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Globalstar 10-Q 2013

 

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, 2013

 

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)    

 

300 Holiday Square Blvd.

Covington, Louisiana 70433

(Address of principal executive offices and zip code)

Registrant's Telephone Number, Including Area Code: (985) 335-1500

 

Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

Yes  ¨   No  x

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  ¨   No  x

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   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     ¨
     
Non-accelerated filer   x   Smaller reporting company  x
(Do not check if a smaller reporting company)    

 

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

 

As of November 1, 2013, 466,486,563 shares of voting common stock and 283,047,118 shares of nonvoting common stock were outstanding. Unless the context otherwise requires, references to common stock in this Report mean Registrant’s voting common stock.

 

 
 

 

GLOBALSTAR, INC.

TABLE OF CONTENTS

 

  Page
   
PART I -  Financial Information  
     
Item 1. Financial Statements 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 55
     
Item 4. Controls and Procedures 55
     
PART II -  Other Information 56
     
Item 1A.   Risk Factors 56
     
Item 6. Exhibits 57
   
Signatures 58

 

 
 

 

GLOBALSTAR, INC.

  

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2013   2012   2013   2012 
                 
Revenue:                    
Service revenues  $17,056   $15,368   $47,854   $42,146 
Subscriber equipment sales   5,493    5,169    13,863    15,110 
Total revenue   22,549    20,537    61,717    57,256 
Operating expenses:                    
Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)   8,181    7,413    22,913    22,218 
Cost of subscriber equipment sales   4,148    4,040    10,675    10,465 
Cost of subscriber equipment sales - reduction in the value of inventory   -    660    -    957 
Marketing, general, and administrative   9,079    7,425    22,579    21,062 
Reduction in the value of long-lived assets   -    -    -    7,218 
Contract termination charge   -    -    -    22,048 
Depreciation, amortization, and accretion   23,715    18,654    66,114    49,277 
Total operating expenses   45,123    38,192    122,281    133,245 
Loss from operations   (22,574)   (17,655)   (60,564)   (75,989)
Other income (expense):                    
Loss on extinguishment of debt   (63,569)   -    (110,809)   - 
Loss on equity issuance   (2,733)   -    (16,701)   - 
Interest income and expense, net of amounts capitalized   (16,901)   (6,565)   (39,869)   (13,396)
Derivative gain (loss)   (97,534)   (16,473)   (126,911)   (2,562)
Other   (1,540)   (439)   (1,125)   (938)
Total other income (expense)   (182,277)   (23,477)   (295,415)   (16,896)
Loss before income taxes   (204,851)   (41,132)   (355,979)   (92,885)
Income tax expense   118    56    341    361 
Net loss  $(204,969)  $(41,188)  $(356,320)  $(93,246)
Loss per common share:                    
Basic  $(0.30)  $(0.10)  $(0.64)  $(0.25)
Diluted   (0.30)   (0.10)   (0.64)   (0.25)
Weighted-average shares outstanding:                    
Basic   673,546    392,344    559,515    376,518 
Diluted   673,546    392,344    559,515    376,518 
                     
Comprehensive loss  $(204,417)  $(40,069)  $(356,417)  $(91,578)

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

1
 

 

GLOBALSTAR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share data)

 

   (Unaudited)   (Audited) 
   September 30, 2013   December 31, 2012 
ASSETS          
Current assets:          
Cash and cash equivalents  $6,643   $11,792 
Restricted cash   -    46,777 
Accounts receivable, net of allowance of $6,567 and $6,667, respectively   16,444    13,944 
Inventory   37,482    42,181 
Deferred financing costs   -    34,622 
Prepaid expenses and other current assets   7,583    5,233 
Total current assets   68,152    154,549 
Property and equipment, net   1,187,288    1,215,156 
Restricted cash   37,940    - 
Deferred financing costs   79,861    16,883 
Advances for inventory   9,158    9,158 
Intangible and other assets, net   7,375    8,029 
Total assets  $1,389,774   $1,403,775 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Current portion of long-term debt  $-   $655,874 
Accounts payable, including contractor payables of $17,801 and $27,747, respectively   26,444    35,685 
Accrued contract termination charge   23,699    23,166 
Accrued expenses   32,828    28,164 
Payables to affiliates   303    230 
Derivative liabilities   41,539    - 
Deferred revenue   17,822    18,041 
Total current liabilities   142,635    761,160 
Long-term debt, less current portion   675,690    95,155 
Employee benefit obligations   7,117    7,221 
Derivative liabilities   254,207    25,175 
Deferred revenue   7,317    4,640 
Debt restructuring fees   20,795    - 
Other non-current liabilities   15,411    15,880 
Total non-current liabilities   980,537    148,071 
           
Commitments and contingent liabilities (Notes 8 and 9)          
           
Stockholders’ equity:          
Preferred Stock of $0.0001 par value; 100,000,000 shares authorized and none issued and outstanding at September 30, 2013 and December 31, 2012:          
Series A Preferred Convertible Stock of $0.0001 par value; one share authorized and none issued and outstanding at September 30, 2013 and December 31, 2012   -    - 
Voting Common Stock of $0.0001 par value; 1,200,000,000 and 865,000,000 shares authorized; 448,117,231 and 354,085,753 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively   45    35 
Nonvoting Common Stock of $0.0001 par value; 400,000,000 and 135,000,000 shares authorized; 256,875,000 and 135,000,000 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively   26    14 
Additional paid-in capital   976,386    864,175 
Future equity issuance of common stock to related party   16,242    - 
Accumulated other comprehensive loss   (1,855)   (1,758)
Retained deficit   (724,242)   (367,922)
Total stockholders’ equity   266,602    494,544 
Total liabilities and stockholders’ equity  $1,389,774   $1,403,775 

 

See accompanying notes to unaudited interim condensed consolidated financial statements. 

 

2
 

 

GLOBALSTAR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   Nine Months Ended 
   September 30, 2013   September 30, 2012 
         
Cash flows provided by (used in) operating activities:          
Net loss  $(356,320)  $(93,246)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation, amortization, and accretion   66,114    49,277 
Change in fair value of derivative assets and liabilities   126,067    2,562 
Stock-based compensation expense   1,850    585 
Amortization of deferred financing costs   6,256    2,498 
Noncash interest and accretion expense   22,341    9,415 
Reduction in the value of long-lived assets and inventory   -    8,176 
Provision for bad debts   1,359    695 
Contract termination charge   -    22,048 
Loss on extinguishment of debt   110,809    - 
Loss on equity issuance   16,701    - 
Unrealized foreign currency gain (loss)   635    (269)
Other, net   605    2,218 
Changes in operating assets and liabilities:          
Accounts receivable   (4,001)   (1,919)
Inventory   4,253    (240)
Prepaid expenses and other current assets   (1,353)   1,459 
Other assets   874    6,253 
Accounts payable and accrued expenses   4,617    360 
Payables to affiliates   73    (147)
Other non-current liabilities   (996)   (1,093)
Deferred revenue   2,450    2,246 
Net cash provided by operating activities   2,334    10,878 
Cash flows used in investing activities:          
Second-generation satellites, ground and related launch costs (including interest)   (37,732)   (43,305)
Property and equipment additions   (1,225)   (382)
Investment in businesses   (496)   (450)
Restricted cash   8,838    (3,650)
Net cash used in investing activities   (30,615)   (47,787)
Cash flows provided by financing activities:          
Borrowings from Facility Agreement   672    5,008 
Proceeds from contingent equity agreement   1,071    23,000 
Payments to reduce principal amount of exchanged 5.75% Notes   (13,544)   - 
Payments for 5.75% Notes not exchanged   (6,250)   - 
Payments to lenders and other fees associated with exchange   (2,482)   - 
Proceeds for equity issuance to related party   51,500    - 
Proceeds from issuance of common stock and exercise of warrants   8,979    100 
Payment of deferred financing costs   (16,904)   (250)
Net cash provided by financing activities   23,042    27,858 
Effect of exchange rate changes on cash   90    319 
Net decrease in cash and cash equivalents   (5,149)   (8,732)
Cash and cash equivalents, beginning of period   11,792    9,951 
Cash and cash equivalents, end of period  $6,643   $1,219 
Supplemental disclosure of cash flow information:          
Cash paid for:          
Interest  $11,445   $18,958 
Income taxes   28    216 
Supplemental disclosure of non-cash financing and investing activities:          
Reduction in accrued second-generation satellites and ground costs   9,688    4,646 
Increase in non-cash capitalized interest for second-generation satellites and ground costs   3,691    4,309 
Capitalization of the accretion of debt discount and amortization of debt issuance costs   4,716    6,786 
Interest and other payments made in convertible notes and common stock   4,240    4,629 
Conversion of debt into common stock   23,570    2,000 
Reduction in debt discount and issuance costs related to note conversions   13,164    1,812 
Extinguishment of principal amount of 5.75% Notes   (71,804)   - 
Issuance of principal amount of 8% Notes Issued in 2013   54,611    - 
Issuance of common stock to exchanging note holders at fair value   12,127    - 
Reduction in carrying amount of Thermo Loan Agreement due to amendment   (35,026)     
Conversion of contingent equity account derivative liability to equity   -    5,853 
Value of warrants issued in connection with the contingent equity account loan fee   -    2,226 

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

3
 

 

GLOBALSTAR, INC.

  

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. BASIS OF PRESENTATION

 

The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Certain information and footnote disclosures normally in financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission; however, management believes the disclosures made are adequate to make the information presented not misleading. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in Globalstar, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012 and Management's Discussion and Analysis of Financial Condition and Results of Operations herein.

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the 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. Certain reclassifications have been made to prior period condensed consolidated financial statements to conform to current year presentation. The Company evaluates estimates on an ongoing basis. Significant estimates include the value of derivative instruments, the allowance for doubtful accounts, the net realizable value of inventory, the useful life and value of property and equipment, the value of stock-based compensation, the reserve for product warranties, and income taxes. Actual results could differ from these estimates.

 

All significant intercompany transactions and balances have been eliminated in the consolidation. In the opinion of management, the information included herein includes all adjustments, consisting of normal recurring adjustments, that are necessary for a fair presentation of the Company’s condensed consolidated statements of operations, condensed consolidated balance sheets, and condensed consolidated statements of cash flows for the periods presented. These unaudited interim condensed consolidated financial statements include the accounts of Globalstar and its majority owned or otherwise controlled subsidiaries. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the full year or any future period.

 

Recently Issued Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income. This standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. ASU 2013-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. This adoption did not have an impact on the Company’s condensed consolidated financial statements.

 

2. MANAGEMENT’S PLANS REGARDING FUTURE OPERATIONS

 

Current sources of liquidity include cash on hand, cash flows from operations, cash received from the exercise of warrants and stock options, funds which Thermo Funding Company LLC (including its affiliates, “Thermo”) has agreed to invest or arrange to be invested in the Company pursuant to the Equity Commitment, Restructuring Support and Consent Agreement dated as of May 20, 2013 among the Company, Thermo, BNP Paribas, as agent, and the lenders under the Facility Agreement (as defined below) (the “Consent Agreement”) and the Global Deed of Amendment and Restatement (the “GARA”) described below and funds available from the Company’s equity line agreement with Terrapin Opportunity, L.P. (“Terrapin”).

 

In order to continue as a going concern, the Company must execute its business plan, which assumes the modification of certain obligations and the funding of the financial arrangements with Thermo and Terrapin referred to above. Substantial uncertainties remain related to the impact and timing of these events. If the resolution of these uncertainties materially and negatively impacts cash and liquidity, the Company’s ability to continue to execute its business plan will be adversely affected. The Company’s financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might result from the uncertainty associated with the items discussed below, except as otherwise disclosed.

 

4
 

 

The Company has taken the following steps towards improving operations; completing and maintaining its second-generation constellation and next-generation ground infrastructure; and obtaining additional financing:

   

Completed the relocation of its corporate headquarters to Covington, Louisiana, streamlined its supply chain and other operations, consolidated its world-wide operations, and simplified its product offerings. The Company has continued to maintain a low cost operating structure, while strategically investing in sales and marketing and new product development.

 

Increased revenues by transitioning legacy Duplex customers to more profitable plans, commensurate with the Company’s improved service coverage, and adding new subscribers to the network at growing rates.

 

Successfully launched and placed into commercial service all of its second-generation satellites, excluding one on-ground spare.

 

Entered into financing arrangements with Thermo under which Thermo has provided or agreed to provide or arrange up to $85.0 million in equity or equity-linked financing.

 

Entered into a $30.0 million equity line agreement with Terrapin.

 

Drew $60.0 million from its contingent equity account.

 

Settled disputes with Thales Alenia Space (“Thales”) regarding contractual issues.

 

Implemented sales and marketing programs targeted to the mass consumer market, as well as the traditional Mobile Satellite Services (“MSS”) vertical markets, that are designed to take advantage of the introduction of new mobile satellite products and the continued expansion of the Company’s Duplex coverage, including entering into new sales agreements and introducing new pricing plans commensurate with improved service levels.

 

Commenced a proceeding before the Federal Communications Commission (“FCC”) seeking authority to utilize the Company’s MSS spectrum to offer terrestrial wireless services, including mobile broadband, separate and apart from, but coordinated with, its satellite-based communications.

 

Introduced the SPOT Global Phone to the consumer mass market, which leverages the Company’s retailer distribution channels and SPOT brand name.

 

Introduced the SPOT Gen3, the next generation of the SPOT Satellite GPS Messenger. SPOT Gen3 offers enhanced functionality with more tracking features, improved battery performance and more power options including rechargeable and USB direct line power.

 

Issued $54.6 million principal amount of new 8.00% Convertible Senior Notes (the “8.00% Notes Issued in 2013”), together with cash and shares of its common stock, in exchange for all of the Company’s $71.8 million principal amount of 5.75% Convertible Senior Unsecured Notes (the “5.75% Notes”), which were in default.

  

Entered into the Global Deed of Amendment and Restatement (the “GARA”), which significantly adjusted the principal repayment schedule and covenant levels required under the Company’s $586.3 million senior secured credit facility (the “Facility Agreement”) and cured existing events of default under the Facility Agreement.

 

The Company believes that these actions, combined with additional actions included in its operating plan, will result in improved cash flows from operations, provided the significant uncertainties described in the first section of this footnote are successfully resolved. These additional actions include, among other things, the following:  

 

Completing second-generation ground infrastructure upgrades that will permit the Company to offer a new suite of consumer and enterprise products that leverage the Company’s new, inexpensive chip architecture and enhanced handset and gateway functionality.

 

Negotiating agreements with third parties to restart operations at certain existing Globalstar gateways to make coverage in additional areas commercially viable.

 

Continuing to pursue numerous opportunities in the field of aviation, including next-generation “space-based” air traffic management services, in association with the Company’s technology partner, ADS-B Technologies, LLC.

 

  Continuing to control operating expenses while redirecting available resources to the marketing and sale of product offerings.

 

5
 

 

Improving its key business processes and leveraging its information technology platform.

 

Introducing new and innovative Simplex, SPOT and Duplex products to the market that will further drive sales volume and revenue by continuing to target traditional MSS vertical markets as well as the consumer mass market.

 

Continuing the Company’s ongoing petition before the FCC to utilize the Company’s MSS spectrum for terrestrial wireless services, including broadband services. On November 1, 2013, the FCC released proposed rules for Globalstar terrestrial broadband services over 22 MHz of spectrum.

 

3. PROPERTY AND EQUIPMENT

 

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

  

   September 30,   December 31, 
   2013   2012 
Globalstar System:          
Space component          
Second-generation satellites in service  $1,212,234   $934,900 
Prepaid long-lead items   17,040    17,040 
Ground component   48,581    49,089 
Construction in progress:          
Space component   33,155    299,209 
Ground component   109,384    84,423 
Other   799    880 
Total Globalstar System   1,421,193    1,385,541 
Internally developed and purchased software   15,023    14,414 
Equipment   12,996    12,800 
Land and buildings   3,837    4,003 
Leasehold improvements   1,507    1,512 
    1,454,556    1,418,270 
Accumulated depreciation and amortization   (267,268)   (203,114)
   $1,187,288   $1,215,156 

 

Amounts in the above table consist primarily of costs incurred related to the construction of the Company’s second-generation constellation and ground upgrades. Amounts included in the Company’s construction in progress - space component balance as of September 30, 2013 consist primarily of costs related to a spare second-generation satellite that is capable of being included in a future launch of satellites. See Note 8 for further discussion of the Company’s current contractual obligations.

 

Capitalized Interest and Depreciation Expense

 

The following tables summarize capitalized interest for the periods indicated below (in thousands):

 

   As of 
   September 30,   December 31, 
   2013   2012 
Total interest capitalized  $231,026   $216,477 

 

   Three Months Ended   Nine Months Ended 
   September 30, 
2013
   September 30, 
2012
   September 30, 
2013
   September 30, 
2012
 
Interest cost eligible to be capitalized  $13,119   $13,777   $38,851   $43,411 
Interest cost recorded in interest expense, net   (10,151)   (5,543)   (24,302)   (10,239)
Net interest capitalized   2,968    8,234    14,549    33,172 

 

6
 

 

The following table summarizes depreciation expense for the periods indicated below (in thousands):

 

   Three Months Ended   Nine Months Ended 
   September 30, 
2013
   September 30, 
2012
   September 30, 
2013
   September 30, 
2012
 
Depreciation expense  $23,961   $17,964   $65,622   $47,542 

 

4. LONG-TERM DEBT

 

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

 

   September 30, 2013   December 31, 2012 
   Principal   Carrying   Principal   Carrying 
   Amount   Value   Amount   Value 
Facility Agreement  $586,342   $586,342   $585,670   $585,670 
Thermo Loan Agreement   58,569    20,488    53,499    49,822 
5.75% Convertible Senior Unsecured Notes   -    -    71,804    70,204 
8.00% Convertible Senior Notes Issued in 2013   47,570    25,547    -    - 
5.0% Convertible Senior Unsecured Notes   25,199    11,959    40,920    16,701 
8.00% Convertible Senior Unsecured Notes Issued in 2009   49,665    31,354    48,228    28,632 
Total Debt   767,345    675,690    800,121    751,029 
Less: Current Portion   -    -    657,474    655,874 
Long-Term Debt  $767,345   $675,690   $142,647   $95,155 

 

The above table represents the principal amount and carrying value of long-term debt at September 30, 2013 and December 31, 2012. The principal amounts shown above include payment of in kind interest, if any. The carrying value is net of any discounts to the loan amounts at issuance, including accretion, as further described below.

 

Facility Agreement

 

 The Company’s Facility Agreement, as described below, was amended and restated in August 2013 and is scheduled to mature in December 2022. Semi-annual principal repayments are scheduled to begin in December 2014. The facility bears interest at a floating LIBOR rate plus a margin of 2.75% through June 2017, increasing by an additional 0.5% each year to a maximum rate of LIBOR plus 5.75%. Ninety-five percent of the Company’s obligations under the Facility Agreement are guaranteed by COFACE, the French export credit agency. The Company’s obligations under the Facility Agreement 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 the Company 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 Facility Agreement contains customary events of default and requires that the Company satisfy various financial and nonfinancial covenants. The Company was in compliance with all covenants as of September 30, 2013.

 

The Facility Agreement requires the Company to maintain a total of $37.9 million in a debt service reserve account. The use of the funds in this account is restricted to making principal and interest payments under the Facility Agreement. As of September 30, 2013, the balance in the debt service reserve account was $37.9 million and classified as restricted cash.

 

Former Terms of Facility Agreement

 

In 2009, the Company entered into 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 agent for the Company’s Facility Agreement. Prior to its amendment and restatement in 2013, the Facility Agreement had a maturity date of 84 months after the first principal repayment date, as amended. Semi-annual principal repayments were scheduled to begin on June 30, 2013, as amended. The Facility Agreement bore interest at a floating LIBOR rate, plus a margin of 2.25% through December 2017 increasing to 2.40% thereafter.

 

The Facility Agreement required the Company to maintain a total of $46.8 million in a debt service reserve account. The use of the funds in this account was restricted to making principal and interest payments under the Facility Agreement. The minimum required balance, not to exceed $46.8 million, fluctuated over time based on the timing of principal and interest payment dates. In December 2012, the amount required to be funded into the debt service reserve account was reduced by approximately $8.9 million due to the timing of the first principal repayment date scheduled for June 2013. In January 2013, the agent for the Facility Agreement permitted the Company to withdraw from the debt service reserve account $8.9 million that was in excess of the required balance to enable the Company to pay capital expenditure costs from the fourth launch of its second-generation satellites.

 

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The Facility Agreement contained customary events of default and required that the Company satisfy various financial and nonfinancial covenants. As a result of the Thales arbitration ruling and the subsequent settlement agreements reached with Thales related to the arbitration ruling in 2012, the lenders concluded that events of default had occurred under the Facility Agreement. The Company was also in default of certain other financial and nonfinancial covenants, including, but not limited to, lack of payment of principal in June 2013 in accordance with the terms of the Facility Agreement, minimum required funding for the Company’s debt service account, and in-orbit acceptance of all of its second-generation satellites by April 2013. As of June 30, 2013, the borrowings were shown as current on the Company’s condensed consolidated balance sheet in accordance with applicable accounting rules. The Company also projected that it would not be in compliance with certain future financial and nonfinancial covenants specified under the Facility Agreement. These events of default were waived or cured by the amendment and restatement of the Facility Agreement.

 

Amended and Restated Facility Agreement

 

As previously disclosed, on July 31, 2013, the Company entered into the GARA with Thermo, the Company’s domestic subsidiaries (the “Subsidiary Guarantors”), a syndicate of bank lenders, including BNP Paribas, Société Générale, Natixis, Credit Agricole Corporate and Investment Bank and Credit Industrial et Commercial as arrangers and BNP Paribas as the security agent and COFACE Agent, providing for the amendment and restatement of the Facility Agreement and certain related credit documents. The GARA became effective on August 22, 2013 and, among other things, waived all of the Company’s defaults under the Facility Agreement and restructured the financial covenants.

 

Pursuant to the GARA,

 

· In August 2013, Globalstar paid the lenders a restructuring fee plus an additional underwriting fee to COFACE in the aggregate amount of approximately $13.9 million, representing 40% of the total restructuring and underwriting fee, the balance of which is due no later than December 31, 2017. Globalstar also paid all outstanding incurred transaction expenses for the Lenders. The remaining $20.8 million due to the lenders no later than December 31, 2017 is included in noncurrent liabilities on the September 30, 2013 condensed consolidated balance sheet.

 

· In August 2013, Globalstar drew the remaining approximately $0.7 million not previously borrowed under the Facility Agreement for certain milestone payments due to Thales for the construction of its second-generation satellites.

 

· In August 2013, all amounts remaining under the Thermo Contingent Equity Account (approximately $1.1 million) and approximately $0.2 million in the Debt Service Reserve Account were paid to the Company’s launch services provider for the account of Globalstar to pay certain costs for the launch of the Company’s second-generation satellites.

 

· Thermo confirmed its obligations under the Equity Commitment, Restructuring and Consent Agreement dated as of May 20, 2013   to make, or arrange for third parties to make, cash contributions to the Company in exchange for equity, subordinated convertible debt or other equity-linked securities, of $20.0 million on or prior to December 26, 2013, and an additional amount of up to $20 million on or prior to December 31, 2014. See further discussion below on the details of the Consent Agreement and subsequent cash contributions to Globalstar.

 

· The Lenders waived all existing defaults or events of default under the Facility Agreement.

 

The GARA made the following changes to the terms of the Facility Agreement:

 

· The initial principal payment date, formerly June 30, 2013, was postponed to December 31, 2014, and the final maturity date was extended from June 30, 2020 to December 31, 2022.

 

· The remaining principal payments, with the final payment due December 31, 2022, were also restructured, resulting in an aggregate postponement of $235.3 million in principal payments through 2019.

 

· The annual interest rate increased by 0.5% to LIBOR plus 2.75% through July 1, 2017, and increases by an additional 0.5% each year thereafter to a maximum rate of LIBOR plus 5.75%.

 

· Mandatory prepayments were expanded in specified circumstances and amounts, including if the Company generates excess cash flow, monetizes its spectrum rights, receives the proceeds of certain asset dispositions or receives more than $145.0 million from the sale of additional debt or equity securities (excluding the Thermo commitments described above and up to $19.5 million under the Company’s equity line with Terrapin.).

 

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· The financial covenants were modified, including changing the amount of permitted capital expenditures, reducing the required minimum liquidity amount from $5.0 million to $4.0 million, restructuring the other existing financial covenants to correspond to the Company’s revised business plan reflecting the delays in delivery of the Company’s second-generation satellites, and adding a new covenant with respect to the Company’s interest coverage ratio.

 

· The definition of Change of Control was amended to require a mandatory prepayment of the entire facility if Thermo and certain of its affiliates own less than 51% of the Company’s common stock.

 

· The required balance of the Debt Service Reserve Account was fixed at the current amount of approximately $37.9 million for the length of the Facility Agreement.

 

· Any new subordinated indebtedness of the Company may not mature or pay cash interest prior to the final maturity date of the Facility Agreement.

 

· The Company, while the Facility Agreement is outstanding, is prohibited from paying any cash dividends or repaying any principal or interest with respect to its indebtedness to Thermo under the Thermo Loan Agreement.

 

· The Company is prohibited from amending its material agreements without the lenders’ prior consent.

 

· An event of default was added if any litigation against the Company results in a final judgment that imposes a material liability that was not anticipated by the Company’s business plan.

 

The Company evaluated the GARA under applicable accounting guidance and determined that the amendment and restatement of the Company’s Facility Agreement was a modification of the former indebtedness. As a result of the modification of the Facility Agreement, all financing costs paid to the Company’s legal and other advisors, a total of $0.3 million, was recorded in other income and expense in the Company’s condensed consolidated statements of operations for the three months ended September 30, 2013. Financing costs paid to the lenders were capitalized as a deferred asset on the Company’s condensed consolidated balance sheet as of September 30, 2013 and will be amortized using the effective interest rate method to interest expense through the maturity of the Facility Agreement.

 

Contingent Equity Agreement

 

The Company has a Contingent Equity Agreement with Thermo whereby Thermo agreed to deposit $60.0 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 had the right to make draws from this account if and to the extent it had an actual or projected deficiency in its ability to meet obligations due within a forward-looking 90-day period. 

 

The Contingent Equity Agreement provided that the Company would pay Thermo an availability fee of 10% per year for maintaining funds in the contingent equity account. This annual fee was payable solely in warrants to purchase common stock at $0.01 per share with a five-year exercise period from issuance. The Company determined that the warrants issued in conjunction with the availability fee were derivatives and recorded the value of the derivatives as a component of other non-current liabilities, at issuance. The offset was recorded in other assets and was amortized over the one-year availability period. The warrants issued on June 19, 2012 were not subject to a reset provision subsequent to issuance and are therefore not considered a derivative instrument. The value of the warrants issued was recorded as equity and the offset was recorded in other assets and was amortized over the one-year availability period.

 

When the Company made draws on the contingent equity account, it issued Thermo shares of common stock calculated using a price per share equal to 80% of the average closing price of the common stock for the 15 trading days immediately preceding the draw. The 20% discount on the value of the shares issued to Thermo is treated as a deferred financing cost and is amortized over the remaining term of the Facility Agreement. The Company has drawn the entire $60.0 million from this account as well as interest earned from the funds previously held in this account of approximately $1.1 million.

 

Since the origination of the Contingent Equity Agreement, the Company has issued to Thermo warrants to purchase 41,467,980 shares of common stock for the annual availability fee and subsequent resets due to provisions in the Contingent Equity Agreement and 160,916,223 shares of common stock resulting from the Company’s draws on the contingent equity account pursuant to the terms of the Contingent Equity Agreement. As of September 30, 2013, the Company had not yet issued 2,133,656 shares of nonvoting common stock to Thermo from the $1.1 million draw in August 2013 from the interest earned on the contingent equity account. The total fair value of these shares of $1.3 million was recorded as a future equity issuance in the stockholders’ equity section on the Company’s condensed consolidated balance sheet as of September 30, 2013, which represented the $1.1 million of interest and $0.2 million of deferred financing costs for the value of the 20% discount on the shares to be issued to Thermo. As of September 30, 2013, no warrants issued in connection with the Contingent Equity Agreement had been exercised.

 

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No voting common stock is issuable to Thermo or any of its affiliates 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.

  

Thermo Loan Agreement

 

The Company has an Amended and Restated Loan Agreement (the “Loan Agreement”) with Thermo whereby Thermo agreed to lend the Company $25.0 million for the purpose of funding the debt service reserve account required under the Facility Agreement. In 2011, this loan was increased to $37.5 million. 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. Amounts deposited in the debt service reserve account are restricted to payments due under the Facility Agreement, unless otherwise authorized by the lenders.

 

The loan accrues interest at 12% per annum, which is 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, if the Company has a change in control or if any acceleration of the maturity of the loans under the Facility Agreement occurs.

 

As additional consideration for the loan, the Company issued to Thermo a warrant to purchase 4,205,608 shares of common stock at $0.01 per share with a five-year exercise period. No voting 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. The Company may issue nonvoting common stock in lieu of common stock to the extent issuing voting common stock would cause Thermo and its affiliates to exceed this 70% ownership level. The Company determined that the warrant was an equity instrument and recorded it as a part of stockholders’ equity with a corresponding debt discount which was netted against the principal amount of the loan. The Company accreted the debt discount associated with the warrant using an effective interest method to interest expense over the term of the loan agreement prior to the amendment and restatement as discussed below. As of September 30, 2013, $21.1 million of interest was outstanding; this amount is included in long-term debt on the Company’s condensed consolidated balance sheet.

 

As previously disclosed, in connection with the amendment and restatement of the Company’s Facility Agreement, the Company also amended and restated the Loan Agreement in July 2013. The Amended and Restated Loan Agreement made the following changes:

 

· Provided that the indebtedness would be represented by a promissory note.

 

· Provided that if a Fundamental Change (as defined in the Fourth Supplemental Indenture with respect to the 8% Notes issued in 2013) occurs prior to the repayment of the indebtedness, the Company would pay Thermo an amount equal to the Fundamental Make-Whole Amount (as defined in that indenture).

 

· Provided that the indebtedness will be convertible into common stock of Globalstar on substantially the same terms as the 8.00% Notes Issued in 2013, excluding the conversion features on special conversion dates as defined in the Indenture.

  

The terms of the amendment and restatement were approved by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors. The committee was represented by independent legal counsel.

 

Based on the Company’s evaluation of the amended and restated Loan Agreement, this transaction was determined to be an extinguishment of the debt under the prior Loan Agreement. The Company recorded a loss on the extinguishment of this debt of $66.1 million in its condensed consolidated statement of operations during the third quarter of 2013. This loss represents the difference between the fair value of the Loan Agreement, as amended and restated, and its carrying value just prior to amendment and restatement. See Note 6 for further discussion on the fair value of this instrument.

 

The Company evaluated the various embedded derivatives within the Loan Agreement. The Company determined that the conversion option and the contingent put feature upon a fundamental change required bifurcation from the Loan Agreement. The conversion option and the contingent put feature were not deemed clearly and closely related to the Loan Agreement and were separately accounted for as a standalone derivative. The Company recorded this compound embedded derivative liability as a non-current liability on its condensed consolidated balance sheet with a corresponding debt discount which is netted against the face value of the Loan Agreement.

 

 The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense through the maturity of the Loan Agreement 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 in the condensed consolidated statements of operations. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model.

 

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The Company netted the debt discount associated with the compound embedded derivative against the fair value of the Loan Agreement to determine the carrying amount of the Loan Agreement. The accretion of the debt discount will increase the carrying amount of the debt through the maturity of the Loan Agreement. The Company allocated the fair value at issuance as follows (in thousands):

 

Loan Agreement  $18,958 
Compound embedded derivative liability   101,114 
Fair value of Loan Agreement  $120,072 

 

5.75% Convertible Senior Unsecured Notes

 

In 2008, the Company issued $150.0 million aggregate principal amount of 5.75% Notes, which were subject to repurchase by the Company for cash at the option of the holders in whole or part on April 1, 2013 at a purchase price equal to 100% of the principal amount ($71.8 million aggregate principal was outstanding at April 1, 2013) of the 5.75% Notes, plus accrued and unpaid interest, if any. 

 

On March 29, 2013, U.S. Bank National Association, the Trustee under the Indenture and the First Supplemental Indenture governing the 5.75% Notes, each dated as of April 15, 2008, between the Company and the Trustee (collectively, as amended and supplemented or otherwise modified, the "Indenture"), notified the Company in writing that holders of approximately $70.7 million principal amount of 5.75% Notes had exercised their purchase rights pursuant to the Indenture. Under the Indenture, the Company was required to deposit with the Trustee on April 1, 2013, the purchase price of approximately $70.7 million in cash to effect the repurchase of the 5.75% Notes from the exercising holders. The Company did not have sufficient funds to pay the purchase price when due, which constituted an event of default under the Indenture.

 

In addition, the Indenture also required that, on April 1, 2013, the Company pay interest on the 5.75% Notes in the aggregate amount of approximately $2.1 million for the six months ended March 31, 2013. The Company did not make this payment. Under the Indenture, failure to pay this interest by April 30, 2013 also constituted an event of default.

 

As discussed below, these events of default were cured pursuant to the Exchange Agreement transactions consummated on May 20, 2013.

 

Exchange Agreement

 

On May 20, 2013, the Company entered into an Exchange Agreement with the beneficial owners and investment managers for beneficial owners (the “Exchanging Note Holders”) of approximately 91.5% of its outstanding 5.75% Notes and completed the transactions contemplated by the Exchange Agreement.

 

Pursuant to the Exchange Agreement, the Exchanging Note Holders surrendered their 5.75% Notes (the “Exchanged Notes”) to the Company for cancellation in exchange for:

 

· Approximately $13.5 million in cash, with respect to the principal amount of the Exchanged Notes, plus approximately $0.5 million in cash, equal to all accrued and unpaid interest on the Exchanged Notes from April 1, 2013 to the closing;
· Approximately 30.3 million shares of voting common stock of the Company; and  
· Approximately $54.6 million principal amount of the Company’s new 8.00% Convertible Senior Notes due April 1, 2028 (the “8.00% Notes Issued in 2013”), with an initial conversion price of $0.80 per share, subject to adjustment as described below.

 

In the Exchange Agreement, the Company also agreed that, if the Company grants certain liens to Thermo or its affiliates in connection with future financing transactions, the Exchanging Note Holders may participate in such transactions in an amount up to 50% of the participation of Thermo and its affiliates.

 

Pursuant to the Exchange Agreement, the Company also cured outstanding defaults under the 5.75% Notes by:

 

· Cancelling the Exchanged Notes as described above;  
· Depositing with the Trustee approximately $2.1 million, an amount equal to the interest due on all of the 5.75% Notes on April 1, 2013 and accumulated interest thereon, for distribution to the holders of record of the 5.75% Notes as of March 15, 2013;

 

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· Depositing with the Trustee approximately $6.3 million, an amount equal to the principal amount of the 5.75% Notes (other than the Exchanged Notes) and interest thereon from April 1, 2013 to June 26, 2013 and directing the Trustee to pay such amounts to the holders of the 5.75% Notes (other than the Exchanged Notes); and
· Redeeming the remaining 5.75% Notes.  

 

On May 20, 2013, the Company agreed to redeem the remaining 5.75% Notes for cash equal to their principal amount. 

 

Based on the Company’s evaluation of the exchange transaction, the Exchange Agreement was determined to be an extinguishment of the 5.75% Notes. As a result of this exchange, the Company recorded a loss on the extinguishment of debt of $47.2 million in its condensed consolidated statement of operations during the second quarter of 2013. This loss represented the difference between the carrying value of the 5.75% Notes and the fair value of the consideration given in the exchange (including the new 8.00% Notes Issued in 2013, cash payments to both exchanging and non-exchanging holders, equity issued to the holders and other fees incurred in the exchange). See Note 6 for further discussion on the fair value of this instrument.

 

The Consent Agreement

 

To obtain the lenders’ consent to the transactions contemplated by the Exchange Agreement, pursuant to the Consent Agreement, Thermo agreed that it would make, or arrange for third parties to make, cash contributions to the Company in exchange for equity, subordinated convertible debt or other equity-linked securities as follows:

 

· At the closing of the exchange transaction and thereafter each week until no later than July 31, 2013, an amount sufficient to enable the Company to maintain a consolidated unrestricted cash balance of at least $4.0 million;
· At the closing of the exchange transaction, $25.0 million to satisfy all cash requirements associated with the exchange transaction, including agreed principal and interest payments to the holders of the 5.75% Notes as contemplated by the Exchange Agreement, with any remaining portion being retained by the Company for working capital and general corporate purposes;
· Contemporaneously with, and as a condition to the closing of, any restructuring of the Facility Agreement, $20.0 million (less any amount contributed pursuant to the commitment described above with respect to the Company’s minimum cash balance);
· Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 26, 2013, $20.0 million; and
· Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 31, 2014, $20.0 million, less the amount by which the aggregate amount of cash received by the Company under the first, third and fourth commitments described above exceeds $40 million.  

 

In accordance with the terms of the Common Stock Purchase Agreement and Common Stock Purchase and Option Agreement discussed below, as of September 30, 2013, Thermo has contributed a total of $51.5 million to the Company in exchange for 145.9 million shares of the Company’s nonvoting common stock. As of September 30, 2013, an additional $8.8 million had been contributed to the Company through warrant exercises and other equity issuances, reducing Thermo’s remaining commitment to $24.7 million.

 

The Common Stock Purchase Agreement

 

On May 20, 2013, the Company and Thermo entered into a Common Stock Purchase Agreement pursuant to which Thermo purchased 78,125,000 shares of the Company’s common stock for $25.0 million ($0.32 per share). Thermo also agreed to purchase additional shares of common stock at $0.32 per share as and when required to fulfill its equity commitment described above to maintain the Company’s consolidated unrestricted cash balance at not less than $4.0 million until the earlier of July 31, 2013 and the closing of a restructuring of the Facility Agreement. In furtherance thereof, at the closing of the transactions contemplated by the Exchange Agreement, Thermo purchased an additional 15,625,000 shares of common stock for an aggregate purchase price of $5.0 million. In June 2013, Thermo purchased an additional 28,125,000 shares of common stock for an aggregate purchase price of $9.0 million pursuant to the Common Stock Purchase Agreement. Pursuant to its commitment, Thermo invested a further $6.0 million on July 29, 2013 and $6.5 million on August 19, 2013, on terms later determined by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors as described below.

 

During the second quarter of 2013, Thermo purchased approximately 121.9 million shares of the Company’s common stock pursuant to the Common Stock Purchase Agreement for an aggregate $39.0 million. For the three months ended June 30, 2013, the Company recognized a loss on the sale of these shares of approximately $14.0 million (included in other income/expense on the condensed consolidated statement of operations), representing the difference between the purchase price and the fair value of the Company’s common stock (measured as the closing stock price on the date of each sale). Pursuant to the Common Stock Purchase Agreement, the shares of common stock are intended to be shares of non-voting common stock. As of May 20, 2013, the Company’s certificate of incorporation did not provide for sufficient shares of authorized but unissued non-voting common stock. The Company recorded the fair value of these shares as a future equity issuance in the stockholders’ equity section of the Company’s condensed consolidated balance sheet as of June 30, 2013. On July 8, 2013, the Company filed an amendment to its certificate of incorporation increasing the number of authorized shares of non-voting common stock by 265.0 million shares to a total of 400.0 million shares and subsequently issued nonvoting shares to Thermo in exchange for the payments previously made under the Common Stock Purchase Agreement. These shares were subsequently recorded in common stock and additional paid-in capital in the third quarter of 2013.

 

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The terms of the Common Stock Purchase Agreement were approved by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors. The committee, which was represented by independent legal counsel, determined that the terms of the Common Stock Purchase Agreement were fair and in the best interests of the Company and its shareholders.

 

The Common Stock Purchase and Option Agreement

 

On October 14, 2013, the Company and Thermo entered into a Common Stock Purchase and Option Agreement pursuant to which Thermo agreed to purchase 11,538,461 shares of the Company’s non-voting common stock at a purchase price of $0.52 per share in exchange for the $6.0 million invested in July and an additional $20 million, or 38,461,538 shares, in exchange for the $6.5 million funded in August and an incremental $13.5 million at a purchase price of $0.52 per share as and when requested to do so by the special committee through November 28, 2013. Thermo further agreed to purchase, upon the request of the special committee prior to December 26, 2013, up to $11.5 million of additional shares of non-voting common stock at a price equal to 85% of the average closing price of the voting common stock during the ten trading days immediately preceding the date of the special committee’s request.

 

During the third quarter of 2013, Thermo purchased approximately 24.0 million shares of the Company’s common stock pursuant to the terms of the Common Stock Purchase and Option Agreement for an aggregate purchase price of $12.5 million. For the three months ended September 30, 2013, the Company recognized a loss on the sale of these shares of approximately $2.4 million (included in other income/expense on the condensed consolidated statement of operations), representing the difference between the purchase price and the fair value of the Company’s common stock (measured as the closing stock price on the date of each sale). As the terms for the stock purchased by Thermo had not been determined as of September 30, 2013, the Company recorded the fair value of these shares as a future equity issuance in the stockholders’ equity section of the Company’s condensed consolidated balance sheet as of September 30, 2013. On October 14, 2013, the Common Stock Purchase and Option Agreement was signed, and shares of nonvoting stock were issued to Thermo and subsequently recorded in common stock and additional paid-in capital in the fourth quarter of 2013.

 

The terms of the Common Stock Purchase and Option Agreement were approved by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors. The committee, which was represented by independent legal counsel, determined that the terms of the Common Stock Purchase and Option Agreement were fair and in the best interests of the Company and its shareholders.

 

Share Lending Agreement

 

Concurrently with the 2008 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 was required to 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 was required to be returned to the Company. At the Company’s election, the Borrower was permitted to deliver cash equal to the market value of the corresponding Borrowed Shares instead of returning to the Company the Borrowed Shares otherwise required by conversions of 5.75% Notes.

 

Pursuant to and upon the terms of the Share Lending Agreement, the Company issued and loaned the Borrowed Shares to the Borrower as a share loan. The Borrowing Agent also acted as an underwriter with respect to the Borrowed Shares, which were 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, could 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.

 

During July 2013, in connection with the exchange or redemption of all of the 5.75% Notes, the Company and the Borrower terminated the Share Lending Agreement. In connection with this termination, the Borrower returned 10.2 million Borrowed Shares to Globalstar and paid approximately $4.4 million in cash for the remaining 7.1 million Borrowed Shares. As of December 31, 2012, approximately 17.3 million Borrowed Shares are outstanding. At September 30, 2013, the Share Lending Arrangement had been terminated, and all Borrowed Shares had been either returned to the Company or purchased by the Borrower.

 

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8.00% Convertible Senior Notes Issued in 2013

 

On May 20, 2013, pursuant to the Exchange Agreement, the Company issued $54.6 million aggregate principal amount of 8.00% Convertible Senior Notes (the “8.00% Notes Issued in 2013”) to the Exchanging Note Holders. The 8.00% Notes Issued in 2013 are convertible into shares of common stock at an initial conversion price of $0.80 per share of common stock, or 1,250 shares of the Company’s common stock per $1,000 principal amount of the 8.00% Notes Issued in 2013, subject to adjustment as provided in the Fourth Supplemental Indenture between the Company and U.S. Bank National Association, as Trustee, (the “New Indenture”). The conversion price of the 8.00% Notes Issued in 2013 will be adjusted in the event of certain stock splits or extraordinary share distributions, or as a reset of the base conversion and exercise price as described below.

  

The 8.00% Notes Issued in 2013 are senior unsecured debt obligations of the Company and rank pari passu with the Company’s existing 5.0% Convertible Senior Unsecured Notes and 8.00% Convertible Senior Unsecured Notes Issued in 2009. There is no sinking fund for the 8.00% Notes Issued in 2013. The 8.00% Notes Issued in 2013 will mature on April 1, 2028, subject to various call and put features as described below, and bear interest at a rate of 8.00% per annum. Interest on the 8.00% Notes Issued in 2013 is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2013. Interest is paid in cash at a rate of 5.75% per annum and additional 8.00% Notes Issued in 2013 at a rate of 2.25% per annum.

  

Subject to certain conditions set forth in the New Indenture, including prior approval of the Majority Lenders (as defined in the Facility Agreement), the Company may redeem the 8.00% Notes Issued in 2013, in whole or in part, on December 10, 2013, if the average of the volume-weighted prices of the Company’s common stock for the 30-day period ending November 29, 2013, is less than $0.20, at a price equal to the principal amount of the 8.00% Notes Issued in 2013 to be redeemed plus an amount equal to 32% of such principal amount minus all interest which is paid on the 8.00% Notes Issued in 2013 prior to their redemption. The Company may also redeem the 8.00% Notes Issued in 2013, with the prior approval of the Majority Lenders, in whole or in part, at any time on or after April 1, 2018, at a price equal to the principal amount of the 8.00% Notes Issued in 2013 to be redeemed plus all accrued and unpaid interest thereon.

 

A holder of 8.00% Notes Issued in 2013 has the right, at the Holder’s option, to require the Company to purchase some or all of the 8.00% Notes Issued in 2013 held by it on each of April 1, 2018 and April 1, 2023 at a price equal to the principal amount of the 8.00% Notes Issued in 2013 to be purchased plus accrued and unpaid interest.

 

A holder of the 8.00% Notes Issued in 2013 has the right, at the holder’s option, to require the Company to purchase some or all of the 8.00% Notes Issued in 2013 held by it at any time if there is a Fundamental Change. A Fundamental Change occurs if the Company’s common stock ceases to be traded on a stock exchange or an established over-the-counter market or there is a change of control of the Company. If there is a Fundamental Change, the price of any 8.00% Notes Issued in 2013 purchased by the Company will be equal to its principal amount plus accrued and unpaid interest and a Fundamental Change Make-Whole Amount calculated as provided in the New Indenture.

 

Subject to the procedures for conversion and other terms and conditions of the New Indenture, a holder may convert its 8.00% Notes Issued in 2013 at its option at any time prior to the close of business on the business day immediately preceding April 1, 2028, into shares of common stock (or, at the option of the Company, cash in lieu of all or a portion thereof, provided that, under the Facility Agreement, the Company may pay cash only with the consent of the Majority Lenders). Upon conversion, the holder will be entitled to receive shares of common stock, cash or a combination thereof (provided that, under the Facility Agreement, the Company may pay cash only with the consent of the Majority Lenders), in such amounts and subject to terms and conditions set forth in the New Indenture. The Company will pay cash in lieu of fractional shares otherwise issuable upon conversion of the 8.00% Notes Issued in 2013 as specified in the Indenture.

 

A holder may elect to convert up to 15% of its 8.00% Notes Issued in 2013 on each of July 19, 2013 and March 20, 2014. If a holder elects to convert on either of those dates, it will receive, at the Company’s option, either cash equal to the par value of the 8.00% Notes Issued in 2013 plus accrued interest (provided that, under the Facility Agreement, the Company may pay cash only with the consent of the Majority Lenders) or shares of the Company’s common stock equal to the principal amount of the 8.00% Notes Issued in 2013 to be converted plus accrued interest divided by the lower of the average price of the common stock in a specified period and $0.50. On July 19, 2013, $7.0 million of principal amount (approximately 12.9% of the outstanding principal amount) of 8.00% Notes Issued in 2013 were converted, resulting in the issuance of 14.3 million shares. There have been no other conversions as of September 30, 2013.

 

14
 

 

The base conversion rate may be adjusted on each of April 1, 2014 and April 1, 2015 based on the average price of the Company’s common stock in the 30-day period ending on that date. If the base conversion rate is adjusted on April 1, 2014, the Company also will provide additional consideration to the holders of the 8.00% Notes Issued in 2013 in an amount equal to 25% of the principal amount of the outstanding 8.00% Notes Issued in 2013, payable in equity or cash at the Company’s election (provided, under the Facility Agreement, that the Company may pay cash only with the consent of the Majority Lenders). That consideration will not reduce the principal amount of the 8.00% Notes Issued in 2013 or any interest otherwise payable on the 8.00% Notes Issued in 2013.

 

The New Indenture also provides for other customary adjustments of the base conversion rate, including upon the Company’s sale of additional equity securities at a price below the then applicable conversion price. If a 8.00% Note Issued in 2013 is converted after May 20, 2014, the holder is entitled to receive additional shares of common stock as a make-whole premium equal to the first three years of interest on the Notes (i.e. 24% of the Notes less any interest already paid through the date of the conversion) as provided in the New Indenture. Due to common stock issuances by the Company since May 20, 2013, the base conversion rate was reduced to $0.75 per share of common stock as of September 30, 2013.

  

The New Indenture provides that the Company and its subsidiaries may not, with specified exceptions, including the liens securing the Facility and liens approved in writing by the Agent, create, incur, assume or suffer to exist any lien on any of their assets, provided that if the Company or any of its subsidiaries creates, incurs or assumes any lien which is junior to the most senior lien securing the Facility Agreement (other than a lien pursuant to a restructuring of the Facility Agreement in which Thermo and its affiliates do not participate as a secured lender), the Company must promptly issue to the holders of the 8.00% Notes Issued in 2013 $3,590,200 (representing 5.0% of the principal amount of the 5.75% Notes outstanding on the date of the Exchange Agreement, which was $71.8 million) of shares of the Company’s common stock. At September 30, 2013, the Company did not believe that a lien will be created that does not meet at least one of the specified exceptions in the New Indenture, and therefore no amount is accrued for this feature at September 30, 2013.

 

The New Indenture requires that on or before December 31, 2013, but subject to the conditions described below, the Company must cause all of its subsidiaries that guaranty the obligations of the Company under the Facility Agreement or any notes of another series issued under the Indenture dated as of April 15, 2008 (the “Base Indenture”) to execute and deliver to the Trustee a guaranty of the Company’s obligations under the 8.00% Notes Issued in 2013 in the form attached to the New Indenture. The subsidiaries’ obligations under the guaranty will be subordinated to their obligations under their guaranty of the Facility Agreement. The execution and delivery of the guaranty is conditioned on the prior completion of the restructuring of the Facility Agreement, the absence of any payment default under the Facility Agreement, and the absence of any breach by Thermo of its obligations to provide funds to the Company (the “Contribution Obligations”) as required by the Consent Agreement (or, as applicable, the anticipated corresponding provision in the Facility Agreement. If the guaranty agreement is not executed and delivered on or before December 31, 2013, the Company must by January 2, 2014, issue to the holders of the 8.00% Notes Issued in 2013 approximately 11.2 million shares of the Company’s common stock. The issuance of these shares will not reduce the principal of the 8.00% Notes Issued in 2013 or interest otherwise payable by the Company with respect to the 8.00% Notes Issued in 2013 and will not relieve its subsidiaries of the obligation to execute and deliver the guaranty at a later date if the conditions described above are then met. As of September 30, 2013, the Company expected its subsidiaries to issue the guarantee required by this provision on or before December 31, 2013, and therefore no amount has been accrued for this feature at September 30, 2013.

 

The New Indenture provides for customary events of default, including without limitation, failure to pay principal or premium on the 8.00% Notes Issued in 2013 when due or to distribute cash or shares of common stock when due as described above; failure by the Company to comply with its obligations and covenants in the New Indenture; default by the Company in the payment of principal or interest on any other indebtedness for borrowed money with a principal amount in excess of $10.0 million, if such indebtedness is accelerated and not rescinded with 30 days; rendering of certain final judgments; failure by Thermo to fulfill the contribution obligations described above; and certain events of insolvency or bankruptcy. If there is an event of default, the Trustee may, at the direction of the holders of 25% or more in aggregate principal amount of the 8.00% Notes Issued in 2013, accelerate the maturity of the 8.00% Notes Issued in 2013. The Company was not in default under the 8.00% Notes Issued in 2013 as of September 30, 2013.

 

The Company evaluated the various embedded derivatives within the New Indenture. The Company determined that the conversion option and the contingent put feature within the New Indenture required bifurcation from the 8.00% Notes Issued in 2013. The conversion option and the contingent put feature were not deemed clearly and closely related to the 8.00% Notes Issued in 2013 and were separately accounted for as a standalone derivative. The Company recorded this compound embedded derivative liability as a non-current liability on its condensed consolidated balance sheet with a corresponding debt discount which is netted against the face value of the 8.00% Notes Issued in 2013.

 

The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense through the first put date of the 8.00% Notes Issued in 2013 (April 1, 2018) using an effective interest rate method. The fair value of the compound embedded derivative liability is being marked-to-market at the end of each reporting period, with any changes in value reported in the condensed consolidated statements of operations. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model.

 

15
 

 

The Company netted the debt discount associated with compound embedded derivative against the fair value of the 8.00% Notes Issued in 2013 to determine the carrying amount of the 8.00% Notes Issued in 2013. The accretion of the debt discount will increase the carrying amount of the debt through April 1, 2018 (the first put date of the 8.00% Notes Issued in 2013). The Company allocated the fair value at issuance as follows (in thousands):

 

Senior notes  $27,890 
Compound embedded derivative liability   56,752 
Fair value of 8.00% Notes Issued in 2013  $84,642 

 

5.00% Convertible Senior Notes

 

In 2011, the Company issued $38.0 million in aggregate principal amount of 5.0% Convertible Senior Unsecured Notes (the “5.0% Notes”) and warrants (the “5.0% Warrants”) to purchase 15,200,000 shares of voting common stock of the Company. The 5.0% Notes are convertible into shares of common stock at an initial conversion price of $1.25 per share of common stock, or 800 shares of the Company’s common stock per $1,000 principal amount of the 5.0% Notes, subject to adjustment in the manner set forth in the Indenture. The 5.0% Notes are guaranteed on a subordinated basis by substantially all of the Company’s domestic subsidiaries (the “Guarantors”), on an unconditional joint and several basis, pursuant to a Guaranty Agreement (the “Guaranty”). The 5.0% Warrants are exercisable until five years after their issuance. The 5.0% Notes and 5.0% Warrants have anti-dilution protection in the event of certain stock splits or extraordinary share distributions, and a reset of the conversion and exercise price on April 15, 2013 if the Company’s common stock is below the initial conversion and exercise price at that time. On April 15, 2013, the base conversion rate for the 5.0% Notes and the exercise price of the 5.0% Warrants were reset to $0.50 and $0.32, respectively.

 

The 5.0% Notes are senior unsecured debt obligations of the Company and rank pari passu with the Company’s existing 8.00% Notes Issued in 2009 and 8.00% Notes Issued in 2013 and are subordinated to the Company’s obligations pursuant to its Facility Agreement. There is no sinking fund for the 5.0% Notes. The 5.0% Notes will mature at the earlier to occur of (i) December 14, 2021, or (ii) six months following the maturity date of the Facility Agreement and bear interest at a rate of 5.0% per annum. Interest on the 5.0% Notes is payable in-kind semi-annually in arrears on June 15 and December 15 of each year. Under certain circumstances, interest on the 5.0% Notes will be payable in cash at the election of the holder if such payments are permitted under the Facility Agreement. The indenture governing the 5.0% Notes contains customary events of default. No event of default existed as of September 30, 2013.

 

Pursuant to the terms of the 5% Notes Indenture, at any time on or after June 14, 2013 and on or prior to Stated Maturity, the closing price of the Globalstar’s common stock has exceeded two hundred percent of the conversion price then in effect for at least thirty consecutive trading days, then, at the option of the Company, all Securities then outstanding shall automatically convert to shares of common stock. The conditions for the automatic conversion were met and the Company elected to convert all outstanding 5.0% Notes on November 7, 2013.

 

The Company evaluated the embedded derivative resulting from the contingent put feature within the Indenture for bifurcation from the 5.0% Notes. The contingent put feature was not deemed clearly and closely related to the 5.0% Notes and was bifurcated as a standalone derivative. The Company recorded this embedded derivative liability as a non-current liability on its condensed consolidated balance sheets with a corresponding debt discount, which is netted against the principal amount of the 5.0% Notes.  The Company is accreting the debt discount associated with the 5.0% Notes and 5.0% Warrants to interest expense over the term of the agreement using the effective interest rate method.

  

As of September 30, 2013, approximately $16.5 million principal amount of 5.0% Notes had been converted resulting in the issuance of 39.0 million shares of Company common stock. As of September 30, 2013 5.0% Warrants had been exercised, which resulted in the Company issuing 5.1 million shares of common stock and receiving $1.5 million.

 

8.00% Convertible Senior Notes Issued 2009

 

In 2009, the Company issued $55.0 million in aggregate principal amount of 8.00% Convertible Senior Unsecured Notes (the “8.00% Notes Issued in 2009”) and warrants (the “8.00% Warrants”) to purchase shares of the Company’s common stock. The 8.00% Notes Issued in 2009 will mature on June 19, 2019 and bear interest at a rate of 8.00% per annum. Interest on the 8.00% Notes Issued in 2009 is payable in the form of additional 8.00% Notes Issued in 2009 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. The 8.00% Notes Issued in 2009 are subordinated to all of the Company’s obligations under the Facility Agreement. The 8.00% Notes Issued in 2009 are the Company’s senior unsecured debt obligations and rank pari passu with the Company’s 5.0% Notes and 8.00% Notes Issued in 2013. The indenture governing the 8.00% Notes Issued in 2009 contains customary events of default. No event of default existed as of September 30, 2013.

 

The Company recorded the conversion rights and features and the contingent put feature embedded within the 8.00% Notes Issued in 2009 as a compound embedded derivative liability on its condensed consolidated balance sheets with a corresponding debt discount, which is netted against the principal amount of the 8.00% Notes Issued in 2009. Due to the cash settlement provisions and reset features in the 8.00% Warrants issued with the 8.00% Notes Issued in 2009, the Company recorded the 8.00% Warrants as an embedded derivative liability on its condensed consolidated balance sheets with a corresponding debt discount, which is netted against the principal amount of the 8.00% Notes Issued in 2009. The Company is accreting the debt discount associated with the 8.00% Notes Issued in 2009 and 8.00% Warrants to interest expense over the term of the Notes using an effective interest rate method.

 

16
 

 

As of September 30, 2013, the current exercise price of the 8.00% Warrants was $0.32 per share of common stock and the base conversion price of the 8.00% Notes Issued in 2009 is $1.19 per share of common stock.

 

As of September 30, 2013 approximately $17.6 million of the 8.00% Notes Issued in 2009 had been converted, resulting in the issuance of approximately 16.1 million shares of common stock and approximately 9.8 million 8.00% Warrants had been exercised, which resulted in the Company issuing 9.4 million shares of common stock and receiving $2.9 million. No 8.00% Notes Issued in 2009 were converted during the nine months ended September 30, 2013.

 

Terrapin Opportunity, L.P. Common Stock Purchase Agreement

 

On December 28, 2012 the Company entered into a Common Stock Purchase Agreement with Terrapin Opportunity, L.P. ("Terrapin") pursuant to which the Company may, subject to certain conditions, require Terrapin to purchase up to $30.0 million of shares of voting common stock over the 24-month term following the effectiveness of a resale registration statement. This type of arrangement is sometimes referred to as a committed equity line financing facility. From time to time over the 24-month term, and in the Company’s sole discretion, the Company may present Terrapin with up to 36 draw down notices requiring Terrapin to purchase a specified dollar amount of shares of voting common stock, based on the price per share per day over 10 consecutive trading days (a "Draw Down Period"). The per share purchase price for these shares equals the daily volume weighted average price of common stock on each date during the Draw Down Period on which shares are purchased, less a discount ranging from 3.5% to 8.0% based on a minimum price that the Company solely specifies. In addition, in the Company’s sole discretion, but subject to certain limitations, the Company may require Terrapin to purchase a percentage of the daily trading volume of its common stock for each trading day during the Draw Down Period. The Company has agreed not to sell to Terrapin a number of shares of voting common stock which, when aggregated with all other shares of voting common stock then beneficially owned by Terrapin and its affiliates, would result in the beneficial ownership by Terrapin or any of its affiliates of more than 9.9% of the then issued and outstanding shares of voting common stock.

 

When the Company makes a draw under the Terrapin equity line agreement, it will issue Terrapin shares of common stock calculated using a price per share as specified in the agreement. As of September 30, 2013 Terrapin had not purchased any shares of common stock. On October 3, 2013, Terrapin purchased 6.1 million shares of voting common stock at a purchase price of $6.0 million pursuant to the terms of the agreement.

 

Warrants Outstanding

 

As a result of the Company’s borrowings described above, as of September 30, 2013 and December 31, 2012 there were warrants outstanding to purchase 107.0 million and 122.5 million shares, respectively, of the Company’s common stock as shown in the table below: 

 

   Outstanding Warrants   Strike Price 
   September 30,
 2013
   December 31, 
2012
   September 30,
 2013
   December 31,
2012
 
Contingent Equity Agreement   41,467,980    41,467,980   $0.01   $0.01 
Thermo Loan Agreement   4,205,608    4,205,608    0.01    0.01 
5.0% Notes (1)   9,600,000    15,200,000    0.32    1.25 
8.00% Notes Issued in 2009 (2)   51,769,358    61,606,706    0.32    0.32 
    107,042,946    122,480,294           

 

  (1) On April 15, 2013, the exercise price of the 5.0% Warrants was reset to $0.32 due to the reset provision in the indenture.
  (2) According to the terms of the indenture, additional 8.00% Warrants may be issued to holders if shares of common stock are issued below the then current warrant strike price.

  

5. DERIVATIVES

 

In connection with certain borrowings disclosed in Note 4, the Company was required to record derivative instruments on its condensed consolidated balance sheets. None of these derivative instruments are designated as a hedge. The following tables disclose the fair values and classification of the derivative instruments on the Company’s condensed consolidated balance sheets (in thousands):

 

17
 

 

   September 30, 2013   December 31, 2012 
Intangible and other assets:          
Interest rate cap  $170   $84 
Total intangible and other assets  $170   $84 
           
Derivative liabilities, current:          
Warrants issued with 8.00% Notes Issued in 2009   (41,539)   - 
           
Derivative liabilities, non-current:          
Compound embedded derivative with 8.00% Notes Issued in 2009  $(41,396)  $(4,163)
Warrants issued with 8.00% Notes Issued in 2009   -    (18,034)
Contingent put feature embedded in the 5.0% Notes   (845)   (2,978)
Compound embedded derivative with 8.00% Notes Issued in 2013   (74,399)   - 
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement   (137,567)   - 
Total derivative liabilities, non-current:   (254,207)   (25,175)
           
Total derivative liabilities, current and non-current  $(295,746)  $(25,175)

 

The following tables disclose the changes in value during the three and nine months ended September 30, 2013 and 2012 recorded as derivative gain (loss) on the Company’s condensed consolidated statement of operations (in thousands):

 

   Three Months Ended 
   September 30, 2013   September 30, 2012 
Interest rate cap  $(30)  $(39)
Compound embedded derivative with 8.00% Notes Issued in 2009   (29,986)   (2,417)
Warrants issued with 8.00% Notes Issued in 2009   (6,323)   (13,963)
Contingent put feature embedded in the 5.0% Notes   848    (54)
Compound embedded derivative with 8.00% Notes Issued in 2013   (25,590)   - 
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement   (36,453)   - 
Total derivative gain (loss)  $(97,534)  $(16,473)

 

   Nine Months Ended 
   September 30, 2013   September 30, 2012 
Interest rate cap  $86   $(161)
Compound embedded derivative with 8.00% Notes Issued in 2009   (37,233)   1,287 
Warrants issued with 8.00% Notes Issued in 2009   (28,949)   (4,031)
Warrants issued in conjunction with contingent equity agreement   -    301 
Contingent put feature embedded in the 5.0% Notes   2,133    42 
Compound embedded derivative with 8.00% Notes Issued in 2013   (26,495)   - 
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement   (36,453)   - 
Total derivative gain (loss)  $(126,911)  $(2,562)

 

Intangible and Other Assets

 

Interest Rate Cap

 

In June 2009, in connection with entering into the Facility Agreement, which provides for interest at a variable rate, the Company entered into five ten-year interest rate cap agreements. The interest rate cap agreements reflect a variable notional amount ranging from $586.3 million to $14.8 million at interest rates that provide coverage to the Company for exposure resulting from escalating interest rates over the term of the Facility Agreement. The interest rate cap provides limits on the six-month Libor rate (“Base Rate”) used to calculate the coupon interest on outstanding amounts on the Facility Agreement and is capped at 5.50% should the Base Rate not exceed 6.5%. Should the Base Rate exceed 6.5%, the Company’s Base Rate will be 1% less than the then six-month Libor rate. The Company paid an approximately $12.4 million upfront fee for the interest rate cap agreements. The interest rate cap did not qualify for hedge accounting treatment, and changes in the fair value of the agreements are included in the condensed consolidated statements of operations.

 

18
 

 

Derivative Liabilities

 

The Company has identified various embedded derivatives resulting from certain features in the Company’s debt instruments. These embedded derivatives required bifurcation from the debt host agreement. All embedded derivatives that required bifurcation, excluding the warrants issued in connection with the Company’s contingent equity agreement (see below for further discussion), are recorded as a derivative liability on the Company’s condensed consolidated balance sheet with a corresponding debt discount netted against the principal amount of the related debt instrument. The Company accretes the debt discount associated with each derivative liability to interest expense over the term of the related debt instrument using an effective interest rate method. The fair value of each embedded derivative liability is marked-to-market at the end of each reporting period with any changes in value reported in its condensed consolidated statements of operations. See below for further discussion for each liability and the features embedded in the debt instrument which required the Company to account for the instrument as a derivative.

 

Compound Embedded Derivative with 8.00% Notes Issued in 2009

 

As a result of the conversion rights and features and the contingent put feature embedded within the 8.00% Notes Issued in 2009, the Company recorded a compound embedded derivative liability on its condensed consolidated balance sheets with a corresponding debt discount which is netted against the principal amount of the 8.00% Notes Issued in 2009. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model.

 

Warrants Issued with 8.00% Notes Issued in 2009

 

Due to the cash settlement provisions and reset features in the 8.00% Warrants issued with the 8.00% Notes Issued in 2009, the Company recorded the 8.00% Warrants as an embedded derivative liability on its condensed consolidated balance sheets with a corresponding debt discount which is netted against the principal amount of the 8.00% Notes Issued in 2009. The Company determined the fair value of the warrant derivative using a Monte Carlo simulation model. As the exercise period for the 8.00% Warrants expires in June 2014, the Company has classified this derivative liability as current on its condensed consolidated balance sheet at September 30, 2013.

 

Warrants Issued in Conjunction with Contingent Equity Agreement

 

Prior to June 19, 2012, the Company determined that the warrants issued in conjunction with the availability fee for the Contingent Equity Agreement were a liability at issuance. The offset was recorded in other non-current assets and was amortized over the one-year availability period. The Company determined the principal amount of the warrant derivative using a Monte Carlo simulation model.

 

On June 19, 2012, the Company issued additional warrants in conjunction with the availability fee for the Contingent Equity Agreement. This tranche of warrants was not subject to a reset provision in the agreement and therefore is not marked-to-market at the end of each reporting period. The Company determined that the warrant was an equity instrument and recorded it as equity on its condensed consolidated balance sheets.

 

Contingent Put Feature Embedded in the 5.0% Notes

 

As a result of the contingent put feature within the 5.0% Notes, the Company recorded a derivative liability on its condensed consolidated balance sheets with a corresponding debt discount which is netted against the principal amount of the 5.0% Notes.  The Company determined the fair value of the contingent put feature derivative using a Monte Carlo simulation model based. 

  

Compound Embedded Derivative with 8.00% Notes Issued in 2013

 

As a result of the conversion option and the contingent put feature within the 8.00% Notes Issued in 2013, the Company recorded a compound embedded derivative liability on its condensed consolidated balance sheet with a corresponding debt discount which is netted against the face value of the 8.00% Notes Issued in 2013. The Company determined the fair value of the compound embedded derivative liability using a Monte Carlo simulation model. 

 

Compound Embedded Derivative with the Amended and Restated Thermo Loan Agreement

 

As a result of the conversion option and the contingent put feature within the Loan Agreement with Thermo entered into in July 2013, the Company recorded a compound embedded derivative liability on its condensed consolidated balance sheet with a corresponding debt discount which is netted against the face value of the Amended and Restated Loan Agreement. The Company determined the fair value of the compound embedded derivative liability using a Monte Carlo simulation model. 

 

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6. FAIR VALUE MEASUREMENTS

 

The Company follows the authoritative guidance for fair value measurements relating to financial and non-financial assets and liabilities, including presentation of required disclosures herein.  This guidance establishes a fair value framework requiring the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities.  Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.  The three levels are defined as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical 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.

 

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).

 

Recurring Fair Value Measurements

 

The following table provides a summary of the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in thousands):

 

   Fair Value Measurements at September 30, 2013: 
   (Level 1)   (Level 2)   (Level 3)   Total
Balance
 
Assets:                    
Interest rate cap  $-   $170   $-   $170 
Total assets measured at fair value  $-   $170   $-   $170 
                     
Liabilities:                    
Derivative Liabilities:                    
Compound embedded derivative with 8.00% Notes Issued in 2009  $-   $-   $(41,396)  $(41,396)
Warrants issued with 8.00% Notes Issued in 2009   -    -    (41,539)   (41,539)
Contingent put feature embedded in 5.0% Notes   -    -    (845)   (845)
Compound embedded derivative with 8.00% Notes Issued in 2013   -    -    (74,399)   (74,399)
Compound embedded derivative with the  Amended and Restated Thermo Loan Agreement   -    -    (137,567)   (137,567)
Total Derivative Liabilities   -    -    (295,746)   (295,746)
                     
Other Liabilities:                    
Liability for contingent consideration   -    -    (2,375)   (2,375)
                     
Total liabilities measured at fair value  $-   $-   $(298,121)  $(298,121)

 

   Fair Value Measurements at December 31, 2012: 
   (Level 1)   (Level 2)   (Level 3)   Total
Balance
 
Assets:                    
Interest rate cap  $-   $84   $-   $84 
Total assets measured at fair value  $-   $84   $-   $84 
                     
Liabilities:                    
Derivative Liabilities:                    
Compound embedded derivative with 8.00% Notes Issued in 2009  $-   $-   $(4,163)  $(4,163)
Warrants issued with 8.00% Notes Issued in 2009   -    -    (18,034)   (18,034)
Contingent put feature embedded in 5.0% Notes   -    -    (2,978)   (2,978)
Total Derivative Liabilities   -    -    (25,175)   (25,175)
                     
Other Liabilities:                    
Liability for contingent consideration   -    -    (3,916)   (3,916)
                     
Total liabilities measured at fair value  $-   $-   $(29,091)  $(29,091)

 

20
 

 

Assets

 

Interest Rate Cap

 

The fair value of the interest rate cap is determined using observable pricing inputs including benchmark yields, reported trades, and broker/dealer quotes at the reporting date. See Note 5 for further discussion.

 

Derivative Liabilities

 

The derivative liabilities in Level 3 include the compound embedded derivative in the 8.00% Notes Issued in 2009, the 8.00% Warrants issued with the 8.00% Notes Issued in 2009, the contingent put feature embedded in the 5.0% Notes, the compound embedded derivative in the 8.00% Notes Issued in 2013 and the compound embedded derivative in the Amended and Restated Loan Agreement with Thermo. The Company marks-to-market these liabilities at each reporting date with the changes in fair value recognized in the Company’s condensed consolidated statements of operations. See Note 5 for further discussion.

 

The significant quantitative Level 3 inputs utilized in the valuation models as of September 30, 2013 and December 31, 2012 are shown in the tables below:

 

   Level 3 Inputs at September 30, 2013: 
   Stock Price
Volatility
   Risk-Free
Interest
Rate
   Note
Conversion
Price
   Warrant
Exercise
Price
   Market Price of
Common Stock
 
Compound embedded derivative with 8.00% Notes Issued in 2009   65 - 100 %   1.3%  $1.19   $N/A   $1.09 
Warrants issued with 8.00% Notes Issued in 2009   100%   0.1%  $N/A   $0.32   $1.09 
Contingent put feature embedded in 5.0% Notes   33 - 106 %   0.03 – 2.64 %  $0.50   $N/A   $1.09 
Compound embedded derivative with 8.00% Notes Issued in 2013   65 - 100 %   1.3 %  $0.75   $N/A   $1.09 
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement   65 - 100 %   2.6 %  $0.75   $N/A   $1.09 

 

   Level 3 Inputs at December 31, 2012:
   Stock Price
Volatility
  Risk-Free
Interest Rate
  Note
Conversion
Price
   Warrant
Exercise  
Price
   Market Price of
Common Stock
 
Compound embedded derivative with 8.00% Notes Issued in 2009  34 -107% 0.02 – 1.78%   $1.59   $N/A   $0.31 
Warrants issued with 8.00% Notes Issued in 2009  34 -107% 0.02 – 1.78%   $N/A   $0.32   $0.31 
Contingent put feature embedded in 5.0% Notes  34 -107% 0.02 – 1.78%   $1.25   $N/A   $0.31 

 

Stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Decreases in expected volatility would generally result in a lower fair value measurement.

 

Assumptions for future issuances of the Company’s common stock are also used in the fair value measurement of the Company’s derivative instruments. The Company is obligated to make certain equity issuances under various agreements, including the earnout agreement with Axonn, the equity line with Terrapin and the Consent Agreement with Thermo. Certain provisions in the Company’s debt instruments may result in adjustments to the current base conversion rates or warrant exercise price if equity is issued at prices lower than the conversion or exercise price then in effect, with certain exclusions. As these prices decrease, the value of the note or warrant to the holder of the instrument increases, thereby increasing the fair value measurement of the derivative liability.

 

Probability of a change of control is another significant unobservable input used in the fair value measurement of the Company’s derivative instruments, excluding the 8.00% Warrants issued with the 8.00% Notes Issued in 2009. Subject to certain restrictions in each indenture, the Company’s debt instruments contain certain provisions whereby holders may require the Company to purchase all or any portion of the convertible debt instrument upon a change of control. A change of control will occur upon certain changes in the ownership of the Company or certain events relating to the trading of the Company’s common stock. The simulated fair value of the derivative liabilities above is sensitive to changes in the assumed probabilities of a change of control. Decreases in the assumed probability of a change of control would generally result in a lower fair value measurement.

 

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In addition to the Level 3 inputs described above, the indentures governing the related debt instrument for each of the derivative liabilities included in the Company’s Level 3 fair value measurements have specific features that impact the valuation of each liability at reporting periods. These features are further described below for each of the Company’s derivative liabilities.

 

Compound Embedded Derivative with 8.00% Notes Issued in 2009

 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded derivative with the 8.00% Notes Issued in 2009 includes payment in kind interest payments, make whole premiums and automatic conversions. Pursuant to the terms of the 8.00% Notes Issued in 2009, the base conversion rate cannot reset to lower than $1.00; therefore if the Company makes future equity issuances at prices below the then current conversion price, this conversion price may be adjusted downward to as low as $1.00.

 

Warrants Issued with 8.00% Notes Issued in 2009

 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the 8.00% Warrants issued with the 8.00% Notes Issued in 2009 includes certain reset features. Pursuant to the terms of the 8.00% Warrants, there is no floor within the reset feature for the exercise price of the 8.00% Warrants; therefore if the Company makes future equity issuances at prices below the current exercise price, this exercise price may be adjusted downward. If the stock price on the issuance date is less than the then current exercise price of the outstanding 8.00% Warrants, additional warrants may be issued, which will increase the fair value of the warrant liability.

 

Contingent Put Feature Embedded in 5.0% Notes

 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the contingent put feature embedded in the Company’s 5.0% Notes includes payment in kind interest and other reset features in the indenture. Pursuant to the terms of the 5% Notes Indenture, if at any time on or after June 14, 2013 and on or prior to Stated Maturity, the closing price of the Globalstar’s common stock has exceeded 200% of the conversion price then in effect for at least 30 consecutive trading days, then, at the option of the Company, all securities then outstanding shall automatically convert to common stock. As a result of the current base conversion price and the Company’s recent stock prices ranges, the fair value measurement has considered this probability, which reduces the fair value measurement of the contingent put feature as conversion could occur prior to change of control of the Company.

 

Compound Embedded Derivative with 8.00% Notes Issued in 2013

 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded derivative within the Company’s 8.00% Notes Issued in 2013 includes payment-in-kind interest payments, make whole premiums, and automatic conversions. Pursuant to the terms of the 8.00% Notes Issued in 2013 Indenture, there are also special distributions and certain put and call features within the notes which impact the valuation model. See Note 4 for further discussion on this feature.

 

Compound Embedded Derivative with Amended and Restated Thermo Loan Agreement

 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded derivative within the Amended and Restated Loan Agreement with Thermo includes payment in kind interest payments, make whole premiums, and automatic conversions.

 

Other Liabilities

 

Liability for Contingent Consideration

 

In connection with the acquisition of Axonn LLC (“Axonn”) in December 2009, the Company is obligated to pay up to an additional $10.8 million in contingent consideration for earnouts based on sales of existing and new products over a five-year earnout period beginning January 1, 2010. The Company will make earnout payments in stock not to exceed 26,684,807 shares of common stock (10% of the Company’s pre-transaction outstanding shares of common stock), but at its option may make payments in cash after 13 million shares have been issued. The Company’s initial estimate of the total earnout expected to be paid was $10.8 million. Since the earnout period started, the Company has made revisions to this estimate, which was $9.4 million at September 30, 2013. Through September 30, 2013, the Company had made $6.6 million in earnout payments by issuing 17,531,459 shares of voting common stock. The liability of $2.4 million recorded at September 30, 2013 represents the present value of the remaining projected earnout payments to be made under the agreement.

 

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The fair value of the accrued contingent consideration was determined using a probability-weighted discounted cash flow approach at the acquisition date and reporting date. The approach is based on significant inputs that are not observable in the market, which are referred to as Level 3 inputs. The fair value is based on the Company reaching specific performance metrics through the remaining earnout period. The change in fair value of the contingent consideration is recorded through accretion expense in the Company’s condensed consolidated statements of operations.

 

The significant unobservable inputs used in the fair value measurement of the Company’s liability for contingent consideration are projected future sales of existing and new products as well as earnout payments made each quarter determined by actual product sales. Decreases in forecasted sales would result in a lower fair value measurement.

 

The following tables present a roll-forward for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2013 as follows (in thousands):

 

Balance at June 30, 2013  $(113,749)
Issuance of compound embedded derivative with the Amended and Restated Loan Agreement with Thermo   (101,114)
Earnout payments made related to liability for contingent consideration   415 
Change in fair value of contingent consideration   443 
Derivative adjustment related to conversions and exercises   13,386 
Unrealized loss, included in derivative gain (loss)   (97,502)
Balance at September 30, 2013  $(298,121)
      
Balance at December 31, 2012  $(29,091)
Issuance of compound embedded derivative with 8.00% Notes Issued in 2013   (56,752)
Issuance of compound embedded derivative with the Amended and Restated Loan Agreement with Thermo   (101,114)
Third party issuance costs expensed to derivative gain (loss) in connection with Issuance of 8.00% Notes Issued in 2013   (905)
Earnout payments made related to liability for contingent consideration   1,351 
Change in fair value of contingent consideration   190 
Derivative adjustment related to conversions and exercises   13,386 
Unrealized loss, included in derivative gain (loss)   (125,186)
Balance at September 30, 2013  $(298,121)

 

Nonrecurring Fair Value Measurements

 

The items measured on a nonrecurring basis include the 8.00% Notes Issued in 2013, the Amended and Restated Loan Agreement with Thermo and equity issued in connection with the Exchange Agreement and the Consent Agreement. As a result of certain transactions that have occurred with the Company’s debt instruments, the Company was required to record these items at fair value as of the date of the respective agreements. See below for a further discussion of the fair value measurement for each item measured on a nonrecurring basis.

 

8.00% Notes Issued in 2013

 

The Company was required to record the 8.00% Notes Issued in 2013 initially at fair value as the issuance was considered to be an extinguishment of debt. Level 3 inputs were required to be used as there was not an active market for a substantial period of time between the issuance date and the balance sheet date. As of the issuance date, the fair value of the Notes was $27.9 million and the fair value of the compound embedded derivative liability was $56.7 million, for a total fair value of the 8.00% Notes Issued in 2013 of $84.6 million. As stated above, the value of the compound embedded derivative was bifurcated from the 8.00% Notes Issued in 2013 and is marked to market on a recurring basis. The Company recorded a loss on extinguishment of debt of $47.2 million in its condensed consolidated statement of operations during the second quarter of 2013. This loss was computed as the difference between the net carrying amount of the old 5.75% Notes of $71.8 million and the fair value of consideration given in the exchange of $119.0 million (including the new 8.00% Notes Issued in 2013, cash payments to both exchanging and non-exchanging holders, equity issued to the exchanging holders and other fees incurred for the exchange). See Notes 4 and 5 for further discussion.

 

23
 

 

 The significant quantitative Level 3 inputs utilized in the valuation models as of the issuance date of the 8.00% Notes Issued in 2013 are shown in the table below:

 

   Level 3 Inputs at May 20, 2013: 
   Stock Price
Volatility
   Risk-Free
Interest Rate
   Note
Conversion
Price
   Discount
Rate
   Market Price of
Common Stock
 
Compound embedded derivative with 8.00% Notes Issued in 2013   65 - 100%   0.9%  $0.80    27%  $0.40 

 

Other inputs used in the valuation model of the 8.00% Notes Issued in 2013 include the underlying features of the compound embedded derivative, including payment-in-kind interest payments, make whole premiums, automatic conversions, future equity issuances and probability of change of control of the Company. See further discussion above in “Derivative Liabilities” for the impact these inputs have on the fair value measurement.

 

Amended and Restated Loan Agreement with Thermo

 

The Company was required to record this Loan Agreement initially at fair value as the amendment and restatement of the Loan Agreement was considered to be an extinguishment of debt. Level 3 inputs were required to be used as there is not an active market for this debt instrument. As of the amendment and restatement date, the fair value of the Loan Agreement was $19.0 million and the fair value of the compound embedded derivative liability was $101.1 million, for a total fair value of the Loan Agreement of $120.1 million. As stated above, the value of the compound embedded derivative was bifurcated from the Loan Agreement and will be marked to market on a recurring basis. The Company recorded a loss on extinguishment of debt of $66.1 million in its condensed consolidated statement of operations for the third quarter of 2013. This loss was computed as the difference between the fair value of the debt, as amended and restated, and its carrying value just prior to amendment and restatement. See Notes 4 and 5 for further discussion.

 

The significant quantitative Level 3 inputs utilized in the valuation models as of the amendment and restatement date of the Loan Agreement are shown in the table below:

 

   Level 3 Inputs at July 31, 2013: 
   Stock Price
Volatility
   Risk-Free
Interest Rate
   Note
Conversion
Price
   Discount
Rate
   Market Price of
Common Stock
 
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement   65 - 100%   2.6%  $0.75    26%  $0.60 

 

Other inputs used in the valuation model of the Amended and Restated Loan Agreement include the underlying features of the compound embedded derivative, including payment in kind interest payments, make whole premiums, automatic conversions, future equity issuances and probability of change of control of the Company. See further discussion above in “Derivative Liabilities” for the impact these inputs have on the fair value measurement.

 

Equity issued in connection with the Exchange Agreement

 

The stockholders’ equity balances measured on a nonrecurring basis in Level 1 include the approximately 30.3 million shares of voting common stock of the Company issued to Exchanging Note Holders in partial payment for exchanged 5.75% Notes in connection with the Exchange Agreement executed on May 20, 2013. The Company was required to record this equity issuance at fair value initially as the Exchange Agreement was considered to be an extinguishment of debt. See Note 4 for further discussion. The Company calculated the aggregate fair value of the shares issued of approximately $12.1 million using the closing stock price on the issuance date (May 20, 2013) and included in its stockholders’ equity in its condensed consolidated balance sheet.

 

Equity issued in connection with the Consent Agreement 

 

On May 20, 2013, the Company and Thermo entered into the Consent Agreement and the Common Stock Purchase Agreement, and subsequently on October 4, 2013, the Common Stock Purchase and Option Agreement. The following table summarizes the amount invested in the Company pursuant to the Consent Agreement with Thermo as of September 30, 2013 and other relevant terms of these agreements (dollars in thousands, except amounts per share):

 

   Amount
Invested
   Issuance
Price per Share
   Closing
Price per Share
   Discount Value
(5)
   Total Fair Value   Shares Issued
(6)
 
May 20, 2013 (1)  $25,000   $0.32   $0.40   $6,250   $31,250    78,125,000 
May 20, 2013 (1)   5,000    0.32    0.40    1,250    6,250    15,625,000 
June 28, 2013 (1)   9,000    0.32    0.55    6,469    15,469    28,125,000 
July 29, 2013 (2), (3)   6,000    0.52    0.62    1,154    7,154    11,538,462 
August 19, 2013 (2), (3)   6,500    0.52    0.62    1,250    7,750    12,500,000 
Total  (4)  $51,500             $16,373   $67,873    145,913,462 

 

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(1) Amounts were invested pursuant to the terms of the Consent Agreement and the Common Stock Purchase Agreement. The fair value of these investments of $53.0 million is recorded in additional paid-in-capital on the Company’s condensed consolidated balance sheet.
(2) Amounts were invested pursuant to the terms of the Consent Agreement and the Common Stock Purchase and Option Agreement.
(3) The terms of the issuance price per share were determined in October 2013; therefore the shares were not issued as of September 30, 2013. The total fair value of the shares of $14.9 million was recorded on the Company’s condensed consolidated balance sheet as future equity issuance of common stock to related party.
(4) Pursuant to the terms of the Consent Agreement, certain equity transactions which result in cash invested into Globalstar may reduce the amounts committed by Thermo. As of September 30, 2013, the Company had received approximately $8.8 million due to cash received upon the termination of the share lending agreement and subsequent shares purchased by the borrower in that transaction and warrant exercises (see Note 4 for further discussion). These equity transactions reduced the remaining amounts available under the Consent Agreement to $24.7 million as of September 30, 2013.
(5) The discount on shares issued is recorded on the Company’s condensed consolidated statement of operations in loss on equity issuance. This expense item represents the discount on shares issued to Thermo as well as certain other losses recorded on equity issued during 2013 related to cashless warrant exercises of the Company’s 5% Notes.
(6) All shares issued to Thermo in connection with these agreements were shares of the Company’s nonvoting common stock.

 

  Under the terms of the Common Stock Purchase and Option Agreement, Thermo agreed to purchase an incremental $13.5 million of shares of non-voting common stock at a purchase price of $0.52 per share as and when requested to do so by the special committee through November 28, 2013. Thermo further agreed to purchase, upon the request of the special committee prior to December 26, 2013, up to $11.5 million of additional shares of non-voting common stock at a price equal to 85% of the average closing price of the common stock during the ten trading days immediately preceding the date of the special committee’s request.

 

The stockholders’ equity balances measured on a nonrecurring basis in Level 1 include the equity purchased by Thermo during the second and third quarters of 2013. As of September 30, 2013, Thermo had purchased approximately 145.9 million shares of the Company’s common stock for an aggregate $51.5 million. The Company calculated the fair value of the Company’s common stock issued to Thermo based on the closing stock price on the date of each sale. This aggregate fair value of approximately $67.9 million is included in stockholders’ equity in the Company’s condensed consolidated balance sheet as of September 30, 2013. Approximately $14.9 million of the total $67.9 million fair value is recorded as future equity issuance of common stock to related party as the shares were not issued as of September 30, 2013 and the remaining $53.0 million is recorded in additional paid-in capital as of September 30, 2013. See Note 4 for further discussion.

 

7. ACCRUED EXPENSES AND NON-CURRENT LIABILITIES

 

Accrued expenses consist of the following (in thousands):

 

   September 30, 2013   December 31, 2012 
Accrued interest  $10,712   $5,620 
Accrued compensation and benefits   3,737    4,076 
Accrued property and other taxes   6,713    6,329 
Accrued customer liabilities and deposits   2,666    2,961 
Accrued professional and other service provider fees   966    1,006 
Accrued liability for contingent consideration   2,021    2,585 
Accrued commissions   1,079    685 
Accrued telecommunications expenses   621    713 
Accrued satellite and ground costs   486    373 
Other accrued expenses   3,827    3,816 
   $32,828   $28,164 

 

Other accrued expenses primarily include outsourced logistics services, storage, inventory in transit, warranty reserve and maintenance.

 

Non-current liabilities consist of the following (in thousands):

 

   September 30, 2013   December 31, 2012 
Long-term accrued interest  $1,932   $457 
Asset retirement obligation   1,062    998 
Deferred rent   447    579 
Liabilities related to the Cooperative Endeavor Agreement with the State of Louisiana   1,536    1,949 
Long-term portion of liability for contingent consideration   354    1,332 
Uncertain income tax positions   5,399    5,571 
Foreign tax contingencies   4,681    4,994 
   $15,411   $15,880 

 

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8. COMMITMENTS

 

Contractual Obligations

 

As of September 30, 2013, the Company had purchase commitments with Thales, Arianespace, Ericsson Inc. (“Ericsson”), Hughes Network Systems, LLC (“Hughes”) and other vendors related to the procurement and deployment of the second-generation network.

 

Second-Generation Satellites

 

As of September 30, 2013, the Company had a contract with Thales for the construction of the Company’s second-generation low-earth orbit satellites and related services. The Company has successfully launched all of these second-generation satellites, excluding one on-ground spare. Six satellites were launched in each of October 2010, July 2011, December 2011, and February 2013. The Company has also incurred additional costs for certain related services, of which a portion are still owed to Thales.

 

As of September 30, 2013, the Company had a contract with Arianespace for the launch of the Company’s second-generation satellites and certain pre and post-launch services under which Arianespace agreed to make four launches of satellites. The Company has successfully completed all of these launches. The Company has also incurred additional costs to Arianespace for launch delays.

 

Next-Generation Gateways and Other Ground Facilities

 

As of September 30, 2013, the Company had a contract with Hughes under which Hughes will design, supply and implement (a) the Radio Access Network (RAN) ground network equipment and software upgrades for installation at a number of the Company’s satellite gateway ground stations and (b) satellite interface chips to be a part of the User Terminal Subsystem (UTS) in various next-generation Globalstar devices.

 

In January 2013, the Company and Hughes amended the contract to extend the schedule of the RAN and UTS program and to revise the remaining payment milestones and program milestones to reflect the revised program timeline. This amendment extended certain payments previously due in 2013 to 2014 and beyond.

 

As of September 30, 2013, the Company had recorded $10.0 million, excluding interest, in accounts payable related to this contract and had incurred and capitalized $72.6 million, excluding interest, of costs related to this contract. These costs are recorded as an asset in property and equipment.

 

In August 2013, the Company entered into an agreement with Hughes which specified a payment schedule for the approximately $15.8 million deferred amount outstanding at the time of the agreement. The Company must make payments of $5.8 million in August 2013, $5.0 million in October 2013, and $5.0 million in December 2013. The Company has made both the August and October payments. Under the terms of the agreement, the Company will also be required to pay interest of approximately $4.9 million in January 2014 for amounts accrued at a rate of 10% on previously deferred balances. Hughes will also have the option to receive all or any portion of the deferred payments and accrued interest in Globalstar common stock. If Hughes chooses to receive any payment in stock, shares will be provided at a 7% discount based upon a trailing volume weighted average price calculation. Hughes will restart work under the contract upon the Company’s payment of the amounts described above and an advance payment for the next milestone pursuant to the terms of the contract. If Globalstar does not make the payments described above by the specified payment dates in the agreement, these amounts will accrue interest at a rate of 15% per annum. If the Company terminates the contract for convenience, the Company must make a final payment of $20.0 million (less any amounts previously paid to reduce the $15.8 million total deferred amount) in cash to Hughes to satisfy its obligations under the contract.

 

As of September 30, 2013, the Company had an agreement with Ericsson. Ericsson will work with the Company to develop, implement and maintain a ground interface, or core network system that will be installed at a number of the Company’s satellite gateway ground stations.

 

26
 

 

 In September 2013, the Company entered into an agreement with Ericsson which deferred to November 2013 approximately $2.3 million in milestone payments scheduled under the core contract, provided the Company made one payment of $1.6 million, which offsets the total deferred amount, in September 2013. The Company made this payment. The remaining milestone payments previously due under the contract were deferred to later in 2013 and beyond. The deferred payments continue to incur interest at a rate of 6.5% per annum. As of September 30, 2013, the Company had recorded $0.7 million in accounts payable and accrued expenses, excluding interest, related to these required payments and has incurred and capitalized $6.8 million of costs related to this contract. The costs are recorded as an asset in property and equipment. If the Company and Ericsson are unable to agree on revised technical requirements and pricing for certain contract deliverables, the contract may be terminated without liability to either party upon the Company’s payment of the outstanding $0.7 million deferred amount plus associated interest. The Company may, however, be required to record an impairment charge. If the contract is terminated for convenience, the Company must make a final payment of $10.0 million in either cash or shares of Company common stock at the Company’s election.  If the Company elects to make payment in common stock, Ericsson will have the option either to accept the shares of common stock or instruct the Company to complete a block sale of the common stock and deliver the proceeds to Ericsson. If Ericsson chooses to accept common stock, the number of shares it will receive will be calculated based on the final payment amount plus 5%.

 

The Company issued separate purchase orders for additional phone equipment and accessories under the terms of executed commercial agreements with Qualcomm. As of September 30, 2013 and December 31, 2012, total advances to Qualcomm for inventory were $9.2 million. This contract was cancelled in March 2013, and the parties are seeking to resolve issues related to the contract termination.

 

9. CONTINGENCIES

 

Arbitration

 

On June 3, 2011, Globalstar filed a demand for arbitration against Thales before the American Arbitration Association to enforce certain rights to order additional satellites under the Amended and Restated Contract for the construction of the Globalstar Satellite for the Second Generation Constellation dated and executed in June 2009 (“2009 Contract”). Globalstar did not include within its demand any claims that it had against Thales for work previously performed under the contract to design, manufacture and timely deliver the first 25 second-generation satellites. On May 10, 2012, the arbitration tribunal issued its award in which it determined that Globalstar materially breached the contract by failing to pay to Thales termination charges in the amount of €51,330,875.00 by October 9, 2011, and that absent further agreement between the parties, Thales has no further obligation to manufacture or deliver satellites under Phase 3 of the 2009 Contract. The award also required Globalstar to pay Thales approximately €53 million in termination charges and interest by June 9, 2012. On May 23, 2012, Thales commenced an action in the United States District Court for the Southern District of New York by filing a petition to confirm the arbitration award (the “New York Proceeding”). Thales and the Company entered into a Tolling Agreement as of June 13, 2013 under which Thales dismissed the New York Proceeding without prejudice. Thales may refile the petition at a later date and pursue the confirmation of the arbitration award, which Globalstar will oppose. Should Thales be successful in confirming the arbitration award, this would have a material adverse effect on the Company’s financial condition and liquidity.

 

On June 24, 2012, the Company and Thales agreed to settle their prior commercial disputes, including those disputes that were the subject of the arbitration award. In order to effectuate this settlement, the Company and Thales entered into a Release Agreement, a Settlement Agreement and a Submission Agreement. Under the terms of the Release Agreement, Thales agreed unconditionally and irrevocably to release and forever discharge the Company from any obligation to pay €35,623,770 of the termination charges awarded in the arbitration together with all interest on the award amount effective upon the earlier of December 31, 2012 and the effective date of the financing for the purchase of any additional second-generation satellites. Under the terms of the Release Agreement, Globalstar agreed unconditionally and irrevocably to release and forever discharge Thales from any and all claims related to Thales’ work under the 2009 satellite construction contract, including any obligation to pay liquidated damages, effective upon the earlier of December 31, 2012 and the effective date of the financing for the purchase of any additional second-generation satellites. In connection with the Release Agreement, the Company recorded a contract termination charge of approximately €17.5 million which is recorded in the Company’s condensed consolidated financial statements for the period ended September 30, 2013. The releases became effective on December 31, 2012.

 

Under the terms of the Settlement Agreement, Globalstar agreed to pay €17,530,000 to Thales, representing one-third of the termination charges awarded to Thales in the arbitration, subject to certain conditions, on the later of the effective date of the new contract for the purchase of any additional second-generation satellites and the effective date of the financing for the purchase of these satellites. Because the effective date of the new contract for the purchase of additional second-generation satellites did not occur on or prior to February 28, 2013, any party may terminate the Settlement Agreement. If any party terminates the Settlement Agreement, all parties’ rights and obligations under the Settlement Agreement shall terminate. However, the Release Agreement provides that it will survive a termination of the Settlement Agreement. As of September 30, 2013, no party had terminated the Settlement Agreement.

 

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Litigation

 

Due to the nature of the Company's business, the Company is involved, from time to time, in various litigation matters or subject to disputes or routine claims regarding its business activities. Legal costs related to these matters are expensed as incurred. In management's opinion, there is no pending litigation, dispute or claim, other than the arbitration award discussed above, that may have a material adverse effect on the Company's financial condition, results of operations or liquidity.

 

10. RELATED PARTY TRANSACTIONS

 

Payables to Thermo and other affiliates relating to normal purchase transactions were $0.3 million and $0.2 million at September 30, 2013 and December 31, 2012, respectively.

 

Transactions with Thermo

 

Thermo incurs certain expenses on behalf of the Company.  The table below summarizes the total expense for the periods indicated below (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2013   2012   2013   2012 
General and administrative expense  $74   $30   $229   $230 
Non-cash expenses   137    132    411    396 
Loss on sale of equity issuance   2,404    -    16,373    - 
Loss on extinguishment of debt related to amendment and restatement of Thermo Loan Agreement   66,088    -    66,088    - 
Total  $68,703   $162   $83,101   $626 

 

General and administrative expenses are related to expenses incurred by Thermo on the Company’s behalf which are charged to the Company. Non-cash expenses are related to services provided by executive officers of Thermo (who are also directors of the Company) who receive no cash compensation from the Company which are accounted for as a contribution to capital. The Thermo expense charges are based on actual amounts (with no mark-up) incurred or upon allocated employee time.

 

Since June 2009, Thermo and its affiliates have also deposited $60.0 million into a contingent equity account to fulfill a condition precedent for borrowing under the Facility Agreement, purchased $20.0 million of the Company’s 5.0% Notes, purchased $11.4 million of the Company's 8.00% Notes Issued in 2009, provided a $2.3 million short-term loan to the Company (which was subsequently converted into nonvoting common stock), and loaned $37.5 million to the Company to fund the debt service reserve account.

 

On May 20, 2013, the Company exchanged 8.00% Notes Issued in 2013 for 5.75% Notes. As a result of this exchange, the Company entered into the Consent Agreement and the Common Stock Purchase Agreement (see Note 4 for further discussion). During the second quarter of 2013, Thermo and its affiliates funded $39.0 million in accordance with the Consent Agreement and the Common Stock Purchase Agreement. During the third quarter of 2013, Thermo and its affiliates funded an additional $12.5 million in accordance with the Consent Agreement and the Common Stock Purchase and Option Agreement. 

 

In August 2013, the Company drew the remaining $1.1 million from the interest earned on the contingent equity account and issued Thermo 2,133,656 shares of nonvoting common stock to Thermo in October 2013. The value of the 20% discount on the shares issued to Thermo was recorded as a deferred financing cost on the Company’s condensed consolidated balance sheet as of September 30, 2013.

 

For the three and nine months ended September 30, 2013, the Company recognized a loss on the sale of these shares of approximately $2.4 million and $16.4 million (included in other income/expense on the condensed consolidated statement of operations), representing the difference between the purchase price and the fair value of the Company’s common stock (measured as the closing stock price on the date of each sale).

 

The terms of the Common Stock Purchase and Option Agreement were approved by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors. The committee, which was represented by independent legal counsel, determined that the terms of the Common Stock Purchase and Option Agreement were fair and in the best interests of the Company and its shareholders. See Note 4 for further discussion.

 

 In July 2013, the Company and Thermo entered into an Amended and Restated Loan Agreement. As a result of this transaction, the Company was required to record this Loan Agreement initially at fair value as the amendment and restatement of the Loan Agreement was considered to be an extinguishment of debt. As of the amendment and restatement date the fair value of the Loan Agreement was $120.1 million. The Company recorded a loss on extinguishment of debt of $66.1 million in its condensed consolidated statement of operations for the third quarter of 2013. The Company computed this loss as the difference between the fair value of the debt, as amended and restated, and its carrying value just prior to amendment and restatement. See Notes 4 for further discussion.

 

28
 

 

11. INCOME TAXES

 

The Company follows authoritative guidance surrounding accounting for uncertainty in income taxes. It is the Company's policy to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense. For the periods ending September 30, 2013 and December 31, 2012, the net deferred tax assets were fully reserved.

  

In January 2012, the Company’s Canadian subsidiary was notified that its income tax returns for the years ended October 31, 2008 and 2009 had been selected for audit. The Canada Revenue Agency is in the process of reviewing the information provided by the Company.

 

Except for the audit noted above, neither the Company nor any of its subsidiaries is currently under audit by the IRS or by any state jurisdiction in the United States. The Company's corporate U.S. tax returns for 2009 and subsequent years remain subject to examination by tax authorities. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.

 

Through a prior foreign acquisition the Company acquired a tax liability for which the Company has been indemnified by the previous owners. As of September 30, 2013 and December 31, 2012, the Company had recorded a tax liability of $2.6 million and $2.8 million, respectively, to the foreign tax authorities with an offsetting tax receivable from the previous owners.

 

12. ACCUMULATED OTHER COMPREHENSIVE LOSS

 

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

 

The components of accumulated other comprehensive loss were as follows (in thousands):

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2013   2012   2013   2012 
Accumulated other comprehensive loss, June 30, 2013 and 2012 and December 31, 2012 and 2011, respectively  $(2,408)  $(2,551)  $(1,758)  $(3,100)
Other comprehensive income (loss):                    
Foreign currency translation adjustments   553    1,119    (97)   1,668 
Accumulated other comprehensive loss, September 30, 2013 and 2012, respectively  $(1,855)   (1,432)  $(1,855)   (1,432)

 

As stated in Note 1, the Company has adopted ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. For the three and nine months ended September 30, 2013 and 2012, no amounts were reclassified out of accumulated other comprehensive loss.

 

13. STOCK COMPENSATION

 

The Company’s 2006 Equity Incentive Plan (“Equity Plan”) provides long-term incentives to the Company’s key employees, including officers, directors, consultants and advisers (“Eligible Participants”) and to align stockholder and employee interests.  Under the Equity Plan, the Company may grant incentive stock options, restricted stock awards, restricted stock units, and other stock based awards or any combination thereof to Eligible Participants.  The Compensation Committee of the Company’s Board of Directors establishes the terms and conditions of any awards granted under the plans.

 

Grants to Eligible Participants of incentive stock options, restricted stock awards, and restricted stock units during the period are indicated in the table below (in thousands):

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2013   2012   2013   2012 
Grants of restricted stock awards and restricted stock units   14    342    852    721 
Grants of options to purchase common stock   1,224    31    1,829    414 
Total   1,238    373    2,681    1,135 

 

29
 

 

Nonstatutory Stock Option

 

In October 2011, the Company granted to eligible participants nonstatutory stock options for 2,710,000 shares of common stock and 273,000 restricted shares that vest and become exercisable on the earlier of (i) the first trading day after the Company’s common stock shall have traded on the then-applicable national or regional securities exchange or market system constituting the primary market for the stock, as reported in The Wall Street Journal , or such other source as the Company deems reliable, including without limitation if then-applicable, the NASDAQ Stock Market, for more than ten consecutive trading days at or above a per-share closing price of $2.50 or (ii) the day that a binding written agreement is signed for the sale of the Company, as determined by the Company’s board of directors in its discretion reasonably exercised.

  

In July 2013, the Compensation Committee of the Company’s Board of Directors modified this award to revise the vesting terms from $2.50 to $0.80. As a result of this modification, the Company’s incremental compensation cost is approximately $0.6 million.

 

In September 2013, the Company’s stock price traded for more than ten consecutive trading days above a price per-share closing price of $0.80, which resulted in immediate vesting of these options. The Company recognized the remaining unamortized compensation cost related to immediate vesting of these options of approximately $0.8 million in the third quarter of 2013.

 

For the three months ended September 30, 2013 and 2012, the Company recorded expense for the fair value of the grant of $0.8 million and less than $0.1 million, respectively and for the nine months ended September 30, 2013 and 2012, the Company recorded expense for the fair value of the grant of $0.9 million and $0.2 million, respectively. The expense recorded for the fair value of the grant is reflected in marketing, general and administrative expenses.

 

Employee Stock Purchase Plan

 

The Company’s Employee Stock Purchase Plan (the “Plan”) provides eligible employees of the Company and its subsidiaries with an opportunity to acquire shares of its common stock at a discount. The Plan permits eligible employees to purchase shares of common stock during two semi-annual offering periods beginning on June 15 and December 15, unless adjusted by the Board or one of its designated committees (the “Offering Periods”). Eligible employees may purchase shares in an amount of up to 15% of their total compensation per pay period, but may purchase no more than the lesser of $25,000 of the fair market value of common stock or 500,000 shares of common stock in any calendar year, as measured as of the first day of each applicable Offering Period. The price an employee pays is 85% of the fair market value of the common stock.  Fair market value is equal to the lesser of the closing price of a share of common stock on either the first or last day of the Offering Period.

 

For the three months ended September 30, 2013 and 2012, the Company recorded expense for the fair value of the grant under the Plan of $0.1 million and less than $0.1 million, respectively, and for the nine months ended September 30, 2013 and 2012, the Company recorded expense for the fair value of the grant of $0.2 million and $0.1 million, respectively. The expense recorded for the fair value of the grant under the Plan is reflected in marketing, general and administrative expenses. Through September 30, 2013, the Company had issued 1,868,401 shares of common stock pursuant to this stock purchase plan.

 

14. HEADQUARTERS RELOCATION

 

During 2010 the Company announced the relocation of its corporate headquarters to Covington, Louisiana. In addition, the Company relocated its product development center, international customer care operations, call center and other global business functions including finance, accounting, sales, marketing and corporate communications. The Company completed the relocation in 2011.

 

In connection with its relocation, the Company entered into a Cooperative Endeavor Agreement with the Louisiana Department of Economic Development (“LED”) whereby the Company would be reimbursed for certain qualified relocation costs and lease expenses. In accordance with the terms of the agreement, these reimbursement costs, not to exceed $8.1 million, will be reimbursed to the Company as incurred provided the Company maintains required annual payroll levels in Louisiana through 2019.

 

Since announcing its relocation, the Company has incurred qualifying relocation expenses. Under the terms of the agreement, the Company was reimbursed a total of $4.2 million for qualifying relocation and lease expenses and $1.3 million for facility improvements and replacement equipment in connection with the relocation through September 30, 2013 by LED. LED will continue to reimburse the Company approximately $352,000 per year through 2019 for certain qualifying lease expenses, provided the Company meets the required payroll levels set forth in the agreement.

 

30
 

 

If the Company fails to meet the required payroll in any project year, the Company will reimburse LED for a portion of the shortfall not to exceed the total reimbursement received from LED. Due to a plan to improve its cost structure by reducing headcount, the Company has projected that it would not meet the required payroll levels set forth in the agreement and recorded a liability of $1.3 million at September 30, 2013 for the estimated impact of the payroll shortfall in future years. This liability is included in current and non-current liabilities in the Company’s condensed consolidated balance sheet.

 

15.  GEOGRAPHIC INFORMATION

 

The Company attributes equipment revenue to various countries based on the location equipment is sold.  Service revenue is attributed to the various countries based on where the service is processed.  Long-lived assets consist primarily of property and equipment and are attributed to various countries based on the physical location of the asset at a given period-end, except for the satellites which are included in the long-lived assets of the United States.  The Company’s information by geographic area is as follows (in thousands): 

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2013   2012   2013   2012 
Revenues:                    
Service:                    
United States  $11,660   $11,051   $33,666   $29,926 
Canada   3,446    2,836    9,123    7,827 
Europe   1,185    732    2,736    2,223 
Central and South America   625    640    1,918    1,897 
Others   140    109    411    273 
Total service revenue  $17,056   $15,368   $47,854   $42,146 
Subscriber equipment:                    
United States   3,688    3,633    8,756    10,724 
Canada   1,201    887    2,964    2,555 
Europe   327    287    1,228    939 
Central and South America   177    220    712    701 
Others   100    142    203    191 
Total subscriber equipment revenue  $5,493   $5,169   $13,863   $15,110 
Total revenue  $22,549   $20,537   $61,717   $57,256 

 

   September 30,   December 31, 
   2013   2012 
Long-lived assets:          
United States  $1,181,700   $1,209,374 
Canada   221    277 
Europe   417    474 
Central and South America   3,677    3,463 
Others   1,273    1,568 
Total long-lived assets  $1,187,288   $1,215,156 

 

16. LOSS PER SHARE

 

The Company is required to present basic and diluted earnings per share. Basic earnings per share are computed based on the weighted average number of common shares outstanding during the period. Common stock equivalents are included in the calculation of diluted earnings per share only when the effect of their inclusion would be dilutive.

 

For the three and nine months ended September 30, 2013 and 2012, diluted net loss per share of common stock was the same as basic net loss per share of common stock, because the effects of potentially dilutive securities are anti-dilutive.

 

As of December 31, 2012, 17.3 million Borrowed Shares related to the Company’s Share Lending Agreement remained outstanding. The Company does not consider the Borrowed Shares to be outstanding for the purposes of computing and reporting its earnings per share. Effective in July 2013, the Company and the Borrower terminated the Share Lending Agreement resulting in the Borrower returning 10.2 million Borrowed Shares to Globalstar and agreeing to pay a cash settlement for the remaining 7.1 million Borrowed Shares at an average of the volume weighted stock prices over a 20-day trading period ending in August 2013. These shares are no longer included in the calculation to arrive at the Company’s September 30, 2013 earnings per share amounts.

 

31
 

 

Pursuant to the terms of the Common Stock Purchase and Option Agreement, approximately 24.0 million shares of nonvoting common stock were issued to Thermo in October 2013. Pursuant to the terms of the Contingent Equity Agreement, approximately 2.1 million nonvoting shares of common stock were issued to Thermo in October 2013. These amounts are not included in the calculation to arrive at the Company’s September 30, 2013 earnings per share amounts. See Note 4 for further discussion.

 

17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

 

In connection with the Company’s issuance of the 5.0% Notes and 5.0% Warrants, certain of the Company’s domestic subsidiaries (the “Guarantor Subsidiaries”), fully, unconditionally, jointly, and severally guaranteed the payment obligations under the 5.0% Notes.  The following supplemental financial information sets forth, on a consolidating basis, the balance sheets, statements of operations and statements of cash flows for Globalstar, Inc. (the “Parent Company”), for the Guarantor Subsidiaries and for the Parent Company’s other subsidiaries (the “Non-Guarantor Subsidiaries”).

 

The supplemental condensed consolidating financial information has been prepared pursuant to the rules and regulations for condensed financial information and does not include disclosures included in annual financial statements.  The principal eliminating entries eliminate investments in subsidiaries, intercompany balances and intercompany revenues and expenses.

 

32
 

 

Globalstar, Inc.

Supplemental Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2013

(Unaudited)

 

           Non-         
   Parent   Guarantor   Guarantor         
   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated 
   (In thousands) 
Revenue:                         
Service revenues  $18,726   $2,478   $4,940   $(9,088)  $17,056 
Subscriber equipment sales   127    4,254    1,070    42    5,493 
Total revenue   18,853    6,732    6,010    (9,046)   22,549 
Operating expenses:                         
Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)   3,125    3,126    1,941    (11)   8,181 
Cost of subscriber equipment sales   90    3,334    1,819    (1,095)   4,148 
Cost of subscriber equipment sales - reduction in the value of inventory   -    -    -    -    - 
Marketing, general and administrative   2,008    4,666    3,774    (1,369)   9,079 
Reduction in the value of long-lived assets   -    -    -    -    - 
Contract termination charge   -    -    -    -    - 
Depreciation, amortization, and accretion   19,645    4,914    6,485    (7,329)   23,715 
Total operating expenses   24,868    16,040    14,019    (9,804)   45,123 
Loss from operations   (6,015)   (9,308)   (8,009)   758    (22,574)
Other income (expense):                         
Loss on extinguishment of debt   (63,569)   -    -    -    (63,569)
Loss on equity issuance   (2,733)   -    -    -    (2,733)
Interest income and expense, net of amounts capitalized   (16,636)   (3)   (262)   -    (16,901)
Derivative gain (loss)   (97,534)   -    -    -    (97,534)
Equity in subsidiary earnings   (17,090)   (1,729)   -    18,819    - 
Other   (1,343)   (171)   (21)   (5)   (1,540)
Total other income (loss)   (198,905)   (1,903)   (283)   18,814    (182,277)
Loss before income taxes   (204,920)   (11,211)   (8,292)   19,572    (204,851)
Income tax expense   49    6    63    -    118 
Net loss  $(204,969)  $(11,217)  $(8,355)  $19,572   $(204,969)
                          
Comprehensive loss  $(204,969)  $(11,217)  $(7,803)  $19,572   $(204,417)

 

33
 

 

Globalstar, Inc.

Supplemental Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2012

(Unaudited)

 

           Non-         
   Parent   Guarantor   Guarantor         
   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated 
   (In thousands) 
Revenue:                         
Service revenues  $14,296   $10,832   $4,002   $(13,762)  $15,368 
Subscriber equipment sales   255    4,138    2,941    (2,165)   5,169 
Total revenue   14,551    14,970    6,943    (15,927)   20,537 
Operating expenses:                         
Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)   2,922    4,152    2,133    (1,794)   7,413 
Cost of subscriber equipment sales   134    4,742    3,780    (4,616)   4,040 
Cost of subscriber equipment sales - reduction in the value of inventory   -    658    2    -    660 
Marketing, general and administrative   4,098    1,377    3,229    (1,279)   7,425 
Reduction in the value of long-lived assets   -    -    -    -    - 
Contract termination charge   -    -    -    -    - 
Depreciation, amortization, and accretion   13,313    13,782    4,338    (12,779)   18,654 
 Total operating expenses   20,467    24,711    13,482    (20,468)   38,192 
Loss from operations   (5,916)   (9,741)   (6,539)   4,541    (17,655)
Other income (expense):                         
Interest income and expense, net of amounts capitalized   (6,172)   (1)   (394)   2    (6,565)
Derivative loss   (16,473)   -    -    -    (16,473)
Equity in subsidiary earnings   (12,120)   2,205    -    9,915    - 
 Other   (456)   (117)   218    (84)   (439)
Total other income (expense)   (35,221)   2,087    (176)   9,833    (23,477)
Loss before income taxes   (41,137)   (7,654)   (6,715)   14,374    (41,132)
Income tax (benefit) expense   51    (18)   23    -    56 
Net loss  $(41,188)  $(7,636)  $(6,738)  $14,374   $(41,188)
                          
Comprehensive loss  $(41,188)  $(7,636)  $(5,619)  $14,374   $(40,069)

 

34
 

 

Globalstar, Inc.

Supplemental Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2013

(Unaudited)

 

           Non-         
   Parent   Guarantor   Guarantor         
   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated 
   (In thousands) 
Revenue:                         
Service revenues  $50,351   $8,544   $13,320   $(24,361)  $47,854 
Subscriber equipment sales   287    10,018    13,264    (9,706)   13,863 
Total revenue   50,638    18,562    26,584    (34,067)   61,717 
Operating expenses:                         
Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)   8,233    7,947    6,791    (58)   22,913 
Cost of subscriber equipment sales   90    8,048    14,323    (11,786)   10,675 
Cost of subscriber equipment sales - reduction in the value of inventory   -    -    -    -    - 
Marketing, general and administrative   4,555    11,710    9,895    (3,581)   22,579 
Reduction in the value of long-lived assets   -    -    -    -    - 
Contract termination charge   -    -    -    -    - 
Depreciation, amortization, and accretion   52,538    15,936    17,167    (19,527)   66,114 
Total operating expenses   65,416    43,641    48,176    (34,952)   122,281 
Loss from operations   (14,778)   (25,079)   (21,592)   885    (60,564)
Other income (expense):                         
Loss on extinguishment of debt   (110,809)   -    -    -    (110,809)
Loss on equity issuance   (16,701)   -    -    -    (16,701)
Interest income and expense, net of amounts capitalized   (38,728)   (39)   (1,098)   (4)   (39,869)
Derivative gain (loss)   (126,911)   -    -    -    (126,911)
Equity in subsidiary earnings   (47,313)   (2,794)   -    50,107    - 
Other   (909)   (170)   (124)   78    (1,125)
Total other income (loss)   (341,371)   (3,003)   (1,222)   50,181    (295,415)
Loss before income taxes   (356,149)   (28,082)   (22,814)   51,066    (355,979)
Income tax expense   171    35    135    -    341 
Net loss  $(356,320)  $(28,117)  $(22,949)  $51,066   $(356,320)
                          
Comprehensive loss  $(356,320)  $(28,117)  $(23,046)  $51,066   $(356,417)

 

35
 

 

Globalstar, Inc.

Supplemental Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2012

(Unaudited)

 

           Non-         
   Parent   Guarantor   Guarantor         
   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated 
   (In thousands) 
Revenue:                         
Service revenues  $35,609   $30,528   $11,609   $(35,600)  $42,146 
Subscriber equipment sales   809    12,328    5,676    (3,703)   15,110 
Total revenue   36,418    42,856    17,285    (39,303)   57,256 
Operating expenses:                         
Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)   8,995    7,936    6,369    (1,082)   22,218 
Cost of subscriber equipment sales   284    9,420    5,377    (4,616)   10,465 
Cost of subscriber equipment sales - reduction in the value of inventory   2    904    51    -    957 
Marketing, general and administrative   12,176    3,292    8,945    (3,351)   21,062 
Reduction in the value of long-lived assets   79    7,139    -    -    7,218 
Contract termination charge   22,048    -    -    -    22,048 
Depreciation, amortization, and accretion   32,789    36,817    12,343    (32,672)   49,277 
Total operating expenses   76,373    65,508    33,085    (41,721)   133,245 
Loss from operations   (39,955)   (22,652)   (15,800)   2,418    (75,989)
Other income (expense):                         
Interest income and expense, net of amounts capitalized   (12,126)   (7)   (1,261)   (2)   (13,396)
Derivative loss   (2,562)   -    -    -    (2,562)
Equity in subsidiary earnings   (37,737)   6,703    -    31,034    - 
Other   (687)   (12)   (163)   (76)   (938)
Total other income (expense)   (53,112)   6,684    (1,424)   30,956    (16,896)
Loss before income taxes   (93,067)   (15,968)   (17,224)   33,374    (92,885)
Income tax expense   179    30    152    -    361 
Net loss  $(93,246)  $(15,998)  $(17,376)  $33,374   $(93,246)
                          
Comprehensive loss  $(93,246)  $(15,998)  $(15,708)  $33,374   $(91,578)

 

36
 

 

Globalstar, Inc.

Supplemental Condensed Consolidating Balance Sheet

As of September 30, 2013

(Unaudited)

 

   Parent
Company
   Guarantor
Subsidiaries
   Non-
Guarantor
Subsidiaries
   Elimination   Consolidated 
   (In thousands) 
ASSETS                         
Current assets:                         
Cash and cash equivalents  $4,298   $359   $1,986   $-   $6,643 
Restricted cash   -    -    -    -    - 
Accounts receivable   4,430    6,512    5,502    -    16,444 
Intercompany receivables   624,466    408,029    17,463    (1,049,958)   - 
Inventory   399    14,941    22,142    -    37,482 
Deferred financing costs   -    -    -    -    - 
Prepaid expenses and other current assets   4,525    415    2,643    -    7,583 
Total current assets   638,118    430,256    49,736    (1,049,958)   68,152 
Property and equipment, net   1,165,336    16,413    7,198    (1,659)   1,187,288 
Restricted cash   37,940    -    -    -    37,940 
Intercompany notes receivable   13,629    -    1,800    (15,429)   - 
Investment in subsidiaries   (187,026)   2,794    -    184,232    - 
Deferred financing costs   79,861    -    -    -    79,861 
Advances for inventory   9,158    -    -    -    9,158 
Intangible and other assets, net   4,104    1,216    2,065    (10)   7,375 
Total assets  $1,761,120   $450,679   $60,799   $(882,824)  $1,389,744 
                          
LIABILITIES AND STOCKHOLDERS’ EQUITY                         
Current liabilities:                         
Current portion of long-term debt  $-   $-   $-   $-   $- 
Accounts payable   21,331    2,514    2,599    -    26,444 
Accrued contract termination charge   23,699    -    -    -    23,699 
Accrued expenses   15,613    8,522    8,693    -    32,828 
Intercompany payables   421,710    510,497    118,452    (1,050,659)   - 
Payables to affiliates   303    -    -    -    303 
Derivative liabilities   41,539    -    -    -    41,539 
Deferred revenue   1,743    13,923    2,156    -    17,822 
Total current liabilities   525,938    535,456    131,900    (1,050,659)   142,635 
Long-term debt, less current portion   675,690    -    -    -    675,690 
Employee benefit obligations   7,117    -    -    -    7,117 
Intercompany notes payable   -    -    14,529    (14,529)   - 
Derivative liabilities   254,207    -    -    -    254,207 
Deferred revenue   6,760    557    -    -    7,317 
Debt restructuring fees   20,795    -    -    -    20,795 
Other non-current liabilities   4,011    625    10,775    -    15,411 
Total non-current liabilities   968,580    1,182    25,304    (14,529)   980,537 
Stockholders’ equity   266,602    (85,959)   (96,405)   182,364    266,602 
Total liabilities and stockholders’ equity  $1,761,120   $450,679   $60,799   $(882,824)  $1,389,744 

 

37
 

 

Globalstar, Inc.

Supplemental Condensed Consolidating Balance Sheet

As of December 31, 2012

(Audited)

 

   Parent
Company
   Guarantor
Subsidiaries
   Non-
Guarantor
Subsidiaries
   Elimination   Consolidated 
   (In thousands) 
ASSETS                         
Current assets:                         
Cash and cash equivalents  $10,220   $251   $1,321   $-   $11,792 
Restricted cash   46,777    -    -    -    46,777 
Accounts receivable   3,814    4,875    5,255    -    13,944 
Intercompany receivables   613,426    411,764    5,534    (1,030,724)   - 
Inventory   262    6,966    34,953    -    42,181 
Deferred financing costs   34,622    -    -    -    34,622 
Prepaid expenses and other current assets   2,177    388    2,668    -    5,233 
Total current assets   711,298    424,244    49,731    (1,030,724)   154,549 
Property and equipment, net   1,095,973    31,382    86,762    1,039    1,215,156 
Restricted cash   -    -    -    -    - 
Intercompany notes receivable   15,783    -    1,800    (17,583)   - 
Investment in subsidiaries   (144,323)   (8,232)   -    152,555    - 
Deferred financing costs   16,883    -    -    -    16,883 
Advances for inventory   9,158    -    -    -    9,158 
Intangible and other assets, net   3,991    1,781    2,273    (16)   8,029 
Total assets  $1,708,763   $449,175   $140,566   $(894,729)  $1,403,775 
                          
LIABILITIES AND STOCKHOLDERS’ EQUITY                         
Current liabilities:                         
Current portion of long-term debt  $655,874   $-   $-   $-   $655,874 
Accounts payable   12,055    2,410    21,220    -    35,685 
Accrued contract termination charge   23,166    -    -    -    23,166 
Accrued expenses   6,492    9,798    11,874    -    28,164 
Intercompany payables   377,526    494,686    156,166    (1,028,378)   - 
Payables to affiliates   230    -    -    -    230 
Deferred revenue   4,576    12,674    791    -    18,041 
Total current liabilities   1,079,919    519,568    190,051    (1,028,378)   761,160 
Long-term debt, less current portion   95,155    -    -    -    95,155 
Employee benefit obligations   7,221    -    -    -    7,221 
Intercompany notes payable   -    -    16,683    (16,683)   - 
Derivative liabilities   25,175    -    -    -    25,175 
Deferred revenue   4,306    334    -    -    4,640 
Other non-current liabilities   2,443    2,233    11,204    -    15,880 
Total non-current liabilities   134,300    2,567    27,887    (16,683)   148,071 
Stockholders’ equity   494,544    (72,960)   (77,372)   150,332    494,544 
Total liabilities and stockholders’ equity  $1,708,763   $449,175   $140,566   $(894,729)  $1,403,775 

 

38
 

 

Globalstar, Inc.

Supplemental Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2013

(Unaudited)

 

           Non-         
   Parent   Guarantor   Guarantor         
   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated 
   (In thousands) 
                     
Net cash provided by (used in) operating activities  $426   $814   $1,094   $-   $2,334 
                          
Cash flows from investing activities:                         
Second-generation satellites, ground and related launch costs   (37,732)   -    -    -    (37,732)
Property and equipment additions   -    (706)   (519)   -    (1,225)
Investment in businesses   (496)   -    -    -    (496)
Restricted cash   8,838    -    -    -    8,838 
Net cash used in investing activities   (29,390)   (706)   (519)   -    (30,615)
                          
Cash flows from financing activities:                         
Borrowings from Facility Agreement   672    -    -    -    672 
Borrowings from contingent equity account   1,071    -    -    -    1,071 
Proceeds from issuance of common stock and stock options   8,979    -    -    -    8,979 
Payments to reduce principal amount of exchanged 5.75% Notes   (13,544)   -    -    -    (13,544)
Payments to reduce principal amount of 5.75% Notes not exchanged   (6,250)   -    -    -    (6,250)
Payments to lenders and other fees associated with exchange   (2,482)   -    -    -    (2,482)
Proceeds for equity issuance to related party   51,500    -    -    -    51,500 
Payment of deferred financing costs   (16,904)   -    -    -    (16,904)
Net cash from by financing activities   23,042    -    -    -    23,042 
Effect of exchange rate changes on cash and cash equivalents   -    -    90    -    90 
Net increase (decrease) in cash and cash equivalents   (5,922)   108    665    -    (5,149)
Cash and cash equivalents at beginning of period   10,220    251    1,321    -    11,792 
Cash and cash equivalents at end of period  $4,298   $359   $1,986   $-   $6,643 
                          

 

39
 

 

Globalstar, Inc.

Supplemental Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2012

(Unaudited

 

           Non-         
   Parent   Guarantor   Guarantor         
   Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated 
   (In thousands) 
Net cash provided by (used in) operating activities  $12,655   $(165)  $(1,612)  $-   $10,878 
                          
Cash flows from investing activities:                         
Second-generation satellites, ground and related launch costs   (43,305)                (43,305)
Property and equipment additions   -    (197)   (185)   -    (382)
Investment in businesses   (450)   -    -    -    (450)
Restricted cash   (3,650)   -    -    -    (3,650)
                          
Net cash used in investing activities   (47,405)   (197)   (185)   -    (47,787)
                          
Cash flows from financing activities:                         
Proceeds from issuance of common stock and stock options   100    -    -    -    100 
Borrowings from Facility Agreement   5,008    -    -    -    5,008 
Proceeds from contingent equity account   23,000    -    -    -    23,000 
Payment of deferred financing costs   (250)   -    -    -    (250)
Net cash from by financing activities   27,858    -    -    -    27,858 
Effect of exchange rate changes on cash and cash equivalents   -    -    319    -    319 
Net increase (decrease) in cash and cash equivalents   (6,892)   (362)   (1,478)      (8,732)
Cash and cash equivalents at beginning of period   7,343    587    2,021    -    9,951 
Cash and cash equivalents at end of period  $451   $225   $543   $-   $1,219 

 

40
 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements

 

Certain statements contained in or incorporated by reference into this Report, other than purely historical information, including, but not limited to, estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions, although not all forward-looking statements contain these identifying words. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements, such as the statements regarding our ability to develop and expand our business, our anticipated capital spending, our ability to manage costs, our ability to exploit and respond to technological innovation, the effects of laws and regulations (including tax laws and regulations) and legal and regulatory changes, the opportunities for strategic business combinations and the effects of consolidation in our industry on us and our competitors, our anticipated future revenues, our anticipated financial resources, our expectations about the future operational performance of our satellites (including their projected operational lives), the expected strength of and growth prospects for our existing customers and the markets that we serve, commercial acceptance of new products, problems relating to the ground-based facilities operated by us or by independent gateway operators, worldwide economic, geopolitical and business conditions and risks associated with doing business on a global basis and other statements contained in this Report regarding matters that are not historical facts, involve predictions. Risks and uncertainties that could cause or contribute to such differences include, without limitation, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

  

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 resul