of eliminations for intercompany sales, was as follows for the three and nine month periods ended September 30, 2009 and 2008 (in thousands):

   
Three months ended 
September 30,
   
Nine months ended 
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Service:
                       
United States
  $ 8,003     $ 8,233     $ 21,899     $ 24,908  
Canada
    3,654       5,018       9,610       16,140  
Europe
    302       946       1,548       3,018  
Central and South America
    1,211       1,747       3,646       4,165  
Others
    90       206       250       602  
Total service revenue
    13,260       16,150       36,953       48,833  
Equipment:
                               
United States
    1,188       3,742       4,116       9,730  
Canada
    367       1,632       2,469       5,644  
Europe
    139       115       607       1,534  
Central and South America
    364       685       1,341       1,677  
Others (1)
    2,203       201       2,914       240  
Total equipment revenue
    4,261       6,375       11,447       18,825  
                                 
Total revenue
  $ 17,521     $ 22,525     $ 48,400     $ 67,658  

 
(1)
Includes revenue from Africa of  $2.2 million and $2.9 million for the three and nine months ended September 30, 2009, respectively.

Note 11: Derivative Instruments

In July 2006, in connection with entering into its credit agreement with Wachovia, which provided for interest at a variable rate (See Note 12 “Borrowings”), the Company entered into a five-year interest rate swap agreement. The interest rate swap agreement reflected a $100.0 million notional amount at a fixed interest rate of 5.64%. The interest rate swap agreement did not qualify for hedge accounting treatment. The decline in fair value for the three and nine months ended September 30, 2008 was charged to “Derivative gain (loss)” in the accompanying Consolidated Statements of Operations. The interest rate swap agreement was terminated on December 10, 2008, by the Company making a payment of approximately $9.2 million.

In June 2009, in connection with entering into the Facility Agreement (See Note 12 “Borrowings”), which provides for interest at a variable rate, the Company entered into ten-year interest rate cap agreements. The interest rate cap agreements reflect a variable notional amount ranging from $586.3 million to $14.8 million at interest rates that provide coverage to the Company for exposure resulting from escalating interest rates over the term of the Facility Agreement. The interest rate cap provides limits on the 6 month Libor rate (“Base Rate”) used to calculate the coupon interest on outstanding amounts on the Facility Agreement of 4.00% from the date of issuance through December 2012. Thereafter, the Base Rate is capped at 5.50% should the Base Rate not exceed 6.5%. Should the Base Rate exceed 6.5%, the Company’s Base Rate will be 1% less than the then 6 month Libor rate. The Company paid an approximately $12.4 million upfront fee for the interest rate cap agreement. The interest rate cap did not qualify for hedge accounting treatment.

The Company recorded the conversion rights and features embedded within the 8.00% Convertible Senior Unsecured Notes (“8.00% Notes”) as a compound embedded derivative liability within Other Non-Current Liabilities on its Consolidated Balance Sheet with a corresponding debt discount which is netted against the face value of the 8.00% Notes (See Note 12 “Borrowings”). The Company will amortize the debt discount associated with the compound embedded derivative liability to interest expense over the term of the 8.00% Notes using the effective interest rate method. The fair value of the compound embedded derivative liability will be marked-to-market at the end of each reporting period, with any changes in value reported as “Derivative gain (loss)” in the Consolidated Statements of Operations. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model based upon a risk-neutral stock price model.

Due to the cash settlement provisions and  reset features in the warrants issued with the 8.00% Notes (See Note 12 “Borrowings”) , the Company recorded the warrants as Other Long Term Liabilities on its Consolidated Balance Sheet with a corresponding debt discount which is netted against the face value of the 8.00% Notes. The Company will amortize the debt discount associated with the warrant liability to interest expense over the term of the warrants using the effective interest rate method. The fair value of the warrant liability will be marked-to-market at the end of each reporting period, with any changes in value reported as “Derivative gain (loss)” in the Consolidated Statements of Operations. The Company determined the fair value of the Warrant derivative using a Monte Carlo simulation model based upon a risk-neutral stock price model.

 
13

 

The Company determined that the warrants issued in conjunction with the availability fee for the Contingent Equity Agreement (See Note 12 “Borrowings”), were a liability and recorded it as a component of Other Non-Current Liabilities, at issuance. The corresponding benefit is recorded in prepaid and other current assets and is being amortized over the one-year availability period.

None of the derivative instruments described above was designated as a hedge. The following tables disclose the fair value of the derivative instruments as of September 30, 2009 and December 31, 2008, and their impact on the Company’s unaudited interim Consolidated Statements of Operations for the three and nine month periods ended September 30, 2009 and 2008 (in thousands):

 
September 30, 2009
 
December 31, 2008
 
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
Interest rate cap derivative
Other assets, net
 
$
6,138
 
N/A
 
N/A
 
Compound embedded conversion option
Other non-current liabilities
 
(14,217
)
N/A
 
N/A
 
Warrants issued with 8.00% Notes
Other non-current liabilities
 
(7,575
)
N/A
 
N/A
 
Warrants issued with contingent equity agreement
Other non-current liabilities
 
(6,000
)
N/A
 
N/A
 
Total
   
$
(21,654
)
   
$
N/A  
 

 
Three months ended September 30,
 
 
2009
 
2008
 
 
Location of Gain
(loss) recognized
in Statement of
Operations
 
Amount of Gain
(loss) recognized
on Statement of
Operations
 
Location of Gain
(loss) recognized in
Statement of
Operations
 
Amount of Gain
(loss) recognized
on Statement of
Operations
 
Interest rate swap derivative
N/A
 
N/A
 
Derivative gain (loss)
 
$
(229)
 
Interest rate cap derivative
Derivative gain (loss)
 
(2,193
)
N/A
 
N/A
 
Compound embedded conversion option
Derivative gain (loss)
 
3,997
 
N/A
 
N/A
 
Warrants issued with 8.00% Notes
Derivative gain (loss)
 
4,189
 
N/A
 
N/A
 
Warrants issued with contingent equity agreement
Derivative gain (loss)
 
 
N/A
 
N/A
 
Total
   
$
5,993
     
$
(229)
 

 
Nine months ended September 30,
 
 
2009
 
2008
 
 
Location of Gain
(loss) recognized
in Statement of
Operations
 
Amount of Gain
(loss) recognized
on Statement of
Operations
 
Location of Gain
(loss) recognized in
Statement of
Operations
 
Amount of Gain
(loss) recognized
on Statement of
Operations
 
Interest rate swap derivative
N/A
 
N/A
 
Derivative gain (loss)
 
$
(25)
 
Interest rate cap derivative
Derivative gain (loss)
 
(6,287
)
N/A
 
N/A
 
Compound embedded conversion option
Derivative gain (loss)
 
6,267
 
N/A
 
N/A
 
Warrants issued with 8.00% Notes
Derivative gain (loss)
 
5,216
 
N/A
 
N/A
 
Warrants issued with contingent equity agreement
Derivative gain (loss)
 
 
N/A
 
N/A
 
Total
   
$
5,196
     
$
 (25)
 

 
14

 

Note 12: Borrowings

Current portion of long term debt

Current portion of long term debt at September 30, 2009 consisted of a loan of $2.3 from Thermo which is payable within one year at an annual interest rate of 12%. Current portion of long term debt at December 31, 2008 consisted of $33.6 million due to the Company’s vendors under vendor financing agreements. Details of vendor financing agreements are described later in this Note.

Long Term Debt:

Long term debt consists of the following (in thousands):

   
September 30,
2009
   
December 31,
2008
As Adjusted –
Note 1
 
Amended and Restated Credit Agreement:
           
Term Loan
  $     $ 100,000  
Revolving credit loans
          66,050  
Total Borrowings under Amended and Restated Credit Agreement
          166,050  
                 
5.75% Convertible Senior Notes due 2028
    52,145       48,670  
8.00% Convertible Senior Unsecured Notes
    17,440        
Vendor Financing (long term portion)
          23,625  
Facility Agreement
    371,219        
Subordinated loan
    20,670        
Total long term debt
  $ 461,474     $ 238,345  

Borrowings under Facility Agreement

On June 5, 2009, the Company entered into a $586.3 million senior secured facility agreement (the “Facility Agreement”) with a syndicate of bank lenders, including BNP Paribas, Natixis, Société Générale, Caylon, Crédit Industriel et Commercial as arrangers and BNP Paribas as the security agent and COFACE agent. Ninety-five percent of the Company’s obligations under the agreement are guaranteed by COFACE, the French export credit agency.  The initial funding process of the Facility Agreement began on June 29, 2009 and was completed on July 1, 2009. The new facility is comprised of:

 
·
a $563.3 million tranche for future payments and to reimburse the Company for amounts it previously paid to Thales Alenia Space for construction of its second-generation satellites. Such reimbursed amounts will be used by the Company (a) to make payments to the Launch Provider for launch services, Hughes for ground network equipment, software and satellite interface chips and Ericsson for ground system upgrades, (b) to provide up to $150 million for the Company’s working capital and general corporate purposes and (c) to pay a portion of the insurance premium to COFACE; and

 
·
a $23 million tranche that will be used to make payments to the Launch Provider for launch services and to pay a portion of the insurance premium to COFACE.

The facility will mature 96 months after the first repayment date.  Scheduled semi-annual principal repayments will begin the earlier of eight months after the launch of the first 24 satellites from the second generation constellation or December 15, 2011. The facility will bear interest at a floating LIBOR rate, plus a margin of 2.07% through December 2012, increasing to 2.25% through December 2017 and 2.40% thereafter.  Interest payments will be due on a semi-annual basis beginning January 4, 2010.

The Company’s obligations under the facility are guaranteed on a senior secured basis by all of its domestic subsidiaries and are secured by a first priority lien on substantially all of the assets of Globalstar and its domestic subsidiaries (other than their FCC licenses), including patents and trademarks, 100% of the equity of the Company’s domestic subsidiaries and 65% of the equity of certain foreign subsidiaries.

The Company may prepay the borrowings without penalty on the last day of each interest period after the full facility has been borrowed or the earlier of seven months after the launch of the second generation constellation or November 15, 2011, but amounts repaid may not be reborrowed. The Company must repay the loans (a) in full upon a change in control or (b) partially (i) if there are excess cash flows on certain dates, (ii) upon certain insurance and condemnation events and (iii) upon certain asset dispositions. The Facility Agreement includes covenants that (a) require the Company to maintain a minimum liquidity amount after the second repayment date, a minimum adjusted consolidated EBITDA, a minimum debt service coverage ratio and a maximum net debt to adjusted consolidated EBITDA ratio, (b) place limitations on the ability of the Company and its subsidiaries to incur debt, create liens, dispose of assets, carry out mergers and acquisitions, make loans, investments, distributions or other transfers and capital expenditures or enter into certain transactions with affiliates and (c) limit capital expenditures incurred by the Company not to exceed $391.0 million in 2009 and $234.0 million in 2010.  The Company is permitted to make cash payments under the terms of its 5.75%  Notes . At September 30, 2009, the Company was in compliance with the covenants of the Facility Agreement.

 
15

 
 
Subordinated Loan Agreement

On June 25, 2009, the Company entered into a Loan Agreement with Thermo whereby Thermo agreed to lend the Company $25 million for the purpose of funding the debt service reserve account required under the Facility Agreement. This loan is subordinated to, and the debt service reserve account is pledged to secure, all of the Company’s obligations under the Facility Agreement. The loan accrues interest at 12% per annum, which will be capitalized and added to the outstanding principal in lieu of cash payments. The Company will make payments to Thermo only when permitted under the Facility Agreement. The loan becomes due and payable six months after the obligations under the Facility Agreement have been paid in full, the Company has a change in control or any acceleration of the maturity of the loans under the Facility Agreement occurs. As additional consideration for the loan, the Company issued Thermo a warrant to purchase 4,205,608 shares of Common Stock at $0.01 per share with a five-year exercise period.  No Common Stock is issuable upon such exercise if such issuance would cause Thermo and its affiliates to own more than 70% of the Company’s outstanding voting stock.

Thermo  borrowed $20 million of the $25 million loaned to the Company under the Loan Agreement from two Company vendors and also agreed to reimburse another Company vendor if its guarantee of a portion of the debt service reserve account were called.  The debt service reserve account is included in restricted cash. The Company agreed to grant one of these vendors a one-time option to convert its debt into equity of the Company on the same terms as Thermo at the first call (if any) by the Company for funds under the Contingent Equity Agreement (described below).

The Company determined that the warrant was an equity instrument and recorded it as a part of its stockholders’ equity with a corresponding debt discount of $5.2 million, which is netted against the face value of the loan. The Company will amortize the debt discount associated with the warrant to interest expense over the term of the loan agreement using an effective interest rate method. At issuance, the Company allocated the proceeds under the subordinated loan agreement to the underlying debt and the warrants based upon their relative fair values.

Contingent Equity Agreement

On June 19, 2009, the Company entered into a Contingent Equity Agreement with Thermo whereby Thermo agreed to deposit $60 million into a contingent equity account to fulfill a condition precedent for borrowing under the Facility Agreement. Under the terms of the Facility Agreement, the Company will be required to make drawings from this account if and to the extent it has an actual or projected deficiency in our ability to meet indebtedness obligations due within a forward-looking 90 day period. Thermo has pledged the contingent equity account to secure the Company’s obligations under the Facility Agreement. If the Company makes any drawings from the contingent equity account, it will issue Thermo shares of Common Stock calculated using a price per share equal to 80% of the volume-weighted average closing price of the Common Stock for the 15 trading days immediately preceding the draw. Thermo may  withdraw undrawn amounts in the account after the Company has made the second scheduled repayment under the Facility Agreement, which the Company currently expects to be no later than June 15, 2012.

The Contingent Equity Agreement also provides that the Company will pay Thermo an availability fee of 10% per year for maintaining funds in the contingent equity account. This fee is payable solely in warrants to purchase Common Stock at $0.01 per share with a five-year exercise period from issuance, with respect to a number of shares equal to the available balance in the contingent equity account divided by $1.37, subject to an annual retroactive adjustment at December 31 of each year, and subject to certain conditions limiting the maximum number of shares issuable. The Company issued Thermo a warrant to purchase 4,379,562 shares of Common Stock for this fee at origination of the loan. No Common Stock is issuable if it would cause Thermo and its affiliates to own more than 70% of the Company’s outstanding voting stock. The Company may issue nonvoting common stock in lieu of Common Stock to the extent issuing Common Stock would cause Thermo and its affiliates to exceed this 70% ownership level.

The Company determined that the warrants issued in conjunction with the availability fee were a liability and recorded it as a component of Other Long Term Liabilities, at issuance. The corresponding benefit is recorded in prepaid and other current assets and will be amortized over the one year of the availability period.

8.00% Convertible Senior Notes

On June 19, 2009, the Company sold $55 million in aggregate principal amount of 8.00% Convertible Senior Unsecured Notes (“8.00% Notes”) and warrants (“Warrants”) to purchase 15,277,771 shares of the Company’s Common Stock at an initial exercise price of $1.80 per share to selected institutional investors (including an affiliate of Thermo) in a direct offering registered under the Securities Act of 1933. The 8.00% Notes are convertible into shares of Common Stock at an initial conversion price of $1.80 per share of Common Stock, subject to adjustment in the manner set forth in the supplemental indenture governing the 8.00% Notes.

 
16

 

The Warrants have full ratchet anti-dilution protection, and the exercise price of the Warrants is subject to adjustment under certain other circumstances.  In addition, if the closing price of the Common Stock on September 19, 2010 is less than the exercise price of the Warrants then in effect, the exercise price of the Warrants will be reset to equal the volume-weighted average closing price of the Common Stock for the previous 15 trading days.  In the event of certain transactions that involve a change of control, the holders of the Warrants have the right to make the Company purchase the Warrants for cash, subject to certain conditions. The exercise period for the Warrants will begin on December 19, 2009 and end on June 19, 2014.

The 8.00% Notes are subordinated to all of the Company’s obligations under the Facility Agreement. The 8.00% Notes are the Company’s senior unsecured debt obligations and, except as described in the preceding sentence, rank pari passu with its existing unsecured, unsubordinated obligations, including its 5.75% Notes. The 8.00% Notes mature at the later of the tenth anniversary of closing or six months following the maturity date of the Facility Agreement and bear interest at a rate of 8.00% per annum. Interest on the 8.00% Notes is payable in the form of additional 8.00% Notes or, subject to certain restrictions, in Common Stock at the option of the holder. Interest is payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2009.

Holders may convert their 8.00% Notes at any time. The initial base conversion price for the 8.00% Notes is $1.80 per share or 555.6 shares of the Company’s Common Stock per $1,000 principal amount of the 8.00% Notes, subject to certain adjustments and limitations. In addition, if the volume-weighted average closing price for one share of the Company’s Common Stock for the 15 trading days immediately preceding September 19, 2010 (“reset day price”) is less than the base conversion price then in effect, the base conversion rate shall be adjusted to equal the reset day price. If the Company issues or sells shares of its Common Stock at a price per share less than the base conversion price on the trading day immediately preceding such issuance or sale subject to certain limitations, the base conversion rate will be adjusted lower based on a formula described in the supplemental indenture governing the 8.00% Notes. However, no adjustment to the base conversion rate shall be made if it would cause the Base Conversion Price to be less than $1.00. If at any time the closing price of the Common Stock exceeds 200% of the conversion price of the 8.00% Notes then in effect for 30 consecutive trading days, all of the outstanding 8.00% Notes will be automatically converted into Common Stock. Upon certain automatic and optional conversions of the 8.00% Notes, the Company will pay holders of the 8.00% Notes a make-whole premium by increasing the number of shares of Common Stock delivered upon such conversion. The number of additional shares per $1,000 principal amount of 8.00% Notes constituting the make-whole premium shall be equal to the quotient of (i) the aggregate principal amount of the 8.00% Notes so converted multiplied by 32.00%, less the aggregate interest paid on such Securities prior to the applicable Conversion Date divided by (ii) 95% of the volume-weighted average Closing Price of the Common Stock for the 10 trading days immediately preceding the Conversion Date. As of September 30, 2009, approximately $5.0 million of the 8% Notes had been converted resulting in the issuance of approximately 4.5 million shares of Common Stock. These conversions also resulted in a decrease of approximately $3.1 million in the embedded derivative liabilities in the 8% Notes. This decrease was recorded to Additional Paid In Capital.

Subject to certain exceptions set forth in the supplemental indenture, if certain changes of control of the Company or events relating to the listing of the Common Stock occur (a “fundamental change”), the 8.00% Notes are subject to repurchase for cash at the option of the holders of all or any portion of the 8.00% Notes at a purchase price equal to 100% of the principal amount of the 8.00% Notes, plus a make-whole payment and accrued and unpaid interest, if any. Holders that require the Company to repurchase 8.00% Notes upon a fundamental change may elect to receive shares of Common Stock in lieu of cash.  Such holders will receive a number of shares equal to (i) the number of shares they would have been entitled to receive upon conversion of the 8.00% Notes, plus (ii) a make-whole premium of 12% or 15%, depending on the date of the fundamental change and the amount of the consideration, if any, received by the Company’s shareholders in connection with the fundamental change.

The indenture governing the 8.00% Notes contains customary financial reporting requirements.  The indenture also provides that upon certain events of default, including without limitation failure to pay principal or interest, failure to deliver a notice of fundamental change, failure to convert the 8.00% Notes when required, acceleration of other material indebtedness and failure to pay material judgments, either the trustee or the holders of 25% in aggregate principal amount of the 8.00% Notes may declare the principal of the 8.00% Notes and any accrued and unpaid interest through the date of such declaration immediately due and payable. In the case of certain events of bankruptcy or insolvency relating to the Company or its significant subsidiaries, the principal amount of the 8.00% Notes and accrued interest automatically becomes due and payable.

The Company evaluated the various embedded derivatives resulting from the conversion rights and features within the Indenture for bifurcation from the 8.00% Notes. Based upon its detailed assessment, the Company concluded that the conversion rights and features could not be either excluded from bifurcation as a result of being clearly and closely related to the 8.00% Notes or were not indexed to the Company’s Common Stock and could not be classified in stockholders’ equity if freestanding. The Company recorded this compound embedded derivative liability as a component of Other Non-Current Liabilities on its Consolidated Balance Sheet with a corresponding debt discount which is netted with the face value of the 8.00% Notes. The Company will amortize the debt discount associated with the compound embedded derivative liability to interest expense over the term of the 8.00% Notes using an effective interest rate method. The fair value of the compound embedded derivative liability will be marked-to-market at the end of each reporting period, with any changes in value reported as “Derivative gain (loss)” in the Consolidated Statements of Operations. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model based upon a risk-neutral stock price model.

 
17

 

Due to the cash settlement provisions and reset features in the Warrants, the Company recorded the Warrants as a component of Other Non-Current Liabilities on its Consolidated Balance Sheet with a corresponding debt discount which is netted with the face value of the 8.00% Notes. The Company will amortize the debt discount associated with the Warrants liability to interest expense over the term of the 8.00% Notes using an effective interest rate method. The fair value of the Warrants liability will be marked-to-market at the end of each reporting period, with any changes in value reported as “Derivative gain (loss)” in the Consolidated Statements of Operations. The Company determined the fair value of the Warrants derivative using a Monte Carlo simulation model based upon a risk-neutral stock price model.

The Company allocated the proceeds received from the 8.00% Notes among the conversion rights and features, the detachable Warrants and the remainder to the underlying debt. The Company netted the debt discount associated with the conversion rights and features and Warrants against the face value of the 8.00% Notes to determine the carrying amount of the 8.00% Notes. The accretion of debt discount will increase the carrying amount of the debt over the term of the 8.00% Notes. The Company allocated the proceeds at issuance as follows (in thousands):

Fair value of compound embedded derivative
 
$
23,542
 
Fair value of Warrants
 
12,791
 
Debt
 
18,667
 
Face Value of 8.00% Notes
 
$
55,000
 

Amended and restated credit agreement

On August 16, 2006, the Company entered into an amended and restated credit agreement with Wachovia Investment Holdings, LLC, as administrative agent and swingline lender, and Wachovia Bank, National Association, as issuing lender, which was subsequently amended on September 29 and October 26, 2006. On December 17, 2007, Thermo was assigned all the rights (except indemnification rights) and assumed all the obligations of the administrative agent and the lenders under the amended and restated credit agreement and the credit agreement was again amended and restated. On December 18, 2008, the Company entered into a First Amendment to Second Amended and Restated Credit Agreement with Thermo, as lender and administrative agent, to increase the amount available to Globalstar under the revolving credit facility from $50.0 million to $100.0 million. In May 2009, $7.5 million outstanding under the $200 million credit agreement was converted into 10 million shares of the Company’s Common Stock.  As of December 31, 2008, the Company had drawn $66.1 million of the revolving credit facility and the entire $100.0 million delayed draw term loan facility was outstanding.

The delayed draw term loan facility bore an annual commitment fee of 2.0% until drawn or terminated. Commitment fees related to the loans, incurred during the three and nine months ended September 30, 2009 were none and $0.2 million, respectively. Commitment fees for the same periods in 2008 were $0.1 million and $0.3 million, respectively. To hedge a portion of the interest rate risk with respect to the delayed draw term loan, the Company entered into a five-year interest rate swap agreement. The Company terminated this interest rate swap agreement on December 10, 2008 (see Note 11 “Derivative Instruments”).

On June 19, 2009, Thermo exchanged all of the outstanding secured debt (including accrued interest) owed to it by the Company under the credit agreement, which totaled approximately $180.2 million, for one share of Series A Convertible Preferred Stock (the “Series A Preferred”), and the credit agreement was terminated.  The Series A Preferred includes the following terms:

Liquidation Preference. The Series A Preferred has a $0.01 liquidation preference upon any voluntary or involuntary liquidation, dissolution or winding up of the company.

Dividend Preference.  The Series A Preferred has no dividend preference to the Common Stock.

Voting Rights. Subject to the conversion limitation set forth below, Thermo Funding may vote its share of Series A Preferred with holders of the Company’s Common Stock, voting as a single class, on an as-converted basis.

Conversion Rights and Limitations.  The Series A Preferred is convertible into 126,174,034 shares of Common Stock or nonvoting common stock.  As of September 30, 2009, Thermo has not exercised its conversion rights. In addition, no Common Stock is issuable upon such conversion if such issuance would cause Thermo and its affiliates to own more than 70% of the Company’s outstanding voting stock. The Company may issue nonvoting common stock in lieu of common stock to the extent issuing Common Stock would cause Thermo and its affiliates to exceed this 70% ownership level.

 
18

 

Additional Issuances.  The Company may not issue additional shares of Series A Preferred or create any other class or series of capital stock that ranks senior to or on parity with the Series A Preferred without the consent of Thermo.

The Company determined that the exchange of debt for Series A Preferred was a capital transaction and did not record any gain as a result of this exchange.

5.75% Convertible Senior Notes due 2028

The Company issued $150.0 million aggregate principal amount of 5.75% Notes pursuant to a Base Indenture and a Supplemental Indenture each dated as of April 15, 2008.

The Company placed approximately $25.5 million of the proceeds of the offering of the 5.75% Notes in an escrow account that is being used to make the first six scheduled semi-annual interest payments on the 5.75% Notes. The Company pledged its interest in this escrow account to the Trustee as security for these interest payments. At September 30, 2009, the balance in the escrow account was $8.3 million.

Except for the pledge of the escrow account, the 5.75% Notes are senior unsecured debt obligations of the Company. The 5.75% Notes mature on April 1, 2028 and bear interest at a rate of 5.75% per annum. Interest on the 5.75% Notes is payable semi-annually in arrears on April 1 and October 1 of each year.

Subject to certain exceptions set forth in the Indenture, the 5.75% Notes are subject to repurchase for cash at the option of the holders of all or any portion of the 5.75% Notes (i) on each of April 1, 2013, April 1, 2018 and April 1, 2023 or (ii) upon a fundamental change, both at a purchase price equal to 100% of the principal amount of the 5.75% Notes, plus accrued and unpaid interest, if any. A fundamental change will occur upon certain changes in the ownership of the Company, or certain events relating to the trading of the Company’s Common Stock.

Holders may convert their 5.75% Notes into shares of Common Stock at their option at any time prior to maturity, subject to the Company’s option to deliver cash in lieu of all or a portion of the share. The 5.75% Notes are convertible at an initial conversion rate of 166.1820 shares of Common Stock per $1,000 principal amount of 5.75% Notes, subject to adjustment. In addition to receiving the applicable amount of shares of Common Stock or cash in lieu of all or a portion of the shares, holders of 5.75% Notes who convert them prior to April 1, 2011 will receive the cash proceeds from the sale by the Escrow Agent of the portion of the government securities in the escrow account that are remaining with respect to any of the first six interest payments that have not been made on the 5.75% Notes being converted.

Holders who convert their 5.75% Notes in connection with a fundamental change occurring on or prior to April 1, 2013 will be entitled to an increase in the conversion rate as specified in the indenture governing the 5.75% Notes.

Except as described above with respect to holders of 5.75% Notes who convert their 5.75% Notes prior to April 1, 2011, there is no circumstance in which holders could receive cash in addition to the maximum number of shares of common stock issuable upon conversion of the 5.75% Notes.

If the Company makes at least 10 scheduled semi-annual interest payments, the 5.75% Notes are subject to redemption at the Company’s option at any time on or after April 1, 2013, at a price equal to 100% of the principal amount of the 5.75% Notes to be redeemed, plus accrued and unpaid interest, if any.

The indenture governing the 5.75% Notes contains customary financial reporting requirements and also contains restrictions on mergers and asset sales. The indenture also provides that upon certain events of default, including without limitation failure to pay principal or interest, failure to deliver a notice of fundamental change, failure to convert the 5.75% Notes when required, acceleration of other material indebtedness and failure to pay material judgments, either the trustee or the holders of 25% in aggregate principal amount of the 5.75% Notes may declare the principal of the 5.75% Notes and any accrued and unpaid interest through the date of such declaration immediately due and payable. In the case of certain events of bankruptcy or insolvency relating to the Company or its significant subsidiaries, the principal amount of the 5.75% Notes and accrued interest automatically becomes due and payable.

 
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Conversion of 5.75% Notes

In 2008, $36.0 million aggregate principal amount of 5.75% Notes, or 24% of the 5.75% Notes originally issued, were converted into Common Stock. The Company also exchanged an additional $42.2 million aggregate principal amount of 5.75% Notes, or 28% of the 5.75% Notes originally issued for a combination of Common Stock and cash. The Company has issued approximately 23.6 million shares of its Common Stock and paid a nominal amount of cash for fractional shares in connection with the conversions and exchanges. In addition, the holders whose 5.75% Notes were converted or exchanged received an early conversion make whole amount of approximately $9.3 million representing the next five semi-annual interest payments that would have become due on the converted 5.75% Notes, which was paid from funds in an escrow account maintained for the benefit of the holders of 5.75% Notes. In the exchanges, 5.75% Note holders received additional consideration in the form of cash payments or additional shares of the Company’s Common Stock in the amount of approximately $1.1 million to induce exchanges. After these transactions, approximately $71.8 million aggregate principal amount of 5.75% Notes remained outstanding at September 30, 2009.

Common Stock Offering and Share Lending Agreement

Concurrently with the offering of the 5.75% Notes, the Company entered into a share lending agreement (the “Share Lending Agreement”) with Merrill Lynch International (the “Borrower”), pursuant to which the Company agreed to lend up to 36,144,570 shares of Common Stock (the “Borrowed Shares”) to the Borrower, subject to certain adjustments, for a period ending on the earliest of (i) at the Company’s option, at any time after the entire principal amount of the 5.75% Notes ceases to be outstanding, (ii) the written agreement of the Company and the Borrower to terminate, (iii) the occurrence of a Borrower default, at the option of Lender, and (iv) the occurrence of a Lender default, at the option of the Borrower. Pursuant to the Share Lending Agreement, upon the termination of the share loan, the Borrower must return the Borrowed Shares to the Company. Upon the conversion of 5.75% Notes (in whole or in part), a number of Borrowed Shares proportional to the conversion rate for such notes must be returned to the Company. At the Company’s election, the Borrower may deliver cash equal to the market value of the corresponding Borrowed Shares instead of returning to the Company the Borrowed Shares otherwise required by conversions of 5.75% Notes.

Pursuant to and upon the terms of the Share Lending Agreement, the Company will issue and lend the Borrowed Shares to the Borrower as a share loan. The Borrowing Agent also is acting as an underwriter with respect to the Borrowed Shares, which are being offered to the public. The Borrowed Shares included approximately 32.0 million shares of Common Stock initially loaned by the Company to the Borrower on separate occasions, delivered pursuant to the Share Lending Agreement and the Underwriting Agreement, and an additional 4.1 million shares of Common Stock that, from time to time, may be borrowed from the Company by the Borrower pursuant to the Share Lending Agreement and the Underwriting Agreement and subsequently offered and sold at prevailing market prices at the time of sale or negotiated prices. The Borrowed Shares are free trading shares. At September 30, 2009, approximately 17.3 million Borrowed Shares remained outstanding.

The Company did not receive any proceeds from the sale of the Borrowed Shares pursuant to the Share Lending Agreement, and it will not reserve any proceeds from any future sale. The Borrower has received all of the proceeds from the sale of Borrowed Shares pursuant to the Share Lending Agreement and will receive all of the proceeds from any future sale. At the Company’s election, the Borrower may remit cash equal to the market value of the corresponding Borrowed Shares instead of returning the Borrowed Shares due back to the Company as a result of conversions by 5.75% Note holders.

The Borrowed Shares are treated as issued and outstanding for corporate law purposes, and accordingly, the holders of the Borrowed Shares will have all of the rights of a holder of the Company’s outstanding shares, including the right to vote the shares on all matters submitted to a vote of the Company’s stockholders and the right to receive any dividends or other distributions that the Company may pay or makes on its outstanding shares of Common Stock. However, under the Share Lending Agreement, the Borrower has agreed:

 
·
To pay, within one business day after the relevant payment date, to the Company an amount equal to any cash dividends that the Company pays on the Borrowed Shares; and

 
·
To pay or deliver to the Company, upon termination of the loan of Borrowed Shares, any other distribution, in liquidation or otherwise, that the Company makes on the Borrowed Shares.

To the extent the Borrowed Shares the Company initially lent under the share lending agreement and offered in the Common Stock offering have not been sold or returned to it, the Borrower has agreed that it will not vote any such Borrowed Shares. The Borrower has also agreed under the Share Lending Agreement that it will not transfer or dispose of any Borrowed Shares, other than to its affiliates, unless the transfer or disposition is pursuant to a registration statement that is effective under the Securities Act. However, investors that purchase the shares from the Borrower (and any subsequent transferees of such purchasers) will be entitled to the same voting rights with respect to those shares as any other holder of the Company’s Common Stock.

 
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On December 18, 2008, the Company entered into Amendment No. 1 to the Share Lending Agreement with the Borrower and the Borrowing Agent. Pursuant to Amendment No.1, the Company has the option to request the Borrower to deliver cash instead of returning Borrowed Shares upon any termination of loans at the Borrower’s option, at the termination date of the Share Lending Agreement or when the outstanding loaned shares exceed the maximum number of shares permitted under the Share Lending Agreement.  The consent of the Borrower is required for any cash settlement, which consent may not be unreasonably withheld, subject to the Borrower’s determination of applicable legal, regulatory or self-regulatory requirements or other internal policies. Any loans settled in shares of Company Common Stock will be subject to a return fee based on the stock price as agreed by the Company and the Borrower.  The return fee will not be less than $0.005 per share or exceed $0.05 per share.

As a result of this amendment, the Company believes that, under generally accepted accounting principles in the United States as currently in effect, the approximately 17.3 million Borrowed Shares outstanding at September 30, 2009 under the Share Lending Agreement will be considered outstanding for the purpose of computing and reporting its earnings per share. Prior to this amendment, the Company did not consider the Borrowed Shares outstanding for the purpose of computing and reporting its earnings per share due to the substantial elimination of the economic dilution due to contractual provisions that otherwise would have resulted from the issuance of the Borrowed Shares.

The Company evaluated the various embedded derivatives within the Indenture for bifurcation from the 5.75% Notes. Based upon its detailed assessment, the Company concluded that these embedded derivatives were either (i) excluded from bifurcation as a result of being clearly and closely related to the 5.75% Notes or are indexed to the Company’s Common Stock and would be classified in stockholders’ equity if freestanding or (ii) the fair value of the embedded derivatives was estimated to be immaterial.

The Company adopted FASB ASC 470-20 on January 1, 2009, and it is applied on a retrospective basis. FASB ASC 470-20 calls for a separation of the liability and equity components of the convertible debt instrument. The carrying amount of the liability component is computed by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated equity component. The carrying amount of the equity component is represented by the embedded conversion option by deducting the fair value of the liability component from the initial proceeds ascribed to the convertible debt instrument as a whole. The excess of the principal amount of the liability component over its carrying amount is recorded as debt discount and is amortized to interest cost using the interest method over a period of five years. This adoption  resulted in a decrease in the Company’s long-term debt of approximately $23.1 million; an increase in its stockholders’ equity of approximately $28.3 million; and an increase in its net property, plant and equipment of approximately $5.9 million as of December 31, 2008.This adoption changed the Company’s full year 2008 Consolidated Statement of Operations, because the gains associated with conversions and exchanges of 5.75% Notes in 2008 were recorded in stockholders’ equity prior to adoption of this standard. This adoption  impacted the Company’s Consolidated Statement of Operations for the three and nine month periods ended September 30, 2008 by reducing the net loss by approximately $0.1 and $0.3 million, respectively. At September 30, 2009 and December 31, 2008, the remaining term for amortization associated with debt discount was approximately 42 and 51 months, respectively. The annual effective interest rate utilized for the amortization of debt discount during the three and nine month periods ended September 30, 2009 was 9.14%. The interest cost associated with the coupon rate on the 5.75% Notes plus the corresponding debt discount amortized during the three and nine month periods ended September 30, 2009, was $2.2 million and $6.6 million, respectively, all of which was capitalized. The carrying amount of the equity and liability component, as of September 30, 2009 and December 31, 2008, is presented below (in thousands):

   
September 30, 2009
   
December 31, 2008
 
             
Equity
  $ 54,675     $ 54,675  
Liability:
               
Principal
    71,804       71,804  
Unamortized debt discount
    (19,659 )     (23,134 )
Net carrying amount of liability
  $ 52,145     $ 48,670  

Vendor Financing

In July 2008 the Company amended the agreement with the Launch Provider for the launch of the Company’s second-generation satellites and certain pre and post-launch services. Under the amended terms, the Company could defer payment on up to 75% of certain amounts due to the Launch Provider. The deferred payments incurred annual interest at 8.5% to 12%. In June 2009, the Company and the Launch Provider again amended their agreement modifying the agreement in certain respects including cancelling the deferred payment provisions. The Company paid all deferred amounts to the vendor in July 2009.

In September 2008 the Company amended its agreement with Hughes for the construction of its RAN ground network equipment and software upgrades for installation at a number of the Company’s satellite gateway ground stations and satellite interface chips to be a part of the UTS in various next-generation Globalstar devices. Under the amended terms, the Company deferred certain payments due under the contract in 2008 and 2009 to December 2009. The deferred payments incurred annual interest at 10%. In June 2009, the Company and Hughes further amended their agreement modifying the agreement in certain respects including cancelling the deferred payment provisions. The Company paid all deferred amounts to the vendor in July 2009.

 
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Note 13: Fair Value of Financial Instruments

The Company measures its financial assets and liabilities on a recurring basis and reports on a fair value basis. The Company classifies its fair value measurements in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

The Company uses observable pricing inputs including benchmark yields, reported trades, and broker/dealer quotes. The financial assets in Level 2 include the interest rate cap derivative instrument.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The financial liabilities in Level 3 include the compound embedded conversion option in the 8.00% Notes and warrants issued with the 8.00% Notes and contingent equity agreement. The Company marks-to-market these liabilities at each reporting date with the changes in fair value recognized in the Company’s results of operations.

The following table presents the financial instruments that are carried at fair value as of September 30, 2009:

         
Fair Value Measurements at September 30, 2009 using
 
         
Quoted
Prices
                   
         
in Active
   
Significant
             
         
Markets for
   
Other
   
Significant
       
         
Identical
   
Observable
   
Unobservable
       
         
Instruments
   
Inputs
   
Inputs
       
(In Thousands)
 
December 31, 2008
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total Balance
 
Other assets:
                             
                               
Interest rate cap derivative
  $ N/A     $     $ 6,138     $     $ 6,138  
                                         
Total other assets measured at fair value
    N/A           $ 6,138             6,138  
                                         
Other non-current liabilities:
                                       
                                         
Compound embedded conversion option
    N/A                   (14,217 )     (14,217 )
                                         
Warrants issued with 8.00% Notes
    N/A                   (7,575 )     (7,575 )
                                         
Warrants issued with contingent equity agreements
    N/A                   (6,000 )     (6,000 )
                                         
Total non-current liabilities measured at fair value
  $     $     $     $ (27,792 )   $ (27,792 )

The following tables present a reconciliation for all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2009 as follows (amounts in thousands):

   
Three Months
Ended
September 30,
2009
 
       
Balance at June 30, 2009
 
$
(39,036)
 
Derivative adjustment related to conversions
 
3,058
 
Unrealized gain, included in derivative gain (loss) on the income statement
 
8,186
 
Balance at September 30, 2009
 
$
(27,792
)
 
 
22

 

   
Nine Months
Ended
September 30,
2009
 
       
Balance at December 31, 2008
 
$
 
Issuance of compound embedded conversion option and warrants liabilities
 
(42,333
)
Derivative adjustment related to conversions
 
3,058
 
Unrealized gain, included in derivative gain (loss) on the income statement
 
11,483
 
Balance at September 30, 2009
 
$
(27,792
)

Note 14: Subsequent Events

The Company has evaluated subsequent events for potential recognition or disclosure through the issuance of these consolidated financial statements, which occurred on November 6, 2009.

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

Forward-Looking Statements

Certain statements contained in or incorporated by reference into this Report, other than purely historical information, including, but not limited to, estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions, although not all forward-looking statements contain these identifying words. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements, such as the statements regarding our ability to develop and expand our business, our ability to manage costs, our ability to exploit and respond to technological innovation, the effects of laws and regulations (including tax laws and regulations) and legal and regulatory changes, the opportunities for strategic business combinations and the effects of consolidation in our industry on us and our competitors, our anticipated future revenues, our anticipated capital spending (including for future satellite procurements and launches), our anticipated financial resources, our expectations about the future operational performance of our satellites (including their projected operational lives), the expected strength of and growth prospects for our existing customers and the markets that we serve, and our ability to obtain additional financing, if needed and other statements contained in this Report regarding matters that are not historical facts, involve predictions. Risks and uncertainties that could cause or contribute to such differences include, without limitation, those in Part II. Item 1A. Risk Factors in this Report or incorporated by reference into this Report, including those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Although we believe that the forward-looking statements contained or incorporated by reference in this Report are based upon reasonable assumptions, the forward-looking events and circumstances discussed in this Report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements.

New risk factors emerge from time to time, and it is not possible for us to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements. You should not rely upon forward-looking statements as predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

This “Management’s Discussion and Analysis of Financial Condition” should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition” and information included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview

We are a provider of mobile voice and data communication services via satellite. Our communications platform extends telecommunications beyond the boundaries of terrestrial wireline and wireless telecommunications networks to serve our customer’s desire for connectivity. Using in-orbit satellites and ground stations, which we call gateways, we offer voice and data communications services to government agencies, businesses and other customers in over 120 countries.

 
23

 

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

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

 
·
awareness of the need for remote communication services;

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

 
·
improved voice and data transmission quality;

 
·
a general reduction in prices of user equipment; and

 
·
innovative data products and services.

Nonetheless, as further described under Part II. Item 1A “Risk Factors,” we face a number of challenges and uncertainties, including:

 
·
Constellation life and health.  Our current satellite constellation is aging. We successfully launched our eight spare satellites in 2007. All of our satellites launched prior to 2007 have experienced various anomalies over time, one of which is a degradation in the performance of the solid-state power amplifiers of the S-band communications antenna subsystem (our “two-way communication issues”). The S-band antenna provides the downlink from the satellite to a subscriber’s phone or data terminal. Degraded performance of the S-band antenna amplifiers reduces the availability of two-way voice and data communication between the affected satellites and the subscriber and may reduce the duration of a call. When the S-band antenna on a satellite ceases to be functional, two-way communication is impossible over that satellite, but not necessarily over the constellation as a whole. We continue to provide two-way subscriber service because some of our satellites are fully functional but at certain times in any given location it may take longer to establish calls and the average duration of calls may be reduced. There are periods of time each day during which no two-way voice and data service is available at any particular location. The root cause of our two-way communication issues is unknown, although we believe it may result from irradiation of the satellites in orbit caused by the space environment at the altitude that our satellites operate.

The decline in the quality of two-way communication does not affect adversely our one-way Simplex data transmission services, including our SPOT satellite GPS messenger products and services, which utilize only the L-band uplink from a subscriber’s Simplex terminal to the satellites. The signal is transmitted back down from the satellites on our C-band feeder links, which are functioning normally, not on our S-band service downlinks.

We continue to work on plans, including new products and services and pricing programs to mitigate the effects of reduced service availability upon our customers and operations until our second-generation satellites are deployed. See “Part II, Item 1A. Risk Factors—Our satellites have a limited life and some have failed, which causes our network to be compromised and which materially and adversely affects our business, prospects and profitability.”

 
·
Launch delays.  Thales Alenia Space has informed us of a force majeure event that has affected its satellite delivery schedule which will result in a satellite delivery delay.  A major earthquake in Italy in April 2009 damaged its satellite component fabrication facility in l’Aquila, Italy, but none of Globalstar’s satellites nor its components.  We believe that this delay will not have a material adverse effect on our operations and business plan because we are able to defer a significant portion of our capital expense unrelated to the launch and construction of our satellites.  Thales Alenia Space may be able to accelerate the satellite delivery schedule over the next few months.  We believe this result is achievable.  We currently expect the launch of the first six second-generation satellites to take place in the summer of 2010 with the launch campaign, consisting of a total of 24 satellites, to be completed in the spring of 2011.

 
24

 

 
·
The economy.  The current recession and its effects on credit markets and consumer spending is adversely affecting sales of our products and services.

 
·
Competition and pricing pressures.  We face increased competition from both the expansion of terrestrial-based cellular phone systems and from other mobile satellite service providers. For example, Inmarsat plans to commence offering satellite services to handheld devices in the United States in 2010, and several competitors, such as ICO Global and TerreStar, are constructing or have launched geostationary satellites that provide mobile satellite service. Increased numbers of competitors, and the introduction of new services and products by competitors, increases competition for subscribers and pressures all providers, including us, to reduce prices. Increased competition may result in loss of subscribers, decreased revenue, decreased gross margins, higher churn rates, and, ultimately, decreased profitability and cash.

 
·
Technological changes.  It is difficult for us to respond promptly to major technological innovations by our competitors because substantially modifying or replacing our basic technology, satellites or gateways is time-consuming and very expensive. Approximately 71% of our total assets at September 30, 2009 represented fixed assets. Although we plan to procure and deploy our second-generation satellite constellation and upgrade our gateways and other ground facilities, we may nevertheless become vulnerable to the successful introduction of superior technology by our competitors.

 
·
Capital Expenditures.  We have incurred significant capital expenditures from 2007 through September 30, 2009, and we expect to incur additional significant expenditures through 2013 to complete and launch our second-generation constellation and related upgrades.

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

Simplex Products (Personal Tracking Services and Emergency Messaging).  In early November 2007, we introduced the SPOT satellite GPS messenger, aimed at attracting both the recreational and commercial markets that require personal tracking, emergency location and messaging solutions for users that require these services beyond the range of traditional terrestrial and wireless communications. Using the Globalstar Simplex network and web-based mapping software, this device provides consumers with the capability to trace or map the location of the user on Google Maps™. The product enables users to transmit messages to specific preprogrammed email addresses, phone or data devices, and to request assistance in the event of an emergency. On July 21, 2009, we introduced our SPOT 2.0 with new features and improved functionality.  We are continuing to work on additional SPOT-like applications.