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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
GLOBALSTAR TELECOMMUNICATIONS LIMITED
CEDAR HOUSE
41 CEDAR AVENUE
HAMILTON HM12, BERMUDA
TELEPHONE: (441) 295-2244
COMMISSION FILE NUMBER 0-25456
JURISDICTION OF INCORPORATION: BERMUDA
IRS IDENTIFICATION NUMBER: 13-3795510
GLOBALSTAR, L.P.
3200 ZANKER ROAD
SAN JOSE, CALIFORNIA 95134
TELEPHONE: (408) 933-4000
COMMISSION FILE NUMBER: 333-25461
JURISDICTION OF REGISTRATION: DELAWARE
IRS IDENTIFICATION NUMBER: 13-3759024
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
GLOBALSTAR TELECOMMUNICATIONS LIMITED:
COMMON STOCK, $1.00 PAR VALUE
(Title of Class)
GLOBALSTAR, L.P.:
NONE
The registrants have 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
and have been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants'
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K
The registrants are not accelerated filers (as defined in Exchange Act Rule
12b-2).
Aggregate market value of Globalstar Telecommunications Limited common
stock outstanding held by non-affiliates of the registrant as of June 28, 2002
was approximately $6.1 million.
As of March 17, 2003, there were 113,059,195 shares of Globalstar
Telecommunications Limited common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
THE COMPANY
OVERVIEW
On November 23, 1994, Globalstar Telecommunications Limited ("GTL") was
incorporated to permit public equity ownership in Globalstar, L.P.
("Globalstar"). GTL was incorporated as an exempted company under the Companies
Act 1981 of Bermuda. In 1995, GTL completed an initial public offering of
40,000,000 shares of common stock and purchased 10,000,000 ordinary partnership
interests from Globalstar, L.P. ("Globalstar"), a limited partnership. At
December 31, 2002, GTL owned approximately 42.4% of Globalstar's outstanding
ordinary partnership interests and 100% of the outstanding 8% convertible
redeemable preferred partnership interests ("8% RPPIs") and 100% of the
outstanding 9% convertible redeemable preferred partnership interests ("9%
RPPIs") of Globalstar.
GTL does not have any operations, personnel or facilities, and does not
manage the day-to-day operations of Globalstar. GTL's sole asset is its
investment in Globalstar, and GTL's results of operations reflect its share of
the results of operations of Globalstar on an equity accounting basis.
Globalstar was founded to design, construct and operate a worldwide, low-earth
orbit satellite-based wireless digital telecommunications system (the
"Globalstar System"). In 2000, Globalstar's losses reduced GTL's investment in
Globalstar ordinary and preferred partnership interests to a book value of zero.
Accordingly, GTL discontinued providing for its allocated share of Globalstar's
net losses and recognized the remaining unallocated losses as a result of its
general partner status in Globalstar. Because GTL is a general partner of
Globalstar, GTL is jointly and severally liable with the other general partner
for the recourse debt and other recourse obligations of Globalstar to the extent
Globalstar is unable to pay such debts. Certain of Globalstar's debt, including
the public debt, is non-recourse to the general partners. On February 15, 2002,
the other general partner of Globalstar, Loral QUALCOMM Satellite Services, L.P.
("LQSS"), filed a voluntary petition under Chapter 11 of Title 11 of the United
States Code (the "Bankruptcy Code"). Effective February 15, 2002, Globalstar
ceased allocating additional losses associated with recourse debt to LQSS. As
the only remaining general partner of Globalstar that has not filed for
bankruptcy protection, GTL has been allocated all losses related to debt that is
recourse to general partners since February 15, 2002. Future funding, if any, or
assets of GTL, may be utilized to fund these general partner liabilities.
In May 2001, NASDAQ determined that GTL no longer met the requirements for
listing on The NASDAQ National Market and was therefore subject to delisting
from that market. GTL applied to have the listing transferred to The NASDAQ
SmallCap Market. This request was granted and the stock began trading on this
market June 14, 2001. The NASDAQ SmallCap Market suspended trading on November
14, 2001, as it sought additional information from GTL. Since December 2001, GTL
shares have traded on the NASDAQ OTC Bulletin Board under the symbol of
GSTRF.OB.
GLOBALSTAR'S RESTRUCTURING
On February 15, 2002, Globalstar and certain of its subsidiaries filed
voluntary petitions under Chapter 11 of the Bankruptcy Code, in the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court")
(Case Nos. 02-10499, 02-10501, 02-10503 and 02-10504). Globalstar and its
subsidiaries remain in possession of their assets and properties and continue to
operate their businesses as debtors-in-possession. As a result of Globalstar's
bankruptcy petition, several of Globalstar's debt obligations were accelerated
and became immediately due and payable. GTL does not intend to file an immediate
petition for bankruptcy relief, but will continue to monitor events and govern
its actions accordingly. It has been GTL's view that any hope of providing a
rights offering or other element of value to its shareholders is enhanced by not
filing for bankruptcy at this time. Globalstar's bankruptcy filing and
subsequent financial restructuring will likely leave shares in GTL with very
little or no value. (See the discussion of Globalstar's proposed restructuring
plan below.) These factors, among others, raise substantial doubt about GTL's
ability to continue as a going concern. However, the accompanying financial
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statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business.
Negotiations prior to filing of Globalstar's bankruptcy petition resulted
in a memorandum of understanding ("MOU") and Plan Support Agreement ("PSA")
reached among Loral Space and Communications Ltd. ("Loral"), Globalstar's
informal committee of bondholders, representing approximately 17% of
Globalstar's outstanding senior notes, and Globalstar, regarding the substantive
terms of a proposed financial and legal restructuring of Globalstar's business.
Among other things, the MOU called for the cancellation of all existing
partnership interests in Globalstar, but contemplated, subject to the
satisfaction of certain conditions, a rights offering to GTL's common and
preferred shareholders and Globalstar's creditors, which could have given them
the option to purchase shares in a newly formed company and successor to
Globalstar's business. Because a disclosure statement relating to a plan of
reorganization incorporating the terms of the MOU was not approved by the
Bankruptcy Court by August 13, 2002, each of Loral and the Official Committee of
Unsecured Creditors in Globalstar's Chapter 11 case (the "Creditors' Committee")
had the right for 15 days thereafter to terminate the PSA. As permitted by the
PSA, on August 21, 2002, the Creditors' Committee advised Loral and Globalstar
that it had terminated the PSA as of that date.
On January 14, 2003, Globalstar and the Creditors' Committee reached an
agreement with New Valley Corporation ("New Valley") providing for
debtor-in-possession financing (the "New Valley DIP Facility") of up to $20
million and a total investment in a reorganized Globalstar of $55 million.
Globalstar filed a motion with the Bankruptcy Court for approval of this new
investment on January 15, 2003 and filed a Form 8-K on the same date. A hearing
to seek Bankruptcy Court approval of the New Valley DIP Facility was scheduled
for January 30, 2003 in Delaware. Prior to the hearing, the Creditors' Committee
informed Globalstar and New Valley that the Creditors' Committee would not
support approval of the New Valley investment, but that a consortium including
certain individual members of the Creditors' Committee was prepared to provide
substitute debtor-in-possession financing. As a consequence, New Valley withdrew
its investment offer as of January 30, 2003. Globalstar filed another Form 8-K
reflecting New Valley's withdrawal on February 4, 2003.
On February 14, 2003, Globalstar and the consortium of lenders (the "DIP
Lenders") reached agreement on debtor-in-possession financing of $10 million
(the "DIP Facility") and filed a motion with the Bankruptcy Court seeking
approval of such financing. Globalstar also filed a motion defining certain
auction procedures by which Globalstar would conclude its search for an investor
to fund Globalstar's restructuring and exit from bankruptcy. The Bankruptcy
Court provided interim approval of the DIP Facility and approved the auction
procedures on February 20, 2003, and the parties executed the DIP Facility
documents on February 25, 2003. Copies of the DIP Facility, auction procedures
and related documents were filed with a Form 8-K on February 27, 2003. The
Bankruptcy Court granted final approval of the DIP Facility on March 6, 2003. As
a condition to the DIP Lenders obligation to fund draws by Globalstar under the
DIP Facility in excess of $2.0 million, among other things (i) Globalstar was
required to secure from Loral/QUALCOMM Partnership, L.P. ("LQP") a pledge in
favor of the DIP Lenders of LQP's ownership interest in the outstanding stock of
L/Q Licensee, Inc. ("L/Q Licensee"), and (ii) Globalstar was required to reach
an agreement, satisfactory to the DIP Lenders, with respect to specified matters
relating to Loral and certain of its affiliates (the conditions set forth in
clauses (i) and (ii) above, collectively, the "Loral Condition"). The Loral
Condition was initially required to be satisfied by March 7, 2003, but the DIP
Facility was amended to extend the deadline for meeting the Loral Condition to
March 21, 2003. The Loral Condition was satisfied prior to the extended deadline
(see discussion of Developments Relating to Loral and QUALCOMM below).
Under the approved auction procedures, Globalstar received expressions of
interest from prospective investors in early March 2003, and with the assistance
of its financial advisors and in consultation with the Creditors' Committee,
determined which of them were "qualified" to perform due diligence and make a
definitive proposal for an equity investment in Globalstar or the purchase of
Globalstar's assets. March 21, 2003 was the deadline set for the submission of
investment proposals by the qualified bidders. Globalstar, in consultation with
the Creditors' Committee, expects to choose the highest and best investment
proposal
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in early-April and to file a modified plan of reorganization with the Bankruptcy
Court shortly thereafter. No assurance can be given as to whether this auction
process will ultimately lead to a successful restructuring of Globalstar.
It is foreseeable that in any financial restructuring, GTL's equity
interest, along with the interests of Globalstar's other partners, will be
eliminated entirely, or at best, severely diluted.
The $15.3 million cash on hand at December 31, 2002 and the anticipated
revenue from operations are insufficient to fund Globalstar's operations.
Globalstar will require additional financing, beyond the $10 million available
under the DIP Facility, to sustain its current operations until breakeven cash
flow is achieved. There can be no assurance that a successful restructuring will
be completed and that additional financing will be available on terms acceptable
to Globalstar, if at all. If Globalstar is unable to obtain additional
financing, it will likely cease to operate.
NEW BUSINESS PLAN AND RELATED TRANSACTIONS
Globalstar has developed a business plan in connection with its
restructuring; the business plan will be an integral part of Globalstar's plan
of reorganization. The business plan, which is predicated on an infusion of
funds, assumes the consolidation of certain Globalstar service provider
operations into a new Globalstar company ("New Globalstar"). Several of the
acquisitions contemplated in the business plan were completed during 2001 and
2002. The consolidation strategy has brought additional efficiencies to the
operation of the Globalstar System and allowed for increased geographic coverage
and pricing coordination in Globalstar's service offerings and pricing. In
addition, Globalstar intends to revise its business relationships with the
remaining independent service providers, including exploring the possible
acquisition of their businesses or assets. Globalstar believes that these, and
additional, steps are needed to achieve and maintain financial viability.
In accordance with Globalstar's consolidation strategy, in December 2001,
Globalstar signed two agreements to acquire certain subsidiaries of Vodafone
Group Plc ("Vodafone") through Globalstar Corporation, a non-debtor subsidiary
of Globalstar. In the first transaction, which closed on December 18, 2001,
Globalstar obtained a majority interest in the Globalstar service provider
company in Canada and a minority interest in the Canadian gateway company. (See
the discussion of the settlement with Loral below.) In the second Vodafone
transaction, which closed on August 19, 2002, Globalstar acquired the United
States and Caribbean service provider and gateway operations from Vodafone at a
cost of $1.9 million. Vodafone is exiting the Globalstar business and has
transferred its service provider interests in Australia and Mexico to third
parties.
TE.SA.M. provided Globalstar service through gateways in France, Turkey,
Venezuela, Argentina, and Peru. TE.SA.M. is in the process of liquidating and
has exited the Globalstar business. On July 2, 2002 Globalstar, through
Globalstar Corporation, acquired TE.SA.M.'s French gateway and back office
assets related to the provision of Globalstar services in Europe, TE.SA.M.'s
interest in Globalstar and TE.SA.M.'s remaining inventory of approximately
15,000 user terminals. Under the terms of the transaction, both Globalstar and
TE.SA.M. forgave all outstanding obligations between the parties and provided
mutual releases of liability. Also, Globalstar reimbursed TE.SA.M. for the cost
of operating the French gateway from March 1, 2002 through July 1, 2002 at a
cost of approximately 400,000 Euros. The French gateway was operational, but was
not producing revenues at the time of the purchase. Globalstar has restarted the
European business and is earning limited revenue from the French gateway. Local
purchasers in Turkey, Venezuela, Argentina, and Peru have purchased local
service provider operations from TE.SA.M. and have executed letter agreements
with Globalstar that define the terms under which they provide Globalstar
services.
On December 30, 2002, the Bankruptcy Court approved a settlement agreement
among Globalstar Services Company, Inc. ("GSCI"), Globalstar, Globalstar
Vodafone Network Pty Ltd. Australia and Globalstar Australia Pty Ltd. Under this
settlement, Globalstar consented to the transfer by Vodafone Satellite Services
Limited ("VSSL") to Localstar of the service provider rights in Australia, and
Globalstar entered into a new service provider agreement with Localstar. VSSL
was the original authorized
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service provider for Australia and the operator of three gateways in that
country. In conjunction with this transaction, VSSL agreed to settle certain
pre-petition and post-petition debts with Globalstar. Globalstar received
payments totaling $1.7 million from Vodafone in January 2003.
On March 25, 2003, Globalstar entered into a settlement and release
agreement with Elsacom S.p.A. ("Elsacom") and a gateway asset purchase agreement
(collectively, the "Elsacom Settlement") with a wholly owned subsidiary of
Elsacom. Elsacom is the primary Globalstar service provider in Central and
Eastern Europe, the operator of the gateway located in Avezzano, Italy and,
through its affiliate, Globalstar Northern Europe, the former operator of the
gateway located in Karkkila, Finland. Although Elsacom had defaulted on its
gateway contract obligations to Globalstar, Elsacom desired to continue
providing Globalstar service to its customers from Avezzano. Accordingly,
Globalstar and Elsacom agreed to negotiate a mutually acceptable plan for paying
certain of the debt, transferring the equipment in Finland to Globalstar and
maintaining Elsacom's service provider rights. Under the terms of the Elsacom
Settlement, Globalstar will receive cash payments totaling $2.4 million in two
installments to be completed by June 2003 and the release of all past payment
obligations due to Elsacom in exchange for liquidation of the gateway contract
payments due to Globalstar from Elsacom. Additionally, Globalstar will retain
title to the gateway equipment installed in Finland. Globalstar intends to
dismantle the Finland gateway and to place the removable parts, which contain
most of the gateway's electronics, in storage for future deployment.
DEVELOPMENTS RELATING TO LORAL AND QUALCOMM
In order to preserve cash during 2001, Globalstar ceased its payments for
services performed by Space Systems/Loral, Inc. ("SS/L") and QUALCOMM
Incorporated ("QUALCOMM").
On March 14, 2003, Loral, the Creditors' Committee and Globalstar signed a
term sheet outlining the terms and conditions of a comprehensive settlement of
certain contested matters and a release of claims against Loral (the "Loral
Settlement"). Also on March 14, 2003, Globalstar and the Creditors' Committee
filed a joint motion under Bankruptcy Rule 9019 for an order approving the Loral
Settlement with the Bankruptcy Court. The parties agreed to use their reasonable
best efforts to execute a definitive agreement based on the term sheet by March
26, 2003.
The Loral Settlement, which will be effected in connection with
Globalstar's restructuring and emergence from bankruptcy, provides the
following, among other items: (1) Loral's subsidiary, SS/L, would transfer to
Globalstar title "as is" to the eight spare satellites that are currently held
in storage by SS/L; (2) certain strategic agreements under which Loral holds
exclusive rights to provide Globalstar services to defense and national security
agencies and in the aviation market would terminate, and a new joint venture
company (to be owned 75% by Globalstar and 25% by Loral) would be formed to
pursue the defense and national security business; (3) L/Q Licensee, a
subsidiary of LQP, would transfer the Federal Communications Commission license
held by it to Globalstar or LQP would transfer operations of L/Q Licensee to
Globalstar; (4) Loral would convey its interests in the Canadian service
provider operations to Globalstar; (5) certain Loral service provider financial
obligations would be settled through a reduction in debt obligations due from
Globalstar Canada Co. ("GCC") to Loral and other financial obligations involving
a Russian joint venture would be restructured; (6) Loral's general unsecured
claims as a creditor in the Globalstar bankruptcy proceeding would be quantified
and allowed; (7) SS/L would return to Globalstar unused advance prepayments
related to the 2 GHz satellite contract ; (8) Loral's designees would resign
from Globalstar's General Partners Committee; and (9) third party claims against
Loral, certain Loral affiliates and all six members of Globalstar's General
Partners' Committee, as provided in the term sheet, would be released. The
motion supporting the Loral Settlement is expected to be heard by the Bankruptcy
Court on April 9, 2003.
Globalstar and QUALCOMM previously contracted for the design and
development of the Globalstar ground segment pursuant to the Development
Contract dated March 18, 1994 (the "Development Contract") and contracted for
the manufacture, deployment and maintenance of Globalstar Gateways via the
Production Gateway Purchase Agreement dated April 30, 1997 (the "Production
Agreement").
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QUALCOMM purported to terminate the Development Contract and the Production
Agreement for non-payment of invoices on November 29, 2001 and on December 20,
2001 respectively. Globalstar has been in discussions with QUALCOMM regarding a
support agreement that will allow it to utilize the QUALCOMM expertise necessary
to maintain the system. There can be no assurances that Globalstar and QUALCOMM
will renegotiate the mutually satisfactory terms required to secure QUALCOMM's
support to Globalstar's system operations.
BUSINESS SEGMENT
Globalstar operates in one industry segment, satellite telecommunications,
providing global mobile and fixed wireless voice and data services.
BUSINESS
OVERVIEW
Globalstar was founded in 1993 by subsidiaries of Loral Corporation, a
predecessor of Loral, and QUALCOMM. Loral is one of the world's leading
satellite communications companies with activities in satellite-based
communications services and satellite manufacturing. QUALCOMM is the leading
developer and supplier of code division multiple access ("CDMA") digital
wireless telecommunications technology. Globalstar is a Delaware limited
partnership whose managing general partner is LQSS; the general partner of LQSS
is LQP, a Delaware limited partnership, the partners of which are subsidiaries
of Loral and QUALCOMM. The managing general partner of LQP is Loral General
Partner, Inc., a subsidiary of Loral. As of December 31, 2002, Loral owned,
directly or indirectly, approximately 38.2% of Globalstar. On February 15, 2002,
LQSS, LQP, Loral General Partner, Inc. and another Loral subsidiary that is a
general partner of LQP also filed voluntary petitions under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court (Case Nos. 02-10506, 02-10507, and
02-10508).
Globalstar owns and operates a satellite constellation that forms the
backbone of a global telecommunications network designed to serve virtually
every populated area of the world. Globalstar's worldwide, low-earth orbit
("LEO") satellite-based digital telecommunications system (the "Globalstar
System"), which uses QUALCOMM's patented CDMA technology, provides high-quality
mobile and fixed telephone service to customers who live, work or travel beyond
the reach of adequately developed communications networks.
The Globalstar System is designed to offer a cost-effective communications
solution for areas underserved or unserved by existing telecommunications
infrastructures. Globalstar mobile phones are simple to use -- just like
ordinary cellular telephones -- and are among the smallest, lightest and least
expensive satellite phones currently available. These phones are multimode,
functioning as cellular phones where cellular service is available and as
satellite phones where cellular service is not available. Globalstar phones
provide this multimode capability without separate modules or plug-ins.
Globalstar pay phones and fixed wireless phones for business and residential use
provide basic telephone service in rural villages and at remote industrial and
residential sites.
Globalstar phones have familiar features such as phone book, voice-mail,
short messaging service, asynchronous data service, and, in some service areas,
call forwarding and internet services through packet data switching.
Globalstar's utilization of QUALCOMM's CDMA technology will enable it to swiftly
adopt future improvements as wireless technology evolves. In addition, because
the intelligence of the Globalstar System is located on the ground rather than
in satellites, future enhancements are easily implemented.
Globalstar currently provides satellite-based telephony and narrow band
data services through 24 gateways. These gateways provide coverage to 133
countries, including all of North America and South America (excluding
northwestern Alaska and portions of Canada above 70 degrees North latitude),
Europe, Australia, Russia, most of the Middle East, Central Asia, China and
South Korea. For the year
5
ended December 31, 2002, Globalstar's recorded consolidated revenues of $24.6
million and provided 34.2 million minutes of billable telecommunication
services. Globalstar's revenues during 2002 were not sufficient to fund
Globalstar's operations.
In late 2002, Globalstar revised the method used to estimate its global
subscribers in order to eliminate roamers from cellular networks being counted
as regular customers. At December 31, 2002, Globalstar estimates it had 77,000
subscribers worldwide, which is slightly less than the number of subscribers
estimated under the previous method. Using the revised method, the number of
subscribers at December 31, 2002 represents an increase of approximately 36%
over the December 31, 2001 estimate of 56,800. The subscriber level estimates do
not change previously reported results of operations.
SALES AND MARKETING ACTIVITIES
Globalstar's current marketing program, implemented through its United
States, Canadian and French subsidiaries, targets vertical markets and large
corporate accounts within vertical markets. New applications, such as simplex
data services for asset tracking and telemetry, have enhanced conventional
marketing efforts and opened new business opportunities.
Globalstar's new "bundled" pricing plans in the United States and Canada,
first announced in August 2002, have significantly reduced the effective per
minute price paid by subscribers. A subscriber can effectively pay as little as
$0.17 per minute with a high volume usage plan. These plans are applicable to
both voice and data service. Globalstar's preliminary analysis of the results of
these plans reveals an increase in usage, growth in the subscriber base and an
increase in the monthly average revenue per subscriber since the plans were
introduced in North America. Globalstar has encouraged its service providers
outside of North America to implement similar "bundled" plans in their service
areas.
Because Globalstar provides services globally, service providers must adapt
their marketing efforts to the needs, characteristics and opportunities within
each of their targeted markets. They have identified a number of key segments of
the addressable marketplace characterized by early expressions of interest in
obtaining the service and by the potential for heavy usage of satellite airtime.
In addition, Globalstar and its service providers are focused on global accounts
that would allow a corporate customer to pay a uniform price for Globalstar
services in multiple locations covered by multiple gateways. Key market segments
include:
Government. Globalstar phones and service have been used by United
States government agencies in peacekeeping operations in the Balkans,
federal accident investigations, public safety and resource management and
in emergency search and rescue operations. Globalstar service has been used
on United States Coast Guard helicopters, by NASA for sending rocket
telemetry test data and for Remote Piloted Vehicle control research for the
United States Navy. For the non-military secure communications market,
Globalstar has introduced two products: the CopyTele DCS-1200 Desktop/
Handset for voice and data and the CopyTele DCS-1400 miniaturized version
for voice only.
Public Safety. Globalstar has concentrated its marketing efforts on
agencies responsible for emergencies such as fire and police departments,
hospitals and emergency response teams. These markets will continue to
expand in 2003 and additional markets, such as national border patrol and
aviation safety, will also be targeted. As an example of Globalstar's
public safety efforts, the 2002 Winter Olympic Games required increased
levels of security, and over 500 Globalstar phones were provided in support
of federal, state and local officials operating in and around Salt Lake
City.
Maritime. Globalstar has extended gateway coverage areas to maritime
customers crossing the North Atlantic, as well as those operating in the
coastal waters surrounding North America and South America, Europe,
northeastern Asia and the Middle East. Fishermen value the attractive
price, coverage, security and privacy offered by a Globalstar call versus
conventional VHF radio or satellite communications systems. Based on
recently collected call usage data, approximately 25% of Globalstar's
current traffic volume is generated from maritime usage, and such usage
continues to grow.
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Globalstar and Seatel developed the MCM-8, a multi-channel packet data
modem capable of 64 kilobits per second ("kbps") in 2001. In 2002, another
product, the MCM-3, a 28.8 kbps terminal capable of both voice and data
transmission, was launched by WaveCall, a Seatel affiliate.
Transportation. Long distance drivers have a continuous need to
contact dispatchers and destinations, to obtain information on, and react
to, changing business demands and weather conditions and simply to stay in
touch with their families and friends. In certain countries, trains and
buses are being equipped with Globalstar phones to provide communication
abilities to their passengers traveling through remote areas.
Natural Resources. Globalstar has been targeting resource industries,
such as oil and gas, mining and forestry, as well as the remote communities
serving these industries. Oil and gas exploration customers operating in
the Gulf of Mexico, off the coast of Brazil, in the far east of Russia and
in the Middle East were early target markets. In 2002, Globalstar
introduced new data products targeted at these markets.
Outdoor Enthusiasts. Globalstar service providers have negotiated
agreements with specialist resellers in an effort to make Globalstar phones
part of the basic equipment of wilderness guides and outfitters, addressing
the growing market for adventure and eco-tourism, as well as the hunting,
fishing and mountaineering markets.
Agribusiness. Large plantations, ranches and other agricultural
businesses in countries such as Australia, Brazil and Argentina typically
lie beyond the range of current or planned cellular service. Workers at
these locations find Globalstar service valuable to coordinate their
operations.
Utilities. Utility companies worldwide need to maintain transmission
lines across long distances in territories that are often vast and remote.
Globalstar voice and data features support both on-site and remote
monitoring of distribution facilities and links. Major utility companies,
such as ENEL (Ente Nazionale per l'Energia Elettrica) in Italy, use
Globalstar's service for their maintenance staff in remote areas.
Aeronautical. Globalstar is working with QUALCOMM, Geneva Aviation,
Northern Airborne Technologies and ARNAV Systems, Inc. to make 9.6 kbps
voice and data products commercially available for installation and use in
general aviation aircraft. These products will be capable of providing
cockpit and cabin voice and data communication, as well as integrated data
services such as weather and graphical flight plan displays.
Rural Telephony. The use of fixed terminals for rural telephony is an
expanding market segment for Globalstar. Initial service was developed
through prepaid payphone services in remote villages. Globalstar rural
payphone services had been deployed in several countries, predominately in
North Africa, South America and Central America. During 2003, Globalstar
expects to see these payphone services introduced into Eastern Europe,
Russia, Brazil and the Middle East. In March 2003, Globalstar introduced a
lower cost fixed terminal designed to penetrate the rural telephony and
public safety markets in North America.
Data. Globalstar has continued deployment of packet and asynchronous
data service throughout the world. Asynchronous data services are available
on all Globalstar gateways, and packet data is being deployed progressively
with commercial service available in North America, Brazil, Peru and Italy.
During 2003, subject to QUALCOMM's support and cooperation, Globalstar
plans to roll out packet data services in all of its gateways.
Globalstar has continued its development of the data market and has
positioned itself for entry into a number of major segments including fixed
asset monitoring, mobile asset tracking and telematics. Globalstar also
entered into a development and production agreement for a low speed simplex
modem with Aero Astro, an independent development company. This modem,
which became commercially available in March 2003, is priced below $100 to
value added resellers in large quantities.
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THE GLOBALSTAR SYSTEM
The Globalstar System consists of a satellite constellation, owned by
Globalstar, a ground segment known as gateways, currently owned and operated
primarily by Globalstar's service providers, and telephones, owned or leased by
subscribers.
The Globalstar space segment consists of:
- 52 low-earth-orbit satellites, including 44 of which are currently in
revenue service, three failed satellites now serving as in-orbit
testbeds, one in-plane spare at 1,414km, one in-orbit spare at the 920km
phasing orbit, and three satellites that are out of service and
undergoing diagnostic testing and recovery operations;
- Eight additional on-ground spare satellites in storage held by SS/L,
seven of which have completed production (see the discussion of the Loral
Settlement above); and
- Two state-of-the art satellite and network operations control centers in
California.
Satellite Constellation. The deployment of six satellites in each of eight
orbital planes assures that two to four satellites are visible to each
subscriber at all times from any point on the earth's surface, other than the
extreme northern and southern latitudes. SS/L's patented system design works
with QUALCOMM's CDMA technology to permit dynamic selection of the strongest
signal available from all satellites in view, a technique Globalstar refers to
as path diversity, resulting in superior call clarity and a low incidence of
dropped calls. As the satellites and the user change positions, satellites are
added and dropped seamlessly from the call.
Globalstar's technology design kept the satellites simple, with the
intelligence of the system accessible on the ground through the Globalstar
gateways and control centers. The Globalstar satellites use a traditional "bent
pipe" design, amplifying and reflecting received signals directly back to earth.
Globalstar's full constellation has been launched and the satellites have,
in general, been performing well. However, since mid-March 2001 fifteen
satellites experienced anomalous behavior in the S-Band converter. Of these,
nine have been recovered and returned to service, three have been declared
failed (two of which were replaced by spares), and three are currently out of
service and undergoing recovery operations. Although recovery cannot be
guaranteed, the recovery period for those satellites returned to service has
ranged from two weeks to six months, occurring on average in approximately two
months.
Gateways. Globalstar satellites relay calls to earth through the
Globalstar gateways, which in turn connect the calls through the public
telephone network or any other wireline or wireless network. Gateways can also
be connected to the Internet to permit the transmission of Internet protocol
data over the satellites. Gateway facilities include three or four large
antennas that send and receive signals to and from the satellites, the
sophisticated call processing equipment that connects calls to the local public
telephone network or any other wireline or wireless network and the software
that implements the Globalstar System's features and supports billing. The
gateway equipment located at these facilities, except for "home location
registers" and certain other off-the-shelf communications equipment, was
designed and manufactured by QUALCOMM and its subcontractors.
Twenty-six gateways are deployed, all but two of which (the South Africa
and Finland gateways) are operational. The gateway deployed in South Africa has
not yet received the regulatory approvals necessary for it to become
operational, and Elsacom, Globalstar's service provider in Italy, Northern
Europe and part of Eastern Europe, ceased operating its gateway in Karkkila,
Finland in May 2002. As part of the Elsacom Settlement, Globalstar has retained
title to the gateway equipment in Karkkila. (See the discussion of the Elsacom
settlement above). Twelve other gateways owned by Globalstar are in storage in
California and are available for sale and deployment to unserved areas of the
globe.
Each gateway serves a large geographic area. For example, three gateways
together cover the United States and Canada from Anchorage to Florida and San
Diego to Newfoundland. The operational gateways
8
provide coverage of approximately 68% of the world's land mass and approximately
18% of the world's bodies of water.
Telephones. Globalstar mobile phones are like ordinary cellular
telephones. They are simple to use and among the smallest, lightest and least
expensive satellite phones currently available. These phones are multimode,
functioning as satellite phones throughout the Globalstar service network and as
cellular phones where cellular service is available. Globalstar phones provide
this multimode capability without separate modules or plug-ins. Globalstar pay
phones and fixed wireless phones provide basic telephone service for both
business and residential use in rural villages and at remote industrial and
residential sites as well as for special applications customers requiring
back-up communications in an emergency such as the United States Department of
Homeland Security.
Globalstar phones have familiar features such as phone books, voice-mail,
short messaging service, asynchronous data service and, in some service areas,
call forwarding and Internet services through packet data switching.
Globalstar's utilization of QUALCOMM's CDMA digital wireless telecommunications
technology will enable it to swiftly adopt future improvements as wireless
technology evolves. In addition, because the intelligence of the Globalstar
System is located on the ground, future enhancements can be implemented without
modification to Globalstar's satellite constellation.
Two manufacturers, QUALCOMM and Telit Mobile Terminals S.p.A. ("Telit"),
produce mobile phones and car kits for Globalstar. QUALCOMM offers a tri-mode
unit that works on AMPS (the North American analog cellular standard) and CDMA
digital cellular networks, as well as on the Globalstar System. The QUALCOMM
phones are packet data-ready. The Telit phones support both the Globalstar
System and the digital cellular GSM protocol currently used throughout Europe
and in many other countries. QUALCOMM also produces a fixed telephone, called
fixed radio access unit or RAU, for business and residential use. These units
provide basic telephone service in rural villages, at remote industrial and
residential sites and on ships at sea. They may also be installed quickly in any
location as backup to existing wireline and wireless systems in case of natural
disasters and other emergencies that render such systems inoperable. The RAUs
can be configured as pay phones that accept tokens, debit cards and credit
cards. Contracts between Ericsson OMC Limited ("Ericsson") and Globalstar that
provided for the manufacture and delivery of both mobile and fixed phones were
terminated during 2001. However, Globalstar has Ericsson fixed access units in
storage that are available for sale.
Service Providers. In creating the Globalstar System, Globalstar selected
strategic partners whose marketing, operating and technical expertise were
expected to enhance Globalstar's capabilities. Many of Globalstar's strategic
partners are or were also Globalstar service providers. Under Globalstar's
agreements with these firms, they received exclusive rights to offer Globalstar
service within their assigned territories, with the right to retain their
exclusivity as long as they met minimum performance goals. Globalstar acts as a
wholesaler of capacity on its space segment to its service providers. In
connection with the implementation of its new business plan, Globalstar has
consolidated the operations of certain service providers into those of
Globalstar. Globalstar intends to restructure its business relationships with
the remaining independent service providers. (See the discussion of Globalstar's
New Business Plan and Related Transactions above.) Principal features of the new
relationships are expected to include the reduction or elimination of exclusive
rights and the imposition of consistent global roaming practices.
QUALITY OF SERVICE
Call success rates for phones used in the system by an experienced operator
with a clear view of the sky should exceed 98% based on Globalstar's extensive
testing program. The actual average for January 2003 based on call data
processed through Globalstar's billing system was 83% for all phone types. In
Globalstar's highest traffic gateway, as the call volume has significantly
increased, the call success rate has climbed to 90%. Globalstar believes that
the lower system average is due to a substantial number of users attempting
calls in adverse environments and circumstances. Fixed phones, not unexpectedly,
had much higher success rates (average of 92%). An individual phone's actual
call success rate is highly dependent upon its use, with variables being the
physical surroundings (e.g., the presence of tall buildings or trees),
9
location of the phone in the service area (e.g., a phone on the very edge of a
large coverage area, as opposed to closer to the gateway) and operator
experience. The system consistently demonstrates excellent voice quality. Single
calls lasting more than two days have been made to confirm the effectiveness of
the system's soft hand-off from satellite to satellite and the completeness of
the satellite coverage.
REGULATION
United States FCC Regulation. The Globalstar satellite constellation is
licensed by the United States Federal Communications Commission (the "FCC") as a
mobile satellite service ("MSS").
Globalstar holds regulatory authorization for two pairs of frequencies on
its current system: user links (from the user to the satellites, and vice versa)
and feeder links (from the gateways to the satellites, and vice versa). The FCC
initially authorized the construction, launch and operation of the Globalstar
System on January 31, 1995 and assigned the 1610-1626.5/2483.5-2500 MHz bands of
the radio frequency spectrum for the user links. However, the FCC currently
restricts operation of the user uplink to the 1610-1621.35 MHz portion of the
band. The portion of the band between 1621.35 and 1626.5 MHz is used by the
Iridium System in competition with Globalstar. This license (the "FCC Big LEO
License") is held by an affiliate of Globalstar, L/Q Licensee, which has agreed
to use the FCC Big LEO License exclusively for the benefit of Globalstar. On
November 19, 1996, the FCC authorized L/Q Licensee to use feeder link
frequencies in the 5091-5250/6875-7055 MHz bands. As part of the Loral
Settlement, the FCC Big LEO License or ownership of L/Q Licensee would be
assigned to New Globalstar.
Under the FCC's band plan for MSS in Globalstar's frequency bands,
Globalstar must share the frequencies in the United States with other licensed
operators of CDMA systems. The FCC initially licensed Odyssey(TM) Mobile
Satellite System, MCHI Mobile Communications Holdings, Inc. (Ellipso(TM) Mobile
Satellite System) and Constellation Communications Holdings, Inc. to share
Globalstar's band. However, each of these three has either turned its license in
or had its license revoked by the FCC. On January 30, 2003, the FCC opened a
rulemaking proceeding to consider whether the 1610-1626.5 MHz band should be
reassigned between Globalstar and Iridium and whether some portion of the
2483.5-2500 MHz band should be assigned to Iridium or to other terrestrial
wireless operators. The FCC will also consider whether these "Big LEO" bands
should be opened up for new satellite system applications. Globalstar intends to
contest any proposed reduction in its spectrum assignment vigorously. However,
there can be no assurance that Globalstar will be permitted to retain all of its
Big LEO spectrum.
On July 17, 2001, the FCC granted Globalstar and seven other applicants
authorizations to construct, launch and operate MSS systems in the 2 GHz band,
subject to strict milestone requirements. Each applicant received a base
allocation of 3.5 MHz of paired spectrum with the opportunity to gain additional
spectrum upon launch of its system. Globalstar held this authorization directly.
Systems were required to be constructed in compliance with certain milestones,
the first of which was executing a non-contingent contract to construct the
system by July 17, 2002. Globalstar believes that it met this first milestone by
entering into a non-contingent contract with SS/L on July 16, 2002. Globalstar
requested the FCC to grant certain waivers of later milestones. On January 30,
2003, the FCC's International Bureau denied Globalstar's waivers and declared
the 2 GHz license to be null and void. Globalstar believes that this action by
the FCC's staff is inconsistent with the facts and the law and has requested the
full FCC to review and reverse it. Globalstar has also requested the full FCC to
stay the Bureau's decision pending review.
The FCC Big LEO License only authorized the construction, launch and
operation of the Globalstar System's satellite constellation. Separate
authorizations were obtained from the FCC by affiliates of the former AirTouch
Satellite Services, later acquired by Vodafone, to operate gateways and
Globalstar phones in the United States. These affiliates, Globalstar USA, LLC
("GUSA") and Globalstar Caribbean Ltd., were acquired by a subsidiary of
Globalstar as of August 19, 2002, pursuant to an FCC authorization issued on
July 2, 2002. These acquisitions, along with the acquisition in December 2001 of
Vodafone's
10
interest in the Canadian Globalstar service provider and the acquisition in July
2002 of TE.SA.M.'s French gateway and service provider business, were
accomplished in accordance with Globalstar's consolidation strategy discussed
above.
In August 2001, the FCC issued Notices of Proposed Rulemaking in two
proceedings that affect (1) the amount of radio frequency spectrum available in
the future for MSS providers, including Globalstar, and (2) an MSS licensee's
ability to use its spectrum for ancillary terrestrial services ("ATC"). In the
first case, terrestrial wireless carriers asserted that they need more spectrum,
including the 2GHz band, for their third generation services. On January 30,
2003, the FCC issued decisions in both of these proceedings. In the first, the
FCC reassigned 30 MHz of MSS spectrum in the 2 GHz band for terrestrial wireless
use. In the second, the FCC allowed all MSS operators, including Globalstar, to
offer ATC in their assigned MSS spectrum subject to certain conditions. Assuming
that Globalstar succeeds in having its 2 GHz license reinstated, Globalstar does
not believe that the reduction in 2 GHz spectrum available for MSS will have a
materially adverse effect on Globalstar's future services. Globalstar is
currently evaluating whether and how to implement ATC in its Big LEO spectrum;
however, no final business decision is expected to be made pending completion of
Globalstar's restructuring.
International Coordination. The Globalstar System operates in frequencies
which were allocated on an international basis for MSS user links and MSS feeder
links. Globalstar is required to engage in international coordination procedures
with other proposed MSS systems under the aegis of the International
Telecommunications Union ("ITU"). Globalstar will also be required to coordinate
the use of its feeder links and any other foreign system that has similar plans.
Both a Russian and a Brazilian LEO MSS system have filed with the ITU their
intention to use the same feeder link spectrum as Globalstar. There can be no
assurance that such coordination will not adversely affect the use of these
bands by Globalstar.
Pursuant to the Intelsat and Inmarsat treaties, international satellite
operators are required to demonstrate that they will not cause economic or
technical harm to Inmarsat or Intelsat and to coordinate with Intelsat and
Inmarsat under obligations imposed on United States satellite systems by
international treaties. Globalstar has successfully completed the required
coordination with both Intelsat and Inmarsat.
Regulation of Service Providers. In order to operate gateways, including
the user uplink frequency, the Globalstar service provider in each country is
required to obtain a license from that country's telecommunications authority.
In addition, the Globalstar service provider must enter into appropriate
interconnection and financial settlement agreements with local and interexchange
telecommunications providers. All of the 24 operating Globalstar gateways
currently in the field are licensed. A potential Globalstar service provider in
South Africa is attempting to secure a license to operate and to reactivate the
gateway in that country.
United States International Traffic in Arms Regulations. The United States
International Traffic in Arms Regulations under the United States Arms Export
Control Act authorize the President of the United States to control the export
and import of articles and services that can be used in the production of arms.
Among other things, these regulations limit the ability to export certain
articles and related technical data to certain nations. The scope of these
regulations is very broad and extends to certain spacecraft, associated ground
equipment, and technical data. Certain information involved in the performance
of Globalstar's operations falls within the scope of these regulations. As a
result, Globalstar may have to obtain an export authorization or restrict access
to that information by international companies that are Globalstar service
providers. Globalstar has received and expects to continue to receive export
licenses for its telemetry and control equipment located outside the United
States.
Other Export Regulation. Globalstar's operations are subject to certain
regulations of the United States Treasury Department's Office of Foreign Assets
Control (i.e., financial transactions) and the United States Commerce
Department's Bureau of Export Administration (i.e., export of gateways and
Globalstar phones).
11
RESEARCH AND DEVELOPMENT
Globalstar's Development Contract with QUALCOMM, which QUALCOMM purported
to terminate in November 2001, provided for QUALCOMM to perform certain
development tasks related to the Globalstar System. Globalstar performs certain
in-house engineering tasks that are classified as development costs. Total
development costs incurred for 2002, 2001, and 2000 were $1.9 million, $4.4
million, and $5.3 million, respectively. The lower figures for 2002 and 2001 are
attributable to Globalstar's having substantially completed initial development
and deployment of the Globalstar System and Globalstar's efforts to contain
spending.
PATENTS AND PROPRIETARY RIGHTS
Globalstar's design and development efforts have yielded 50 patents issued
and 27 patents pending in the United States, as well as 32 patents issued and
more than 94 patents pending internationally for various aspects of
communication satellite system design, implementation and operation. The issued
patents cover, among other things, Globalstar's process of combining signals
received from multiple satellites to improve the signal received and minimize
call fading.
INTERNATIONAL OPERATIONS
Globalstar earns the majority of its revenue from international operations.
For 2002, Globalstar earned $6.3 million in U.S. revenue and $18.3 million in
international revenue. At December 31, 2002, 2001, and 2000, Globalstar had
substantially all of its long-lived assets located in the United States with the
exception of its in-orbit satellites, its gateway and back office support
systems in France, and support equipment for telemetry and command equipment
located in various other countries. Globalstar also owns 50.1% of the Canadian
service provider operations based in Ontario, Canada. See "Certain Factors that
May Affect Future Results -- Globalstar faces currency risks and special risks
by doing business in developing markets" for a discussion of the risks related
to operating internationally.
EMPLOYEES
As of December 31, 2002, Globalstar had 146 full-time employees and 2
part-time employees, none of whom is subject to any collective bargaining
agreement. Globalstar considers its employee relations to be satisfactory.
COMPETITION
Iridium L.L.C. has emerged from bankruptcy with no debt under new ownership
and resumed commercial service in competition with Globalstar in April 2001. It
has secured long term contract from the United States Department of Defense. ICO
Global Communications (Holdings) Limited ("ICO") has also emerged from
bankruptcy, and is expected to complete its system and compete with Globalstar
in the future.
Existing MSS systems, including those of Mobile Satellite Ventures
(formerly Motient and American Mobile Satellite Corporation) and Inmarsat, and
recently developed systems, including those of ACeS and Thuraya Satellite
Communications Company, also provide competing service on a regional basis at
potentially lower costs.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). In addition, from time to time, Globalstar or GTL or their
representatives have made or may make forward-looking statements, orally or in
writing. They can be identified by the use of forward-looking words such as
"believes", "expects", "plans", "may", "will", "should", or "anticipates" or
their negatives or other variations of these words or other comparable words,
12
or by discussions of strategy that involve risks and uncertainties. Such
forward-looking statements may be included in, but are not limited to, various
filings made by Globalstar or GTL with the Securities and Exchange Commission,
press releases or oral statements made by or with the approval of an authorized
executive officer of Globalstar or GTL. Globalstar warns you that
forward-looking statements are only predictions. Actual events or results may
differ materially as a result of risks that Globalstar faces, including those
presented below. The following are representative of factors that could affect
the outcome of the forward-looking statements.
GLOBALSTAR FILED FOR BANKRUPTCY PROTECTION ON FEBRUARY 15, 2002; GTL'S EQUITY
INTEREST IN GLOBALSTAR WILL LIKELY BE ELIMINATED, OR AT BEST, SEVERELY DILUTED,
IN WHICH EVENT IT WILL HAVE LITTLE OR NO VALUE.
Globalstar and certain of its subsidiaries filed petitions under Chapter 11
of the Bankruptcy Code on February 15, 2002. On February 20, 2003, the
Bankruptcy Court approved certain auction procedures intended to enable
Globalstar to conclude its search for an investor to fund its restructuring and
exit from bankruptcy. However, no assurances can be given as to whether the
auction process will ultimately result in a successful reorganization of
Globalstar. It is very likely that in any financial restructuring, GTL's equity
interest, along with the interests of Globalstar's other partners, would be
eliminated.
GLOBALSTAR HAS LIMITED CASH TO FUND ITS OPERATIONS.
The $15.3 million cash on hand at December 31, 2002 and the anticipated
revenue from operations are insufficient to fund Globalstar's operations.
Globalstar will require additional financing to sustain its current operations
until breakeven cash flow is achieved. Globalstar will likely require debtor in
possession financing, beyond the $10 million available under the DIP Facility,
to sustain its operations through the conclusion of its bankruptcy case. There
can be no assurance that a successful restructuring will be completed and that
additional financing will be available on terms acceptable to Globalstar, if at
all. If Globalstar is unable to obtain additional financing, it will likely
cease to operate.
GLOBALSTAR HAS DEFAULTED ON CERTAIN DEBT PAYMENTS.
On January 16, 2001, Globalstar suspended indefinitely principal and
interest payments on its funded debt and dividend payments on its 8% RPPIs and
9% RPPIs in order to conserve cash for operations. Non-payment of interest on
Globalstar's debt instruments, credit facility and vendor financing agreements
when due, and continuance of such non-payment beyond the applicable grace
periods, constitute "events of default" under the terms of each of those debt
instruments. Events of default have occurred under Globalstar's $500 million
credit facility, its vendor financing facility with QUALCOMM, and its 11 3/8%
senior notes due February 15, 2004, its 11 1/4% senior notes due June 15, 2004,
its 10 3/4% senior notes due November 1, 2004, and its 11 1/2% senior notes due
June 1, 2005 (collectively, the "Senior Notes").
In addition, as a result of Globalstar's bankruptcy petition on February
15, 2002, other debt obligations of Globalstar were accelerated and became
immediately due and payable. Claims in respect of these obligations are
unsecured claims in the bankruptcy proceeding.
THE RATE OF GROWTH FOR THE SERVICE HAS NOT BEEN SUFFICIENT TO SUSTAIN
GLOBALSTAR'S COST OF OPERATIONS.
Low earth orbit satellite telecommunications systems are an immature
business sector that has not yet achieved commercial success in the marketplace.
Globalstar commenced commercial service in early 2000 but had acquired only
approximately 77,000 commercial subscribers by December 31, 2002, too few to
generate sufficient revenue to cover Globalstar's operating costs and service
its debt. By announcing a financial restructuring and filing for bankruptcy
protection on February 15, 2002, Globalstar became vulnerable to additional
risks, namely, that potential subscribers may defer subscribing for fear that
Globalstar will cease operating in the near future, and that potential
investors, partners and service providers would withhold investment because of
Globalstar's uncertain future. If Globalstar is unable to restructure its debt
obligations in bankruptcy, or ultimately generate positive additional cash flows
from operations, Globalstar is unlikely to survive.
13
GLOBALSTAR MAY BE REQUIRED TO WITHHOLD TAX ON INCOME RESULTING FROM THE
CANCELLATION OF DEBT.
Any plan of reorganization would likely involve the cancellation of debt in
exchange for equity. The cancellation of debt will give rise to considerable
taxable income that will be allocable to the partners of Globalstar. Under a
certain interpretation of Section 1446 of the Internal Revenue Code of 1986, as
amended, Globalstar may be obligated to pay a 35% withholding tax on all income
allocated to the foreign partners even if they do not receive a cash
distribution. Globalstar believes the imposition of the withholding tax may have
the effect of diverting its assets from its creditors to its foreign partners in
contravention of bankruptcy law. Globalstar expects to enter into an agreement
with the United States Internal Revenue Service pursuant to which, based upon
certain representations and satisfaction of certain terms and conditions,
Globalstar's total withholding obligation on this taxable income will be
significantly reduced. However, there can be no assurances such an agreement
will be reached. Failure to successfully implement such an agreement or
otherwise resolve this tax issue may adversely impact Globalstar's ability to
have a plan of reorganization confirmed.
GLOBALSTAR DEPENDS ON SERVICE PROVIDERS TO MARKET ITS SERVICE AND IMPLEMENT
IMPORTANT PARTS OF ITS SYSTEM.
Until relatively recently, Globalstar depended entirely on unaffiliated
service providers to purchase, install and operate gateway equipment, to sell
phones and to market Globalstar service in each country where the service
provider holds exclusive rights. Not all of these service providers have been
successful, and in some countries they have not initiated service according to
their schedules or sold as much usage as they originally anticipated. Globalstar
service providers are generally not earning revenues sufficient to fund their
operating costs. Globalstar has implemented its consolidation strategy and
intends to revise its business relationship with the service providers that are
not consolidated. Globalstar believes that the consolidation of certain service
providers completed during 2001 and 2002, and the possible consolidation of
remaining independent service providers contemplated by Globalstar's new
business plan, will increase Globalstar's operating efficiencies and provide for
improved global service coordination. Globalstar has limited experience in
offering Globalstar services at the retail level and may encounter unforeseen
difficulties in assuming retail service provider operations. No assurance can be
given that the consolidation strategy will be successful or that such
efficiencies will be realized over the longer term.
Globalstar has been unable to find suitable new or replacement service
providers for several important regions and countries, including South Africa,
India, Malaysia and Indonesia, the Philippines and other parts of Southeast
Asia. Globalstar has also not been able to find purchasers for gateways, which
were ordered and later canceled. Globalstar's inability to offer service in
these areas ultimately reduces overall demand for its service and undermines its
value for potential users who require global service or service in Africa,
Southeast Asia and the Indian subcontinent. In addition to the lack of global
service availability, roaming is not yet available in certain countries because
the affected service providers have been unable to date to reach business
arrangements with one another and conclude roaming testing.
While the assets Globalstar acquired from TE.SA.M. in July 2002 are
operational, TE.SA.M. ceased operating its billing systems, and, therefore,
generating revenue, in Western Europe and Northern Africa in late 2001.
Globalstar has recently reinitiated commercial operations of the Western
European Globalstar service, including distribution networks, billing and
customer care operations. There can be no assurance that TE.SA.M.'s former
customers will continue their subscriptions on the Globalstar network or that
Globalstar's Western European operations will provide revenue sufficient to
cover its cost of operations.
GLOBALSTAR'S CONSOLIDATION OF CERTAIN SERVICE PROVIDERS MIGHT NOT BRING
EFFICIENCIES TO OPERATIONS.
While Globalstar believes that the consolidation of certain service
providers with Globalstar will increase operating efficiencies and provide for
improved global service coordination, there can be no assurance that such
efficiencies will be realized. (See the discussion of Globalstar's New Business
Plan and Related Transactions above.)
14
GLOBALSTAR IS DEPENDENT ON KEY VENDORS.
Globalstar is dependent on QUALCOMM for gateway hardware and software, on
QUALCOMM as the exclusive manufacturer of phones using the IS-41 CDMA North
American standard, and on Telit for the manufacture of GSM dual-mode phones.
Ericsson has discontinued manufacturing Globalstar products, and there is no
assurance that QUALCOMM or Telit will not choose to terminate its business
relationship with Globalstar. If either does, Globalstar may not be able to find
a replacement. Even if Globalstar does find a replacement, there may be a
substantial period of time in which its products are not available.
In late-2001 QUALCOMM purported to terminate its Development Contract with
Globalstar. Globalstar has been in discussions with QUALCOMM regarding a follow
on agreement that will allow it to utilize the QUALCOMM expertise necessary to
maintain the system. There can be no assurances that Globalstar and QUALCOMM
will successfully negotiate mutually satisfactory terms required to secure
QUALCOMM's support to Globalstar's system operations. QUALCOMM has substantially
reduced its staff assigned to Globalstar and is requesting advance payments or
deposits for current and future work.
Globalstar is currently experiencing shortages of QUALCOMM car kits and
fixed radio access unit or RAU. QUALCOMM has restarted production of these
units, but its current production capacity is limited, and components required
to build the units as currently designed may not be available for future
production. There can be no assurance that Globalstar will have sufficient
QUALCOMM car kits and RAU units to meet anticipated demand for those products
without incurring substantial redesign and inventory costs.
Telit is itself restructuring in Italy. There can be no assurance at this
time that Telit will continue as a going concern and will continue to
manufacture products for the Globalstar System.
SS/L completed production of seven of the eight spare satellites. All eight
are in storage in California. Title to those satellites, which is currently held
by SS/L, is expected to be transferred to Globalstar as part of the Loral
Settlement discussed above. However, there can be no assurances that the Loral
Settlement will ultimately be effected.
GTL WILL LIKELY BE UNABLE TO FUND MANDATORY REDEMPTION REQUIREMENTS OF 8% AND 9%
CONVERTIBLE REDEEMABLE PREFERRED STOCK.
GTL's 8% convertible redeemable preferred stock ("8% Preferred Stock") and
9% convertible redeemable preferred stock ("9% Preferred Stock") have mandatory
redemption dates in 2011. Under the terms of the mandatory redemption, GTL may
make payments to the holders in either cash or common stock or a combination
thereof. Based upon the price of GTL's common stock at December 31, 2002, GTL
has not authorized a sufficient number of shares of common stock to effect
payment in common stock. Accordingly, as of December 31, 2002, GTL classified
$202,865,000 of the 8% and 9% Preferred Stock outside the shareholders' deficit
section of the balance sheet based on GTL's average common stock price in the
10-day period preceding December 31, 2002 (approximately $0.06). The number of
shares of GTL common stock that may be issued on the mandatory redemption date
will depend on factors at the redemption date including the price of GTL's
common stock and the number of shares of 8% Preferred Stock 9% Preferred Stock
outstanding at the time of the redemption. The amount of the 8% Preferred Stock
and 9% Preferred Stock classified outside the shareholders' deficit section will
vary in future periods depending on these variables.
GTL HAS BEEN DE-LISTED BY THE NASDAQ NATIONAL MARKET.
On June 14, 2001, GTL's listing was transferred to The NASDAQ SmallCap
Market. This change, while still permitting public trading of GTL's shares,
reduced their liquidity and may also have had an adverse effect on their trading
value. Since December 12, 2001, GTL has traded on the Nasdaq OTC Bulletin Board
under the symbol GSTRF.OB. There can be no assurance that there will be any
future trading market for the GTL common stock.
15
LOCKHEED MARTIN IS DISPUTING GLOBALSTAR'S RIGHT TO ISSUE IT A $150 MILLION NOTE
IN SATISFACTION OF PAYMENTS MADE UNDER A GUARANTY.
On June 30, 2000, Globalstar's $250 million credit facility with The Chase
Manhattan Bank became due and was repaid in full by its guarantors, including
Lockheed Martin Corporation. Pursuant to the relevant agreements, Globalstar
issued to all the guarantors three-year notes in proportion to the principal
amount of the credit facility guaranteed. Lockheed Martin, however, rejected the
notes it received and instead requested that Globalstar issue new securities
with additional rights and enhanced value without waiving its claim that it is
entitled to receive an immediate cash reimbursement by Globalstar of its $150
million payment to the bank lenders. Globalstar disputes Lockheed Martin's
interpretation of the relevant agreements. If the dispute is not resolved,
Globalstar cannot be sure that a court would agree with Globalstar's
interpretation of the agreements. Management believes, however, that a court
would agree with Globalstar's interpretation of the relevant agreements.
GLOBALSTAR'S SATELLITES HAVE A LIMITED USEFUL LIFE AND MAY FAIL PREMATURELY.
The Globalstar System has performed well, in general. The satellites in
orbit have certain redundant systems in case of failure. However, in-orbit
failure may result from various causes, including:
- component failure;
- loss of power or fuel;
- inability to control positioning of the satellite;
- solar and other astronomical events; and
- space debris.
Repair of satellites in space is not feasible. Factors that affect the
useful lives of Globalstar's satellites include the quality of construction,
gradual degradation of solar panels and the durability of components. Random
failure of satellite components may result in damage to or loss of a satellite
before the end of its expected life. Globalstar has not insured its satellites
against in-orbit failures.
Since mid-March 2001, fifteen satellites experienced anomalous behavior in
the S-Band converter. Of these, nine have been recovered and returned to
service, three have been declared failed (two of which were replaced by spares),
and three are currently out of service and undergoing recovery operations.
Although recovery cannot be guaranteed, the recovery period for those satellites
returned to service has ranged from two weeks to six months, occurring on
average in approximately two months. If Globalstar is unable to recover those
satellites currently undergoing recovery operations or any satellites that
experienced anomolous behavior in the future are not recovered, Globalstar's
results of operations may be materially adversely affected.
GLOBALSTAR FACES CURRENCY RISKS AND SPECIAL RISKS BY DOING BUSINESS IN
DEVELOPING MARKETS.
Based on business operations in 2002, in which Globalstar earned about 74%
of its revenue internationally, it expects that most of its business in the
future will be conducted outside the United States. International operations are
subject to changes in domestic and foreign government regulations and
telecommunications standards, tariffs or taxes and other trade barriers.
Political, economic or social instability or other developments, including
currency fluctuations, could also adversely affect Globalstar's operations. In
addition, Globalstar's contracts may be governed by international law or
enforceable only in foreign jurisdictions. As a result, Globalstar may find it
difficult to enforce its rights under these agreements if there is a dispute.
Globalstar's largest potential markets are in developing countries or
regions that are substantially underserved and are not expected to be served by
existing telecommunications systems. Developing countries are more likely than
industrialized countries to experience market, currency and interest
fluctuations and may have higher inflation. In addition, these countries present
risks relating to government
16
policy, price and wage, exchange control, tax related and social instability,
expropriation and other economic, political and diplomatic conditions.
The limited availability of United States currency in some local markets
may prevent a service provider from making payments in United States dollars. In
addition, exchange rate fluctuations may affect Globalstar's ability to control
the prices charged for its services.
GLOBALSTAR'S BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS.
Globalstar's operations are and will continue to be subject to United
States and international regulation. Globalstar's service providers must be
authorized in each of the markets in which they intend to provide service.
Globalstar and its service providers may not be able to obtain or retain all
regulatory approvals needed for operations. For example, Vodafone's affiliate,
Globalstar Southern Africa, has not received a license from the government
although its gateway has been operational for more than three years. Regulatory
changes, such as those resulting from judicial decisions and/or adoption of
treaties, legislation or regulation, in countries where Globalstar intends to
operate, may also significantly affect Globalstar's business.
See "BUSINESS, Regulation", above for a general description of Globalstar's
regulatory environment and a discussion of certain recent actions by the FCC
that could materially impact Globalstar's future operations.
GLOBALSTAR'S 2 GHZ LICENSE MAY BE NULL AND VOID.
On July 17, 2001, the FCC granted Globalstar and seven other applicants
authorizations to construct, launch and operate MSS systems in the 2 GHz band,
subject to strict milestone requirements. Each applicant received a base
allocation of 3.5 MHz of paired spectrum with the opportunity to gain additional
spectrum upon launch of its system. Globalstar held this authorization directly.
Systems were required to be constructed in compliance with certain milestones,
the first of which was executing a non-contingent contract to construct the
system by July 17, 2002. Globalstar believes that it met this first milestone by
entering into a non-contingent contract with SS/L on July 16, 2002. Globalstar
requested the FCC to grant certain waivers of later milestones. On January 30,
2003, the FCC's International Bureau denied Globalstar's waivers and declared
the 2 GHz license to be null and void. Globalstar believes that this action by
the FCC's staff is inconsistent with the facts and the law and has requested the
full FCC to review and reverse it. Globalstar has also requested the full FCC to
stay the International Bureau's decision pending review. However, there can be
no assurance that the FCC will ultimately overturn the International Bureau's
decision and reinstate Globalstar's 2GHz license.
In August 2001, the FCC issued Notices of Proposed Rulemaking in two
proceedings that affect (1) the amount of radio frequency spectrum available in
the future for MSS, including Globalstar and (2) an MSS licensee's ability to
use its spectrum for ATC. In the first case, terrestrial wireless carriers
asserted that they need more spectrum, including the 2GHz band for their third
generation services. On January 30, 2003, the FCC issued decisions in both of
these proceedings. In the first, the FCC reassigned 30 MHz of MSS spectrum in
the 2 GHz band for terrestrial wireless use. In the second, the FCC allowed all
MSS operators, including Globalstar, to offer ATC in their assigned MSS spectrum
subject to certain conditions. Assuming that Globalstar succeeds in having its 2
GHz license reinstated, Globalstar does not believe that the reduction in 2 GHz
spectrum available for MSS will have a materially adverse effect on Globalstar's
future services. Globalstar is currently evaluating whether and how to implement
ATC in its Big LEO spectrum; however, no final business decision will be made
pending completion of Globalstar's restructuring.
GLOBALSTAR MAY HAVE ITS BIG LEO SPECTRUM ALLOCATION REDUCED.
Under the FCC's band plan for MSS in Globalstar's frequency bands,
Globalstar must share the frequencies in the United States with other licensed
operators of CDMA systems. The FCC initially licensed Odyssey(TM) Mobile
Satellite System, MCHI Mobile Communications Holdings, Inc. (Ellipso(TM)
17
Mobile Satellite System) and Constellation Communications Holdings, Inc. to
share Globalstar's band. However, each of these three has either turned its
license in or had its license revoked by the FCC. On January 30, 2003, the FCC
opened a rulemaking proceeding to consider whether the 1610-1626.5 MHz band
should be reallocated between Globalstar and Iridium and whether some portion of
the 2483.5-2500 MHz band should be assigned to Iridium or to other terrestrial
wireless operators. The FCC will also consider whether these "Big LEO" bands
should be opened up for new satellite system applications. Globalstar intends to
contest any proposed reduction in its spectrum assignment vigorously. There can
be no assurance that Globalstar will be permitted to retain all of its Big LEO
spectrum.
GLOBALSTAR FACES INTENSE COMPETITION FROM BOTH DIRECT AND INDIRECT COMPETITORS,
AND ADDITIONAL DIRECT COMPETITORS PLAN TO ENTER THE MARKET IN THE FUTURE.
Iridium L.L.C. ("Iridium") has emerged from bankruptcy with no debt under
new ownership and resumed commercial service in competition with Globalstar in
April 2001. It has secured a long-term contract from the United States
Department of Defense. ICO Global Communications has also emerged from
bankruptcy, and is expected to complete its system and compete with Globalstar
in the future.
Existing MSS systems, including those of Mobile Satellite Ventures
(formerly Motient and American Mobile Satellite Corporation) and Inmarsat, and
recently developed systems, including those of ACeS and Thuraya Satellite
Communications Company, also provide competing service on a regional basis at
potentially lower costs.
TECHNOLOGICAL ADVANCES AND A CONTINUING TREND TOWARD STRATEGIC ALLIANCES IN THE
TELECOMMUNICATIONS INDUSTRY COULD GIVE RISE TO SIGNIFICANT NEW COMPETITORS.
Satellite-based telecommunications systems are characterized by high
up-front costs and relatively low operating costs. Several systems are being
proposed and, while the proponents of these systems believe that there will be
significant demand for their services, actual demand will not become known until
such systems are operational. If the capacity of Globalstar and competing
systems exceeds demand, price competition could be intense.
NEW TECHNOLOGIES AND THE EXPANSION OF LAND-BASED SYSTEMS MAY REDUCE DEMAND FOR
GLOBALSTAR'S SERVICE.
Globalstar believes that the extension of land-based telecommunications
services to regions previously underserved or not served by wireline or cellular
services has reduced demand for Globalstar service in those regions. These
land-based telecommunications services have been built more quickly than
Globalstar anticipated; therefore, demand for Globalstar service is expected to
be reduced sooner than Globalstar assumed in formulating earlier business plans.
This development has been responsible, in part, for Globalstar's efforts in 2001
and 2002 to identify and sell into vertical markets and to deploy data products,
rather than focusing more resources on areas formerly underserved by terrestrial
systems. Globalstar may also face competition in the future from companies using
new technologies and new satellite systems. The space and communications
industries are subject to rapid advances and innovations in technology. New
technology could render the Globalstar System obsolete or less competitive by
satisfying consumer demand in more attractive ways or through the introduction
of incompatible standards. In addition, Globalstar depends on technologies
developed by third parties, and Globalstar cannot be certain that these
technologies will continue to be available to New Globalstar on a timely basis
or on commercially reasonable terms.
GLOBALSTAR COULD FACE LIABILITY BASED ON ALLEGED HEALTH RISKS.
There has been adverse publicity concerning alleged health risks associated
with the use of portable hand-held telephones which have transmitting antennae.
Recent medical studies, however, have again failed to confirm such health risks.
In any event, because hand-held Globalstar telephones will use on average lower
power to transmit signals than traditional cellular telephones, Globalstar does
not believe that any new guidelines from the FCC, or any other regulatory
agency, will require any significant
18
modifications of its system or of its hand-held telephones. Even so, Globalstar
cannot be certain that these guidelines, or any associated health issues, will
not have an adverse effect on Globalstar's business.
GLOBALSTAR RELIES ON KEY PERSONNEL.
Globalstar must hire and retain highly qualified personnel to operate its
system and manage its business successfully. None of Globalstar's officers has
an employment contract with Globalstar, except that Mr. Olof Lundberg has a
written agreement to serve as chairman of Globalstar's General Partners'
Committee and chief executive officer of Globalstar. In addition, Globalstar
does not maintain "key man" life insurance. The departure of any of its
executives or other key employees could have an adverse effect on Globalstar's
business.
CERTAIN POTENTIAL CONFLICTS OF INTEREST COULD RESULT IN DECISIONS ADVERSE TO
GLOBALSTAR'S INTERESTS.
Potential conflicts of interest include the following:
- Globalstar partners, or their affiliates, are suppliers of the major
parts of the Globalstar System, as well as retail service providers. They
also manufacture the system elements which are sold to service providers
and subscribers.
- Globalstar is dependent upon technologies developed by Loral, QUALCOMM
and others.
- Partners and affiliates of Globalstar, including companies affiliated
with or controlled by Loral, are among Globalstar's main customers.
Accordingly, they may have conflicts of interest with respect to the
terms of Globalstar's service provider agreements.
- Globalstar is currently managed by a committee of its general partners, a
majority of the representatives on which may be designated by Loral,
which in turn owns SS/L, a contractor of Globalstar. Loral is also a
significant creditor of Globalstar.
- Certain members of Globalstar's Creditors' Committee have loaned money to
Globalstar and have invested, or are considering investing, in service
provider operations.
- On February 25, 2003, the Bankruptcy Court approved a $10 million DIP
Facility, which provided interim funding from two of Globalstar's
competitors. Affiliates of Iridium and ICO each contributed to the
interim financing for Globalstar.
AS A GENERAL PARTNER, GTL IS LIABLE FOR THE RECOURSE DEBT AND OTHER OBLIGATIONS
OF GLOBALSTAR.
Because GTL is a general partner of Globalstar, GTL is jointly and
severally liable with the other general partner for the recourse debt and other
recourse obligations of Globalstar to the extent Globalstar is unable to pay
such debts. GTL believes that such recourse obligations totaled approximately
$1.4 billion as of December 31, 2002. Globalstar's other general partner, LQSS,
filed for protection under the Bankruptcy Code on February 15, 2002 and is
extremely unlikely to have sufficient funds to pay the portion of Globalstar's
recourse debt previously allocated to it. Certain of Globalstar's debt,
including the public debt, is non-recourse to the general partners.
A CHANGE OF CONTROL OF GTL OR REDUCTION IN GTL'S OWNERSHIP OF GLOBALSTAR COULD
RESULT IN GTL HAVING TO PAY ADDITIONAL TAXES AND BECOMING SUBJECT TO ONEROUS
REQUIREMENTS UNDER THE INVESTMENT COMPANY ACT.
If either of the following occurs, GTL will become a limited partner in
Globalstar and will no longer appoint representatives to serve on its committee
of general partners:
- a change of control of GTL at a time when GTL owns less than 50% of the
Globalstar partnership interests outstanding, including changes in GTL's
board of directors; or
19
- a sale or other disposition of partnership interests following which
GTL's equity interest is reduced to less than 5%, without prior approval
by the managing general partner of Globalstar or by the limited partners
of Globalstar.
If GTL were to become a limited partner in Globalstar, GTL could be deemed
to be an investment company under the Investment Company Act of 1940. If this
happens, GTL would become subject to the registration and other requirements of
that law. In order to register, GTL might be required to reincorporate as a
domestic U.S. corporation and would thereafter be subject to U.S. tax on its
worldwide income. GTL currently intends to conduct its operations so as to avoid
being deemed an investment company under the Investment Company Act of 1940.
HOLDERS OF GTL PREFERRED STOCK WILL HAVE THE RIGHT UNDER CERTAIN CIRCUMSTANCES
TO APPOINT DIRECTORS TO GTL'S BOARD OF DIRECTORS AND TO APPOINT A MEMBER TO
GLOBALSTAR'S GENERAL PARTNERS' COMMITTEE.
In January 2001, GTL announced that it was suspending indefinitely dividend
payments on its 8% Preferred Stock and its 9% Preferred Stock. Under the terms
of each such series of preferred stock, if GTL should fail to pay dividend
payments on such series for an aggregate of six quarters, holders of the
majority of the outstanding shares of that series will have the right to elect
up to two additional members to GTL's Board of Directors. Globalstar's
partnership agreement further provides that in the event accrued and unpaid
dividends accumulate to an amount equal to six quarterly dividends on the 8%
Preferred Stock and/or the 9% Preferred Stock, holders of the majority of such
outstanding preferred stock, voting together as a class, will have the right to
appoint one additional member to Globalstar's General Partners' Committee.
Dividends have been accrued and not paid for six consecutive quarters on May 15,
2002 and June 1, 2002 for the 8% Preferred Stock and the 9% Preferred Stock,
respectively. As of December 31, 2002, these rights have not been exercised.
PATENTS HELD BY OTHER FIRMS OR INDIVIDUALS MAY BLOCK GLOBALSTAR'S PATENTS.
Because the U.S. patent application process is confidential, there can be
no assurance that third parties, including competitors of Globalstar, do not
have patents pending or issued that could result in infringement by Globalstar.
In such an event, Globalstar could be required to redesign some part of its
system or pay royalties for use of the third parties' patents, which could
increase cost or delay implementation of certain features or functions.
PUBLICLY TRADED SECURITIES ARE SUBJECT TO VOLATILITY OF MARKET VALUES.
GTL's stock price and the fair value of Globalstar's Senior Notes
experienced substantial price volatility in the period before Globalstar
announced that it would restructure its debt. This volatility may continue as
Globalstar restructures its debt obligations and increases cash flows from
operations. These factors, as well as general economic conditions, actions of
its competitors, and political conditions may materially adversely affect the
market values of those securities in the future.
GTL IS DEPENDENT UPON PAYMENTS FROM GLOBALSTAR TO MEET ITS OBLIGATIONS.
Because GTL is a holding company whose only assets are its interests in
Globalstar, GTL is dependent upon payments from Globalstar to meet its
obligations, including those under its preferred stock. Globalstar has made no
such payments, nor is it likely to do so. Further, GTL's rights and the rights
of holders of its securities, including the holders of preferred stock, to
participate in the distribution of assets upon Globalstar's restructuring will
be subject to the prior claims of Globalstar's and GTL's creditors.
GTL HAS NO SOURCE OF FUNDS OTHER THAN THOSE PROVIDED BY GLOBALSTAR.
GTL is totally dependent on Globalstar for funding of its ongoing operating
costs, including legal fees, transfer agent fees, directors fees and its
restructuring officer fees. Continued funding from Globalstar is subject to
Bankruptcy Court approval and there can be no assurance that future funding of
GTL will be authorized.
20
GLOBALSTAR IS SUBJECT TO EXPORT REGULATION.
Globalstar's operations are subject to certain regulations of the United
States State Department's Office of Defense Trade Controls (i.e., satellites and
related technical data), United States Treasury Department's Office of Foreign
Assets Control (i.e., financial transactions) and the United States Commerce
Department's Bureau of Export Administration (i.e., gateways and Globalstar
phones). There can be no assurance that such regulations will not adversely
affect or delay Globalstar's operations in a particular country.
AVAILABLE INFORMATION
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports, are available free of
charge at http://www.sec.gov once those reports are electronically filed with
the Securities and Exchange Commission.
ITEM 2. PROPERTIES
Globalstar currently has a lease covering approximately 106,000 square feet
for its headquarters' office space in San Jose, California. This lease expires
on December 31, 2008. Globalstar has two options to extend the initial term of
this lease for five years each. Globalstar is currently in discussions with the
landlord of the office space in San Jose to modify the terms and conditions of
the existing lease. Globalstar leases approximately 12,000 square feet for its
back-up ground operations control center in El Dorado Hills, California. The
lease expires in November 2006 with options to renew for up to an additional six
years. In addition, Globalstar Canada Satellite Co. ("GCSC") leases
approximately 8,000 square feet for its service provider operations in Ontario,
Canada. The lease expires in July 2005.
ITEM 3. LEGAL PROCEEDINGS
On February 20, 2001, a purported class action lawsuit was filed against
Globalstar and Globalstar Capital Corporation on behalf of the owners of the
10 3/4% senior notes, due November 2004 (the "10 3/4% Senior Notes") in Superior
Court, New Castle County, Delaware. Globalstar Capital Corporation and
Globalstar issued the 10 3/4% Senior Notes as joint obligors. The complaint
alleges that the defendants repudiated the 10 3/4% Senior Notes' registration
statement, prospectus and indenture, without consent of the holders of the
10 3/4% Senior Notes, when Globalstar announced that it was suspending its
future interest payments on the 10 3/4% Senior Notes. On April 23, 2001, the
defendants moved to dismiss the complaint for failure to state a cause of
action. A second similar class action was filed in Delaware on June 5, 2001. The
defendants have also moved to dismiss this complaint. Plaintiffs subsequently
amended the complaint and defendants again moved to dismiss the amended
complaint for failure to state a cause of action. On December 31, 2001, the
court granted defendants' motion to dismiss in part, dismissing plaintiffs'
claims for principal and interest not yet due, but allowing plaintiffs to
proceed with their breach of contract claim based on the interest payments
already missed at the time the amended complaints were filed. Defendants
answered the complaints on January 17, 2002. These proceedings are now
automatically stayed in accordance with Section 362(a) of the Bankruptcy Code.
On August 7, 2001, Globalstar received a petition filed on July 13, 2001 in
Texas state court by L.E. Creel III, a holder of an 11 3/8% senior note due
February 2004 seeking principal payment of the note plus interest. Globalstar
filed an answer contesting the petition. On December 6, 2001, the parties
participated in court ordered mediation, which failed to lead to a settlement of
plaintiff's claim. This proceeding is also stayed pursuant the Bankruptcy Code.
On February 28, 2001, plaintiff Eric Eismann filed a purported class action
complaint against GTL in the United States District Court for the Southern
District of New York. The other defendants named in the complaint were Loral and
Bernard Schwartz, the former Chief Executive Officer of Globalstar. Globalstar
was not a named defendant in these actions. The complaint alleges that (a) GTL
and Mr. Schwartz violated Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder, by making material misstatements or failing to state
material facts about GTL's business and prospects and
21
(b) that Loral and Mr. Schwartz are secondarily liable for these alleged
misstatements and omissions under Section 20(a) of the Exchange Act as alleged
"controlling persons" of GTL. The class of plaintiffs on whose behalf this
lawsuit has been asserted consists of all buyers of GTL common stock from
December 6, 1999, through October 27, 2000, excluding the defendants, officers
and directors of GTL and certain persons affiliated therewith. Eighteen
additional purported class action complaints were subsequently filed in the
United States District Court for the Southern District of New York. These
complaints were granted class action status and consolidated into a case known
as In Re Globalstar Securities Litigation, 01 Civ. 1748 (SHS). On September 26,
2001, the court appointed The Phillips Family as Lead Plaintiff for the class.
On November 13, 2001, Lead Plaintiff filed a Consolidated Amended Class Action
Complaint and a demand for jury trial. The amended complaint drops the cause of
action against certain individuals and adds causes of action against Globalstar
and its wholly-owned subsidiary, Globalstar Capital. GTL and Globalstar believe
that they have meritorious defenses to these actions and on or about February
25, 2002, filed a motion to dismiss the complaint. The case against Globalstar
and Globalstar Capital is stayed pursuant to the Bankruptcy Code. There are,
however, no assurances that the defenses to these actions will be successful.
During 2001, Ericsson filed two separate demands for arbitration with the
American Arbitration Association that sought monetary damages in the combined
amount of $64.0 million with respect to two contracts. Ericsson took the
position that Globalstar failed to satisfy minimum purchase requirements for
phones under two contracts, one for the purchase of Fixed Access Units (FAU) and
one for the purchase of mobile R290 units (R290). The parties negotiated a
settlement and liquidation in the amount of $35.0 million, which amount is a
creditor's claim by Ericsson against Globalstar.
On December 5, 2002, StarMD, LLC ("StarMD") filed a complaint in the
Pennsylvania Court of Common Pleas, Allegheny County, naming GUSA as the
defendant. The complaint alleges four counts: (1) in equity, seeking a mandatory
injunction requiring GUSA to sell to StarMD "as many telephones as its requests
and to provide service to plaintiff's customers . . . ;" (2) in assumpsit, for
lost profits "and related revenue" from the sale of "an estimated 10,800
telephones," in the amount of $31,104,000; (3) in assumpsit, for recovery of the
value of plaintiff's efforts in developing a marketing campaign, for damages "in
excess of $25,000;" and (4) in trespass, for tortiously interfering with
plaintiff's agreement with Globalstar for the development and co-marketing of an
antenna kit for the Globalstar 1600 telephone. In February 2003, GUSA filed
Preliminary Objections requesting the court to dismiss the complaint on grounds
of (1) lack of personal jurisdiction, (2) improper venue, (3) forum non
conveniens, (4) a prior-existing valid and enforceable agreement to arbitrate
and (5) legal insufficiency. The request for dismissal is before the court
awaiting decision.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(a) MARKET PRICE AND DIVIDEND INFORMATION
GTL's common stock is currently traded on the NASDAQ OTC Bulletin Board
under the symbol "GSTRF.OB" The following table presents the reported high and
low bid quotations of GTL's common stock as reported on The NASDAQ National
Market, The NASDAQ SmallCap Market, and the NASDAQ OTC Bulletin Board markets
during 2002 and 2001.
BID QUOTATIONS
--------------------------------
2002 2001
-------------- --------------
HIGH LOW HIGH LOW
----- ----- ----- -----
Quarter ended:
March 31.................................. $0.19 $0.05 $2.28 $0.36
June 30................................... 0.15 0.06 0.77 0.25
September 30.............................. 0.28 0.06 0.47 0.20
December 31............................... 0.15 0.01 1.14 0.10
GTL and Globalstar do not currently anticipate paying any dividends or
distributions (other than to the extent that Globalstar's payment of GTL's
operating expenses related to Globalstar would be treated as a distribution).
GTL has not declared or paid any cash dividends on its common stock, and
Globalstar has not made any distributions on its ordinary partnership interests.
GTL is a holding company, the sole asset of which is its partnership interests
in Globalstar; GTL has no independent means of generating revenues. Globalstar
expects to pay GTL's operating expenses related to Globalstar; such expenses are
not expected to be material. Globalstar's credit agreements and the indentures
related to its Senior Notes restrict, and the DIP Facility eliminates, the
ability of Globalstar to pay cash distributions on its ordinary partnership
interests. On January 16, 2001, Globalstar and GTL suspended indefinitely
dividend payments on their preferred equity interests.
(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of March 17, 2003, there were 1,834 holders of record of GTL's common
stock.
23
ITEM 6. SELECTED FINANCIAL DATA
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000(1) 1999(2) 1998(3)
----------- ----------- ---------- ---------- --------
STATEMENT OF OPERATIONS DATA:
Equity in net loss applicable to
ordinary partnership interests
of Globalstar, L.P. .......... $ 55,173 $ 142,298 $1,667,761 $ 81,861 $ 50,561
Equity in net loss applicable to
preferred partnership
interests of Globalstar,
L.P. ......................... -- -- 356,944 -- --
Net loss........................ 55,173 142,298 2,029,123 32,151 50,561
Net loss applicable to common
shareholders.................. 74,844 168,860 2,059,853 81,861 50,561
Net loss per share -- basic and
diluted(4).................... 0.66 1.54 20.85 0.99 0.67
CASH FLOW DATA:
Provided by operating
activities.................... -- -- 30,745 22,470 --
Used in investing activities.... -- -- 354,326 488,309 1,112
Provided by equity
transactions.................. -- -- 323,581 465,839 1,112
Provided by borrowings.......... -- -- -- -- --
Dividends paid per common
share......................... -- -- -- -- --
RATIO OF EARNINGS TO FIXED
CHARGES....................... N/A N/A 1x 1x 1x
Deficiency of earnings to cover
fixed charges................. 19,671 26,562 N/A N/A N/A
DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ---------- ---------- --------
BALANCE SHEET DATA:
Investment in Globalstar,
L.P........................... $ -- $ -- $ -- $1,034,902 $580,428
Total assets.................... -- -- -- 1,034,902 580,428
Convertible redeemable preferred
stock(4)...................... 202,865 220,296 -- -- --
Shareholders' equity
(deficit)..................... (1,133,216) (1,075,803) (686,647) 1,031,579 580,428
Shareholders' equity per common
share(5)...................... (12.13) (10.49) (9.76) 7.46 7.08
- ---------------
(1) Includes GTL's share of Globalstar's $2.9 billion charge from the impairment
of the Globalstar System.
(2) Includes GTL's proportionate share of Globalstar's $29.9 million loss from
the write-off of excess launch vehicle deposits.
(3) Includes GTL's proportionate share of Globalstar's $17.3 million loss from
launch failure.
(4) Certain convertible redeemable preferred stock was classified outside of
shareholders' deficit in 2001.
(5) The 2001, 2000 and 1999 balances exclude the redemption value of the 8%
Preferred Stock and 9% Preferred Stock.
24
GLOBALSTAR, L.P.
(IN THOUSANDS, EXCEPT PER PARTNERSHIP INTEREST AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2002(2) 2001 2000(3) 1999(4) 1998(5)
-------- -------- ---------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net revenue............................ $ 24,639 $ 6,404 $ 3,650 $ -- $ --
Operating expenses..................... 128,110 205,185 3,476,402 186,505 146,684
Interest income........................ 101 4,513 16,490 6,141 17,141
Interest expense....................... 46,523 381,170 329,163 -- --
Net loss applicable to ordinary
partnership interests................ 152,846 602,073 3,816,401 232,584 151,740
Net loss per weighted average ordinary
partnership interest outstanding --
basic and diluted.................... 2.32 9.26 61.23 3.99 2.69
OTHER DATA:
Deficiency of earnings to cover fixed
charges(1)........................... 152,846 602,073 3,824,533 466,369 330,475
CASH FLOW DATA:
Used in operating activities........... 38,013 120,448 455,741 56,576 24,958
Used in (provided by) investing
activities........................... 2,328 (3,909) 95,156 721,733 682,884
Provided by partners' capital
transactions......................... -- -- 331,275 463,329 14,825
Provided by (used in) other financing
activities........................... -- (2,237) 266,348 386,432 287,552
DECEMBER 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ---------- ----------
BALANCE SHEET DATA:
Cash and cash
equivalents(6).............. $ 15,284 $ 55,625 $ 196,849 $ 173,921 $ 56,739
Globalstar System, net........ 198,756 229,774 264,856 -- --
Globalstar System under
construction................ -- -- 1,634 3,181,189 2,302,333
Total assets.................. 294,374 456,391 702,276 3,781,459 2,670,025
Vendor financing liability,
including current portion... -- 869,385 788,423 393,795 371,170
Long-term debt(7)............. -- 277,330 262,366 1,799,111 1,396,175
Liabilities subject to
compromise(8)............... 3,425,921 -- -- -- --
Partners' capital (deficit)... (3,150,598) (2,997,753) (2,395,214) 1,028,329 602,401
- ---------------
(1) The ratio of earnings to fixed charges is not meaningful, as Globalstar has
incurred operating losses.
(2) The results of operations for 2002 include a $18.4 million charge for the
launch termination penalty and write off of launch related deposits.
(3) The results of operations for 2000 include a $2.9 billion charge from the
impairment of the Globalstar System.
(4) The results of operations for 1999 include a $29.9 million loss from the
write-off of excess launch vehicle deposits.
(5) The results of operations for 1998 include a $17.3 million loss from launch
failure.
(6) Includes restricted cash of $22.4 million and $46.2 million for 2000 and
1999, respectively, received from service providers for the purchase of
gateways.
(7) Reflects the classification of $1.9 billion of Senior Notes and term loans
as current obligations in 2000.
(8) All pre-petition liabilities of Globalstar and its debtor subsidiaries
constitute unsecured claims and have been classified as liabilities subject
to compromise.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Financial
Condition and Results of Operations are not historical facts, but are
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995. In addition, Globalstar and GTL or its
representatives have made and may continue to make forward-looking statements,
orally or in writing, in other contexts, such as in reports filed with the SEC,
press releases or statements made with the approval of an authorized executive
officer of either Globalstar or GTL. These forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "plans," "may," "will," "would," "could," "should," "anticipates,"
"estimates," "project," "intend," or "outlook" or the negative of these words or
other variations of these words or other comparable words, or by discussion of
strategy that involve risks and uncertainties. These forward-looking statements
are only predictions, and actual events or results may differ materially as a
result of a wide variety of factors and conditions, many of which are beyond
Globalstar's or GTL's control. Some of these factors and conditions include: (i)
Globalstar filed for bankruptcy protection on February 15, 2002 and GTL's equity
interest in Globalstar will likely be eliminated, or at best, severely diluted,
in which event it will have little or no value; (ii) Globalstar has limited cash
to fund its operations; (iii) Globalstar has defaulted on certain debt payments;
(iv) the rate of growth for the service has not been sufficient to sustain
Globalstar's cost of operations; (v) Globalstar may be required to withhold tax
on income resulting from the cancellation of debt; (vi) Globalstar depends on
service providers to market its service and implement important parts of its
system; (vii) Globalstar's consolidation of certain service providers might not
bring efficiencies to operations; (viii) Globalstar is dependent on key vendors;
(ix) GTL will likely be unable to fund mandatory redemption requirements of 8%
Preferred Stock 9% Preferred Stock; (x) GTL has been de-listed by The NASDAQ
Stock Market; (xi) Lockheed Martin is disputing Globalstar's right to issue it a
$150 million note in satisfaction of payments made under a guaranty; (xii)
Globalstar's satellites have a limited useful life and may fail prematurely;
(xiii) Globalstar faces currency risks and special risks by doing business in
developing markets; (xiv) Globalstar's business is regulated, causing
uncertainty and additional costs; (xv) Globalstar's 2 GHz license may be null
and void; (xvi) Globalstar may have its Big Leo spectrum allocation reduced;
(xvii) Globalstar faces intense competition from both direct and indirect
competitors, and additional direct competitors plan to enter the market in the
future; (xviii) technological advances and a continuing trend toward strategic
alliances in the telecommunications industry could give rise to significant new
competitors; (xix) new technologies and the expansion of land-based systems may
reduce demand for Globalstar's service; (xx) Globalstar could face liability
based on alleged health risks; (xxi) Globalstar relies on key personnel; (xxii)
certain potential conflicts of interest could result in decisions adverse to
Globalstar's interests; (xxiii) as a general partner, GTL is liable for the
recourse debt and other obligations of Globalstar; (xxiv) a change of control of
GTL or reduction in GTL's ownership of Globalstar could result in GTL having to
pay additional taxes and becoming subject to onerous requirements under the
Investment Company Act; (xxv) holders of GTL preferred stock will have the right
under certain circumstances to appoint directors to GTL's Board of Directors and
to appoint a member to Globalstar's General Partners' Committee; (xxvi) patents
held by other firms or individuals may block Globalstar's patents; (xxvii)
publicly traded securities are subject to volatility of market values; (xxviii)
GTL is dependent upon payments from Globalstar to meet its obligations; (xxix)
GTL has no source of funds other than those provided by Globalstar; and (xxx)
Globalstar is subject to export regulation. See Certain Factors That May Affect
Future Results above.
GTL, a general partner of Globalstar, was created to permit public equity
ownership in Globalstar. GTL does not have any operations, personnel or
facilities, and does not manage the day-to-day operations of Globalstar. GTL's
sole asset is its investment in Globalstar, and GTL's results of operations
reflect its
26
share of the results of operations of Globalstar on an equity accounting basis.
Therefore, matters discussed in this section address the financial condition and
results of operations of Globalstar.
On February 15, 2002, Globalstar and certain of its subsidiaries filed
voluntary petitions under Chapter 11 of the Bankruptcy Code, in the Bankruptcy
Court. Globalstar and its subsidiaries remain in possession of their assets and
properties and continue to operate their businesses as debtors-in-possession. As
a result of Globalstar's bankruptcy petition, several of Globalstar debt
facilities were accelerated and became immediately due and payable. GTL does not
intend to file an immediate petition for bankruptcy relief, but will continue to
monitor events and govern its actions accordingly. It has been GTL's view that
any hope of providing a rights offering or other element of value to its
shareholders is enhanced by not filing for bankruptcy at this time. Globalstar's
bankruptcy filing and subsequent financial restructuring will likely leave
shares in GTL with very little or no value. (See the discussion of Globalstar's
proposed restructuring plan below.) These factors, among others, raise
substantial doubt about GTL's ability to continue as a going concern. However,
the accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
On February 14, 2003, Globalstar and the DIP Lenders reached agreement on
debtor-in-possession financing of $10 million and filed a motion with the
Bankruptcy Court seeking approval of such financing. Globalstar also filed a
motion defining certain auction procedures by which Globalstar would conclude
its search for an investor to fund Globalstar's restructuring and exit from
bankruptcy. The Bankruptcy Court provided interim approval of the DIP Facility
and approved the auction procedures on February 20, 2003, and the parties
executed the DIP Facility documents on February 25, 2003. The Bankruptcy Court
granted final approval of the DIP Facility on March 6, 2003. As a condition to
the DIP Lenders obligation to fund draws by Globalstar under the DIP Facility in
excess of $2.0 million, among other things (i) Globalstar was required to secure
from LQP a pledge in favor of the DIP Lenders of LQP's ownership interest in the
outstanding stock of L/Q Licensee, and (ii) Globalstar was required to reach an
agreement, satisfactory to the DIP Lenders, with respect to specified matters
relating to Loral and certain of its affiliates (the conditions set forth in
clauses (i) and (ii) above, collectively, the "Loral Condition"). The Loral
Condition was initially required to be satisfied by March 7, 2003, but the DIP
Facility was amended to extend the deadline for meeting the Loral Condition to
March 21, 2003. The Loral Condition was satisfied prior to the extended deadline
(see discussion of Developments Relating to Loral and QUALCOMM above).
Under the approved auction procedures, Globalstar received expressions of
interest from prospective investors in early March 2003, and with the assistance
of its financial advisors and in consultation with the Creditors' Committee,
determined which of them were "qualified" to perform due diligence and make a
definitive proposal for an equity investment in Globalstar or the purchase of
Globalstar's assets. March 21, 2003 was the deadline set for the submission of
investment proposals by the qualified bidders. Globalstar, in consultation with
the Creditors' Committee, expects to choose the highest and best investment
proposal in early-April and to file a modified plan of reorganization with the
Bankruptcy Court shortly thereafter. No assurance can be given as to whether
this auction process will ultimately lead to a successful restructuring of
Globalstar.
Any plan of reorganization is expected to involve the conversion of all
outstanding Globalstar debt into equity of New Globalstar. Moreover, it is
foreseeable that under any such plan of reorganization, GTL's equity interest,
along with the interest of Globalstar's other partners, will be eliminated
entirely.
RESULTS OF OPERATIONS
Globalstar currently provides satellite-based telephony and narrow band
data services through 24 gateways. These gateways provide coverage to 133
countries, including all of North America and South America (excluding
northwestern Alaska and portions of Canada above 70 degrees North latitude),
Europe, Australia, Russia, most of the Middle East, Central Asia, China and
South Korea. For the year ended December 31, 2002, Globalstar recorded
consolidated revenues of $24.6 million and provided
27
34.2 million minutes of billable telecommunication services as compared to $6.4
million and 23.9 million minutes for the year ended December 31, 2001. As of
December 31, 2002, approximately 77,000 commercial subscribers were using the
Globalstar System. Globalstar's revenues during 2002 were not sufficient to fund
Globalstar's operations.
Globalstar's revenues have increased significantly during 2002, primarily
through its acquisitions of GUSA and the majority interest in GCSC. The
distribution of Globalstar's 2002, 2001 and 2000 revenue by subsidiary and
affiliated companies is as follows (in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
2002 2001(1) 2000(1)
------- -------- --------
Wholesale -- revenue Globalstar, L.P. ................... $ 5,776 $5,994 $3,650
Service provider revenue:
Canada -- Globalstar Canada Satellite Co. ............. 15,916 410 --
United States -- Globalstar USA, LLC................... 6,732 -- --
Europe -- Globalstar Europe Satellite Services,
Ltd. ............................................... 72 -- --
Eliminations............................................. (3,857) -- --
------- ------ ------
Total revenue....................................... $24,639 $6,404 $3,650
======= ====== ======
- ---------------
(1) Includes $0.1 million and $1.5 million of royalty income for 2001 and 2000,
respectively. There was no royalty revenue in 2002.
2002 Compared with 2001
Globalstar, L.P. owns and operates the Globalstar satellite constellation
and earns its revenues primarily through the sale of airtime minutes on a
wholesale basis to Globalstar service providers. During 2002, Globalstar, L.P.
recognized total revenue of $5.8 million, consisting of $5.4 million of service
revenue and $0.4 million related to the sale of subscriber equipment and spare
parts, compared with total revenue of $6.0 million, consisting of $5.9 million
of service revenue and $0.1 million of royalty income, for 2001. The decrease in
service revenue is due to revenue not being recognized in regions where service
provider collections are not certain and is partially offset by increased minute
volume. The Globalstar System's call minute volume increased to 34.2 million
billable minutes during 2002 from 23.9 million for 2001.
On December 18, 2001, Globalstar acquired an indirect 50.1% interest in
GCSC, Globalstar's Canadian service provider. During 2002, GCSC and its
affiliates recognized total revenue of $15.9 million, consisting of $10.2
million of service revenue and $5.7 million of subscriber equipment sales,
compared to $0.4 million, consisting of $0.2 million of service revenue and $0.2
million of subscriber equipment sales, for 2001. Because Globalstar acquired the
majority interest in GCSC in December 2001, Globalstar earned only very limited
revenue related to its investment in GCSC during 2001.
GUSA is the Globalstar service provider in the United States and the
Caribbean. GUSA and Globalstar Caribbean Ltd., which holds the Caribbean gateway
license, were acquired by a wholly-owned non-debtor subsidiary of Globalstar,
L.P. on August 19, 2002. From August 19, 2002 through December 31, 2002, GUSA
recognized total revenue of $6.7 million, consisting of $3.6 million of service
revenue and $3.1 million of subscriber equipment sales. Globalstar did not earn
any revenue related to GUSA in 2001.
Globalstar Europe Satellite Services, Ltd. ("GESS") was formed in July 2002
by Globalstar to restart the commercial Globalstar operations in western Europe
and North Africa. From July 2, 2002 through December 31, 2002, GESS recognized
service revenue of $0.1 million. Globalstar did not earn any revenue related to
GESS in 2001.
28
Globalstar eliminates revenues recorded on sales between subsidiary
companies and between the parent and subsidiaries. During 2002, $3.9 million of
revenues were eliminated, consisting primarily of wholesale airtime sales from
Globalstar, L.P. to GCSC, GUSA, and GESS of $2.2 million, subscriber equipment
sales between GUSA and GCSC of $1.4 million, and other eliminations of $0.3
million. No such eliminations were recorded in 2001 due to the timing of the
GCSC, GUSA and GESS transactions.
On a consolidated basis, Globalstar recorded subscriber equipment revenue
of $7.5 million and $0.2 million in 2002 and 2001, respectively. In order to
facilitate service demand, Globalstar typically sells subscriber equipment at or
near its cost. Globalstar's cost of subscriber equipment sold was $5.7 million
and $0.1 million for 2002 and 2001, respectively. No subscriber equipment
revenue or cost of subscriber equipment sold was recorded until December 2001,
when Globalstar acquired the majority interest in GCSC.
For 2002, operations expenses were $26.4 million as compared to $56.1
million for 2001. The decline is primarily the result of reduced development
costs incurred under Globalstar's development contract with QUALCOMM. Costs
incurred under the QUALCOMM development contract were $23.2 million during 2001
and there were no costs incurred during 2002. The balance of the decrease in
operations expense is the result of cost saving measures implemented during
2001, partially offset by $10.1 million of operations costs incurred by GCSC,
GUSA, and GESS during 2002.
Marketing, general and administrative expenses decreased to $39.1 million
in 2002 from $101.4 million in 2001. The decline is primarily related to
reductions in promotional activities and cost savings measures implemented in
2001. Marketing, general and administrative expenses in 2001 included a $35
million accrual related to the Ericsson arbitration proceeding and $6.1 million
in equipment write-offs. Additionally, 2001 included $20.7 million of net bad
debt expense related to the sale of Globalstar gateways, versus $9.2 million
incurred in 2002. Exclusive of nonrecurring costs, bad debt expense related to
gateways and costs associated with recently acquired service provider
operations, expenses declined from $39.7 million in 2001 to $17.1 million in
2002. The decrease is partially offset by $12.2 million of additional costs
related to the acquisitions of GCSC, GUSA and the start up of the GESS
operations.
Restructuring and reorganization costs of $7.7 million were incurred in
2002, compared to $12.0 million in 2001. In 2002, these costs were primarily
fees to Globalstar's restructuring specialists including financial advisors,
legal counsel, and other advisors of $5.4 million, fees to the creditors' legal
counsel and financial advisors of $2.3 million, and employee separation costs of
$0.2 million. Other restructuring costs of $0.1 million, net of interest earned,
were paid in 2002. These costs are partially offset by interest income earned
during Globalstar's Chapter 11 case of $0.3 million. Restructuring and
reorganization costs in 2002 decreased by $4.3 million from 2001 primarily due
to employee separation costs paid in 2001.
Launch termination costs for 2002 were $18.4 million. Globalstar recorded
$17.2 million in launch termination costs when SS/L terminated the Globalstar
satellite launches on October 31, 2002. Globalstar believes that this
termination liability will not be classified as an administrative claim in its
bankruptcy case, and has recorded the liability as a pre-petition liability
subject to compromise. Also, Globalstar wrote off a deposit of $1.2 million
associated with the future satellite launches. There was no launch termination
expense in 2001.
Depreciation and amortization was $30.9 million and $35.6 million for 2002
and 2001, respectively. The decrease is primarily the result of the reduction in
the Globalstar System due to the failed satellites being written off and minimal
capital investments in 2002.
Interest income earned subsequent to the filing of the bankruptcy case on
February 15, 2002 (the "Petition Date") is accounted for as an offset to
restructuring costs. Consequently, only $0.1 million was recorded as interest
income in 2002, prior to the Petition Date. Interest income earned in 2001 was
$4.5 million.
29
Globalstar ceased recognizing interest expense on pre-petition debts on the
Petition Date. Interest expense recorded from the beginning of the year through
the Petition Date was $46.5 million in 2002. Interest expense of $381.2 million
was recorded 2001.
The accrual of preferred dividends on the 8% RPPIs and 9% RPPIs ceased on
the Petition Date. Preferred dividends accrued from the beginning of the year
through the Petition Date were $2.9 million in 2002 and preferred dividends
accrued in 2001 were $26.6 million. The decrease is primarily the result of the
change in accounting practice as well as conversions of portions of the 8% RPPIs
and 9% RPPIs. None of the distributions accrued during 2001 or 2002 have been
paid.
As a result of the above, the net loss applicable to ordinary partnership
interests decreased to $152.8 million for 2002, compared to $602.7 million in
2001.
Globalstar is organized as a limited partnership with various corporate
subsidiaries. Generally, taxable income or loss, deductions and credits of the
partnership are passed through to its partners. Globalstar's corporate
subsidiaries will provide for a tax provision or benefit using the asset and
liability method of accounting for income taxes as prescribed by SFAS No. 109,
Accounting for Income Taxes. As of December 31, 2002, Globalstar's corporate
subsidiaries had gross deferred tax assets of approximately $6.2 million. A
valuation reserve has been set up to reserve 100% of the deferred tax assets due
to concerns about the ability of Globalstar to generate sufficient income to be
able to utilize the assets.
2001 Compared with 2000
For 2001, Globalstar recognized consolidated service revenue of $6.2
million compared to $2.2 million in 2000. The increase in service revenue over
the previous year is due to the increased usage of the Globalstar System as
Globalstar's market penetration increased from approximately 31,000 subscribers
globally on December 31, 2000 to 66,000 subscribers on December 31, 2001.
Subscriber equipment revenue of $152,000 was recorded during the portion of
December 2001 that Globalstar owned a majority interest in the Canadian service
provider; no such revenue was generated in 2000. Royalty income decreased from
$1.4 million in 2000 to $57,000 in 2001 as equipment sales channels filled to
capacity. During 2001, Globalstar recognized total revenue of $6.4 million, an
increase of $2.7 million over the 2000 total revenue of $ 3.7 million.
For 2001, operations expenses were $56 million as compared to $128 million
for 2000. The decrease is primarily due to the cost saving measures implemented
during 2001. In addition, many of the costs associated with Globalstar's support
to gateway installation and testing and the commencement of commercial
operations of the Globalstar constellation and ground control centers incurred
in 2000 to complete the system, were not necessary in 2001.
Marketing, general and administrative expenses were $101 million and $81
million for 2001 and 2000, respectively. The increase is primarily the result of
accrued liabilities related to the Ericsson arbitration and increases in bad
debt expense. Globalstar provided a bad debt allowance on gateway and user
terminal receivables of $20.2 million in 2001. However, these increases were
offset partially by significant decreases in advertising and marketing costs and
a 71% decrease in payroll and fringe benefit expenses. Exclusive of the
arbitration and bad debt expense, marketing, general and administrative expenses
declined $35.2 million from 2000 to 2001.
Depreciation and amortization was $36 million and $328 million for 2001 and
2000, respectively. In 2000, Globalstar took an impairment charge of $2.9
billion dollars against its assets; the reduced depreciation and amortization in
2001 resulted from the reduced cost basis of the assets.
Interest income decreased to $5 million in 2001 from $16 million in 2000.
The decrease is the result of lower average cash balances available for
investment during 2001, and to a lesser extent, lower interest rates.
Interest expense increased to $381 million in 2001, as compared to $329
million in 2000. This increase resulted from higher debt accumulation during
2001 as compared to 2000.
30
Preferred distributions decreased to $27 million in 2001 from $31 million
in 2000, primarily the result of conversions of preferred interests into common
interests. None of the distributions accrued during 2001 were paid.
During 2001, Globalstar incurred $12 million in restructuring costs.
Globalstar's restructuring costs included employee separation costs, the cost of
financial advisors and legal counsel to both Globalstar and its informal
committee of bondholders and other costs associated with Globalstar's financial
restructuring. Employee separation costs relate to a reduction in workforce from
approximately 439 full-time employees at the beginning of 2001 to 146 full-time
employees and 2 part-time employees on December 31, 2002.
As a result of the above, the net loss applicable to ordinary partnership
interests decreased to $602 million for 2001, compared to $3.8 billion in 2000.
Globalstar is organized as a limited partnership with various corporate
subsidiaries. Generally, taxable income or loss, deductions and credits of the
partnership are passed through to its partners. Globalstar's corporate
subsidiaries will provide for a tax provision or benefit using the asset and
liability method of accounting for income taxes as prescribed by SFAS No. 109,
Accounting for Income Taxes. As of December 31, 2001, Globalstar's corporate
subsidiaries had gross deferred tax assets of approximately $0.8 million. A
valuation reserve has been set up to reserve 100% of the deferred tax assets due
to concerns about the ability of Globalstar to generate sufficient income to be
able to utilize the assets.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, Globalstar had approximately $15.3 million in cash
and cash equivalents on hand, including $2.8 million held by GCSC. During 2003,
Globalstar plans to use its available funds to cover its net cash out flow,
which it expects to include costs associated with operating its satellite
constellation, operating gateways, and providing retail services in North
America and portions of Europe.
The $15.3 million cash on hand at December 31, 2002 and the anticipated
revenue from operations are insufficient to fund Globalstar's operations.
Globalstar will require additional financing, beyond the $10 million available
under the DIP Facility, to sustain its current operations until breakeven cash
flow is achieved. There can be no assurance that a successful restructuring will
be completed and that additional financing will be available on terms acceptable
to Globalstar, if at all. If Globalstar is unable to obtain additional
financing, it will likely cease to operate.
Cash and cash equivalents decreased from $55.6 million on December 31, 2001
to $15.3 million on December 31, 2002. The decrease is primarily the result of
cash used to fund operations for the year ended December 31, 2002.
As a result of Globalstar's bankruptcy petition, several of Globalstar's
debt obligations were accelerated and became immediately due and payable.
Globalstar is not authorized to pay any pre-petition liabilities without
Bankruptcy Court approval.
CAPITAL EXPENDITURE REQUIREMENTS
Following a launch failure in September 1998, Globalstar decided to
purchase eight additional satellites for $148 million (including performance
incentives of up to $16 million) to serve as on-ground spares. As of December
31, 2002, costs of $147 million (including a portion of the performance
incentives) have been recognized for these spare satellites. Seven of the eight
have been completed, and all eight are in storage in California. Title to those
satellites, which is currently held by SS/L, is expected to be transferred to
Globalstar as part of the Loral Settlement discussed above. However, there can
be no assurance that the Loral Settlement will be effected. (See discussion of
Developments Relating to Loral and QUALCOMM above.)
In 1998, Globalstar secured twelve-month call-up orders for two additional
Delta launch vehicles from SS/L for the purpose of launching spare satellites.
The call-up date for Delta 8 was September 8, 2002, and the call-up date for
Delta 9 was March 31, 2002. During 2002, Globalstar sought and received several
31
no-cost month-to-month deferrals of the call-up deadline for Delta 9. In October
2002, the launch contractor declined to grant additional no-cost extensions.
Globalstar determined that it would be more advantageous to terminate the
launches than to begin to make the required progress payments and requested SS/L
to terminate the launches if further no cost extensions could not be secured.
Consequently, SS/L terminated the Globalstar Delta 8 and 9 launches on October
31, 2002.
In early 2003, GCSC contracted with QUALCOMM for the manufacture and
delivery of 2,000 fixed units and 5,000 car kits to be sold in the United States
and Canada. The units are scheduled for delivery beginning in March 2003 and
ending in March 2004. The contract values total $5.8 million.
COMMITMENTS AND CONTINGENCIES
There are pending legal proceedings involving GTL and Globalstar and the
outcome of such proceedings is uncertain. For information concerning such
proceedings, see "Item 3 Legal Proceedings" above. Such information is
incorporated in this Item 7 by reference.
Any plan of reorganization would likely involve the cancellation of debt in
exchange for equity. The cancellation of debt will give rise to considerable
taxable income that will be allocable to the partners of Globalstar. Under a
certain interpretation of Section 1446 of the Internal Revenue Code of 1986, as
amended, Globalstar may be obligated to pay a 35% withholding tax on all income
allocated to the foreign partners even if they do not receive a cash
distribution. Globalstar believes the imposition of the withholding tax may have
the effect of diverting its assets from its creditors to its foreign partners in
contravention of bankruptcy law. Globalstar expects to enter into an agreement
with the United States Internal Revenue Service pursuant to which, based upon
certain representations and satisfaction of certain terms and conditions,
Globalstar's total withholding obligation on this taxable income will be
significantly reduced. However, there can be no assurances such an agreement
will be reached.
At the time of their respective acquisitions both GCSC and GUSA were
offering service guarantees to portions of their customer base, under which
certain customers are entitled to cash compensation in the event that Globalstar
services do not remain active and available to them for at least one year after
initial activation. Globalstar has assumed these guarantees since the
acquisition and is continuing them only when necessary for certain accounts. As
of December 31, 2002, Globalstar has maximum contingent obligations with respect
to these service guarantees of approximately $3.1 million, that would come due
in the event that Globalstar services were discontinued in Canada or the United
States.
On June 30, 2000, Globalstar's $250 million credit facility with The Chase
Manhattan Bank became due and was repaid in full by its guarantors, including
Lockheed Martin Corporation ("Lockheed Martin"), QUALCOMM, DASA Globalstar
Limited Partner, Inc. ("DASA") and SS/L, who had previously received warrants
for GTL common stock in consideration of their guarantee. Pursuant to the
relevant agreements, Globalstar issued three-year notes in the amounts of $206.3
million, $21.9 million, $11.7 million and $10.1 million to Lockheed Martin,
QUALCOMM, SS/L and DASA, respectively, in satisfaction of their subrogation
rights. The notes are due on June 30, 2003 and bear interest, on a deferred
basis, at a rate of LIBOR plus 3%. On the consolidated balance sheet of
Globalstar the notes are presented as liabilities subject to compromise as of
December 31, 2002 and notes payable and notes payable to affiliates as of
December 31, 2001.
Lockheed Martin, however, rejected the notes it received and instead
requested that Globalstar issue new securities with additional rights and
enhanced value, without waiving its claim that it is entitled to receive an
immediate cash reimbursement by Globalstar of its $150 million payment to the
bank lenders. Globalstar disputes Lockheed Martin's interpretation of the
relevant agreements. If the dispute is not resolved, Globalstar cannot be sure
that if the matter were litigated, the court would agree with Globalstar's
interpretation of the agreements. Management believes, however, that a court
would agree with Globalstar's interpretation of the relevant agreements. The
notes are an unsecured claim in Globalstar's bankruptcy case.
32
In 2001, an issue was raised as to whether the three-year notes issued to
the guarantors of The Chase Manhattan Bank $250 million credit facility were
prepared in accordance with the recourse provisions of the guarantee
arrangement. Management does not believe the existing notes containing
non-recourse language will need to be replaced with notes not containing the
non-recourse language. If the existing non-recourse notes were replaced with
notes not containing the non-recourse language, the replacement would not impact
Globalstar's results of operations. However, allocations of Globalstar's losses
to general partners would increase by the amount of the increase in recourse
obligations.
On May 21, 2002, an employee incentive program was approved by the
Bankruptcy Court to recognize and retain key employees. The total value of the
program is $2.9 million of which $0.7 million was paid in July 2002. The balance
of the incentive program will be paid upon the successful reorganization of
Globalstar. Under certain conditions, up to $1.0 million of the remaining
payments may be made in common stock of New Globalstar.
Globalstar's satellites have a limited useful like and may fail
prematurely. Since mid-March 2001, fifteen satellites in the Globalstar System
experienced anomalous behavior in the S-Band converter. Of these, nine have been
returned to service, three have been declared failed (two of which were replaced
by spares), and three are currently out of service undergoing recovery
operations. Although recovery cannot be guaranteed, the recovery period for
those satellites returned to service has ranged from two weeks to six months,
occurring on average in approximately two months. If Globalstar is unable to
recover those satellites currently undergoing recovery operations or any
satellites that experience anomalous behavior in the future are not recovered,
Globalstar's results of operations may be materially adversely affected.
TAXATION
GTL will be subject to U.S. federal, state and local corporate tax on its
share of Globalstar's income that is effectively connected with the conduct of a
trade or business in the United States ("U.S. Income") and will be required to
file federal, state and local income tax returns with respect to such U.S.
Income. GTL expects, based on Globalstar's description of its proposed
activities, that most of GTL's income will be from sources outside the United
States and that such income will not be effectively connected with the conduct
of a trade or business within the United States ("Foreign Income"). Thus, GTL
believes that there generally will be no U.S. taxes on its share of Globalstar's
Foreign Income
In addition, any portion of GTL's income from sources outside the United
States, realized through Globalstar or otherwise, may be subject to taxation by
certain foreign countries. The extent to which these countries may require GTL
or Globalstar to pay tax or to make payments in lieu of tax cannot be determined
in advance. However, based upon its review of current tax laws, including
applicable international tax treaties of certain countries that Globalstar
believes to be among its key potential markets, it expects that a significant
portion of its worldwide income will not be subject to tax by the foreign
countries from which Globalstar derives its income. To the extent that
Globalstar bears a higher foreign tax because any holder of its ordinary
partnership interests (including GTL) is not subject to United States tax on its
share of Globalstar's Foreign Income, the additional foreign tax will be
specially allocated to such partner and will reduce amounts distributed by
Globalstar to such partner with respect to the ordinary partnership interests
held by such partner.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that business combinations be accounted for under the purchase
method and addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination. SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination and the accounting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 provides that
intangible assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives not
33
be amortized, but will rather be tested at least annually for impairment.
Globalstar adopted SFAS No. 142 on January 1, 2002. The adoption of this
pronouncement did not have an impact on its financial position or its results of
operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. Globalstar adopted SFAS No. 144 on January 1,
2002. The adoption of this pronouncement did not have an impact on its financial
position or its results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force ("EITF") Issue No. 94-3. Globalstar will
adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized
at the date of the company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires companies to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. Guarantees in existence at
December 31, 2002 are grandfathered for the purposes of recognition and would
only need to be disclosed. Globalstar does not expect that the adoption of FIN
No. 45 will have an effect on its consolidated financial statements. Globalstar
will adopt the initial recognition and measurement provisions of FIN No. 45 for
guarantees issued or modified after December 31, 2002.
In December 2002, the EITF reached a consensus on EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. In some
arrangements, the different revenue-generating activities (deliveries) are
sufficiently separable and there exists sufficient evidence of their fair values
to separately account for some or all of the deliveries (that is, there are
separate units of accounting). In other arrangements, some or all of the
deliveries are not independently functional, or there is not sufficient evidence
of their fair values to account for them separately. EITF Issue No. 00-21
addresses when, and if so, how an arrangement involving multiple deliverables
should be divided into separate units of accounting. EITF Issue No. 00-21 does
not change otherwise applicable revenue recognition criteria. The guidance in
this Issue is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 is not
expected to have a material effect on Globalstar's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment to FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirement of
SFAS No. 123, "Accounting for Stock-Based Compensation", to require prominent
disclosures in both annual and interim consolidated financial statements about
the method of accounting for stock-based employee compensation and the effect of
the method used on reported results. Globalstar adopted the disclosure
provisions of SFAS No. 148 effective December 31, 2002.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported
34
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the amount of revenues
and expenses reported for the period. Actual results could differ from
estimates.
GTL accounts for its investment in Globalstar's ordinary partnership
interests on an equity basis, recognizing its allocated share of net loss for
each period since its initial investment on February 22, 1995. In 2000,
Globalstar's losses reduced GTL's investment in Globalstar ordinary and
preferred partnership interests to zero. Accordingly, GTL discontinued providing
for its allocated share of Globalstar's net losses and recognized the remaining
unallocated losses as a result of its general partner status in Globalstar.
Because GTL is a general partner of Globalstar, GTL is jointly and
severally liable with the other general partner for the recourse debt and other
recourse obligations of Globalstar to the extent Globalstar is unable to pay
such debts. GTL believes that such recourse obligations totaled approximately
$1.4 billion as of December 31, 2002. Certain of Globalstar's debt, including
the public debt, is non-recourse to the general partners. On February 15, 2002,
LQSS, the other general partner of Globalstar filed a voluntary petition under
Chapter 11 of the Bankruptcy Code. Effective February 15, 2002, Globalstar
ceased allocating additional losses associated with recourse debt to LQSS. As
the only remaining general partner of Globalstar that has not filed for
bankruptcy protection, GTL has been allocated all loses related to debt that is
recourse the general partners since February 15, 2002. As a result of its
general partner status, GTL has recorded a cumulative liability of $880.8
million.
In 2001, an issue was raised as to whether the three-year notes issued to
the guarantors of The Chase Manhattan Bank $250 million credit facility were
prepared in accordance with the recourse provisions of the guarantee
arrangement. Management does not believe the existing notes containing
non-recourse language will need to be replaced with notes not containing the
non-recourse language. If the existing non-recourse notes were replaced with
notes not containing the non-recourse language, the replacement would not impact
Globalstar's results of operations. However, allocations of Globalstar's losses
to general partners would increase by the amount of the increase in recourse
obligations. Replacement of the notes would not alter the subordinate position
of GTL's shareholders relative to holders of these notes.
Since the Petition Date, Globalstar's consolidated financial statements
have been prepared in compliance with Statement of Position ("SOP 90-7") on
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code
issued by the American Institute of Certified Public Accountants. Specifically,
all pre-petition liabilities subject to compromise have been segregated on the
balance sheet and classified as liabilities subject to compromise. No interest
expense on pre-petition liabilities or dividends on redeemable preferred
partnership interests since the Petition Date have been accrued or recorded as
these amounts are not expected to be allowed claims. No debt discounts or
deferred financing costs have been amortized since the Petition Date as the
value of the allowed debt has not been fixed by the Bankruptcy Court. Debt
obligations have not been adjusted to reorganization values since the Bankruptcy
Court has not yet confirmed a plan of reorganization. Management expects that
the allowed claims will be established near the date that a final plan of
reorganization is confirmed by the Bankruptcy Court and pre-petition liabilities
will be adjusted as the claims are resolved.
Globalstar and its subsidiaries remain in possession of their assets and
properties and continue to operate their businesses as debtors-in-possession. As
a result of Globalstar's bankruptcy petition, several of Globalstar's debt
obligations were accelerated and became immediately due and payable. GTL does
not intend to file an immediate petition for bankruptcy relief, but will
continue to monitor events and govern its actions accordingly. Globalstar's
bankruptcy filing and subsequent financial restructuring will likely leave
shares in GTL with very little or no value. These factors, among others, raise
substantial doubt about GTL's ability to function as a going concern.
Inventory consists of fixed and mobile user terminals, accessories and
gateway spare parts that are held for sale. Inventory is stated at lower of cost
or market. Cost is computed using a standard cost, which approximates actual
cost on a first-in, first-out basis. Inventory write-downs are based on
management's best estimates as they relate to excess and obsolescence. If actual
market conditions are less favorable than those projected by management,
inventory write-downs may be required.
35
The carrying value of the Globalstar System is reviewed for impairment
whenever events or changes in circumstances indicate that the recorded value of
the space segment and ground segment, taken as a whole, may not be recoverable.
Globalstar looks to current and future undiscounted cash flows, excluding
financing costs, as primary indicators of recoverability. If an impairment is
determined to exist, any related impairment loss is calculated based on fair
value. If Globalstar's estimates of future performance and long term revenue
projections change, management may be required to record additional impairment
charges.
Long term assets include receivables from service providers associated with
the reimbursement of gateway acquisition and deployment costs previously paid by
Globalstar to QUALCOMM. As of December 31, 2002, these receivables are
delinquent and Globalstar has sent notices of default where appropriate. If the
collection of these payments is unsuccessful, Globalstar may retain title to
these gateways, subject to local restrictions, or Globalstar may receive an
equity position in the service provider company in exchange for debt
forgiveness. The production gateway receivable, net of reserve, is based on the
estimated value of the anticipated recovery of the receivables based on current
discussions between Globalstar and the service providers. As of December 31,
2002, Globalstar has reserved $18.9 million of the production gateway
receivables.
RELATED PARTY DISCLOSURES
Globalstar has a number of transactions with its affiliates. Such
transactions have been negotiated on an arms-length basis and Globalstar
believes that the arrangements are no less favorable to Globalstar than could be
obtained from unaffiliated parties. The following describes these related-party
transactions.
The governing body of Globalstar is the General Partners' Committee. The
Committee may have up to seven members, five of whom may be appointed by the
managing general partner of Globalstar, LQSS. The general partner of LQSS is
LQP, a Delaware limited partnership comprised of subsidiaries of Loral and
QUALCOMM. The managing general partner of LQP is Loral General Partner, Inc.
("LGP"), a subsidiary of Loral. As of December 31, 2002, Loral owned, directly
or indirectly, 25,163,207 (approximately 38.2%) of the ordinary partnership
interests of Globalstar, including interests attributable to 9,902,990 shares of
GTL outstanding common stock.
In order to accelerate the deployment of gateways around the world,
Globalstar agreed to help service providers finance approximately $80 million of
the cost of the initial gateways. Globalstar entered into an agreement with
QUALCOMM for the manufacturing, deployment and maintenance of Globalstar
gateways. Globalstar, in turn, invoiced the service providers for the contract
costs plus a markup. As of December 31, 2002, the collection of $35.2 million of
service provider gateway purchase receivables, which are secured by gateway
assets, are deferred indefinitely, as well as $2.8 million of interest.
Globalstar forgave the debt due from TE.SA.M. from its five gateways in
connection with the July 2, 2002, transaction and settlement described above.
(See discussion of New Business Plan and Related Transactions above.) Currently
due under the production gateway purchase agreement are $4.1 million of gateway
operational costs. The collection of these receivables is delinquent and
Globalstar has sent notices of default where appropriate. If the collection of
these payments is unsuccessful, Globalstar will retain title to these gateways,
subject to local restrictions. As of December 31, 2002, Globalstar has
classified the production gateway purchase receivables as long-term assets and
provided an allowance for doubtful collection of $18.9 million.
Following a launch failure in September 1998, Globalstar decided to
purchase eight additional satellites for $148 million (including performance
incentives of up to $16 million) to serve as on-ground spares. As of December
31, 2002, costs of $147 million (including a portion of the performance
incentives) have been recognized for these spare satellites. SS/L has not
terminated its satellite contract with Globalstar and has completed seven of the
eight spare satellites. All eight are in storage in the California. Title to
those satellites, which is currently held by SS/L, is expected to be transferred
to Globalstar as part of the Loral Settlement discussed below. However, there
can be no assurance that the Loral Settlement will be effected.
36
On July 17, 2001, the FCC granted Globalstar and seven other applicants
authorizations to construct, launch and operate MSS systems in the 2 GHz band,
subject to strict milestone requirements. Globalstar entered into a
non-contingent contract with SS/L on July 16, 2002. On January 30, 2003, the
FCC's International Bureau declared the 2 GHz license to be null and void.
Globalstar believes that this action by the FCC's staff is inconsistent with the
facts and the law and has requested the full FCC to review and reverse it.
Globalstar has also requested the full FCC to stay the Bureau's decision pending
review. On January 31, 2003, Globalstar instructed SS/L to stop work on the
contract and requested repayment of the balance of that had not been spent.
Loral is expected to repay this balance in connection with the Loral Settlement
discussed below. However, there can be no assurances that the Loral Settlement
will be effected.
In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of accrued interest) with QUALCOMM that
replaced the previous arrangement. As of December 31, 2002, $623.3 million was
outstanding under this facility (including $123.3 million of accrued interest).
This liability, including accrued interest through the Petition Date, has been
included in liabilities subject to compromise. In connection with this
agreement, QUALCOMM received warrants to purchase 3,450,000 Globalstar
partnership interests at an exercise price of $42.25 per interest. The exercise
price was determined by reference to the fair market value of GTL's common stock
on the closing date of the vendor financing, based on an approximate ratio of
one partnership interest for every four shares of GTL common stock. The warrants
are vested and will expire in 2007. The fair value of the vested warrants
totaled approximately $34.0 million and is being amortized over the term of the
vendor financing arrangements. However, in light of Globalstar's Chapter 11
petition, these warrants are likely to be of little or no value.
In January 2001, Globalstar suspended indefinitely principal and interest
payments on all of its vendor financing, in order to conserve cash for
operations. Under the terms of the QUALCOMM vendor financing facility,
non-payment of interest payments when they become due, and continuance of non-
payment for five days, is an "event of default". An event of default occurred on
January 16, 2001, when Globalstar failed to pay interest with respect to
separate credit extensions made under the QUALCOMM vendor financing facility. As
a result of Globalstar's bankruptcy petition filed on February 15, 2002, this
vendor financing was accelerated and became immediately due and payable. The
vendor financing is an unsecured claim in Globalstar's bankruptcy case.
SS/L provided $344 million of billings deferred under its construction
contracts with Globalstar, which included $120 million of orbital incentives.
The orbital payments on the replacement satellites are due on a per satellite
basis with 50% due when the satellite is placed in storage. The remaining 50% is
due when Globalstar directs SS/L to ship the satellite to the launch base. Until
such time, interest on the remaining 50% accrues at an interest rate of 10% per
annum. As of December 31, 2002, seven of the eight replacement satellites were
placed in storage and payments became due. No payments were made in 2002, and
interest accrued on the remaining 50% through the Petition Date. Total accrued
interest on the orbitals as of December 31, 2002 was $237,000. Payments were
made on the $134 million of non-interest bearing vendor financing through
January 15, 2001. Penalty fees were accrued at LIBOR plus 3%, through the
Petition Date, and total accrued penalties as of December 31, 2002 were $1.2
million. Interest was being accrued at LIBOR plus 3%, through the Petition Date,
and total accrued interest as of December 31, 2002 was $53.7 million. All of the
construction contract amounts owed to SS/L have been included in liabilities
subject to compromise. The amounts are unsecured claims in Globalstar's
bankruptcy case. Claims of Loral and its affiliates are expected to be resolved
as part of the Loral Settlement discussed below. However, there can be no
assurances that the Loral Settlement will be effected.
37
Payables and vendor financing due to affiliates is comprised of the
following (in thousands):
POST PETITION PRE-PETITION
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2002 2001
------------- ------------ ------------
SS/L............................................ $ 409 $278,364 $259,098
Loral........................................... 277 981 961
QUALCOMM........................................ -- 637,755 629,139
GCC............................................. 6,770 -- 6,199
Other affiliates................................ 289 3,249 9,099
------ -------- --------
$7,745 $920,349 $904,496
====== ======== ========
On June 30, 2000, Globalstar's $250 million credit facility with The Chase
Manhattan Bank became due and was repaid in full by its guarantors, including
Lockheed Martin, QUALCOMM, DASA and SS/ L, who had previously received warrants
for GTL common stock in consideration of their guarantee. Pursuant to the
relevant agreements, Globalstar issued three-year notes in the amounts of $206.3
million, $21.9 million, $11.7 million and $10.1 million to Lockheed Martin,
QUALCOMM, SS/L and DASA, respectively, in satisfaction of their subrogation
rights. The notes are due on June 30, 2003 and bear interest, on a deferred
basis, at a rate of LIBOR plus 3%. On the consolidated balance sheet of
Globalstar the notes are presented as liabilities subject to compromise as of
December 31, 2002 and notes payable and notes payable to affiliates as of
December 31, 2001.
Lockheed Martin, however, rejected the notes it received and instead
requested that Globalstar issue new securities with additional rights and
enhanced value, without waiving its claim that it is entitled to receive an
immediate cash reimbursement by Globalstar of its $150 million payment to the
bank lenders. Globalstar disputes Lockheed Martin's interpretation of the
relevant agreements. If the dispute is not resolved, Globalstar cannot be sure
that if the matter were litigated, the court would agree with Globalstar's
interpretation of the agreements. Management believes, however, that a court
would agree with Globalstar's interpretation of the relevant agreements. The
notes are an unsecured claim in Globalstar's bankruptcy case.
In 2001, an issue was raised as to whether the three-year notes issued to
the guarantors of The Chase Manhattan Bank $250 million credit facility were
prepared in accordance with the recourse provisions of the guarantee
arrangement. Management does not believe the existing notes containing
non-recourse language will need to be replaced with notes not containing the
non-recourse language. If the existing non-recourse notes were replaced with
notes not containing the non-recourse language, the replacement would not impact
Globalstar's results of operations. However, allocations of Globalstar's losses
to general partners would increase by the amount of the increase in recourse
obligations.
Prior to filing Chapter 11, in 2001 $5.0 million of the notes payable to
affiliates (Loral) were offset with various receivables from Globalstar.
On August 5, 1999, Globalstar entered into a $500 million credit agreement
with a group of banks. The creditors' interests under the credit facility were
purchased by a wholly owned subsidiary of Loral on November 17, 2000, which had
previously guaranteed the facility. As of December 31, 2002, all amounts under
the $500 million credit agreement were drawn. Borrowings under the facilities
bear interest, at Globalstar's option, at various rates based on margins over
the lead bank's base rate or the LIBOR for periods of one to six months. The
claims of the Loral subsidiary, in respect of this credit agreement constitute
unsecured claims in Globalstar's bankruptcy case.
In consideration for the guarantee by Loral in 1999, Loral and certain
Loral subsidiaries received warrants to purchase an aggregate of 3,450,000
Globalstar partnership interests, valued at $141.1 million, (equivalent to
approximately 13.8 million shares of common stock of GTL) at an exercise price
of $91.00 per partnership interest (equivalent to $22.75 per share of GTL common
stock). However, in light of Globalstar's Chapter 11 petition, the warrants are
likely to be of little or no value.
38
On September 14, 1995, Loral, in its capacity as managing general partner,
granted certain of its officers options to purchase 560,000 shares of the GTL
common stock owned by Loral at an exercise price of $5.00 per share. The
exercise price was greater than the market price at grant date. These options
are immediately exercisable, of which 60,000 options were exercised in 2000, and
expire 12 years from date of grant. In October 1996 and in January 1998, Loral,
in its capacity as managing general partner, granted certain of its officers
options to purchase 608,000 and 20,000 shares, respectively, of GTL common stock
owned by Loral at a price $6.34 and $12.50, below market price on the grant
date. These options vest over a three year period and expire 10 years from date
of grant; 40,000 options were exercised in 1999 and no options were cancelled
during 2002, 2001 and 2000. Loral granted options of Loral common stock to
certain officers and employees of Globalstar as follows: April 1996, 94,000
shares at $10.50 per share, of which 13,200 shares were exercised in 1998 and
1997; April 1997, 5,000 shares at $13.75 per share, of which 1,000 shares were
exercised and 4,000 shares were cancelled in 1998; February 1998, 2,000 shares
at $24.44 per share; October 1998, 600 shares at $13.50 per share; and December
16, 1999, 30,000 shares at $16.00 per share. In light of Globalstar's planned
restructuring, these options are likely to be of little or no value.
Globalstar has granted to SS/L an irrevocable, royalty-free, non-exclusive
license to use certain intellectual property expressly developed in connection
with the SS/L agreement provided that SS/L will not use, or permit others to
use, such license for the purpose of engaging in any business activity that
would be in material competition with Globalstar. Globalstar has similarly
agreed that it will not license such intellectual property if it will be used
for the purpose of designing or building satellites that would be in competition
with SS/L. If the Loral Settlement is effected, then these mutual promises would
be cancelled with the underlying satellite contract.
Globalstar has granted to QUALCOMM an irrevocable, non-exclusive, worldwide
perpetual license to intellectual property owned by Globalstar in the Ground
Segment and developed pursuant to the QUALCOMM agreement. QUALCOMM may, pursuant
to such grant, use the intellectual property for applications other than the
Globalstar System provided that QUALCOMM may not for a period of three years
after its withdrawal as a strategic partner or prior to the third anniversary of
the Full Constellation Date (as defined in such grant), whichever is earlier,
engage in any business activity that would be in competition with the Globalstar
System. The grant of intellectual property to QUALCOMM described above is
generally royalty free. Under certain specified circumstances, however, QUALCOMM
will be required to pay a 3% royalty fee on such intellectual property.
QUALCOMM initially agreed to grant at least one vendor a nonexclusive
worldwide license to use QUALCOMM's intellectual property to manufacture and
sell gateways to Globalstar's service providers. The foregoing license would be
granted by QUALCOMM to one or more such vendors on reasonable terms and
conditions, which will in any event not provide for royalty fees in excess of 7%
of a gateway's sales price (not including the approximately $400,000 per gateway
in recoupment expenses payable to Globalstar). Thus far, no other vendor has
committed to manufacture gateways, and Globalstar does not expect any other
vendor to manufacture gateways. QUALCOMM granted a license to manufacture
Globalstar user terminals to Ericsson and Telit and also agreed to grant a
similar license to at least one additional qualified manufacturer to enable it
to manufacture and sell the Globalstar user terminals to service providers.
However, these rights were granted under the Development Contract, which
QUALCOMM has purported to terminate.
Subsidiaries of Loral have formed joint ventures with partners that have
executed service provider agreements granting the joint ventures exclusive
rights to provide Globalstar service to users in Brazil, Canada, Mexico, and
Russia as long as specified minimum levels of subscribers are met. In December
2001, a subsidiary of Globalstar acquired a majority interest in the Canadian
service provider business. As a result of this transaction, Globalstar and Loral
are now partners in the Canadian joint venture. Because of the consolidation,
all transactions between Globalstar and GCSC are eliminated in Globalstar's
consolidated financial statements. Founding service provider agreements have
been entered into with certain of Globalstar's limited partners for specific
countries. These service providers will receive certain discounts from
Globalstar's expected pricing schedule generally over a five-year period.
Globalstar has also
39
agreed to provide QUALCOMM, under certain circumstances, with capacity on the
Globalstar System for its OmniTRACS services at its most favorable rates and to
grant to QUALCOMM the exclusive right to utilize the Globalstar System to
provide OmniTRACS-like services.
In December 2001, a subsidiary of Globalstar purchased all of the
outstanding common shares of Vodafone Satellite Services, Inc., a Delaware
corporation, for $100, plus acquisition costs of $258,000. Globalstar has
renamed the company Globalstar Satellite Services, Inc. ("GSSI"). GSSI
indirectly owns the majority interest in GCSC, a Nova Scotia corporation based
in Ontario, Canada. GCSC is the Globalstar service provider in Canada and
generates its revenue from the provision of Globalstar services in Canada,
billing customers for usage over two Canadian gateways. Loral Holdings Ltd., a
subsidiary of Loral, owns the remaining minority interest in GCSC. Therefore,
the result of this transaction is that Globalstar is now a shareholder with
Loral in GCSC, the Canadian service provider. The acquisition has brought
additional efficiencies to the operation of the Globalstar network and allowed
for increased coordination in the Globalstar service offerings and pricing.
Loral's interest in GCSC is expected to be transferred to Globalstar as part of
the Loral Settlement discussed below. However, there can be no assurances that
the Loral Settlement will be effected.
On March 14, 2003, Loral, the Creditors' Committee and Globalstar signed a
term sheet outlining to the terms and conditions of a comprehensive settlement
of certain contested matters and a release of the claims against Loral (the
"Loral Settlement"). Also on March 14, 2003, Globalstar and the Creditors'
Committee filed a joint motion under Bankruptcy Rule 9019 for an order approving
the Loral Settlement with the Bankruptcy Court. The parties agreed to use their
reasonable best efforts to execute a definitive agreement based on the term
sheet by March 26, 2003. The Loral Settlement, which will be effected in
connection with Globalstar's restructuring and emergence from bankruptcy,
provides the following, among other items: (1) SS/L would transfer to Globalstar
title "as is" to the eight spare satellites that are currently held in storage
by SS/L; (2) certain strategic agreements under which Loral holds exclusive
rights to provide Globalstar services to defense and national security agencies
and in the aviation market would terminate, and a new joint venture company (to
be owned 75% by Globalstar and 25% by Loral) would be formed to pursue the
defense and national security business; (3) L/Q Licensee would transfer the
Federal Communications Commission license held by it to Globalstar or LQP would
transfer operations of L/Q Licensee to Globalstar; (4) Loral would convey its
interests in the Canadian service provider operations to Globalstar; (5) certain
Loral service provider financial obligations would be settled through a
reduction in debt obligations due from GCC to Loral and other financial
obligations involving a Russian joint venture would be restructured; (6) Loral's
general unsecured claims as a creditor in the Globalstar bankruptcy proceeding
would be quantified and allowed; (7) SS/L would return to Globalstar unused
advance prepayments related to the 2 GHz satellite contract; (8) Loral's
designees would resign from Globalstar's General Partners Committee; and (9)
third party claims against Loral, certain Loral affiliates and all six members
of Globalstar's General Partners' Committee, as provided in the term sheet,
would be released. The motion supporting the Loral Settlement is expected to be
heard by the Bankruptcy Court on April 9, 2003.
On July 2, 2002, Globalstar closed a transaction with TE.SA.M. under which
a subsidiary of Globalstar acquired TE.SA.M.'s French gateway, back office
assets, inventory and TE.SA.M.'s limited partnership interests. Under the terms
of the transaction, both Globalstar and TE.SA.M. forgave all outstanding
obligations between the parties and provided mutual releases of liability.
On December 30, 2002, the Bankruptcy Court approved a settlement agreement
among GSCI, Globalstar, Globalstar Vodafone Network Pty Ltd. Australia and
Globalstar Australia Pty Ltd. Under this settlement, Globalstar consented to the
transfer by VSSL to Localstar of the service provider rights in Australia, and
Globalstar entered into a new service provider agreement with Localstar. VSSL
was the original authorized service provider for Australia and the operator of
three gateways in that country. In conjunction with this transaction, VSSL
agreed to settle certain pre-petition and post-petition debts with Globalstar.
Globalstar received payments totaling $1.7 million from Vodafone in January
2003.
40
On March 25, 2003, Globalstar entered into a settlement and release
agreement with Elsacom and a gateway asset purchase agreement with a wholly
owned subsidiary of Elsacom. Elsacom is the primary Globalstar service provider
in Central and Eastern Europe, the operator of the gateway located in Avezzano,
Italy and, through its affiliate, Globalstar Northern Europe, the former
operator of the gateway located in Karkkila, Finland. Although Elsacom had
defaulted on its gateway contract obligations to Globalstar, Elsacom desired to
continue providing Globalstar service to its customers from Avezzano.
Accordingly, Globalstar and Elsacom agreed to negotiate a mutually acceptable
plan for paying certain of the debt, transferring the equipment in Finland to
Globalstar and maintaining Elsacom's service provider rights. Under the terms of
the Elsacom Settlement, Globalstar will receive cash payments totaling $2.4
million in two installments to be completed by June 2003 and the release of all
past payment obligations due to Elsacom in exchange for liquidation of the
gateway contract payments due to Globalstar from Elsacom. Additionally,
Globalstar will retain title to the gateway equipment installed in Finland.
Globalstar intends to dismantle the Finland gateway and to place the removable
parts, which contain most of the gateway's electronics, in storage for future
deployment.
Globalstar has entered into various agreements with other service providers
and gateway operators to provide and receive various services related to the
Globalstar business. Currently, Globalstar is providing retail billing support
to its service providers in Mexico and Brazil, on a cost reimbursable basis.
Additionally, Globalstar has agreements in place to provide, also on cost
reimbursable basis, certain information technology and telecommunications
network related support to GCC, in which it holds a minority interest. Also, GCC
bills Globalstar for the monitoring of gateways in the United States, Canada,
and France. In addition, Globalstar is billed for all costs related to the
operations of the gateways located in Canada, as cost recovery mechanism for
GCC. Globalstar also net settles with other service providers roaming charges
that arise from subscribers using gateways other then their home gateway to
complete calls on the Globalstar System.
Globalstar's limited partnership agreement provides that, LQP, the general
partner of LQSS, would receive a managing partner's allocation equal to 2.5% of
Globalstar's revenues up to $500 million plus 3.5% of revenues in excess of $500
million. Loral and QUALCOMM ultimately would receive 80% and 20% of such
distribution, respectively. As of December 31, 2002, the managing partner's
allocation of $167,000 has been deferred and $108,000 is an unsecured claim in
Globalstar's bankruptcy case.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS DISCLOSURE
As of December 31, 2002, Globalstar had various contractual obligations and
commercial commitments, which are more fully disclosed in the notes to
Globalstar's consolidated financial statements. Commercial commitments are items
that Globalstar could be obligated to pay in the future that are not included in
Globalstar's consolidated balance sheet. The following table discloses aggregate
information
41
about Globalstar's contractual obligations and commercial commitments and the
periods in which payment are due (in thousands):
PAYMENTS DUE BY PERIOD
--------------------------------------------------
CONTRACTUAL OBLIGATIONS AND TOTAL INCLUDING AFTER
COMMERCIAL COMMITMENTS ACCRUED INTEREST LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
- --------------------------- ---------------- ---------------- --------- --------- -------
CONTRACTUAL OBLIGATIONS
Accounts payable............................... $ 2,522 $ 2,522 $ -- $ -- $ --
Payable to affiliates.......................... 7,745 7,745 -- -- --
Accrued expenses............................... 6,419 6,419 -- -- --
Deferred revenue............................... 2,365 2,365 -- -- --
---------- ---------- ------ ------ ------
Total Contractual Obligations.................. $ 19,051 $ 19,051 $ -- $ -- $ --
========== ========== ====== ====== ======
LIABILITIES SUBJECT TO COMPROMISE.............. $3,425,921 $3,425,921 $ -- $ -- $ --
========== ========== ====== ====== ======
COMMERCIAL COMMITMENTS
Operating leases............................... $ 19,680 $ 3,235 $6,574 $6,548 $3,323
QUALCOMM inventory purchase commitment(1)...... 5,786 5,522 264 -- --
---------- ---------- ------ ------ ------
Total Commercial Commitments................... $ 25,466 $ 8,757 $6,838 $6,548 $3,323
========== ========== ====== ====== ======
- ---------------
(1) In 2003, GCSC contracted with QUALCOMM for the manufacture and delivery of
2,000 fixed units and 5,000 car kits.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2002 and 2001, the fair value of Globalstar's long-term
debt and interest bearing vendor financing (collectively, "long-term
obligations") was estimated to be $124 million and $201 million, respectively,
using quoted market prices or, in the case of vendor financing and term-loans
with variable interest rates, the ratio of the carrying amount to fair value of
the Senior Notes for 2002 and 2001. The long-term obligations carrying value
exceeded fair value by $3.0 billion and $2.9 billion as of December 31, 2002 and
2001, respectively. Market rate risk on long-term obligations is estimated as
the potential increase in annual interest expense resulting from a hypothetical
one percentage point increase in interest rates and amounted to approximately
$31 million and $30 million for 2002 and 2001, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS
The following sets forth information concerning GTL's directors as of March
17, 2003.
Douglas G. Dwyre
Age: 70
Director Since: 1999
Business Experience: Mr. Dwyre was President of Globalstar, L.P. from March 1994
until his retirement in March 1999. He also served as Senior
Vice President of Globalstar Telecommunications Limited from
May 1996 to March 1999.
Sir Ronald Grierson
Age: 81
Director Since: 1996
Business Experience: Sir Ronald is a member of the General Partners' Committee of
Globalstar. In addition, Sir Ronald is the Chairman of the
European Advisory Board of The Blackstone Group, which was
previously retained by Globalstar, L.P. as a financial
advisor. He is the retired Vice-Chairman of General Electric
Company plc.
Other Directorships: Chime Communications plc, Etam Development S.A. and
Safic-Alcan S.A. Retired director of Daily Mail and General
Trust plc.
E. John Peett
Age: 67
Director Since: 1994
Business Experience: Mr. Peett was a founder and Executive Director of Vodafone
Group Plc. until his retirement in October 1997.
Other Directorships: Chairman of Cambridge Positioning Systems Limited and
Vice-Chairman of PNC Telecom Plc.
Michael B. Targoff
Age: 58
Director Since: 1994
Business Experience: Mr. Targoff is Founder and Chief Executive Officer of
Michael B. Targoff & Co. Prior to that, he was President of
Globalstar Telecommunications Limited and Chief Operating
Officer of Globalstar, L.P. from May 1996 to January 1998.
From April 1996 to January 1998, Mr. Targoff was President
and Chief Operating Officer of Loral Space & Communications
Ltd. Prior to that time, he served as Senior Vice President
and Secretary of Loral Corporation.
Other Directorships: Leap Wireless International, Infocrossing, Inc., and ViaSat,
Inc.
43
A. Robert Towbin
Age: 67
Director Since: 1995
Business Experience: Mr. Towbin is a member of the General Partners' Committee of
Globalstar. Mr. Towbin is a Managing Director of Stephens
Inc. From January 1, 2000 to November 2001 he was
Co-Chairman of C.E. Unterberg, Towbin and from September
1995 to 1999 was Senior Managing Director of C.E. Unterberg,
Towbin. From January 1994 to September 1995, Mr. Towbin was
President and CEO of the Russian-American Enterprise Fund (a
U.S. government-owned investment fund) and later Vice
Chairman of its successor fund, The U.S. Russia Investment
Fund. He was a Managing Director of Lehman Brothers and Co-
Head, High Technology Investment Banking from January 1987
until January 1994. Prior to joining Lehman Brothers, Mr.
Towbin was Vice Chairman and a Director of L.F. Rothschild,
Unterberg, Towbin Holdings Inc. and its predecessor
companies from 1959 to 1987. Mr. Towbin received his B.A.
from Dartmouth College in 1957
Other Directorships: Gerber Scientific Inc., Globecomm Systems Inc. and K&F
Industries Inc.
The following sets forth information concerning members of Globalstar's
General Partners' Committee who are not also Directors of GTL as of March 17,
2003.
Olof Lundberg
Age: 59
Member Since: 2001
Business Experience: Mr. Lundberg is chairman of the General Partners' Committee
of Globalstar and Chief Executive Officer of Globalstar
since April 2001. Mr. Lundberg was the founding Director
General of Inmarsat from 1979 to 1995 and he then served as
founding CEO and then Chairman and CEO of ICO Global
Communications until 1999. Prior to Inmarsat Mr. Lundberg
held management positions at Swedish Telecom, now Telia,
mainly in their mobile communications businesses.
Other Directorships: Actinus Ltd.
Russell R. Mack
Age: 48
Member Since: 2001
Business Experience: Mr. Mack is a member of the General Partners' Committee of
Globalstar. He has been Vice President, Business Ventures of
Loral Space & Communications Ltd. since February 1998.
Previously, he was Director of Business Planning and
Development of Loral Space & Communications Ltd. since April
1996.
44
Bernard L. Schwartz
Age: 77
Member Since: 1994
Business Experience: Mr. Schwartz is a member of the General Partners' Committee
of Globalstar. He had previously served as Chief Executive
Officer of Globalstar until May 15, 2001 and as Chairman of
the Board and Chief Executive Officer of Globalstar
Telecommunications Limited until March 8, 2001. Mr. Schwartz
has been Chairman of the Board of Directors and Chief
Executive Officer of Loral Space & Communications Ltd. since
January 1996.
Other Directorships: Loral Space & Communications Ltd., First Data Corp., K&F
Industries, Inc., and Satelites Mexicanos, S.A. de C.V.
Trustee of Mount Sinai -- NYU Medical Center and Health
System and Thirteen/WNET Educational Broadcasting
Corporation.
Eric J. Zahler
Age: 52
Member Since: 2000
Business Experience: Mr. Zahler is a member of the General Partners' Committee of
Globalstar. He had previously served as Vice Chairman of
Globalstar Telecommunications Limited until March 8, 2001.
Mr. Zahler has been President and Chief Operating Officer of
Loral Space & Communications Ltd. since February 2000.
Previously, he was Executive Vice President of Loral Space &
Communications since October 1999 and Senior Vice President,
General Counsel and Secretary of Loral Space &
Communications Ltd. since February 1998.
Other Directorships: Loral Space & Communications Ltd. and Satelites Mexicanos,
S.A. de C.V.
It is expected that Messrs. Mack, Schwartz and Zahler will resign from the
General Partners' Committee as part of the Loral Settlement discussed above.
However, there can be no assurances that the Loral Settlement will be effected.
(See discussion of Developments Relating to Loral and QUALCOMM above.)
DIRECTOR COMPENSATION
GTL directors are paid a fixed fee of $12,000 per year. Directors are also
paid $1,500 for personal attendance at each meeting. Audit Committee members are
paid $2,000 per year and $1,000 per meeting.
Members of the Globalstar's General Partners' Committee are each appointed
by a general partner and serve until his successor is appointed by the
appropriate general partner. Members of the General Partners' Committee receive
no compensation for serving on the General Partners' Committee.
Globalstar has purchased insurance from The Hartford and several other
companies insuring Globalstar and GTL against obligations they might incur as a
result of its indemnification of its officers and directors for certain
liabilities they might incur, and insuring such officers and directors for
additional liabilities against which they might not be indemnified by
Globalstar. Discussions are ongoing between Globalstar and The Hartford to
extend such insurance upon its scheduled expiration date.
EXECUTIVE OFFICERS OF GTL
NAME AGE POSITION
- ---- --- --------
Ira E. Goldberg......................................... 56 Restructuring Officer
Mr. Goldberg has been Restructuring Officer of GTL since July 2001. Mr.
Goldberg is an investment banking professional and attorney with extensive
capital markets experience in structuring and negotiating
45
transactions, and in project financing. From 2000 through July 2001, Mr.
Goldberg was an attorney at Robinson, Brog, et al. Prior to that from 1999
through 2000 he worked on the Business Development Team at MuniAucion, Inc. and
from 1997 through 1999 he was the Municipal Finance Group Director at Newcourt
Credit Corporation.
EXECUTIVE OFFICERS OF GLOBALSTAR
NAME AGE POSITION
- ---- --- --------
Olof Lundberg........................................... 59 Chief Executive Officer
Anthony J. Navarra...................................... 55 President
Megan Fitzgerald........................................ 43 Senior Vice President, Operations
Terry R. Evans.......................................... 55 Senior Vice President, Business
Development
William F. Adler........................................ 57 Vice President, Legal and Regulatory
Affairs
Daniel P. McEntee....................................... 40 Vice President and Chief Financial
Officer
Sam Garcia.............................................. 46 Vice President -- Human Resources &
Administration
Mr. Lundberg has been chairman of the General Partners' Committee of
Globalstar and Chief Executive Officer of Globalstar since April 2001. Mr.
Lundberg was the founding Director General of Inmarsat from 1979 to 1995 and he
then served as founding CEO and then Chairman and CEO of ICO Global
Communications until 1999. Prior to Inmarsat Mr. Lundberg held management
positions at Swedish Telecom, now Telia, mainly in their mobile communications
businesses.
Mr. Navarra has been President of Globalstar since September 1999. Mr.
Navarra was President of GTL between May 2000 and July 2001. Mr. Navarra was
acting Chief Operating Officer of Globalstar from March 1999 to September 1999
and Executive Vice President of GTL from May 1999 to May 2000. Mr. Navarra had
been Vice President of GTL from 1995 to May 1999 and Executive Vice President,
Strategic Development of Globalstar from March 1994 to March 1999.
Ms. Fitzgerald has been Senior Vice President, Operations, of Globalstar
since November 2000 and Vice President for Satellite Constellation Establishment
of Globalstar since September 1997. Ms. Fitzgerald has been with Globalstar
since June 1994.
Mr. Evans has been Senior Vice President, Business Development since June
2000. Prior to that time, Mr. Evans was Vice President, Business Development of
Globalstar since January 1996, and prior to that time, he was Vice President,
Finance since July 1993.
Mr. Adler has been Vice President of Legal and Regulatory Affairs of
Globalstar since January 1996. He was a partner with Fleischman and Walsh,
L.L.P. from May 1994 to November 1995, specializing in domestic and
international telecommunications law, regulation legislation and policy. Prior
to that, he was the Executive Director of Federal Regulatory Relations with
Pacific Telesis Group.
Mr. McEntee has been Vice President and Chief Financial Officer of
Globalstar since July 2000. Prior to that time, Mr. McEntee was Vice President
Market Development, New Territories of Globalstar since March 2000, and prior to
that time he was Director, Business Operations, since October 1996. Prior to
that time, Mr. McEntee was Finance Manager for Globalstar since June 1992.
Mr. Garcia has been Vice President-Human Resources & Administration since
March 1996. Prior to that time, Mr. Garcia was Director of Human Resources for
Loral AeroSys in Seabrook, Maryland from October 1988 to March 1996.
46
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
GTL believes that during 2002 all reports for GTL's executive officers,
directors and beneficial owners of more than 10% of the GTL common stock that
were required to be filed under Section 16(a) of the Securities Exchange Act of
1934 were timely filed.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Sir Ronald Grierson and A. Robert Towbin make up the Compensation Committee
of GTL and Globalstar. Neither of the members of the Compensation Committee are
present or former officers or employees of Globalstar, GTL or their respective
subsidiaries. Sir Ronald and Mr. Towbin serve as members of Globalstar's General
Partners' Committee. Sir Ronald is the Chairman of the European Advisory Board
of The Blackstone Group, which previously served as a financial advisor of
Globalstar. Mr. Towbin is a Managing Director of Stephens Inc. and was formerly
Co-Chairman of C.E. Unterberg, Towbin, which has provided advisory, investment
banking and underwriting services to Globalstar and GTL. Mr. Towbin resigned
from that position during 2001.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the executive
officer of GTL and the Chief Executive officer and four most highly compensated
executive officers of Globalstar (Named Executive Officers).
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------
SECURITIES
OTHER UNDERLYING
NAME AND ANNUAL STOCK ALL OTHER
PRINCIPAL POSITION(A) YEAR SALARY BONUS(B) COMPENSATION(C) OPTIONS COMPENSATION(D)
- --------------------- ---- -------- -------- --------------- ------------ ---------------
Olof Lundberg.............. 2002 $962,760 $ -- -- -- $ 87,911
Chief Executive Officer
of 2001 688,169 -- $300,000 -- --
Globalstar and Chairman
of 2000 N/A N/A N/A N/A N/A
Committee of Partners of
Globalstar
Anthony J. Navarra......... 2002 297,692 190,834 -- -- 16,927
President of Globalstar 2001 301,518 306,666 -- -- 113,932
2000 293,269 -- -- 143,700 10,548
Gloria Everett(a).......... 2002 257,818 24,000 -- -- 91,041
Executive Vice President 2001 273,126 322,400 -- -- 49,427
Corporate Sales of 2000 260,499 -- 50,000 175,000 5,722
Globalstar
Megan Fitzgerald........... 2002 182,144 23,750 -- -- 9,102
Senior Vice President 2001 184,184 239,000 -- -- 36,263
Operations of Globalstar 2000 175,865 -- -- 155,000 5,998
William F. Adler........... 2002 173,340 23,125 -- -- 10,366
Senior Vice President 2001 178,047 197,600 -- -- 33,261
Legal and Regulatory 2000 171,720 -- -- 89,500 6,086
Affairs of Globalstar
47
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------
SECURITIES
OTHER UNDERLYING
NAME AND ANNUAL STOCK ALL OTHER
PRINCIPAL POSITION(A) YEAR SALARY BONUS(B) COMPENSATION(C) OPTIONS COMPENSATION(D)
- --------------------- ---- -------- -------- --------------- ------------ ---------------
Terry R. Evans............. 2002 164,698 21,500 -- -- 6,138
Senior Vice President 2001 170,800 199,000 -- -- 73,630
Business Development 2000 156,880 -- -- 50,000 4,685
of Globalstar
Ira E. Goldberg............ 2002 100,000 -- -- -- --
Restructuring Officer of 2001 50,000 -- -- -- --
GTL 2000 N/A N/A N/A N/A N/A
- ---------------
(a) Gloria Everett terminated her employment with Globalstar on November 27,
2002.
(b) For years prior to 2001, reflects bonuses earned for each of the respective
fiscal years; these bonuses, however, were paid in the subsequent year.
Exclusive of patent and retention bonuses, there were no management bonuses
paid in the fiscal year 2002 or 2001. The 2002 and 2001 bonuses were
retention bonuses paid during the respective year.
(c) Consists of a signing bonus paid to Mr. Lundberg in the amount of $300,000
for 2001. Consists of signing bonus paid to Ms. Everett in the amount of
$50,000 for 2000.
(d) Includes company matching contributions to the savings plan, vacation
payouts, insurance premiums, relocation and separation pay.
OTHER COMPENSATION ARRANGEMENTS
On January 31, 2002, a payment was made to Mr. Navarra in the amount of
$153,000 as part of a retention bonus program implemented by Globalstar in
February of 2001 to retain its executives and key employees. This payment was
the final payment due to Globalstar employees under the February 2001 program.
On March 31, 2002, a second and final retention bonus payment was made to 69
employees in the amount of $523,010 as part of the retention bonus program
implemented in October 2001 for employees who did not participate in the
February 2001 retention bonus program for key employees.
In May 2002, the Bankruptcy Court entered the Stipulation and Agreed Order
Pursuant to Sections 105(a), 363(b) and 503(b)(1) of the Bankruptcy Code
Authorizing Debtors to Adopt and Implement an Employee Incentive Program,
authorizing Globalstar to make two payments totaling approximately $2.9 million
under an Employee Retention Program, including approximately $1.9 million in
cash payments and approximately $1.0 million in non-cash awards. The non-cash
awards will be made in the form of common stock of the New Globalstar, except
that common stock is not (or cannot be) issued without material trading
restrictions, or if New Globalstar is organized as a limited partnership or a
limited liability company, an equivalent value will be awarded in cash. In July
2002, Globalstar distributed the first of two payments to participants under the
Employee Retention Program in an aggregate amount of approximately $0.7 million,
including payments to the Named Executive Officers as follows: Mr. Goldberg, $0;
Mr. Lundberg, $0; Mr. Navarra, $37,500; Ms. Fitzgerald, $23,750; Mr. Evans,
$21,250; Mr. Adler, $23,125; Mr. McEntee, $20,000; and Mr. Garcia, $18,750. A
second payment, totaling approximately $1.2 million in cash and $1.0 million in
stock or cash, will be made only upon successful emergence from restructuring.
Globalstar's senior management was granted absolute discretion as to the
allocation of all payments under the Employee Retention Program, except that (a)
such allocations must be consistent with the schedule provided to the Creditors'
Committee on May 6, 2002 and (b) if an employee for any reason becomes
ineligible to receive payments under the Employee Retention Program, including
without limitation due to termination of employment prior to the effective date
of a plan of reorganization, the
48
payments allocated to such employee under the Employee Retention Program may not
be reallocated or distributed under the Employee Retention Program. Eight
participants in the Employee Retention Program have terminated their employment
with Globalstar since the inception of this program and are ineligible to
receive future payments under this program.
During 2001, Olof Lundberg was named the Chief Executive Officer of
Globalstar. The terms of his three year renewable agreement commencing on April
23, 2001 stipulated that he receive a $300,000 signing bonus, an annual salary
of $1.0 million, and an annual target bonus of $500,000, subject to achievement
of performance criteria to be agreed by Globalstar's General Partners'
Committee. If Mr. Lundberg is terminated without cause or resigns for good
reason, Mr. Lundberg will be entitled to salary and target bonus for the
remainder of the three-year term. In 2002, Mr. Lundberg was paid an annual
salary of $1,000,000; however, he did not receive an annual bonus.
Ira E. Goldberg, GTL Restructuring Officer, is currently being compensated
$25,000 per quarter, payable, in advance, on the first day of each quarter.
OPTION EXERCISES AND YEAR-END VALUE TABLE
Aggregated Option Exercises in 2002 and Year-End Option Values
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR END
ACQUIRED ON REALIZED ---------------------------- ----------------------------
NAME EXERCISE VALUE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
Olof Lundberg........... -- $-- -- -- $-- $--
Anthony J. Navarra...... -- $-- 263,025 136,975 $-- $--
Gloria Everett.......... -- $-- 221,042 221,042 $-- $--
Megan Fitzgerald........ -- $-- 195,833 122,167 $-- $--
William F. Adler........ -- $-- 123,542 55,458 $-- $--
Terry R. Evans.......... -- $-- 83,958 36,042 $-- $--
Ira E. Goldberg......... -- $-- -- -- $-- $--
PENSION PLAN
Globalstar's Retirement Plan (the "Plan") provides a non-contributory
benefit for each year of non-contributory participation, and additional benefits
associated with contributory participation. Globalstar also has a Supplemental
Executive Retirement Plan ("SERP") under which eligible employees receive
benefits which generally make up for certain required reductions in Plan
benefits caused by limitations under the Internal Revenue Code. For
non-contributory participation, the annual retirement benefit is $252 times
credited years of service. For contributory participation, the following table
shows the amounts of annual retirement benefits that would be payable at normal
retirement (age 65 or later). Benefits are shown for various rates of final
average salary, assuming that employee contributions were made for the periods
indicated. Employees who have completed at least one year of service and
attained age 21 will receive the contributory benefit if they contribute to the
Plan at the rate of 1% of salary.
YEARS OF CONTRIBUTORY SERVICE
-----------------------------
FINAL AVERAGE SALARY 15 20 25 30 35 40
- -------------------- -------- -------- -------- -------- -------- --------
$100,000..................................... $ 22,270 $ 29,690 $ 37,110 $ 44,540 $ 51,960 $ 58,460
125,000..................................... 28,830 38,440 48,050 57,660 67,270 75,400
150,000..................................... 35,390 47,190 58,990 70,790 82,580 92,330
175,000..................................... 41,960 55,940 69,930 83,910 97,900 109,270
200,000..................................... 48,520 64,690 80,860 97,040 113,210 126,210
225,000..................................... 55,080 73,440 91,800 110,160 128,520 143,150
250,000..................................... 61,640 82,190 102,740 123,290 143,830 160,080
275,000..................................... 68,210 90,940 113,680 136,410 159,150 177,020
300,000..................................... 74,770 99,690 124,610 149,540 174,460 193,960
350,000..................................... 87,890 117,190 146,490 175,790 205,080 227,830
400,000..................................... 101,020 134,690 168,360 202,040 235,710 261,710
49
The table above shows total estimated benefits payable under the Plan and
SERP including amounts attributable to employee contributions, determined on a
straight annuity basis. Such estimated benefits are not subject to any deduction
for Social Security or other offset amounts. The compensation covered by the
Plan and SERP is the employee's base salary, and is identical to compensation
disclosed as "Salary" in the summary compensation table. (See discussion of
Executive Compensation above.) The Plan and SERP benefits are computed on the
basis of the average of an employee's highest five consecutive annual salaries
out of the last ten years contributions are made. Only Globalstar employees are
eligible to participate in the Plan and SERP. As of December 31, 2002, the
contributory credited years of service for each of the Named Executive Officers
are as follows: Olof Lundberg, 0 years; Anthony Navarra, 11 years; Megan
Fitzgerald, 7 years; William Adler, 6 years; Terry Evans, 16 years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table shows, based upon filings made with the Securities and
Exchange Commission, certain information concerning persons who may be deemed
beneficial owners of 5% or more of the outstanding shares of its common stock
because they possessed or shared voting or investing power with respect to the
shares of GTL's common stock:
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP CLASS(1)
- ---------------- -------------------- ----------
Loral Space & Communications Ltd............................ 16,352,855(2)(3) 13.68%
c/o Loral SpaceCom Corporation
600 Third Avenue
New York, New York 10016
Private Capital Management, Inc............................. 9,697,091(4) 8.58%
3003 Tamiami Trail North
Naples, Florida 33940
- ---------------
(1) Percent of class refers to percentage of class beneficially owned as the
term beneficial ownership is defined in Rule 13d-3 under the Exchange Act
and is based upon the number of shares of GTL common stock outstanding as of
March 17, 2003.
(2) This information is as of March 17, 2003 and includes 6,449,865 shares of
common stock issuable upon the conversion of GTL's 8% Preferred Stock held
by Loral.
(3) Of such amount, 1,568,000 shares represent shares of common stock subject to
options granted by Loral to certain of its executive officers and directors.
(4) A Schedule 13G filed by Private Capital Management, Inc. ("Private Capital")
and certain of its affiliated persons with the Securities and Exchange
Commission on February 15, 2001 reported that as of December 31, 2000,
Private Capital beneficially owned 9,697,091 shares of GTL's common stock.
Of such shares, Private Capital reported sole voting power over 50,000
shares, shared voting power over 9,647,091 shares, sole investment power
over 50,000 shares and shared investment power over 9,647,091 shares.
The following table presents the number of shares of GTL common stock
beneficially owned by the GTL directors, Globalstar's General Partners'
Committee members, the Named Executive Officers of GTL and Globalstar and all
GTL directors, Globalstar's General Partners' Committee members, Named Executive
Officers and other executive officers as a group on March 17, 2003. Individuals
have sole voting and investment power over the stock unless otherwise indicated
in the footnotes.
AMOUNT AND NATURE OF PERCENT OF
NAME OF INDIVIDUAL BENEFICIAL OWNERSHIP(1) CLASS
- ------------------ ----------------------- ----------
Olof Lundberg............................................... 0 --
Ira E. Goldberg............................................. 0 --
50
AMOUNT AND NATURE OF PERCENT OF
NAME OF INDIVIDUAL BENEFICIAL OWNERSHIP(1) CLASS
- ------------------ ----------------------- ----------
William F. Adler............................................ 123,542(2) *
Douglas G. Dwyre............................................ 131,244(3) *
Terry R. Evans.............................................. 83,958(4) *
Megan Fitzgerald............................................ 196,273(5) *
Sir Ronald Grierson......................................... 205,000(6) *
Russell R. Mack............................................. 5,000(7) *
Anthony J. Navarra.......................................... 267,477(8) *
E. John Peett............................................... 200,000(9) *
Bernard L. Schwartz......................................... 710,000(10) *
Michael B. Targoff.......................................... 0 --
A. Robert Towbin............................................ 190,000(11) *
Eric J. Zahler.............................................. 288,012(12) *
ALL DIRECTORS, AND EXECUTIVE OFFICERS AS A GROUP (16
PERSONS).................................................. 2,555,115(13) 2.2%
- ---------------
* Represents holdings of less than one percent.
(1) Includes shares which, as of March 17, 2003, may be acquired within sixty
days upon the exercise of options granted by Loral: 560,000 to Mr.
Schwartz, 100,000 to Mr. Zahler and 908,000 to all directors and executive
officers as a group.
(2) Includes 123,542 shares underlying options granted under GTL's stock option
plan.
(3) Includes 130,800 shares underlying options granted under GTL's stock option
plan.
(4) Includes 83,958 shares underlying options granted under GTL's stock option
plan.
(5) Includes 195,833 shares underlying options granted under GTL's stock option
plan.
(6) Includes 190,000 shares underlying options granted under GTL's stock option
plan.
(7) Includes 5,000 shares underlying options granted under GTL's stock option
plan.
(8) Includes 263,025 shares underlying options granted under GTL's option plan.
(9) Includes 200,000 shares underlying options granted under GTL's stock option
plan.
(10) Includes 204,790 shares underlying options granted under GTL's option plan.
(11) Includes 190,000 shares underlying options granted under GTL's stock option
plan.
(12) Includes 4,452 shares held in a Keogh Account, 3,560 shares held by minor
children and 260,000 shares underlying options granted under GTL's stock
option plan.
(13) Includes 1,855,767 shares underlying options granted under GTL's stock
option plan
51
EQUITY COMPENSATION PLAN INFORMATION.
The following table presents certain aggregate information, as of December
31, 2002, with respect to (i) the GTL's 1994 Stock Option Plan, (ii) options to
purchase GTL common stock that were granted by Loral to certain of its officers,
and (iii) warrants to purchase Globalstar ordinary partnership interests that
were issued to certain non-employees of Globalstar.
NUMBER OF WEIGHTED- NUMBER OF SECURITIES
SECURITIES TO BE AVERAGE EXERCISE REMAINING AVAILABLE FOR
ISSUED UPON PRICE OF FUTURE ISSUANCE UNDER
EXERCISE OF OUTSTANDING EQUITY COMPENSATION
OUTSTANDING OPTIONS, PLANS (EXCLUDING
OPTIONS, WARRANTS WARRANTS AND SECURITIES REFLECTED IN
PLAN CATEGORY AND RIGHTS RIGHTS COLUMN
- ------------- ----------------- ----------------- -----------------------
Equity compensation plans approved by
security holders -- GTL common stock..... 5,408,567 $14.96 4,490,733
Equity compensation plans not approved by
security holders -- Globalstar
partnership interests(1)................. 7,835,000 $61.07 Not applicable
- ---------------
(1) In May 2000, in connection with a vendor financing arrangement with
QUALCOMM, Globalstar issued to QUALCOMM warrants to purchase 3,450,000
ordinary partnership interests of Globalstar at an exercise price of $42.25
per interest (approximately 25% of the fair market value of GTL's common
stock on the date of issuance). The warrants vested 50% on the date of
issuance, 25% vested in September 2000, and the remaining 25% vested in
September 2002. The warrants expire in 2007.
In August 1999, in connection with Loral's guarantee of a $500 million
credit agreement entered into by Globalstar, Globalstar issued to Loral and
certain of its subsidiaries warrants to purchase an aggregate of 3,450,000
ordinary partnership interests of Globalstar at an exercise price of $91.00
per interest (approximately 25% of the fair market value of GTL's common
stock on the date of issuance. The warrants vested 50% in February 2000, 25%
vested in August 2000 and the remaining 25% vested in August 2001. The
warrants expire in 2006.
In April 1998, in connection with service provider arrangements in China,
Globalstar granted China Telecom (Hong Kong) Group Ltd. warrants to acquire
937,500 ordinary partnership interests of Globalstar at an exercise price of
$20.00 per interest.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS SECTION
GOVERNANCE
The governing body of Globalstar is the General Partners' Committee. The
Committee may have up to seven members, five of whom may be appointed by the
managing general partner of Globalstar, LQSS. The general partner of LQSS is
LQP, a Delaware limited partnership comprised of subsidiaries of Loral and
QUALCOMM. The managing general partner of LQP is LGP, a subsidiary of Loral. As
of December 31, 2002, Loral owned, directly or indirectly, 25,163,207
(approximately 38.2%) of the ordinary partnership interests of Globalstar,
including interests attributable to 9,902,990 shares of GTL outstanding common
stock.
LORAL AGREEMENTS
Following a launch failure in September 1998, Globalstar decided to
purchase eight additional satellites for $148 million (including performance
incentives of up to $16 million) to serve as on-ground spares. As of December
31, 2002, costs of $147 million (including a portion of the performance
incentives) have been recognized for these spare satellites. SS/L has not
terminated its satellite contract with Globalstar and has completed seven of the
eight spare satellites. All eight are in storage in the California. Title to
those satellites, which is currently held by SS/L, is expected to be transferred
to Globalstar as part of the Loral Settlement discussed below. However, there
can be no assurance that the Loral Settlement will be effected.
52
On July 17, 2001, the FCC granted Globalstar and seven other applicants
authorizations to construct, launch and operate MSS systems in the 2 GHz band,
subject to strict milestone requirements. Globalstar entered into a
non-contingent contract with SS/L on July 16, 2002. On January 30, 2003, the
FCC's International Bureau declared the 2 GHz license to be null and void.
Globalstar believes that this action by the FCC's staff is inconsistent with the
facts and the law and has requested the full FCC to review and reverse it.
Globalstar has also requested the full FCC to stay the Bureau's decision pending
review. On January 31, 2003, Globalstar instructed SS/L to stop work on the
contract and requested repayment of the balance of that had not been spent.
Loral is expected to repay this balance in connection with the Loral Settlement
discussed below. However, there can be no assurance that the Loral Settlement
will be effected.
Globalstar has granted SS/L an irrevocable, royalty-free, non-exclusive
license to use certain intellectual property expressly developed in connection
with the SS/L agreement provided that SS/L will not use, or permit others to
use, such license for the purpose of engaging in any business activity that
would be in material competition with Globalstar. Globalstar has similarly
agreed that it will not license such intellectual property if it will be used
for the purpose of designing or building satellites that would be in competition
with SS/L.
SS/L provided $344 million of billings deferred under its construction
contracts with Globalstar, which included $120 million of orbital incentives.
The orbital payments on the replacement satellites are due on a per satellite
basis with 50% due when the satellite is placed in storage. The remaining 50% is
due when Globalstar directs SS/L to ship the satellite to the launch base. Until
such time, interest on the remaining 50% accrues at an interest rate of 10% per
annum. As of December 31, 2002, seven of the eight replacement satellites were
placed in storage and payments became due. No payments were made in 2002 and
interest accrued on the remaining 50% through the Petition Date. Total accrued
interest on the orbitals as of December 31, 2002 was $237,000. Payments were
made on the $134 million of non-interest bearing vendor financing through
January 15, 2001. Penalty fees were accrued at LIBOR plus 3%, through the
Petition Date, and total accrued penalties as of December 31, 2002 were $1.2
million. Interest was being accrued at LIBOR plus 3%, through the Petition Date,
and total accrued interest as of December 31, 2002 was $53.7 million. All of the
construction contract amounts owed to SS/L have been included in liabilities
subject to compromise. The amounts are unsecured claims in Globalstar's
bankruptcy case. Claims of Loral and its affiliates are expected to be resolved
as part of the Loral Settlement discussed below. However, there can be no
assurance that the Loral Settlement will be effected.
The Loral Settlement, which will be effected in connection with
Globalstar's restructuring and emergence from bankruptcy, provides the
following, among other items: (1) Loral's subsidiary, SS/L, would transfer to
Globalstar title "as is" to the eight spare satellites that are currently held
in storage by SS/L; (2) certain strategic agreements under which Loral holds
exclusive rights to provide Globalstar services to defense and national security
agencies and in the aviation market would terminate, and a new joint venture
company (to be owned 75% by Globalstar and 25% by Loral) would be formed to
pursue the defense and national security business; (3) L/Q Licensee, a
subsidiary of LQP, would transfer the Federal Communications Commission license
held by it to Globalstar or LQP would transfer operations of L/Q Licensee to
Globalstar; (4) Loral would convey its interests in the Canadian service
provider operations to Globalstar; (5) certain Loral service provider financial
obligations would be settled through a reduction in debt obligations due from
Globalstar Canada Co. ("GCC") to Loral and other financial obligations involving
a Russian joint venture would be restructured; (6) Loral's general unsecured
claims as a creditor in the Globalstar bankruptcy proceeding would be quantified
and allowed; (7) SS/L would return to Globalstar unused advance prepayments
related to the 2 GHz satellite contract ; (8) Loral's designees would resign
from Globalstar's General Partners Committee; and (9) third party claims against
Loral, certain Loral affiliates and all six members of Globalstar's General
Partners' Committee, as provided in the term sheet, would be released. The
motion supporting the Loral Settlement is expected to be heard by the Bankruptcy
Court on April 9, 2003
53
QUALCOMM AGREEMENTS
Globalstar and QUALCOMM contracted for the design and development of the
Globalstar ground segment pursuant to the Development Contract. This contract
provided for the delivery of four pre-production gateways, two ground operations
control centers and 300 pre-production subscriber terminals. The contract
provided for reimbursement to QUALCOMM, subject to a cap for certain joint
development efforts, for contract costs incurred, plus a 12% fee thereon. On
November 29, 2001, QUALCOMM purported to terminate the Development Contract for
non-payment of invoices allegedly in the amount of $9.8 million. Deliverables
contracted under the Development Contract are substantially complete with
certain remaining software warranty and other obligations.
Globalstar will receive from QUALCOMM or its licensee(s) a payment of
approximately $400,000 for each installed gateway sold to a Globalstar service
provider. As of December 31, 2002, 26 gateways have been sold resulting in a
$7.7 million reduction in costs associated with the Globalstar System. In
addition, Globalstar will receive a payment of up to $10 on each Globalstar user
terminal shipped by the terminal manufacturer, until Globalstar funding of that
design has been recovered.
Globalstar and QUALCOMM contracted for the manufacture, deployment and
maintenance of Globalstar gateways pursuant to the Production Agreement. This
agreement provides for delivery of thirty-eight Gateways of which twenty-six
have been installed by QUALCOMM at various locations worldwide. All but two of
the twenty-six are operational. Twelve gateways are in storage and are available
for sale and deployment to unserved areas of the globe. On December 20, 2001,
QUALCOMM purported to terminate the Production Agreement for non-payment of
invoices allegedly in the amount of $7.1 million. Remaining activities under
this contract are mainly comprised of warranty obligations.
On April 2, 1998, Globalstar and QUALCOMM entered into a User Terminal
Agreement. Under this Agreement and other agreements with Globalstar service
providers, QUALCOMM has shipped approximately 148,000 Globalstar handsets,
18,000 car kits and 5,800 Radio Access Units. QUALCOMM maintains the capability
of designing and manufacturing user terminals if and when service providers
place orders for them.
In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of accrued interest) with QUALCOMM that
replaced the previous arrangement. As of December 31, 2002, $623.3 million was
outstanding under this facility (including $123.3 million of accrued interest).
This liability, including accrued interest through the Petition Date, has been
included in liabilities subject to compromise. In connection with this
agreement, QUALCOMM received warrants to purchase 3,450,000 Globalstar
partnership interests at an exercise price of $42.25 per interest. The exercise
price was determined by reference to the fair market value of GTL's common stock
on the closing date of the vendor financing, based on an approximate ratio of
one partnership interest for every four shares of GTL common stock. The warrants
are vested and will expire in 2007. The fair value of the vested warrants
totaled approximately $34.0 million and is being amortized over the term of the
vendor financing arrangements. However, in light of Globalstar's Chapter 11
petition, these warrants are likely to be of little or no value.
In January 2001, Globalstar suspended indefinitely principal and interest
payments on all of its vendor financing, in order to conserve cash for
operations. Under the terms of the QUALCOMM vendor financing facility,
non-payment of interest payments when they become due, and continuance of non-
payment for five days, is an "event of default". An event of default occurred on
January 16, 2001, when Globalstar failed to pay interest with respect to
separate credit extensions made under the QUALCOMM vendor financing facility. As
a result of Globalstar's bankruptcy petition filed on February 15, 2002, this
vendor financing was accelerated and became immediately due and payable. The
vendor financing is an unsecured claim in Globalstar's bankruptcy case.
In March 1994 Globalstar granted QUALCOMM the worldwide exclusive right to
utilize the Globalstar System to provide OmniTRACS-like services, including
certain data-messaging and position-determination services offered by QUALCOMM,
primarily to fleets of motor vehicles and rail cars and/or
54
vessels and supervisory control and data acquisition services. QUALCOMM has
never exploited these rights, and it is not certain that QUALCOMM remains
interested in providing OmniTRACS-like services over the Globalstar System.
Globalstar has the right to assume, reject or modify this contract with QUALCOMM
in its Chapter 11 case.
PURCHASE OF UNITED STATES SERVICE PROVIDER AND GATEWAY ASSETS
In December 2001, a subsidiary of Globalstar purchased all of the
outstanding common shares of Vodafone Satellite Services, Inc., a Delaware
corporation, for $100, plus acquisition costs of $258,000. Globalstar has
renamed the company GSSI. GSSI indirectly owns the majority interest in GCSC, a
Nova Scotia corporation based in Ontario, Canada. GCSC is the Globalstar service
provider in Canada and generates its revenue from the provision of Globalstar
services in Canada, billing customers for usage over two Canadian gateways.
Loral Holdings Ltd., a subsidiary of Loral, owns the remaining minority interest
in GCSC. Therefore, the result of this transaction is that Globalstar is now a
shareholder with Loral in GCSC, the Canadian service provider. The acquisition
has brought additional efficiencies to the operation of the Globalstar network
and allowed for increased coordination in the Globalstar service offerings and
pricing. Loral's interest in GCSC is expected to be transferred to Globalstar as
part of the Loral Settlement discussed below. However, there can be no
assurances that the Loral Settlement will be effected.
On July 2, 2002, Globalstar closed a transaction with TE.SA.M. under which
a subsidiary of Globalstar acquired TE.SA.M.'s French gateway, back office
assets, inventory and TE.SA.M.'s limited partnership interests. Under the terms
of the transaction, both Globalstar and TE.SA.M. forgave all outstanding
obligations between the parties and provided mutual releases of liability.
AUSTRALIA SETTLEMENT
On December 30, 2002, the Bankruptcy Court approved a settlement agreement
among GSCI, Globalstar, Globalstar Vodafone Network Pty Ltd. Australia and
Globalstar Australia Pty Ltd. Under this settlement, Globalstar consented to the
transfer by VSSL to Localstar of the service provider rights in Australia, and
Globalstar entered into a new service provider agreement with Localstar. VSSL
was the original authorized service provider for Australia and the operator of
three gateways in that country. In conjunction with this transaction, VSSL
agreed to settle certain pre-petition and post-petition debts with Globalstar.
Globalstar received payments totaling $1.7 million from Vodafone in January
2003.
ELSACOM SETTLEMENT
On March 25, 2003, Globalstar entered into a settlement and release
agreement with Elsacom and a gateway asset purchase agreement with a wholly
owned subsidiary of Elsacom. Elsacom is the primary Globalstar service provider
in Central and Eastern Europe, the operator of the gateway located in Avezzano,
Italy and, through its affiliate, Globalstar Northern Europe, the former
operator of the gateway located in Karkkila, Finland. Although Elsacom had
defaulted on its gateway contract obligations to Globalstar, Elsacom desired to
continue providing Globalstar service to its customers from Avezzano.
Accordingly, Globalstar and Elsacom agreed to negotiate a mutually acceptable
plan for paying certain of the debt, transferring the equipment in Finland to
Globalstar and maintaining Elsacom's service provider rights. Under the terms of
the Elsacom Settlement, Globalstar will receive cash payments totaling $2.4
million in two installments to be completed by June 2003 and the release of all
past payment obligations due to Elsacom in exchange for liquidation of the
gateway contract payments due to Globalstar from Elsacom. Additionally,
Globalstar will retain title to the gateway equipment installed in Finland.
Globalstar intends to dismantle the Finland gateway and to place the removable
parts, which contain most of the gateway's electronics, in storage for future
deployment.
55
SUPPORT AND CONSULTING AGREEMENTS
Globalstar has entered into various agreements with other service providers
and gateway operators to provide and receive various services related to the
Globalstar business. Currently, Globalstar is providing retail billing support
to its service providers in Mexico and Brazil, on a cost reimbursable basis.
Additionally, Globalstar has agreements in place to provide, also on cost
reimbursable basis, certain information technology and telecommunications
network related support to GCC, in which it holds a minority interest. Also, GCC
bills Globalstar for the monitoring of gateways in the United States, Canada,
and France. In addition, Globalstar is billed for all costs related to the
operations of the gateways located in Canada, as cost recovery mechanism for
GCC. Globalstar also net settles with other service providers roaming charges
that arise from subscribers using gateways other then their home gateway to
complete calls on the Globalstar System.
SERVICE PROVIDER AGREEMENTS
Partners of Globalstar or their affiliates entered into service provider
agreements with Globalstar granting them the right to provide Globalstar service
to users in designated countries as long as specified minimum levels of
subscribers are met. These service providers received certain discounts from
Globalstar's standard airtime pricing. A number of Globalstar service providers
pre-purchased discounted minutes of use, amounting to approximately $11.7
million in pre-committed gross revenue ($8.8 million net of 25% discount), all
of which had been received prior to 2002. Of the prepaid committed revenue, $6.6
million has been recognized as of December 31, 2002.
CREDIT FACILITIES
In January 2001, Globalstar suspended indefinitely principal and interest
payments on its funded debt in order to conserve cash for operations.
Non-payment of interest payments when they become due, and continuance of
non-payment for five days, is an "event of default" under the terms of the $500
million credit facility. An event of default occurred on January 16, 2001 under
the $500 million credit facility when Globalstar failed to pay interest with
respect to two separate credit extensions made under the $500 million credit
agreement. As a result of Globalstar's bankruptcy petition filed on February 15,
2002, this credit facility was accelerated and became immediately due and
payable. This debt is an unsecured claim in Globalstar's bankruptcy case.
$250 Million Credit Agreement
On June 30, 2000, Globalstar's $250 million credit facility with The Chase
Manhattan Bank became due and was repaid in full by its guarantors, including
Lockheed Martin, QUALCOMM, DASA and SS/L, who had previously received warrants
for GTL common stock in consideration of their guarantee. Pursuant to the
relevant agreements, Globalstar issued three-year notes in the amounts of $206.3
million, $21.9 million, $11.7 million and $10.1 million to Lockheed Martin,
QUALCOMM, SS/L and DASA, respectively, in satisfaction of their subrogation
rights. The notes are due on June 30, 2003 and bear interest, on a deferred
basis, at a rate of LIBOR plus 3%. On the consolidated balance sheet of
Globalstar the notes are presented as liabilities subject to compromise as of
December 31, 2002 and notes payable and notes payable to affiliates as of
December 31, 2001.
Lockheed Martin, however, rejected the notes it received and instead
requested that Globalstar issue new securities with additional rights and
enhanced value, without waiving its claim that it is entitled to receive an
immediate cash reimbursement by Globalstar of its $150 million payment to the
bank lenders. Globalstar disputes Lockheed Martin's interpretation of the
relevant agreements. If the dispute is not resolved, Globalstar cannot be sure
that if the matter were litigated, the court would agree with Globalstar's
interpretation of the agreements. Management believes, however, that a court
would agree with Globalstar's interpretation of the relevant agreements. The
notes are unsecured claims in Globalstar's bankruptcy case.
56
In 2001, an issue was raised as to whether the three-year notes issued to
the guarantors of The Chase Manhattan Bank $250 million credit facility were
prepared in accordance with the recourse provisions of the guarantee
arrangement. Management does not believe the existing notes containing
non-recourse language will need to be replaced with notes not containing the
non-recourse language. If the existing non-recourse notes were replaced with
notes not containing the non-recourse language, the replacement would not impact
Globalstar's results of operations. However, allocations of Globalstar's losses
to general partners would increase by the amount of the increase in recourse
obligations.
$500 Million Credit Agreement with Affiliates
On August 5, 1999, Globalstar entered into a $500 million credit agreement
with a group of banks. The creditors' interests under the credit facility were
purchased by a wholly owned subsidiary of Loral on November 17, 2000, which had
previously guaranteed the facility. As of December 31, 2002, all amounts under
the $500 million credit agreement were drawn. Borrowings under the facilities
bear interest, at Globalstar's option, at various rates based on margins over
the lead bank's base rate or LIBOR for periods of one to six months. The claims
of the Loral subsidiary, in respect of this credit agreement constitute
unsecured claims in Globalstar's bankruptcy case.
In consideration for the guarantee by Loral in 1999, Loral and certain
Loral subsidiaries received warrants to purchase an aggregate of 3,450,000
Globalstar partnership interests, valued at $141.1 million, (equivalent to
approximately 13.8 million shares of common stock of GTL) at an exercise price
of $91.00 per partnership interest (equivalent to $22.75 per share of GTL common
stock). The outstanding warrants are vested and expire in 2006. However, in
light of Globalstar's Chapter 11 petition, the warrants are likely to be of
little or no value.
GLOBALSTAR MANAGING PARTNER'S ALLOCATION AND DISTRIBUTION
Globalstar's limited partnership agreement provides that, LQP, the general
partner of LQSS, would receive a managing partner's allocation equal to 2.5% of
Globalstar's revenues up to $500 million plus 3.5% of revenues in excess of $500
million. Loral and QUALCOMM ultimately would receive 80% and 20% of such
distribution, respectively. As of December 31, 2002, the managing partner's
allocation of $167,000 has been deferred and $108,000 is an unsecured claim in
Globalstar's bankruptcy case.
JOINT VENTURES
Subsidiaries of Loral have formed joint ventures with partners which have
executed service provider agreements granting the joint ventures the exclusive
rights to provide Globalstar System services to users in Brazil, Canada, Mexico
and Russia. Globalstar holds a 49% legal interest in GlobalTel, the Russian
service provider, for the benefit of Loral. In December 2001, a subsidiary of
Globalstar acquired a majority interest in the Canadian service provider
business. As a result of this transaction, Globalstar and Loral are now partners
in the Canadian joint venture. Founding service providers, including Loral,
receive specified discounts from Globalstar's expected pricing schedule
generally over a five-year period. Loral's interest in the Canadian service
provider is expected to be transferred to Globalstar as part of the Loral
Settlement discussed above. However, there can be no assurances that the Loral
Settlement will be effected. See discussion of the Loral Agreements above.
ITEM 14. CONTROLS AND PROCEDURES
(a) Globalstar maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its filings under the
Exchange Act is recorded, processed, summarized and reported within the
periods specified in the rules and forms of the Securities and Exchange
Commission. Such information is accumulated and communicated to Globalstar's
management, including its chief executive officer and chief financial
officer, to allow timely decisions regarding
57
required disclosure. Globalstar's management recognizes that any set of
controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives.
Within 90 days prior to the filing date of this annual report on Form 10-K,
Globalstar has carried out an evaluation, under the supervision and with the
participation of Globalstar's management, including Globalstar's chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of Globalstar's disclosure controls and procedures.
Based on such evaluation, Globalstar's chief executive officer and chief
financial officer concluded that Globalstar's disclosure controls and
procedures are effective.
GTL maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in its filings under the Exchange
Act is recorded, processed, summarized and reported within the periods
specified in the rules and forms of the Securities and Exchange Commission.
Such information is accumulated and communicated to GTL's restructuring
officer to allow timely decisions regarding required disclosure. GTL's
restructuring officer recognizes that any set of controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
Within 90 days prior to the filing date of this annual report on Form 10-K,
GTL has carried out an evaluation, under the supervision and with the
participation of GTL's restructuring officer, of the effectiveness of the
design and operation of GTL's disclosure controls and procedures. Based on
such evaluation, GTL's restructuring officer concluded that GTL's disclosure
controls and procedures are effective.
(b) There have been no significant changes in Globalstar's internal controls or
in other factors that could significantly affect the internal controls
subsequent to the date of Globalstar's evaluation in connection with the
preparation of this annual report on Form 10-K.
There have been no significant changes in GTL's internal controls or in
other factors that could significantly affect the internal controls
subsequent to the date of GTL's evaluation in connection with the
preparation of this annual report on Form 10-K.
58
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements -- See "Index to Consolidated Financial Statements"
on page F-1.
2. Financial Statement Schedules
Not applicable.
(A) 3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTIONS OF EXHIBIT
- ------- -----------------------
3.1 Memorandum of Association of Globalstar Telecommunications
Limited(1)
3.2 Bye-Laws of Globalstar Telecommunications Limited, as
amended, and including Schedule III annexed there to
regarding the 8% Series A Convertible Redeemable Preferred
Shares due 2011(10)
3.3 Schedule IV to the Bye-laws of Globalstar Telecommunications
Limited regarding the 9% Series B Convertible Redeemable
Preferred Shares due 2001(11)
4.1 Indenture dated as of February 15, 1997 relating to
Globalstar's and Globalstar Capital Corporation's 11 3/8%
Senior Notes due 2004(2)
4.2 Indenture dated as of June 1, 1997 relating to Globalstar's
and Globalstar Capital Corporation's 11 1/4% Senior Notes
due 2004(3)
4.3 Indenture dated as of October 15, 1997 relating to
Globalstar's and Globalstar Capital Corporation's 10 3/4%
Senior Notes due 2004(4)
4.4 Indenture dated as of May 20, 1998 relating to Globalstar's
and Globalstar Capital Corporation's 11 1/2% Senior Notes
due 2005(5)
4.5 Form of note issued to guarantors of Globalstar's $250
million credit facility(14)
10.1 Amended and Restated Agreement of Limited Partnership of
Globalstar L.P., dated as of January 26, 1999, among
Loral/QUALCOMM Satellite Services, L.P., Globalstar
Telecommunications Limited, AirTouch Satellite Services,
Inc., Dacom Corporation, Dacom International, Inc., Hyundai
Corporation, Hyundai Electronics Industries Co., Ltd.,
Loral/DASA Globalstar, L.P., Loral Space & Communications
Ltd., San Giorgio S.p.A., Telesat Limited, TE. SA. M., and
Vodafone Satellite Services Limited(10)
10.1.2 Amendment dated as of December 8, 1999 to the Amended and
Restated Agreement of Limited Partnership of Globalstar,
L.P.(11)
10.1.3 Amendment dated as of February 1, 2000 to the Amended and
Restated Agreement of Limited Partnership of Globalstar,
L.P.(13)
10.2 Subscription Agreements by and between Globalstar, L.P., and
each of AirTouch Communications, Alcatel Spacecom, Loral
General Partner, Inc., Hyundai/Dacom and Vodastar Limited(1)
10.3 Subscription Agreement by and between Globalstar, L.P. and
Loral/QUALCOMM Satellite Services, L.P.(1)
10.4 Subscription Agreement by and between Globalstar, L.P. and
Finmeccanica S.p.A.(1)
10.5 Subscription Agreement by and between Globalstar, L.P. and
China Telecommunications Broadcast Satellite Corporation(10)
10.6 Form of Service Provider Agreements by and between
Globalstar, L.P. and each of AirTouch Satellite Services,
Inc., Finmeccanica S.p.A., Loral Globalstar, L.P.,
Loral/DASA Globalstar, L.P., Hyundai/Dacom, TE. SA. M., and
Vodastar Limited(1)
10.7 Development Agreement by and between QUALCOMM Incorporated
and Globalstar, L.P.(1)
10.8 Contract between Globalstar, L.P. and Space Systems/Loral,
Inc.(1)
10.9 Contract for the Development of Certain Portions of the
Ground Operations Control Center between Globalstar and
Loral Western Development Laboratories(1)
59
EXHIBIT
NUMBER DESCRIPTIONS OF EXHIBIT
- ------- -----------------------
10.10 Contract for the Development of Satellite Orbital Operations
Centers between Globalstar and Loral Aerosys, a division of
Loral Aerospace Corporation(1)
10.11 1994 Stock Option Plan(6)+
10.12 Amendment to 1994 Stock Option Plan(7)+
10.12.2 Amendment No. 2 to 1994 Stock Option Plan.(13)+
10.13 Revolving Credit Agreement dated as of December 15, 1995, as
amended on March 25, 1996, among Globalstar, certain banks
parties thereto and Chemical Bank, as Administrative
Agent(2)
10.14 Second Amendment to Revolving Credit Agreement dated July
31, 1997 among Globalstar, certain banks parties thereto and
The Chase Manhattan Bank, as Administrative Agent(4)
10.15 Third Amendment to Revolving Credit Agreement dated as of
October 15, 1997 among Globalstar, certain banks parties
thereto and The Chase Manhattan Bank, as Administrative
Agent(4)
10.16 Fourth Amendment to Revolving Credit Agreement dated as of
November 13, 1998 among Globalstar, certain banks parties
thereto and The Chase Manhattan Bank, as Administrative
Agent(10)
10.17 Exchange and Registration Rights Agreement, dated as of
December 31, 1994, among Globalstar, L.P. and AirTouch
Satellite Services, Inc., Finmeccanica S.p.A., Loral
Globalstar, L.P., Loral/DASA Globalstar, L.P.,
Hyundai/Dacom, TE. SA. M., and Vodastar Limited(1)
10.18 Amendment to the Exchange and Registration Rights Agreement,
dated as of April 8, 1998, among Globalstar, L.P.,
Globalstar Telecommunications Limited and Telesat
Limited(10)
10.19 Warrant Agreement dated as of February 19, 1997 relating to
Warrants to purchase 4,129,000 shares of Common Stock of
Globalstar Telecommunications Limited(2)
10.20 Registration Rights Agreement dated February 19, 1997
relating to Globalstar's 11 3/8% Senior Notes due 2004 and
the Company's Warrants to purchase 4,129,000 shares of
Common Stock issued in connection therewith(2)
10.21 Registration Rights Agreement dated June 13, 1997 relating
to Globalstar's and Globalstar Capital Corporation's 11 1/4%
Senior Notes due 2004(3)
10.22 Registration Rights Agreement dated October 29, 1997
relating to Globalstar's and Globalstar Capital
Corporation's 10 3/4% Senior Notes due 2004(4)
10.23 Registration Rights Agreement dated May 20, 1998 relating to
Globalstar's and Globalstar Capital Corporation's 11 1/2%
Senior Notes due 2005(5)
10.24 Registration Rights Agreement dated as of July 6, 1998
relating to 8,400,000 shares of Common Stock by and among
Globalstar Telecommunications Limited, Loral Space &
Communications Ltd., Quantum Partners LDC, Quasar Strategic
Partners LDC and Quantum Industrial Partners LDC.(8)
10.25 Exchange Agreement dated as of September 28, 1998 relating
to 717,600 shares of Common Stock by and between Loral Space
& Communications Ltd., DACOM Corporation and DACOM
International, Inc.(9)
10.26 Registration Rights Agreement dated as of January 26, 1999
relating to the Company's 8% Convertible Redeemable
Preferred Stock(10)
10.27 Credit Agreement dated August 5, 1999 among Globalstar,
L.P., Bank of America, National Association, as
Administration Agent, Banc of America Securities LLC, as
Sole Lead Arranger and Sole Book Manager, Credit Lyonnais,
New York Branch, as Syndication Agent and Lehman Commercial
Paper Inc., as Documentation Agent(12)
10.28 Registration Rights Agreement dated December 8, 1999
relating to GTL's 9% Series B Preferred Stock due 2011(11)
60
EXHIBIT
NUMBER DESCRIPTIONS OF EXHIBIT
- ------- -----------------------
10.29 Fee Agreement dated as of April 19, 1996 by and among
Globalstar, Globalstar Telecommunications Limited, Loral
Corporation, Loral Space & Communications Ltd., QUALCOMM
Limited Partner, Inc., Space Systems/Loral, Inc. and DASA
Globalstar Limited Partner, Inc.(14)
10.30 Intercreditor Agreement dated as of April 19, 1996 by and
among Globalstar, Globalstar Telecommunications Limited,
Loral Corporation, Loral Space & Communications Ltd.,
QUALCOMM Limited Partner, Inc., Space Systems/Loral, Inc,
Inc. and DASA Globalstar Limited Partner, Inc.(14)
10.31 Waiver and Amendment dated as of June 30, 2000 to the Credit
Agreement, dated as of August 5, 2000 by and among
Globalstar, Bank of America, National Association, as
administrative agent, and the several banks and other
financial institutions from time to time thereto.(14)
10.32 Forbearance and Waiver Agreement dated as of June 30, 2000
between Globalstar and QUALCOMM Incorporated.(14)
10.33 Purchase Agreement dated as of September 18, 2000 among
Globalstar Telecommunications Limited, Globalstar, L.P. and
Bear Sterns International Limited.(15)
10.34 Subscription Agreement dated September 22, 2000 between
Globalstar Telecommunications Limited and Loral Space &
Communications Ltd.(16)
10.35 Assignment, Amendment and Release Agreement dated as of
November 17, 2000 by and among the lenders parties to the
Globalstar Credit Agreement, Loral Satellite, Inc., Loral
Satcom Ltd., Loral Space & Communications Ltd., Loral Space
& Communications Corporation, Globalstar, L.P. and Bank of
America, National Association.(17)
10.36 Plan Support Agreement Between Loral and Columbia Ventures
Corp., Loeb Partners Corp., Stonehill Capital Management,
LLC and Blue River LLC.(18)
10.37 Memorandum Of Understanding -- Proposed Restructuring
Between Loral and Columbia Ventures Corp., Loeb Partners
Corp., Stonehill Capital Management, LLC and Blue River
LLC.(18)
10.38 Investment Agreement with New Valley Corporation pursuant to
which New Valley would invest $55 million as part of a plan
of reorganization.(19)
10.39 Debtor-in-possession credit agreement with New Valley
Corporation.(19)
10.40 Debtor-in-possession credit agreement with Blue River
Capital LLC, Columbia Ventures Corporation, ICO Investment
Corp, Iridium Investors, LLC and Loeb Partners
Corp.(collectively, the "DIP Lenders"), subject to final
Bankruptcy Court approval, for the DIP lenders to make $10
million available to Globalstar.*
12 Statement Regarding Computation of Ratios*
21 List of Subsidiaries of the Registrant*
23 Consent of Deloitte & Touche LLP*
- ---------------
(1) Incorporated by reference to GTL's Registration Statement on Form S-1 (No.
33-86808).
(2) Incorporated by reference to GTL's and Globalstar's Annual Report on Form
10-K for the Year Ended December 31, 1996.
(3) Incorporated by reference to Globalstar's Registration Statement on Form
S-4 (No. 333-25461).
(4) Incorporated by reference to Globalstar's Registration Statement on Form
S-4 (No. 333-41229).
(5) Incorporated by reference to Globalstar's Registration Statement on Form
S-4 (No. 333-57749).
(6) Incorporated by reference to GTL's Registration Statement on Form S-3 (No.
333-6477).
(7) Incorporated by reference to GTL's and Globalstar's Annual Report on Form
10-K for the Year Ended December 31, 1997.
61
(8) Incorporated by reference to Schedule 13D filed by Loral Space &
Communications Ltd. on August 3, 1998.
(9) Incorporated by reference to Schedule 13D filed by Loral Space &
Communications Ltd. on February 10, 1999.
(10) Incorporated by reference to GTL's and Globalstar's Annual Report on Form
10-K for the Year Ended December 31, 1998.
(11) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on December 21, 1999.
(12) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on August 6, 1999.
(13) Incorporated by reference to GTL's and Globalstar's Annual Report on Form
10-K for the Year Ended December 31, 1999.
(14) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on July 7, 2000.
(15) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on September 19, 2000.
(16) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on September 25, 2000.
(17) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on November 20, 2000.
(18) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on February 19, 2002.
(19) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on January 15, 2003 and February 4, 2003.
* Filed herewith.
+ Management compensation plan.
(B) REPORTS ON FORM 8-K
The registrants did not file any reports on Form 8-K during the quarter
ended December 31, 2002. Since that date, the registrants have filed the
following reports on Form 8-K:
DATE OF REPORT DESCRIPTION
- -------------- -----------
January 15, 2003.................. Globalstar reached agreement with New Valley pursuant to
which New Valley would invest $55 million as part of a plan
of reorganization.
February 4, 2003.................. The agreement between Globalstar and New Valley was
terminated due to the inability to reach final agreement
with the official committee of unsecured creditors.
February 27, 2003................. Globalstar entered into a $10 million debtor-in-possession
credit agreement, subject to the final approval of the
Bankruptcy Court.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GLOBALSTAR TELECOMMUNICATIONS LIMITED
Registrant
/s/ IRA E. GOLDBERG
--------------------------------------
Ira E. Goldberg
Restructuring Officer
and Registrant's Authorized Officer
Date: March 28, 2003
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ IRA E. GOLDBERG Restructuring Officer March 28, 2003
- --------------------------------------------------- (Principal Executive, Financial
Ira E. Goldberg and Accounting Officer)
/s/ DOUGLAS DWYRE Director March 28, 2003
- ---------------------------------------------------
Douglas Dwyre
/s/ SIR RONALD GRIERSON Director March 28, 2003
- ---------------------------------------------------
Sir Ronald Grierson
/s/ E. JOHN PEETT Director March 28, 2003
- ---------------------------------------------------
E. John Peett
/s/ MICHAEL B. TARGOFF Director March 28, 2003
- ---------------------------------------------------
Michael B. Targoff
/s/ A. ROBERT TOWBIN Director March 28, 2003
- ---------------------------------------------------
A. Robert Towbin
63
CERTIFICATION
I, Ira E. Goldberg, certify that:
1. I have reviewed this annual report on Form 10-K of Globalstar
Telecommunications Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ IRA E. GOLDBERG
--------------------------------------
Ira E. Goldberg
Restructuring Officer
Date: March 28, 2003
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California, on March 28, 2003.
GLOBALSTAR, L.P.
/s/ ANTHONY J. NAVARRA
--------------------------------------
Anthony J. Navarra
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ OLOF LUNDBERG Chairman of the General March 28, 2003
- --------------------------------------------------- Partners' Committee and Chief
Olof Lundberg Executive Officer (Principal
Executive Officer)
/s/ BERNARD L. SCHWARTZ Member of the General Partners' March 28, 2003
- --------------------------------------------------- Committee
Bernard L. Schwartz
/s/ ERIC J. ZAHLER Member of the General Partners' March 28, 2003
- --------------------------------------------------- Committee
Eric J. Zahler
/s/ SIR RONALD GRIERSON Member of the General Partners' March 28, 2003
- --------------------------------------------------- Committee
Sir Ronald Grierson
/s/ A. ROBERT TOWBIN Member of the General Partners' March 28, 2003
- --------------------------------------------------- Committee
A. Robert Towbin
/s/ RUSSELL R. MACK Member of the General Partners' March 28, 2003
- --------------------------------------------------- Committee
Russell R. Mack
/s/ DANIEL P. MCENTEE Vice President and Chief March 28, 2003
- --------------------------------------------------- Financial Officer (Principal
Daniel P. McEntee Financial and Accounting
Officer)
65
CERTIFICATIONS
I, Olof Lundberg, certify that:
1. I have reviewed this annual report on Form 10-K of Globalstar, L.P.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ OLOF LUNDBERG
--------------------------------------
Olof Lundberg
Chief Executive Officer
Date: March 28, 2003
66
I, Daniel P. McEntee, certify that:
1. I have reviewed this annual report on Form 10-K of Globalstar, L.P.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ DANIEL P. MCENTEE
--------------------------------------
Daniel P. McEntee
Vice President and Chief Financial
Officer
Date: March 28, 2003
67
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Globalstar Telecommunications Limited (A General Partner of
Globalstar, L.P.)
Independent Auditors' Report.............................. F-2
Balance Sheets............................................ F-3
Statements of Operations.................................. F-4
Statements of Shareholders' Equity (Deficit).............. F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
Globalstar, L.P. (A Debtor-in-Possession)
Independent Auditors' Report.............................. F-16
Consolidated Balance Sheets............................... F-17
Consolidated Statements of Operations..................... F-18
Consolidated Statements of Partners' Capital (Deficit).... F-19
Consolidated Statements of Cash Flows..................... F-20
Notes to Consolidated Financial Statements................ F-21
F-1
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Globalstar Telecommunications Limited:
We have audited the accompanying balance sheets of Globalstar
Telecommunications Limited ("GTL") (a Bermuda company and a General Partner of
Globalstar, L.P.) as of December 31, 2002 and 2001 and the related statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of GTL's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Globalstar Telecommunications Limited as of
December 31, 2002 and 2001 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that GTL
will continue as a going concern. As discussed in Note 2, GTL is dependent upon
Globalstar L.P.'s ("Globalstar") successful financial results and achievement of
profitable operations for the recovery of its investment. On February 15, 2002,
Globalstar and certain of its subsidiaries filed for reorganization under
Chapter 11 of the Federal Bankruptcy Code. These factors raise substantial doubt
about GTL's ability to continue as a going concern. Management's plans
concerning these matters for restructuring are also discussed in Note 2. The
financial statements do not include adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
San Jose, California
February 24, 2003 (March 21, 2003 as to the third and fourth paragraph of Note
2)
F-2
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------------
2002 2001
------------ ------------
ASSETS...................................................... $ -- $ --
=========== ===========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' (DEFICIT)
Current liabilities:
Dividends payable......................................... $ 49,541 $ 29,870
Equity losses in excess of partnership interests in
Globalstar............................................. 880,810 825,637
----------- -----------
Total current liabilities......................... 930,351 855,507
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
Convertible Redeemable Preferred Stock:
8% Series A (3,836,463 and 3,268,796 shares outstanding at
December 31, 2002 and 2001, respectively, $192 million
and $163 million redemption value at December 31, 2002
and 2001, respectively)................................ 186,220 158,666
9% Series B (343,021 and 1,270,075 shares outstanding at
December 31, 2002 and 2001, respectively, $18 million
and $64 million redemption value at December 31, 2002
and 2001, respectively)................................ 16,645 61,630
----------- -----------
202,865 220,296
----------- -----------
Shareholders' (deficit):
Convertible redeemable preferred stock, $.01 par value,
20,000,000 shares authorized:
8% Series A convertible redeemable preferred stock,
(519,832 and 1,089,599 shares outstanding at December
31, 2002 and 2001, respectively, $26 million and $55
million redemption value at December 31, 2002 and
2001, respectively)................................... 25,232 52,888
9% Series B convertible redeemable preferred stock,
(46,479 and 423,358 shares outstanding at December 31,
2002 and 2001, respectively, $2 million and $21
million redemption value at December 31, 2002 and
2001, respectively)................................... 2,256 20,544
Common stock, $1.00 par value, 600,000,000 shares
authorized (113,059,195 and 110,542,921 shares
outstanding at December 31, 2002 and 2001,
respectively).......................................... 113,059 110,543
Additional paid-in capital................................ 1,202,812 1,141,953
Warrants.................................................. 11,268 11,268
Accumulated deficit....................................... (2,487,843) (2,412,999)
----------- -----------
Total shareholders' (deficit)..................... (1,133,216) (1,075,803)
----------- -----------
Total liabilities and shareholders' (deficit)..... $ -- $ --
=========== ===========
See notes to financial statements.
F-3
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- ----------
Equity in net loss applicable to ordinary partnership
interests of Globalstar, L.P.............................. $ 55,173 $142,298 $1,667,761
Equity in net loss applicable to preferred partnership
interests of Globalstar, L.P.............................. 356,944
Amortization of excess carrying value in Globalstar, L.P.... 31,840
Dividend income on Globalstar, L.P. redeemable preferred
partnership interests..................................... (27,422)
-------- -------- ----------
Net loss.................................................... 55,173 142,298 2,029,123
Preferred dividends on convertible redeemable preferred
stock..................................................... 19,671 26,562 30,730
-------- -------- ----------
Net loss applicable to common shareholders.................. $ 74,844 $168,860 $2,059,853
======== ======== ==========
Net loss per share -- basic and diluted..................... $ 0.66 $ 1.54 $ 20.85
======== ======== ==========
Weighted average shares outstanding -- basic and diluted.... 112,816 109,778 98,807
======== ======== ==========
See notes to financial statements.
F-4
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
CONVERTIBLE
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS DEFICIT TOTAL
------ --------- ------- -------- ---------- -------- ----------- -----------
Balance, January 1, 2000......... 7,396 $ 358,968 88,743 $ 88,743 $ 756,615 $11,539 $ (184,286) $ 1,031,579
Exercise of warrants............. 92 92 1,772 (271) 1,593
Conversion of 8% Series A
convertible redeemable
preferred stock................ (10) 1 1 9
Conversion of 9% Series B
convertible redeemable
preferred stock................ (41) (2,014) 80 80 1,934
Issuance of common stock......... 17,346 17,346 335,095 352,441
Exercise of stock options........ 26 26 266 292
Dividends on convertible
redeemable preferred stock..... 1,737 1,737 5,957 (30,730) (23,036)
Change in fair value of stock
compensation for the benefit of
Globalstar..................... (20,393) (20,393)
Net loss......................... (2,029,123) (2,029,123)
------ --------- ------- -------- ---------- ------- ----------- -----------
Balance, December 31, 2000....... 7,355 356,944 108,025 108,025 1,081,255 11,268 (2,244,139) (686,647)
Conversion of 8% Series A
convertible redeemable
preferred stock................ (38) (1,829) 81 81 1,748
Conversion of 9% Series B
convertible redeemable
preferred stock................ (1,265) (61,387) 2,437 2,437 58,950
Classification of convertible
redeemable preferred stock
outside equity................. (4,539) (220,296) (220,296)
Dividends on convertible
redeemable preferred stock..... (26,562) (26,562)
Net loss......................... (142,298) (142,298)
------ --------- ------- -------- ---------- ------- ----------- -----------
Balance, December 31, 2001....... 1,513 73,432 110,543 110,543 1,141,953 11,268 (2,412,999) (1,075,803)
Conversion of 8% Series A
convertible redeemable
preferred stock................ (2) (102) 5 5 97
Conversion of 9% Series B
convertible redeemable
preferred stock................ (1,304) (63,273) 2,511 2,511 60,762
Classification of convertible
redeemable preferred stock
outside equity................. 359 17,431 17,431
Dividends on convertible
redeemable preferred stock..... (19,671) (19,671)
Net loss......................... (55,173) (55,173)
------ --------- ------- -------- ---------- ------- ----------- -----------
Balance, December 31, 2002....... 566 $ 27,488 113,059 $113,059 $1,202,812 $11,268 $(2,487,843) $(1,133,216)
====== ========= ======= ======== ========== ======= =========== ===========
See notes to financial statements.
F-5
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
-------- --------- -----------
Operating activities:
Net loss.................................................. $(55,173) $(142,298) $(2,029,123)
Equity in net loss applicable to ordinary partnership
interests of Globalstar, L.P. .......................... 55,173 142,298 1,667,761
Equity in net loss applicable to preferred partnership
interests of Globalstar, L.P. .......................... -- 356,944
Amortization of excess carrying value in Globalstar,
L.P. ................................................... -- 31,840
Dividends accrued on redeemable preferred partnership
interests............................................... -- -- 3,323
-------- --------- -----------
Net cash provided by operating activities................. -- -- 30,745
-------- --------- -----------
Investing activities:
Purchase of ordinary partnership interests in Globalstar,
L.P. ................................................... (354,326)
-------- --------- -----------
Net cash used in investing activities..................... -- -- (354,326)
-------- --------- -----------
Financing activities:
Net proceeds from issuance of common stock upon exercise
of options and warrants................................. -- 1,885
Net proceeds from sale of common stock.................... -- 352,441
Payment of preferred stock dividends...................... -- (30,745)
-------- --------- -----------
Net cash provided by financing activities................. -- -- 323,581
-------- --------- -----------
Net increase in cash and cash equivalents................... -- -- --
Cash and cash equivalents, beginning of period.............. -- -- --
-------- --------- -----------
Cash and cash equivalents, end of period.................... $ -- $ -- $ --
======== ========= ===========
Noncash transactions:
Common stock issued upon conversion of convertible
preferred securities and related interest and dividend
make-whole payments..................................... $ 63,375 $ 63,216 $ 2,024
======== ========= ===========
Change in fair value of stock compensation for the benefit
of Globalstar........................................... $ (20,393)
===========
Common stock issued in lieu of cash payment to preferred
stockholders............................................ $ 7,694
===========
See notes to financial statements.
F-6
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
On November 23, 1994, Globalstar Telecommunications Limited ("GTL") was
incorporated as an exempted company under the Companies Act 1981 of Bermuda.
GTL's financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. GTL's sole
business is acting as a general partner of Globalstar, L.P. ("Globalstar"), a
Delaware limited partnership, which was founded to design, construct and operate
a worldwide, low-earth orbit ("LEO") satellite-based wireless digital
telecommunications system (the "Globalstar System"). The Globalstar System's
worldwide coverage is designed to enable its service providers to extend modern
telecommunications services to millions of people who currently lack basic
telephone service and to enhance wireless communications in areas underserved or
not served by existing or future cellular systems, providing a
telecommunications solution in parts of the world where the build-out of
terrestrial systems cannot be economically justified.
As of December 31, 2002, GTL owned 27,911,240 (42.4%) of Globalstar's
65,848,740 outstanding ordinary partnership interests, 100% of Globalstar's
outstanding 8% convertible redeemable preferred partnership interests (the "8%
RPPIs") and 100% of Globalstar's outstanding 9% convertible redeemable preferred
partnership interests (the "9% RPPIs") (see Note 5).
Globalstar operates in one industry segment, satellite telecommunications,
providing global mobile and fixed wireless voice and data services.
Loral QUALCOMM Satellite Services, L.P. ("LQSS"), an affiliate of Loral
Space & Communications Ltd. ("Loral"), is the managing general partner of
Globalstar. As of December 31, 2002, Loral owned, directly or indirectly,
25,163,207 (approximately 38.2%) of the ordinary partnership interests of
Globalstar, including interests attributable to 9,902,990 shares of GTL's
outstanding common stock.
2. BASIS OF PRESENTATION
On February 15, 2002 (the "Petition Date"), Globalstar and certain of its
subsidiaries filed voluntary petitions under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court
("Bankruptcy Court") for the District of Delaware (Case Nos. 02-10499, 02-10501,
02-10503 and 02-10504). Globalstar and its debtor subsidiaries remain in
possession of their assets and properties and continue to operate their
businesses as debtors-in-possession. As a result of Globalstar's bankruptcy
petition, several of Globalstar's debt obligations were accelerated and became
immediately due and payable. GTL does not intend to file an immediate petition
for bankruptcy relief, but will continue to monitor events and govern its
actions accordingly. It has been GTL's view that any hope of providing a rights
offering or other element of value to its shareholders is enhanced by not filing
for bankruptcy at this time. Globalstar's bankruptcy filing and subsequent
financial restructuring will likely leave shares in GTL with very little or no
value. These factors, among others, raise substantial doubt about GTL's ability
to continue as a going concern. However, the accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
On January 14, 2003, Globalstar and the Creditors' Committee reached an
agreement with New Valley Corporation ("New Valley") providing for
debtor-in-possession financing (the "New Valley DIP Facility") of up to $20
million and a total investment in a reorganized Globalstar of $55 million.
Globalstar filed a motion with the Bankruptcy Court for approval of this new
investment on January 15, 2003 and filed a Form 8-K on the same date. A hearing
to seek Bankruptcy Court approval of the New Valley DIP Facility was scheduled
for January 30, 2003 in Delaware. Prior to the hearing, the Creditors' Committee
informed Globalstar and New Valley that the Creditors' Committee would not
support
F-7
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
approval of the New Valley investment, but that a consortium including certain
individual members of the Creditors' Committee was prepared to provide
substitute debtor-in-possession financing. As a consequence, New Valley withdrew
its investment offer as of January 30, 2003. Globalstar filed another Form 8-K
reflecting New Valley's withdrawal on February 4, 2003.
On February 14, 2003, Globalstar and the consortium of lenders (the "DIP
Lenders") reached agreement on debtor-in-possession financing of $10 million
(the "DIP Facility") and filed a motion with the Bankruptcy Court seeking
approval of such financing. Globalstar also filed a motion defining certain
auction procedures by which Globalstar would conclude its search for an investor
to fund Globalstar's restructuring and exit from bankruptcy. The Bankruptcy
Court provided interim approval of the DIP Facility and approved the auction
procedures on February 20, 2003, and the parties executed the DIP Facility
documents on February 25, 2003. Copies of the DIP Facility, auction procedures
and related documents were filed with a Form 8-K on February 27, 2003. The
Bankruptcy Court granted final approval of the DIP Facility on March 6, 2003. As
a condition to the DIP Lenders obligation to fund draws by Globalstar under the
DIP Facility in excess of $2.0 million, among other things (i) Globalstar was
required to secure from Loral/QUALCOMM Partnership, L.P. ("LQP") a pledge in
favor of the DIP Lenders of LQP's ownership interest in the outstanding stock of
L/Q Licensee, Inc. ("L/Q Licensee"), and (ii) Globalstar was required to reach
an agreement, satisfactory to the DIP Lenders, with respect to specified matters
relating to Loral and certain of its affiliates (the conditions set forth in
clauses (i) and (ii) above, collectively, the "Loral Condition"). The Loral
Condition was initially required to be satisfied by March 7, 2003, but the DIP
Facility was amended to extend the deadline for meeting the Loral Condition to
March 21, 2003. The Loral Condition was satisfied prior to the extended
deadline.
Under the approved auction procedures, Globalstar received expressions of
interest from prospective investors in early March 2003, and with the assistance
of its financial advisors and in consultation with the Creditors' Committee,
determined which of them were "qualified" to perform due diligence and make a
definitive proposal for an equity investment in Globalstar or the purchase of
Globalstar's assets. March 21, 2003 was the deadline set for the submission of
investment proposals by the qualified bidders. Globalstar, in consultation with
the Creditors' Committee, expects to choose the highest and best investment
proposal in early-April and to file a modified plan of reorganization with the
Bankruptcy Court shortly thereafter. No assurance can be given as to whether
this auction process will ultimately lead to a successful restructuring of
Globalstar.
GTL, a general partner of Globalstar, was created to permit public equity
ownership in Globalstar. GTL does not have any operations, personnel or
facilities, and does not manage the day-to-day operations of Globalstar. GTL's
sole asset is its investment in Globalstar, and GTL's results of operations
reflect its share of the results of operations of Globalstar on an equity
accounting basis. In 2000, Globalstar's losses reduced GTL's investment in
Globalstar's ordinary and preferred partnership interests to a book value of
zero. Accordingly, GTL discontinued providing for its allocated share of
Globalstar's net losses and recognized the remaining unallocated losses as a
result of its general partner status in Globalstar.
Because GTL is a general partner of Globalstar, GTL is jointly and
severally liable with the other general partner for the recourse debt and other
recourse obligations of Globalstar to the extent Globalstar is unable to pay
such debts. GTL believes that such recourse obligations totaled approximately
$1.4 billion as of December 31, 2002. Certain of Globalstar's debt, including
the public debt, is non-recourse to the general partners. On February 15, 2002,
LQSS, the other general partner of Globalstar, filed a voluntary petition under
Chapter 11 of the Bankruptcy Code. Effective February 15, 2002, Globalstar
ceased allocating additional losses associated with recourse debt to LQSS. As
the only remaining general partner of Globalstar that has not filed for
bankruptcy protection, GTL has been allocated all losses related to debt
F-8
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
that is recourse to general partners since February 15, 2002. As a result of its
general partner status, GTL has recorded a cumulative liability of $880.8
million.
During the year ended December 31, 2001, an issue was raised as to whether
the three-year notes issued to the guarantors of The Chase Manhattan Bank $250
million credit facility were prepared in accordance with the recourse provisions
of the guarantee arrangement. Management does not believe the existing notes
containing non-recourse language will need to be replaced with notes not
containing the non-recourse language. If the existing non-recourse notes were
replaced with notes not containing the non-recourse language, the replacement
would not impact Globalstar's results of operations. However, allocations of
Globalstar's losses to general partners, including GTL, would increase by the
amount of the increase in recourse obligations. Replacement of the notes would
not alter the subordinate position of GTL's shareholders relative to holders of
these notes.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock Based Compensation
GTL accounts for stock-based employee compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB No. 25") and related interpretations and complies
with the disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123").
The following table illustrates the effect on GTL's reported net loss
applicable to common shareholders and net loss per share if GTL had applied the
fair value recognition provision of SFAS No. 123 to stock-based employee
compensation (in thousands, except per share amounts):
DECEMBER 31,
-------------------------------
2002 2001 2000
------- -------- ----------
Net loss, as reported....................................... $74,844 $168,860 $2,059,853
Less: Total stock-based employee compensation expense
determined under the fair value method for all awards..... 4,138 9,748 12,495
------- -------- ----------
Pro-forma net loss.......................................... $78,982 $178,608 $2,072,348
======= ======== ==========
Reported basic and diluted earnings per common share........ $ 0.66 $ 1.54 $ 20.85
======= ======== ==========
Pro-forma basic and diluted earnings per common share....... $ 0.70 $ 1.63 $ 20.97
======= ======== ==========
Income Taxes
GTL is incorporated in Bermuda. Bermuda does not levy tax on income,
profits or capital gains. As a partner in Globalstar, however, GTL will be
subject to U.S. federal, state and local income taxation at regular corporate
rates plus an additional 30% "branch profits" tax on its share of Globalstar's
income that is effectively connected with the conduct of a trade or business in
the U.S. and may be subject to tax in some foreign jurisdictions on portions of
its share of the partnership's foreign source income. Commencing with its
investment in Globalstar, GTL has been allocated its proportionate share of
partnership tax losses.
Earnings Per Share
Due to GTL's net losses in 2002, 2001 and 2000, diluted weighted average
common shares outstanding excludes the weighted average effect of: (i) the
assumed conversion of GTL's 8% Series A convertible redeemable preferred stock,
due 2011, (the "8% Preferred Stock") into 9.4 million common shares for 2002 and
2001 and 9.5 million for 2000, (see Note 5); (ii) the assumed conversion of
GTL's
F-9
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9% Series B convertible redeemable preferred stock, due 2011, (the "9% Preferred
Stock") into 0.8 million, 4.0 million, and 5.7 million common shares for 2002,
2001 and 2000, respectively, (see Note 5); and (iii) the assumed exercise of
outstanding options and warrants, into 12.0 million, 12.0 million and 10.5
million common shares for 2002, 2001 and 2000, respectively, as their effect
would have been anti-dilutive. Accordingly, basic and diluted net loss per share
is based on the net loss applicable to common shareholders and the weighted
average common shares outstanding for 2002, 2001 and 2000.
Comprehensive Loss
During the periods presented, GTL had no changes in equity from
transactions or other events and circumstances from non-owner sources.
Accordingly, a statement of comprehensive loss has not been provided.
4. SENIOR NOTE WARRANTS
As of December 31, 2002, there were outstanding warrants to purchase
3,814,897 shares of GTL common stock relating to Globalstar's senior notes,
which were exercisable at a price of $17.394 per share and expire on February
15, 2004. Any proceeds from the exercise of the warrants will be used to
purchase Globalstar ordinary partnership interests.
5. CONVERTIBLE REDEEMABLE PREFERRED STOCK
The 8% Preferred Stock and 9% Preferred Stock of GTL have mandatory
redemption dates in 2011. Under the terms of the mandatory redemption, GTL may
make payments to the holders in either cash or common stock, or a combination of
both. Based upon the price of GTL's common stock at December 31, 2002 and 2001,
GTL has not authorized a sufficient number of shares of common stock to effect
payment in common stock. Accordingly, GTL classified $202,865,000 and
$220,296,000 as of December 31, 2002 and 2001, respectively, of the 8% Preferred
Stock and 9% Preferred Stock outside the shareholders' deficit section of the
balance sheet based on GTL's average common stock price in the 10-day period
preceding the end of the period (approximately $0.06 and $0.16, as of December
31, 2002 and 2001, respectively). The number of shares of GTL common stock that
may be issued on the mandatory redemption date will depend on factors at the
redemption date including the price of GTL's common stock and the number of
shares of 8% Preferred Stock and 9% Preferred Stock outstanding at the time of
the redemption. The amount of the 8% Preferred Stock and 9% Preferred Stock
classified outside the shareholders' deficit section will vary in future periods
depending on these variables. No dividends have been paid on this preferred
stock since December 31, 2000.
8% Preferred Stock
In 1999, GTL sold seven million shares (face amount of $50 per share) of 8%
Preferred Stock. Dividends accrue at 8% per annum and are payable quarterly. The
8% Preferred Stock is convertible into shares of GTL common stock at a
conversion price of $23.2563 per share, subject to adjustment for certain
antidilution events. Loral purchased 3 million shares ($150 million face amount)
of the 8% Preferred Stock issued, in order to maintain its prior percentage
ownership interest in Globalstar. GTL used the net proceeds of approximately
$340 million to purchase seven million units ($50 per unit face amount) of
Globalstar's 8% RPPIs, which have terms substantially similar to those of the 8%
Preferred Stock.
The 8% Preferred Stock has limited voting rights. With respect to dividend
rights and rights upon liquidation, winding up and dissolution, the 8% Preferred
Stock ranks pari passu with the 9% Preferred Stock and senior to common stock
and to all other future series of preferred stock or other classes of
F-10
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
capital stock of GTL, the terms of which do not expressly provide that such
series or class ranks senior to or on parity with the 8% Preferred Stock. Prior
to its mandatory redemption date, the 8% Preferred Stock is redeemable (at a
premium which declines over time) by GTL beginning in February 2002. Payments
due on the 8% Preferred Stock may be made in cash, GTL common stock or a
combination of both at the option of GTL. In January 2001, GTL suspended
dividend payments on the 8% Preferred Stock. Under the terms of the 8% Preferred
Stock, if accrued and unpaid dividends accumulate to an amount equal to six
quarterly dividends, holders of the majority of the outstanding shares of 8%
Preferred Stock will have the right to elect up to two additional members to
GTL's Board of Directors. Dividends had not been paid for six consecutive
quarters on May 15, 2002. As of December 31, 2002, this right had not been
exercised.
In 2002, 2,100 shares of the 8% Preferred Stock were converted into 4,508
shares of GTL common stock. As a result of such conversions, the 2,100 8% RPPIs
were converted into 1,113 Globalstar ordinary partnership interests. As of
December 31, 2002, the 8% Preferred Stock had an aggregate liquidation
preference equal to its $218 million aggregate redemption value and a mandatory
redemption date of February 15, 2011. The remaining shares of 8% Preferred Stock
outstanding at December 31, 2002 were convertible into 9,365,807 shares of GTL
common stock.
9% Preferred Stock
In 1999, GTL sold three million shares (face amount of $50 per share) of 9%
Preferred Stock. Dividends accrue at 9% per annum and are payable quarterly. The
9% Preferred Stock is convertible into shares of GTL common stock at a
conversion price of $25.9569 per share, subject to adjustment for certain
antidilution events. GTL used the net proceeds of approximately $145 million to
purchase three million units (face amount of $50 per unit) of Globalstar's 9%
RPPIs, which have terms substantially similar to those of the 9% Preferred
Stock.
The 9% Preferred Stock has limited voting rights. With respect to dividend
rights and rights upon liquidation, winding up and dissolution, the 9% Preferred
Stock ranks pari passu with the 8% Preferred Stock and senior to common stock
and to all other future series of Preferred Stock, or other classes of capital
stock of GTL, the terms of which do not expressly provide that such series or
class ranks senior to or on parity with the 9% Preferred Stock. Prior to its
mandatory redemption date, the 9% Preferred Stock is redeemable (at a premium
which declines over time) by GTL beginning in December 2002. Payments due on the
9% Preferred Stock may be made in cash, GTL common stock or a combination of
both at the option of GTL. In January 2001, GTL suspended dividend payments on
the 9% Preferred Stock. Under the terms of the 9% Preferred Stock, if accrued
and unpaid dividends accumulate to an amount equal to six quarterly dividends,
holders of the majority of the outstanding shares of 9% Preferred Stock will
have the right to elect up to two additional members to GTL's Board of
Directors. Dividends had not been paid for six consecutive quarters on June 1,
2002. As of December 31, 2002, this right had not been exercised.
In 2002, 1,303,933 shares of 9% Preferred Stock were converted into
2,511,766 shares of GTL common stock. As a result of such conversions, the
1,303,933 9% RPPIs were converted into 620,189 Globalstar ordinary partnership
interests. As of December 31, 2002, the 9% Preferred Stock had an aggregate
liquidation preference equal to its $20 million aggregate redemption value and a
mandatory redemption date of December 1, 2011. The remaining shares of 9%
Preferred Stock outstanding at December 31, 2002 were convertible into 750,213
shares of GTL common stock.
F-11
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY
Common Stock
GTL's equity securities and convertible securities are represented by
equivalent Globalstar partnership interests on an approximate four-for-one
basis.
Partners in Globalstar have the right to exchange their ordinary
partnership interests for common stock of GTL on an approximate one-for-four
basis following Globalstar's commencement of service date and after at least two
consecutive quarters of positive net income, subject to certain annual
limitations. GTL has reserved approximately 153.7 million shares for this
purpose.
Stock Option Arrangements
Officers, directors and employees of Globalstar are eligible to participate
in GTL's 1994 Stock Option Plan (the "Plan"), which provides for nonqualified
and incentive stock options. The Plan is administered by a stock option
committee (the "Committee"), appointed by GTL's Board of Directors. The
Committee determines the option price, exercise date and the expiration date of
each option (provided no option shall be exercisable after ten years from the
date of grant). Proceeds received by GTL for options exercised will in turn be
used to purchase Globalstar ordinary partnership interests under an approximate
four-for-one exchange arrangement.
SFAS No. 123 requires the disclosure of pro forma net income and earnings
per share as though GTL had adopted the fair value method. Under SFAS No. 123,
the fair value of stock-based awards to employees is calculated through the use
of option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from GTL's stock option awards. These
models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. GTL's calculations for the purpose of estimating the fair value of
options (see Note 3) were made using the Black-Scholes option pricing model with
the following weighted average assumptions: expected life, six to twelve months
following vesting; stock volatility, 70% for 2002, 2001 and 2000; risk free
interest rates, 4.4% to 6.6% based on date of grant; and no dividends during the
expected term. GTL's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur.
F-12
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Plan for 2002, 2001 and 2000 is presented
below:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
Outstanding at January 1, 2000.............................. 4,643,800 $20.03
Granted (weighted average fair value of $4.04 per share).... 4,566,250 9.76
Forfeited................................................... (984,750) 16.29
Exercised................................................... (26,300) 10.72
---------- ------
Outstanding at December 31, 2000............................ 8,199,000 14.79
Granted..................................................... -- --
Forfeited................................................... (1,745,638) 15.50
Exercised................................................... -- --
---------- ------
Outstanding at December 31, 2001............................ 6,453,362 14.46
Granted..................................................... -- --
Forfeited................................................... (1,044,795) 14.09
Exercised................................................... -- --
---------- ------
Outstanding at December 31, 2002............................ 5,408,567 $14.96
========== ======
Outstanding at December 31, 2001............................ 2,425,071 $11.87
========== ======
Outstanding at December 31, 2000............................ 1,123,816 $14.20
========== ======
The options generally expire ten years from the date of grant and become
exercisable over the period stated in each option, generally ratably over a
five-year period except for 4,336,250 options granted in 2000 which become
exercisable ratably over a three-year period. All options granted were
non-qualified stock options with an exercise price equal to fair market value at
the date of grant. During 2000, GTL granted stock options to certain
non-employees to purchase 167,000 shares of GTL common stock. The fair value of
such options totaled approximately $290,000 which has been recorded as
additional investment in Globalstar and is being amortized by Globalstar over
the vesting period. The fair value attributable to the unvested portion of such
options is subject to adjustment based upon the future value of GTL's common
stock. As of December 31, 2002, 4,490,733 shares of common stock were available
for future grant under the Plan.
The following table summarizes information about GTL's outstanding stock
options at December 31, 2002:
OUTSTANDING EXERCISABLE
------------------------------------ ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE-YEARS PRICE NUMBER PRICE
- -------------------- --------- ----------- -------- --------- --------
$ 3.01 to $ 4.64..................... 198,000 4.03 $ 4.11 195,333 $ 4.13
$ 4.65 to $17.15..................... 3,156,617 6.81 9.73 2,336,892 9.96
$17.16 to $29.03..................... 1,809,450 6.12 23.11 1,058,200 23.28
$29.04 to $31.41..................... 244,500 6.21 30.98 193,750 31.00
--------- ---------
5,408,567 6.45 $14.96 3,784,175 $14.46
========= =========
F-13
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
GTL and Globalstar have agreed that upon the exercise of options under the
Plan, GTL will use the proceeds from the issuance of GTL common stock pursuant
to such option exercises to purchase one Globalstar ordinary partnership
interest for approximately every four shares of common stock issued to an
optionee. During 2000, GTL purchased 6,825 Globalstar ordinary partnership
interests with such proceeds. No ordinary partnership interests were purchased
during 2002 or 2001.
7. INCOME TAXES
As a partner in Globalstar, GTL has been allocated its proportionate share
of partnership tax losses. To the extent that these losses are effectively
connected with the conduct of a trade or business in the U.S., they will be
available as a carryforward to offset GTL's share of Globalstar's income that
may be subject to U.S. tax in the future. As of December 31, 2002, GTL had
approximately $746.2 million of such effectively connected losses available for
carryforward which expire at varying dates from 2010 through 2021.
Since the ultimate realization of these tax loss carryforwards depends upon
the ability of Globalstar to generate sufficient U.S. income in the future, GTL
has established a 100% valuation allowance against the deferred tax asset
related to these loss carryforwards. Accordingly, no income tax expense or
benefit is included in GTL's statements of operations and net deferred taxes are
zero at December 31, 2002 and 2001.
8. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
--------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002:
Equity in net loss applicable to ordinary
partnership interests of Globalstar.............. $18,819 $ 9,151 $ 8,861 $18,342
Net loss........................................... 18,819 9,151 8,861 18,342
Net loss applicable to common shareholders......... 24,104 13,946 13,657 23,137
Net loss per share -- basic and diluted............ .22 .12 .12 .20
2001:
Equity in net loss applicable to ordinary
partnership interests of Globalstar.............. $25,983 $37,709 $29,925 $48,681
Net loss........................................... 25,983 37,709 29,925 48,681
Net loss applicable to common shareholders......... 33,362 44,302 36,235 54,961
Net loss per share -- basic and diluted............ .31 .40 .33 .50
9. COMMITMENTS AND CONTINGENCIES
On February 28, 2001, plaintiff Eric Eismann filed a purported class action
complaint against GTL in the United States District Court for the Southern
District of New York. The other defendants named in the complaint were Loral and
Bernard Schwartz, the former Chief Executive Officer of Globalstar. Globalstar
was not a named defendant in these actions. The complaint alleges that (a) GTL
and Mr. Schwartz violated Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder, by making material misstatements or failing to state
material facts about GTL's business and prospects and (b) that Loral and Mr.
Schwartz are secondarily liable for these alleged misstatements and omissions
under Section 20(a) of the Exchange Act as alleged "controlling persons" of GTL.
The class of plaintiffs on whose behalf this lawsuit has been asserted consists
of all buyers of GTL common stock from
F-14
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 6, 1999, through October 27, 2000, excluding the defendants, officers
and directors of GTL and certain persons affiliated therewith. Eighteen
additional purported class action complaints were subsequently filed in the
United States District Court for the Southern District of New York. These
complaints were granted class action status and consolidated into a case known
as In Re Globalstar Securities Litigation, 01 Civ. 1748 (SHS). On September 26,
2001, the court appointed The Phillips Family as Lead Plaintiff for the class.
On November 13, 2001, Lead Plaintiff filed a Consolidated Amended Class Action
Complaint and a demand for jury trial. The amended complaint drops the cause of
action against certain individuals and adds causes of action against Globalstar
and its wholly-owned subsidiary, Globalstar Capital. GTL and Globalstar believe
that they have meritorious defenses to these actions and on or about February
25, 2002, filed a motion to dismiss the complaint. The case against Globalstar
and Globalstar Capital is stayed pursuant to the Bankruptcy Code. There are,
however, no assurances that the defenses to these actions will be successful.
F-15
INDEPENDENT AUDITORS' REPORT
To the Partners of Globalstar, L.P. (a Debtor-in-Possession):
We have audited the accompanying consolidated balance sheets of Globalstar,
L.P. (a limited partnership) and its subsidiaries (collectively, the
"Partnership") (a Debtor-in-Possession) as of December 31, 2002 and 2001 and the
related consolidated statements of operations, partners' capital (deficit) and
cash flows for each of the three years in the period ended December 31, 2002.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Partnership at December 31,
2002 and 2001 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the
Partnership has filed for reorganization under Chapter 11 of the Federal
Bankruptcy Code. The accompanying consolidated financial statements do not
purport to reflect or provide for the consequences of the bankruptcy
proceedings. In particular, such financial statements do not purport to show (a)
as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to pre-petition liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to the partnership interests, the effect of any changes
that may be made in the capitalization of the Partnership; or (d) as to the
operations, the effect of any changes that may be made in its business.
The accompanying consolidated financial statements have been prepared
assuming that the Partnership will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, on February 15, 2002, the
Partnership filed for reorganization under Chapter 11 of the Federal Bankruptcy
Code. These factors, among others, raise substantial doubt about the
Partnership's ability to continue as a going concern. The consolidated financial
statements do not include adjustments that might result from the outcome of this
uncertainty.
DELOITTE & TOUCHE LLP
San Jose, California
February 24, 2003 (March 25, 2003 as to the fourth and fifth paragraph of Note 2
and Note 20)
F-16
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PARTNERSHIP INTERESTS)
DECEMBER 31,
--------------------------
2002 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,284 $ 55,625
Accounts receivable, net of allowance of $2,030 at
December 31, 2002 and $2,158 at December 31, 2001....... 4,687 2,282
Inventory................................................. 1,294 1,090
Prepaid expenses and other current assets................. 7,899 12,971
----------- -----------
Total current assets.................................... 29,164 71,968
----------- -----------
Property and equipment:
Globalstar System, net.................................... 198,756 229,774
Other property and equipment, net......................... 2,143 2,216
----------- -----------
200,899 231,990
----------- -----------
Additional spare satellites................................. 24,236 23,823
Production gateways, net of allowance of $18,943 at December
31, 2002 and $20,212 at December 31, 2001................. 12,553 28,151
Deferred financing costs.................................... -- 68,330
Other assets, net........................................... 27,522 32,129
----------- -----------
Total assets............................................ $ 294,374 $ 456,391
=========== ===========
LIABILITIES AND PARTNERS' (DEFICIT)
Current liabilities:
Term loans payable to affiliates.......................... $ -- $ 400,000
Revolving credit facility to affiliates................... -- 100,000
Senior notes payable ($1,450,000 aggregate principal
amount)................................................. -- 1,417,942
Accounts payable.......................................... 2,522 3,752
Payable to affiliates..................................... 7,745 35,111
Vendor financing liability................................ -- 814,246
Dividends payable......................................... -- 29,870
Accrued expenses.......................................... 6,419 42,524
Accrued interest.......................................... -- 246,871
Deferred revenue.......................................... 2,365 --
----------- -----------
Total current liabilities............................... 19,051 3,090,316
----------- -----------
Deferred revenues........................................... -- 31,359
Vendor financing liability, net of current portion.......... -- 55,139
Accrued interest on notes payable........................... -- 32,320
Notes payable............................................... -- 150,000
Notes payable to affiliates................................. -- 95,010
----------- -----------
Total noncurrent liabilities............................ -- 363,828
----------- -----------
Liabilities subject to compromise........................... 3,425,921 --
Commitments and contingencies (Note 10 and 19)
Partners' (deficit):
8% Series A convertible redeemable preferred partnership
interests (4,356,295 and 4,358,395 interests outstanding
at December 31, 2002 and 2001, respectively, $218
million redemption value at December 31, 2002 and
2001.................................................... -- --
9% Series B convertible redeemable preferred partnership
interests (389,500 and 1,693,433 interests outstanding
at December 31, 2002 and 2001, respectively, $20 million
and $85 million redemption value at December 31, 2002
and 2001, respectively)................................. -- --
Ordinary general partnership interests (45,910,604 and
45,289,938 interests outstanding at December 31, 2002
and 2001, respectively)................................. (3,114,193) (2,961,347)
Ordinary limited partnership interests (19,937,500
interests outstanding at December 31, 2002 and 2001).... (239,740) (239,740)
Unearned compensation..................................... -- (1)
Warrants.................................................. 203,335 203,335
----------- -----------
Total partners' (deficit)............................... (3,150,598) (2,997,753)
----------- -----------
Total liabilities and partners' (deficit)............... $ 294,374 $ 456,391
=========== ===========
See notes to consolidated financial statements.
F-17
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER ORDINARY PARTNERSHIP INTEREST AMOUNTS)
YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
-------- -------- ----------
Revenues:
Service................................................. $ 17,182 $ 6,195 $ 2,223
Subscriber equipment.................................... 7,457 152 --
Royalty income.......................................... -- 57 1,427
-------- -------- ----------
Total revenue................................... 24,639 6,404 3,650
-------- -------- ----------
Operating expenses:
Cost of subscriber equipment............................ 5,650 130 --
Operations.............................................. 26,379 56,074 127,969
Marketing, general and administrative................... 39,104 101,392 80,705
Restructuring........................................... 7,694 12,035 --
Launch termination costs................................ 18,379 -- --
Impairment of assets.................................... -- -- 2,939,790
Depreciation and amortization........................... 30,904 35,554 327,938
-------- -------- ----------
Total operating expenses........................ 128,110 205,185 3,476,402
-------- -------- ----------
Operating loss............................................ 103,471 198,781 3,472,752
Interest income........................................... 101 4,513 16,490
Interest expense.......................................... 46,523 381,170 329,163
-------- -------- ----------
Loss before taxes......................................... 149,893 575,438 3,785,425
Income tax expense........................................ 66 73 246
-------- -------- ----------
Net loss.................................................. 149,959 575,511 3,785,671
Preferred distributions on redeemable preferred
partnership interests................................... 2,887 26,562 30,730
-------- -------- ----------
Net loss applicable to ordinary partnership interests..... $152,846 $602,073 $3,816,401
======== ======== ==========
Net loss per ordinary partnership interest -- basic and
diluted................................................. $ 2.32 $ 9.26 $ 61.23
======== ======== ==========
Weighted average ordinary partnership interests
outstanding -- basic and diluted........................ 65,789 65,040 62,325
======== ======== ==========
See notes to consolidated financial statements.
F-18
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(IN THOUSANDS)
CONVERTIBLE
REDEEMABLE GENERAL LIMITED
PREFERRED ORDINARY ORDINARY
PARTNERSHIP PARTNERSHIP PARTNERSHIP UNEARNED
INTERESTS INTERESTS INTERESTS COMPENSATION WARRANTS TOTAL
----------- ----------- ----------- ------------ -------- -----------
Capital balances -- January 1, 2000............ $ 358,968 $ 481,616 $ 34,914 $(16,754) $169,585 $ 1,028,329
Exercise of warrants (23 interests)............ 1,864 (271) 1,593
Stock compensation transactions by managing
general partner for the benefit of
Globalstar................................... 95 95
Sale of ordinary partnership interests in
connection with GTL stock option exercises (7
interests)................................... 293 293
Sale of ordinary partnership interests in
connection with GTL common stock
issuance -- February 2000 (1,988
interests)................................... 268,471 268,471
Sale of ordinary partnership interests in
connection with GTL stock
issuance -- September & October 2000 (1,000
interests)................................... 27,769 27,769
Sale of ordinary partnership interests from
partner's equity financing -- September 2000
(1,295 interests)............................ 56,200 56,200
Conversion of 9% Series B convertible
redeemable preferred partnership interests
into ordinary partnership interests and
related payment of dividend in stock (269
interests)................................... (2,014) 5,344 3,330
Warrants issued for ordinary partnership
interests in exchange for debt guarantee..... 34,442 34,442
Conversion of 8% Series A convertible
redeemable preferred partnership interests
into ordinary partnership interests and
related payment of dividend in stock (180
interests)................................... (10) 4,374 4,364
Change in fair value of stock compensation for
the benefit of Globalstar.................... (20,393) 20,393
Amortization of unearned compensation.......... (3,699) (3,699)
Net loss applicable to ordinary partnership
interests -- year ended December 31, 2000.... (356,944) (3,184,708) (274,749) (3,816,401)
--------- ----------- --------- -------- -------- -----------
Capital balances -- December 31, 2000.......... -- (2,359,170) (239,740) (60) 203,756 (2,395,214)
Warrants issued for ordinary partnership
interests in exchange for debt guarantee..... (421) (421)
Conversion of 8% Series A convertible
redeemable preferred partnership interests
(20 interests)............................... -- --
Conversion of 9% Series B convertible
redeemable preferred partnership interests
(602 interests).............................. -- --
Change in fair value of stock compensation for
the benefit of Globalstar.................... (104) 104
Amortization of unearned compensation.......... (45) (45)
Net loss applicable to ordinary partnership
interests -- year ended December 31, 2001.... (602,073) (602,073)
--------- ----------- --------- -------- -------- -----------
Capital balances -- December 31, 2001.......... -- (2,961,347) (239,740) (1) 203,335 (2,997,753)
Conversion of 8% Series A convertible
redeemable preferred partnership interests (1
interest).................................... -- --
Conversion of 9% Series B convertible
redeemable preferred partnership interests
(620 interests).............................. -- --
Amortization of unearned compensation.......... 1 1
Net loss applicable to ordinary partnership
interests -- year ended December 31, 2002.... (152,846) (152,846)
--------- ----------- --------- -------- -------- -----------
Capital balances -- December 31, 2002.......... $ -- $(3,114,193) $(239,740) $ -- $203,335 $(3,150,598)
========= =========== ========= ======== ======== ===========
See notes to consolidated financial statements.
F-19
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
--------- ----------- -----------
Operating activities:
Net loss................................................... $(149,959) $ (575,511) $(3,785,671)
Impairment of assets....................................... -- -- 2,939,790
Launch termination costs................................... 18,379 -- --
Loss on failed satellites and disposal of fixed assets..... 3,553 1,392 --
Provision for gateway receivables.......................... 9,494 20,212 --
Provision for doubtful accounts............................ (136) 9,419 --
Provision for inventory.................................... -- 5,471 --
Amortization of unearned compensation...................... 1 (45) (3,604)
Depreciation and amortization.............................. 30,904 35,554 327,938
Non-cash interest.......................................... 8,388 66,426 63,809
Changes in operating assets and liabilities:
Accounts receivable...................................... (416) (3,504) (422)
Inventory................................................ 2,319 130 --
Prepaid expenses and other current assets................ 2,342 (13,039) (2,720)
Other assets............................................. (142) (401) (2,090)
Accounts payable......................................... (188) (10,146) 6,174
Payable to affiliates.................................... (1,054) 11,278 (25,027)
Accrued expenses......................................... 2,451 23,204 1,479
Accrued interest and other............................... 38,125 315,705 12,462
Deferred revenue......................................... (2,074) (6,593) 12,141
--------- ----------- -----------
Net cash used in operating activities.................. (38,013) (120,448) (455,741)
--------- ----------- -----------
Investing activities:
Globalstar System.......................................... -- (4,364) (23,305)
Payable to affiliates for Globalstar System................ -- (7,673) (31,399)
Accounts payable........................................... -- (253) (3,536)
Vendor financing liability................................. -- -- 94,543
--------- ----------- -----------
Cash provided by (used for) Globalstar System.............. -- (12,290) 36,303
Advances for production gateways and user terminals........ -- (2,120) (163,547)
Cash receipts for production gateways and user terminals... 283 3,609 111,875
Receipt and use of restricted cash, net.................... -- 22,448 23,798
Additional spare satellites, net of vendor financing....... -- (8,505) (100,688)
Construction in progress................................... (326) -- --
Purchases of property and equipment........................ (394) (604) (2,897)
Acquisition, net of cash acquired.......................... (1,891) 1,371 --
--------- ----------- -----------
Net cash provided by (used in) investing activities...... (2,328) 3,909 (95,156)
--------- ----------- -----------
Financing activities:
Sale of ordinary partnership interests upon exercise of
options and warrants..................................... -- -- 354,326
Repayment of vendor financing.............................. -- (2,237) (83,652)
Distributions on redeemable preferred partnership
interests................................................ -- -- (23,051)
Borrowings under credit facilities......................... -- -- 350,000
--------- ----------- -----------
Net cash provided by (used in) financing activities...... -- (2,237) 597,623
--------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ (40,341) (118,776) 46,726
Cash and cash equivalents, beginning of period.............. 55,625 174,401 127,675
--------- ----------- -----------
Cash and cash equivalents, end of period.................... $ 15,284 $ 55,625 $ 174,401
========= =========== ===========
Noncash transactions:
Receivables offset by payables and notes payable........... $ (2,391) $ (11,314)
========= ===========
Issuance of notes to guarantors for repayment of revolving
credit line.............................................. $ 250,000
===========
Payables to affiliates converted into vendor financing..... $ (368,259)
===========
Distributions on redeemable preferred partnership interests
on GTL common stock...................................... $ (7,694)
===========
Ordinary partnership interests distributed upon conversion
of redeemable preferred partnership interests and related
dividend make-whole payments............................. $ 2,024
===========
Warrants issued in connection with QUALCOMM vendor
financing................................................ $ (421) $ 34,442
=========== ===========
Dividends accrued.......................................... $ 2,887 $ 26,562 $ (15)
========= =========== ===========
Change in fair value of stock compensation for the benefit
of Globalstar............................................ $ 104 $ (20,393)
=========== ===========
See notes to consolidated financial statements.
F-20
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Globalstar, L.P. ("Globalstar"), a Delaware limited partnership, was formed
in November 1993, remaining inactive until March 23, 1994, when it received
capital subscriptions for $275 million and commenced operations.
The governing body of Globalstar is the General Partners' Committee. The
Committee may have up to seven members, five of whom may be appointed by the
managing general partner of Globalstar, Loral/ QUALCOMM Satellite Services, L.P.
("LQSS"). The general partner of LQSS is Loral/QUALCOMM Partnership, L.P.
("LQP"), a Delaware limited partnership comprised of subsidiaries of Loral Space
& Communications Ltd., a Bermuda company (and with its subsidiaries "Loral") and
QUALCOMM Incorporated ("QUALCOMM"). The managing general partner of LQP is Loral
General Partner, Inc. ("LGP"), a subsidiary of Loral. As of December 31, 2002,
Loral owned, directly or indirectly, 25,163,207 (approximately 38.2%) of the
ordinary partnership interests of Globalstar, including interests attributable
to 9,902,990 shares of Globalstar Telecommunications Limited ("GTL") outstanding
common stock.
Globalstar was founded to design, construct and operate a worldwide,
low-earth orbit satellite-based wireless digital telecommunications system (the
"Globalstar System"). The Globalstar System's worldwide coverage is designed to
enable its service providers to extend modern telecommunications services to
millions of people who currently lack basic telephone service and to enhance
wireless communications in areas underserved or not served by existing or future
cellular systems, providing a telecommunications solution in parts of the world
where the build-out of terrestrial systems cannot be economically justified. In
1995, the United States Federal Communications Commission (the "FCC") granted
the necessary license to a wholly-owned subsidiary of LQP to construct, launch
and operate the Globalstar System. LQP has agreed to use such license for the
exclusive benefit of Globalstar.
GTL was incorporated in 1994 as an exempted company under the Companies Act
1981 of Bermuda. GTL's sole business is acting as a general partner of
Globalstar and its sole assets consist of its equity interests in Globalstar. As
of December 31, 2002, GTL owned 27,911,240 (42.4%) of Globalstar's outstanding
ordinary partnership interests and 100% of the outstanding 8% and 9% convertible
redeemable preferred partnership interests (the "RPPIs").
Globalstar operates in one industry segment, satellite telecommunications,
providing global mobile and fixed wireless voice and data services.
2. BASIS OF PRESENTATION
On February 15, 2002 (the "Petition Date"), Globalstar and certain of its
subsidiaries filed voluntary petitions under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code"), in the United States Bankruptcy
Court ("Bankruptcy Court") for the District of Delaware (Case Nos. 02-10499,
02-10501, 02-10503 and 02-10504). Globalstar and its debtor subsidiaries remain
in possession of their assets and properties and continue to operate their
businesses as debtors-in-possession. Also, on February 15, 2002, the managing
general partner of Globalstar, LQSS, filed a voluntary petition in Delaware
under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. These factors,
among others, raise substantial doubt about Globalstar's ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Under Chapter 11, substantially all unsecured liabilities as of the
Petition Date are subject to compromise or other treatment under a plan of
reorganization, which must be approved and confirmed by the Bankruptcy Court.
For financial reporting purposes, those liabilities and obligations whose
treatment and satisfaction are dependent on the outcome of the Chapter 11 case
have been segregated in the condensed consolidated balance sheet as liabilities
subject to compromise. Generally, all actions to enforce
F-21
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or otherwise require repayment of Globalstar's pre-petition liabilities are
stayed under Section 362(a) of the Bankruptcy Code while Globalstar continues
its business operations as a debtor-in-possession. The amount and settlement
terms of the pre-petition liabilities subject to compromise are subject to an
approved plan of reorganization and may differ significantly from the amounts as
reflected in these consolidated financial statements.
On January 14, 2003, Globalstar and the Creditors' Committee reached an
agreement with New Valley Corporation ("New Valley") providing for
debtor-in-possession financing (the "New Valley DIP Facility") of up to $20
million and a total investment in a reorganized Globalstar of $55 million.
Globalstar filed a motion with the Bankruptcy Court for approval of this new
investment on January 15, 2003 and filed a Form 8-K on the same date. A hearing
to seek Bankruptcy Court approval of the New Valley DIP Facility was scheduled
for January 30, 2003 in Delaware. Prior to the hearing, the Creditors' Committee
informed Globalstar and New Valley that the Creditors' Committee would not
support approval of the New Valley investment, but that a consortium including
certain individual members of the Creditors' Committee was prepared to provide
substitute debtor-in-possession financing. As a consequence, New Valley withdrew
its investment offer as of January 30, 2003. Globalstar filed another Form 8-K
reflecting New Valley's withdrawal on February 4, 2003.
On February 14, 2003, Globalstar and the consortium of lenders (the "DIP
Lenders") reached agreement on debtor-in-possession financing of $10 million
(the "DIP Facility") and filed a motion with the Bankruptcy Court seeking
approval of such financing. Globalstar also filed a motion defining certain
auction procedures by which Globalstar would conclude its search for an investor
to fund Globalstar's restructuring and exit from bankruptcy. The Bankruptcy
Court provided interim approval of the DIP Facility and approved the auction
procedures on February 20, 2003, and the parties executed the DIP Facility
documents on February 25, 2003. Copies of the DIP Facility, auction procedures
and related documents were filed with a Form 8-K on February 27, 2003. The
Bankruptcy Court granted final approval of the DIP Facility on March 6, 2003. As
a condition to the DIP Lenders obligation to fund draws by Globalstar under the
DIP Facility in excess of $2.0 million, among other things (i) Globalstar was
required to secure from Loral/QUALCOMM Partnership, L.P. ("LQP") a pledge in
favor of the DIP Lenders of LQP's ownership interest in the outstanding stock of
L/Q Licensee, Inc. ("L/Q Licensee"), and (ii) Globalstar was required to reach
an agreement, satisfactory to the DIP Lenders, with respect to specified matters
relating to Loral and certain of its affiliates (the conditions set forth in
clauses (i) and (ii) above, collectively, the "Loral Condition"). The Loral
Condition was initially required to be satisfied by March 7, 2003, but the DIP
Facility was amended to extend the deadline for meeting the Loral Condition to
March 21, 2003. The Loral Condition was satisfied prior to the extended
deadline.
Under the approved auction procedures, Globalstar received expressions of
interest from prospective investors in early March 2003, and with the assistance
of its financial advisors and in consultation with the Creditors' Committee,
determined which of them were "qualified" to perform due diligence and make a
definitive proposal for an equity investment in Globalstar or the purchase of
Globalstar's assets. March 21, 2003 was the deadline set for the submission of
investment proposals by the qualified bidders. Globalstar, in consultation with
the Creditors' Committee, expects to choose the highest and best investment
proposal in early-April and to file a modified plan of reorganization with the
Bankruptcy Court shortly thereafter. No assurance can be given as to whether
this auction process will ultimately lead to a successful restructuring of
Globalstar.
Globalstar has developed a business plan in connection with its
restructuring; the business plan will be an integral part of Globalstar's plan
of reorganization. The business plan, which is predicated on an infusion of
funds, assumes the consolidation of certain Globalstar service provider
operations into a new Globalstar company ("New Globalstar"). Several of the
acquisitions contemplated in the business plan
F-22
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were completed during 2001 and 2002. The consolidation strategy has brought
additional efficiencies to the operation of the Globalstar System and allowed
for increased geographic coverage and pricing coordination in Globalstar's
service offerings and pricing. In addition, Globalstar intends to revise its
business relationships with the remaining independent service providers,
including exploring the possible acquisition of their businesses or assets.
Globalstar believes that these, and additional, steps are needed to achieve and
maintain financial viability (see Note 4).
Globalstar has incurred cumulative partnership losses of $5.21 billion
through December 31, 2002, which have been funded primarily through the issuance
of partnership interests and debt by Globalstar.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Since the Petition Date, Globalstar's consolidated financial statements
have been prepared in compliance with Statement of Position ("SOP 90-7") on
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code
issued by the American Institute of Certified Public Accountants. Specifically,
all pre-petition liabilities subject to compromise have been segregated on the
balance sheet and classified as liabilities subject to compromise. No interest
expense on pre-petition liabilities or dividends on redeemable preferred
partnership interests since the Petition Date have been accrued or recorded as
these amounts are not expected to be allowed claims. No debt discounts or
deferred financing costs have been amortized since the Petition Date as the
value of the allowed debt has not been fixed by the Bankruptcy Court. Debt
obligations have not been adjusted to reorganization values since the Bankruptcy
Court has not yet confirmed a plan of reorganization. Management expects that
the allowed claims will be established near the date that a final plan of
reorganization is confirmed by the Bankruptcy Court and pre-petition liabilities
will be adjusted as the claims are resolved.
Adjusting the debt obligations to redemption values may result in a
reorganization charge approximating $102.2 million. Interest income since the
Petition Date has been reported as a reorganization item as the amounts are
considered to be proceeds of the bankruptcy proceedings.
Pre-petition Debt, Accrued Interest, and Dividends Payable
Under Chapter 11, substantially all unsecured liabilities as of the
Petition Date are subject to compromise or other treatment under a plan of
reorganization, which must be approved and confirmed by the Bankruptcy Court.
For financial reporting purposes, those liabilities and obligations whose
treatment and satisfaction are dependent on the outcome of the Chapter 11 case
have been segregated in the consolidated balance sheet as liabilities subject to
compromise. Generally, all actions to enforce or otherwise require repayment of
pre-petition liabilities are stayed while Globalstar continues its business
operations as a debtor-in-possession. The amount and settlement terms of the
pre-petition liabilities subject to compromise are subject to an approved plan
of reorganization and may differ significantly from the amounts as reflected in
these consolidated financial statements.
As a result of the Chapter 11 filing, no principal or interest payments
will be made on unsecured pre-petition debt without Bankruptcy Court approval or
until a plan of reorganization providing for the repayment terms has been
confirmed by the Bankruptcy Court and becomes effective. Interest expense on
pre-petition debt will not be paid during the bankruptcy proceeding and is not
expected to be an allowed claim; therefore, $266.2 million of interest on
pre-petition debt has not been recorded since the Petition Date. In addition,
$15.0 million and $41.0 million of amortization have not been recorded since the
Petition Date on the debt discounts and premiums and deferred financing costs,
respectively. Dividends of $16.8 million on RPPIs since the Petition Date have
not been accrued or recorded as these amounts are not expected to be allowed
claims.
F-23
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates in Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the amounts of expenses reported for the period. Actual results
could differ from estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Globalstar
and its wholly owned and majority owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Reclassifications
Certain amounts from the prior year have been reclassified to conform to
current year presentation. These reclassifications do not change previously
reported total assets, liabilities, partners' capital (deficit) or net loss.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less.
Concentration of Credit Risk
Financial instruments which potentially subject Globalstar to
concentrations of credit risk are cash and cash equivalents. Globalstar's cash
and cash equivalents are maintained with high-credit-quality financial
institutions. The creditworthiness of such institutions is generally substantial
and management believes that its credit evaluation, approval and monitoring
processes mitigate potential credit risks.
Inventory
Inventory consists of purchased products, including fixed and mobile user
terminals, accessories and gateway spare parts. Inventory is stated at lower of
cost or market. Cost is computed using a standard cost, which approximates
acquisition cost on a first-in, first-out basis. Globalstar provides inventory
allowances for inventories with a lower market value or which is slow moving.
Unsalable inventory is written off.
In connection with the Vodafone and TE.S.A.M. transactions (see Note 4),
Globalstar acquired a large number of user terminals and accessories. Management
allocated value only to inventory for which Globalstar forecasts usage through
2003. There is no alternative market for these products.
Property and Equipment
Property and equipment are stated at historical cost, less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, as follows:
Globalstar System Up to periods of 10 years from
commencement of service in the first
quarter of 2000
Furniture, fixtures & equipment 3 to 10 years
Leasehold improvements Shorter of lease term or the
estimated useful lives of the
improvements
F-24
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Globalstar System
The Globalstar System includes costs for the design, manufacture, test, and
launch of a constellation of low-earth orbit satellites, including in-orbit
spare satellites (the "Space Segment"), and ground and satellite operations
control centers, gateways and user terminals (the "Ground Segment").
Losses from in-orbit failures of Globalstar's satellites, net of insurance
proceeds, are recorded in the period it is determined that the satellite is not
recoverable.
The carrying value of the Globalstar System is reviewed for impairment
whenever events or changes in circumstances indicate that the recorded value of
the Space Segment and Ground Segment, taken as a whole, may not be recoverable.
Globalstar looks to current and future undiscounted cash flows, excluding
financing costs, as primary indicators of recoverability. If an impairment is
determined to exist, any related impairment loss is calculated based on fair
value.
Additional Spare Satellites
Following a launch failure in September 1998, Globalstar decided to
purchase eight additional satellites for $148 million (including performance
incentives of up to $16 million) to serve as on-ground spares. As of December
31, 2002, costs of $147 million (including a portion of the performance
incentives) have been recognized for these spare satellites. Seven of the eight
have been completed, and all eight are in storage in California. Depreciation of
these assets will not begin until the satellites are placed in service.
Production Gateways
These assets include $12.6 million and $28.2 million in net receivables at
December 31, 2002 and 2001, respectively, from service providers associated with
the reimbursement of gateway acquisition and deployment costs previously paid by
Globalstar to QUALCOMM. As of December 31, 2002, these receivables are
delinquent and Globalstar has sent notices of default where appropriate. If the
collection of these payments is unsuccessful, Globalstar may retain title to
these gateways, subject to local restrictions, or Globalstar may receive an
equity position in the service provider company in exchange for debt
forgiveness. The production gateway receivable, net of reserve, is based on the
estimated value of the anticipated recovery of the receivables based on current
discussions between Globalstar and the service providers. As of December 31,
2002, Globalstar has reserved $18.9 million of the production gateway
receivables.
Deferred Financing Costs and Interest
Deferred financing costs represent costs incurred in obtaining long-term
credit facilities and the estimated fair value of warrant agreements issued in
connection with these facilities. Prior to the Petition Date, these costs were
classified as long term assets and were being amortized over the terms of the
credit facilities as interest expense. Globalstar ceased the amortization of the
costs on the Petition Date as the value of the debt has not been confirmed by
the Bankruptcy Court. The amortization expense that otherwise would have been
recorded from the Petition Date through December 31, 2002 is $41.0 million. As
of December 31, 2002, the deferred financing costs have been offset with the
related debt and included in the liabilities subject to compromise.
Other Assets
Other assets primarily include the fair value of warrants issued to China
Telecom (see Note 12) and expenditures, including license fees, legal fees and
direct engineering and other technical support, for
F-25
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obtaining the required FCC licenses. Such amounts are amortized over periods of
up to 10 years, the expected life of the first generation satellites.
Accumulated amortization totaled $9.7 million at December 31, 2002.
Deferred Revenues
Customer activation fees are deferred and recognized over one year, the
average life of the customer contract. Globalstar service providers purchased
approximately $11.7 million of gross advance minutes ($8.8 million net of 25%
discount). Approximately $2.2 million of these gross advance minutes were
recognized as service revenue during the year ended December 31, 2002. Prior to
the Petition Date, deferred revenues included the advance payments from
Globalstar's strategic partners to secure exclusive rights to Globalstar service
territories and related to promotional programs. These advance payments were
recoverable by the service providers, through credits against certain service
fees payable to Globalstar, but since the Petition Date they have been
classified as liabilities subject to compromise.
Preferred Partnership Distributions
Distributions are accrued on RPPIs at the stated rate per annum.
Distributions are recorded as reductions against the ordinary partnership
capital accounts (see Note 12). Since the Petition Date, the distributions on
RPPIs are no longer accrued. The distributions that otherwise would have been
recorded from the Petition Date through December 31, 2002 are $16.8 million.
Stock-Based Compensation
Globalstar accounts for stock-based employee compensation in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB No. 25") and related interpretations and
complies with the disclosure provisions under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123").
The following table illustrates the effect on Globalstar's reported net
loss applicable to common shareholders and net loss per share if Globalstar had
applied the fair value recognition provision of SFAS No. 123 to stock-based
employee compensation (in thousands, except per share amounts):
DECEMBER 31,
------------------------------------
2002 2001 2000
-------- ------------ ----------
Net loss, as reported............................. $152,846 $602,073 $3,816,401
Less: Total stock-based employee compensation
expense determined under the fair value method
for all awards.................................. 4,138 9,748 12,495
-------- -------- ----------
Pro-forma net loss................................ $156,984 $611,821 $3,828,896
======== ======== ==========
Reported basic and diluted earnings per common
share........................................... $ 2.32 $ 9.26 $ 61.23
======== ======== ==========
Pro-forma basic and diluted earnings per common
share........................................... $ 2.39 $ 9.41 $ 61.43
======== ======== ==========
Revenue Recognition
Globalstar owns and operates the Globalstar satellite constellation and
earns its revenues primarily through the sale of airtime minutes on a wholesale
basis to Globalstar service providers. Revenue from services to Globalstar
service providers is recognized based upon airtime minutes processed and
contractual fee arrangements. Service provider airtime revenue, resulting from
recently acquired operations in North America (see Note 4), is recognized at the
close of the monthly billing cycle for each customer. Where collectibility is
uncertain, revenue is recognized on the cash basis.
F-26
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Customer activation fees are deferred and recognized over one year, the
average life of the customer contract. Service revenue is presented net of
commissions paid to distributors ($1.3 million for the year ended December 31,
2002).
Subscriber equipment revenue represents the sale of fixed and mobile user
terminals and accessories. Revenue is recognized upon shipment provided title
and risk of loss had passed to the customer, persuasive evidence of an
arrangement exists, the fee is fixed and determinable and collectibility is
probable.
Research and Development Expenses
Globalstar's research and development costs were $1.9 million, $4.4 million
and $5.3 million in 2002, 2001 and 2000, respectively, and are expensed as
incurred as part of operating expenses.
User Terminal Rebates and Subsidies
In some cases Globalstar provides rebates to service providers that offer
rebates to end users and subsidies to service providers for user terminal
purchases from manufacturers. These rebates and subsidies are accounted for as
marketing expenses as incurred. These rebates and other financial assistance are
not linked to contractual service periods with either the service providers or
end users and there is no pattern of billable minutes or revenue that suggests a
linkage to these arrangements.
Net Loss Allocation
Net losses are allocated among the partners in proportion to their
percentage interests until the adjusted capital account of a partner is reduced
to zero, then in proportion to, and to the extent of, positive adjusted capital
account balances and then to the general partners.
Under the terms of Globalstar's partnership agreement, adjusted partners'
capital accounts are calculated in accordance with the principles of United
States Treasury regulations governing the allocation of taxable income and loss
including adjustments to reflect the fair market value (including intangibles)
of partnership assets upon certain capital transactions including a sale of
partnership interests. Such adjustments are not permitted under generally
accepted accounting principles and, accordingly, are not reflected in the
accompanying consolidated financial statements.
Foreign Currency
Globalstar uses the U.S. dollar as its functional currency. Foreign
currency assets and liabilities are remeasured into U.S. dollars at current
exchange rates and revenue and expenses are translated at the average exchange
rates in effect during each period. Gains or losses are recognized as a
component of other comprehensive income. During the period ended December 31,
2002, net foreign currency transaction gains and losses were not material.
Income Taxes
Globalstar is organized as a limited partnership with various corporate
subsidiaries. Generally, taxable income or loss, deductions and credits of the
partnership are passed through to its partners. Globalstar's corporate
subsidiaries will provide for a tax provision or benefit using the asset and
liability method of accounting for income taxes as prescribed by SFAS No. 109,
Accounting for Income Taxes. As of December 31, 2002 and 2001, Globalstar's
corporate subsidiaries have gross deferred tax assets of approximately $6.1
million and $0.8 million, respectively. A valuation reserve has been set up to
reserve 100% of the deferred tax assets due to concerns about the ability to
generate sufficient income to be able to utilize the assets.
F-27
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Ordinary Partnership Interest
Due to Globalstar's net losses for 2002, 2001 and 2000, diluted weighted
average ordinary partnership interests outstanding excludes the weighted average
effect of: (i) the assumed conversion of the 8% RPPIs into 2.3 million ordinary
partnership interests for 2002, 2001 and 2000; (ii) the assumed conversion of
the 9% RPPIs into 0.2 million, 1.0 million and 1.4 million ordinary partnership
interests for 2002, 2001 and 2000, respectively; and (iii) the assumed issuance
of ordinary partnership interests upon exercise of warrants and GTL's
outstanding options and warrants, totaling 10.8 million for 2002 and 2001, and
9.3 million ordinary partnership interests for 2000, as their effect would have
been anti-dilutive. Accordingly, basic and diluted net loss per ordinary
partnership interest are based on the net loss applicable to ordinary
partnership interests and the weighted average ordinary partnership interests
outstanding for 2002, 2001 and 2000.
Comprehensive Income
Comprehensive income (loss) is comprised of two components: net loss and
other comprehensive income (loss). Other comprehensive income (loss) refers to
revenue, expenses, gains and losses that under generally accepted accounting
principles are recorded as an element of partners' capital (deficit), but are
excluded from net loss. Comprehensive income (loss) for the years ended December
31, 2002, 2001 and 2000 was the same as net loss.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that business combinations be accounted for under the purchase
method and addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination. SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination and the accounting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 provides that
intangible assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives not be amortized, but will rather be
tested at least annually for impairment. Globalstar adopted SFAS No. 142 on
January 1, 2002. The adoption of this pronouncement did not have an impact on
its financial position or its results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. Globalstar adopted SFAS No. 144 on January 1,
2002. The adoption of this pronouncement did not have an impact on its financial
position or its results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force ("EITF") Issue No. 94-3. Globalstar will
adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized
at the date of the company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.
F-28
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires companies to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. Guarantees in existence at
December 31, 2002 are grandfathered for the purposes of recognition and would
only need to be disclosed. Globalstar does not expect that the adoption of FIN
No. 45 will have an effect on its consolidated financial statements. Globalstar
will adopt the initial recognition and measurement provisions of FIN No. 45 for
guarantees issued or modified after December 31, 2002.
In December 2002, the EITF reached a consensus on EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. In some
arrangements, the different revenue-generating activities (deliveries) are
sufficiently separable and there exists sufficient evidence of their fair values
to separately account for some or all of the deliveries (that is, there are
separate units of accounting). In other arrangements, some or all of the
deliveries are not independently functional, or there is not sufficient evidence
of their fair values to account for them separately. EITF Issue No. 00-21
addresses when, and if so, how an arrangement involving multiple deliverables
should be divided into separate units of accounting. EITF Issue No. 00-21 does
not change otherwise applicable revenue recognition criteria. The guidance in
this Issue is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 is not
expected to have a material effect on Globalstar's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment to FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirement of
SFAS No. 123, "Accounting for Stock-Based Compensation", to require prominent
disclosures in both annual and interim consolidated financial statements about
the method of accounting for stock-based employee compensation and the effect of
the method used on reported results. Globalstar adopted the disclosure
provisions of SFAS No. 148 effective December 31, 2002.
4. ACQUISITIONS
In December 2001, Globalstar signed two agreements to acquire certain
subsidiaries of Vodafone Group Plc ("Vodafone") through Globalstar Corporation,
a non-debtor subsidiary of Globalstar. In the first transaction, completed on
December 18, 2001, Globalstar purchased all of the outstanding common shares of
Vodafone Satellite Services, Inc. ("VSSI"), a Delaware corporation, for $100
plus acquisition costs of $258,000. Globalstar has renamed the company
Globalstar Satellite Services Inc. ("GSSI"). GSSI indirectly owns the majority
interest in Globalstar Canada Satellite Co. ("GCSC"), a Nova Scotia corporation
based in Ontario, Canada. The results of operations of GCSC, since December
2001, are presented in these consolidated financial statements. GCSC is the
Globalstar service provider in Canada and generates its revenue from the
provision of Globalstar services in Canada, billing customers for usage over two
Canadian gateways. Loral Holdings Ltd., a subsidiary of Loral, owns the
remaining minority interest in GCSC. As part of the purchase, Globalstar
released the seller from a portion of a gateway payment guarantee related to
Canadian gateways in exchange for a credit memo to offset expenses from an
affiliated company. Loral's interest in GCSC is expected to be transferred to
Globalstar as part of the Loral Settlement discussed below (see Note 20).
However, there can be no assurances that the Loral Settlement will be effected.
F-29
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the estimated values of the assets acquired
and liabilities assumed with the acquisition (in thousands):
DECEMBER 18, 2001
-----------------
Current assets.............................................. $4,399
Receivables from affiliates................................. 2,134
Property and equipment...................................... 1,720
------
Total assets acquired.................................. 8,253
------
Current liabilities......................................... 1,312
Payable to affiliates....................................... 6,683
------
Total liabilities assumed.............................. 7,995
------
Net assets acquired.................................... $ 258
======
On August 19, 2002, the second transaction with Vodafone was completed to
acquire the United States and Caribbean gateways and sales operations. A
Globalstar subsidiary purchased all the outstanding equity interests of
Globalstar USA, LLC ("GUSA"), a Delaware limited liability company, and all
outstanding common shares of Globalstar Caribbean Ltd. ("GCL"), a Cayman Islands
corporation, for $100 plus acquisition costs of $1.9 million. Included with the
transaction was the transfer of the U.S. operating license for mobile satellite
services. This transaction was part of Globalstar's plan to bring additional
efficiencies to the operation of the Globalstar System. The following table
summarizes the estimated values of the assets acquired and liabilities assumed
with the acquisition (in thousands):
AUGUST 19, 2002
---------------
Current assets.............................................. $3,806
------
Total assets acquired.................................. 3,806
------
Current liabilities......................................... 1,137
Payable to affiliates....................................... 778
------
Total liabilities assumed.............................. 1,915
------
Net assets acquired.................................... $1,891
======
The operating results of GCSC, GUSA and GCL, since the acquisition dates,
are included in the consolidated statements. The following unaudited pro forma
consolidated amounts give effect to the acquisitions of GUSA and GCL as if they
had occurred on January 1, 2001 and GCSC as if it had occurred on January 1,
2000 by consolidating the results of operations with Globalstar's results for
the years ended December 31, 2002, 2001 and 2000 (in thousands, except per
ordinary partnership interest amounts):
YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
-------- -------- ----------
Revenue................................... $ 32,685 $ 28,775 $ 10,383
Net loss.................................. $155,793 $630,091 $3,828,368
Net loss per ordinary partnership
interest -- basic and diluted........... $ 2.37 $ 9.69 $ 61.43
Shares used in per share
calculation -- basic and diluted........ 65,789 65,040 62,325
F-30
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have been achieved had the combination been in effect at the
beginning of the periods presented, or of future results of the operations of
the entities.
On July 2, 2002 Globalstar, through Globalstar Corporation, acquired
TE.SA.M.'s French gateway and back office assets related to the provision of
Globalstar services in Europe, TE.SA.M.'s limited partnership interests in
Globalstar and TE.SA.M.'s remaining inventory. Under the terms of the
transaction, both Globalstar and TE.SA.M. forgave all outstanding obligations
between the parties and provided mutual releases of liability. Also, Globalstar
reimbursed TE.SA.M. for the cost of operating the French gateway from March 1,
2002 through July 1, 2002 at a cost of approximately 400,000 Euros. The French
gateway was operational, but was not producing revenues at the time of the
purchase. Globalstar has restarted the European business and is earning limited
revenue from the French gateway. TE.SA.M. is in the process of liquidating and
has exited the Globalstar business. TE.SA.M. provided Globalstar service through
gateways in France, Turkey, Venezuela, Argentina, and Peru. Local purchasers in
Turkey, Venezuela, Argentina, and Peru have purchased local service provider
operations from TE.SA.M. and have executed letter agreements with Globalstar
that define the terms under which they provide Globalstar services. As a result
of the TE.SA.M transaction, net gateway receivables of $3.7 million were written
off, $6.6 million in liabilities were forgiven, $1.6 million of inventory was
purchased and $4.4 million of previously provided bad debt allowances were
reversed.
5. PRODUCTION GATEWAYS
In order to accelerate the deployment of gateways around the world,
Globalstar agreed to help service providers finance approximately $80 million of
the cost of the initial gateways. Globalstar entered into an agreement with
QUALCOMM for the manufacture, deployment and maintenance of Globalstar gateways.
Globalstar, in turn, invoiced the service providers for the contract costs plus
a markup. As of December 31, 2002, the collection of $35.2 million of service
provider gateway purchase receivables, which are secured by gateway assets, are
deferred indefinitely, as well as $2.8 million of interest. Currently due under
the production gateway purchase agreement are $4.1 million of gateway
operational costs. The collection of these receivables is delinquent and
Globalstar has sent notices of default where appropriate. If the collection of
these payments is unsuccessful, Globalstar will retain title to these gateways,
subject to local restrictions. As of December 31, 2002, Globalstar has
classified the production gateway purchase receivables as long-term assets and
provided an allowance for doubtful collection of $18.9 million and $20.2 million
as of December 31, 2002 and 2001, respectively.
6. PROPERTY AND EQUIPMENT
DECEMBER 31,
--------------------
2002 2001
-------- --------
(IN THOUSANDS)
Globalstar System...................................... $284,151 $288,206
Construction in progress............................... 326 --
Leasehold improvements................................. 388 434
Furniture and office equipment......................... 4,283 3,800
-------- --------
289,148 292,440
Accumulated depreciation............................... (88,249) (60,450)
-------- --------
$200,899 $231,990
======== ========
F-31
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Globalstar's property and equipment consists of an in-orbit satellite
constellation, ground equipment located in the United States and support
equipment located in various countries around the world. Depreciation expense
for 2002, 2001 and 2000 was $27.2 million, $31.6 million, and $323.9 million,
respectively.
7. ACCRUED EXPENSES
Accrued expenses at December 31, 2002 consist of the following:
DECEMBER 31,
-----------------
2002 2001
------ -------
(IN THOUSANDS)
Accrued professional fees................................. $3,028 $ 617
Accrued compensation and benefits......................... 1,310 3,129
Accrued contract services................................. 608 --
Accrued legal settlement(1)............................... -- 35,000
Other accrued expenses.................................... 1,473 3,778
------ -------
$6,419 $42,524
====== =======
- ---------------
(1) Legal settlement included in liabilities subject to compromise as of
December 31, 2002.
8. LIABILITIES SUBJECT TO COMPROMISE
Under Chapter 11, substantially all unsecured liabilities as of the
Petition Date are subject to compromise or other treatment under a plan of
reorganization, which must be approved and confirmed by the Bankruptcy Court.
For financial reporting purposes, those liabilities and obligations whose
treatment and satisfaction are dependent on the outcome of the Chapter 11 case
have been segregated in the condensed consolidated balance sheet as liabilities
subject to compromise. Generally, all actions to enforce or otherwise require
repayment of pre-petition liabilities are stayed while Globalstar continues its
business operations as a debtor-in-possession. The amount and settlement terms
of the pre-petition liabilities subject to compromise are subject to an approved
plan of reorganization and may differ significantly from the amounts as
reflected in these consolidated financial statements.
As a result of the Chapter 11 filing, no principal or interest payments
will be made on unsecured pre-petition debt without Bankruptcy Court approval or
until a plan or reorganization providing for the repayment terms has been
confirmed by the Bankruptcy Court becomes effective. Therefore, interest expense
on pre-petition debt has not been accrued since the Petition Date.
F-32
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Liabilities subject to compromise are comprised of the following (in
thousands):
DECEMBER 31,
2002
------------
Term loans payable to affiliates............................ $ 400,000
Revolving credit facility to affiliates..................... 100,000
Senior notes payable........................................ 1,419,283
Notes payable............................................... 150,000
Notes payable to affiliates................................. 95,010
Accounts payable............................................ 1,461
Payable to affiliates....................................... 40,287
Vendor financing liability.................................. 880,062
Dividends payable........................................... 32,757
Accrued expenses............................................ 38,342
Accrued interest............................................ 306,639
Deferred revenues........................................... 23,363
Deferred financing costs.................................... (61,283)
----------
Total liabilities subject to compromise........... $3,425,921
==========
Globalstar recorded a $17.2 million pre-petition liability when it
requested Space Systems/Loral, Inc. ("SS/L") terminate the satellite launch
call-up orders in October 2002. Globalstar believes that this termination
liability will not be classified as an administrative claim in its bankruptcy
case, and has recorded the liability as a pre-petition liability subject to
compromise. In addition, Globalstar wrote off a $1.2 million deposit associated
with the launch call-up orders.
9. PAYABLES TO AFFILIATES AND VENDOR FINANCING
Payables and vendor financing due to affiliates is comprised of the
following (in thousands):
POST PETITION PRE-PETITION
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2002 2001
------------- ------------ ------------
SS/L.................................... $ 409 $278,364 $259,098
Loral................................... 277 981 961
QUALCOMM................................ -- 637,755 629,139
GCC..................................... 6,770 -- 6,199
Other affiliates........................ 289 3,249 9,099
------ -------- --------
$7,745 $920,349 $904,496
====== ======== ========
All payables to affiliates and vendor financing incurred prior to the
Petition Date have been classified as liabilities subject to compromise (see
Note 8). No principal or interest payments will be made on unsecured
pre-petition debt without Bankruptcy Court approval or until a plan of
reorganization providing for the repayment terms has been confirmed by the
Bankruptcy Court and becomes effective. Interest expense of $71.9 million, which
would have been recognized for the period from the Petition Date through
December 31, 2002 under pre-petition accounting practices, has not been accrued.
Debt discounts related to the vendor financing have not been adjusted since the
Petition Date. Under pre-petition accounting practices, the value of vendor
financing debt would have been increased by $5.1 million during the period from
the Petition Date through December 31, 2002.
F-33
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of accrued interest) with QUALCOMM that
replaced the previous arrangement. As of December 31, 2002, $623.3 million was
outstanding under this facility (including $123.3 million of accrued interest).
This liability, including accrued interest through the Petition Date, has been
included in liabilities subject to compromise (see Note 8). In connection with
this agreement, QUALCOMM received warrants to purchase 3,450,000 Globalstar
partnership interests at an exercise price of $42.25 per interest. The exercise
price was determined by reference to the fair market value of GTL's common stock
on the closing date of the vendor financing, based on an approximate ratio of
one partnership interest for every four shares of GTL common stock. The warrants
are vested and will expire in 2007. The fair value of the vested warrants
totaled approximately $34.0 million and is being amortized over the term of the
vendor financing arrangements. However, in light of Globalstar's Chapter 11
petition, these warrants are likely to be of little or no value.
As a result of Globalstar's bankruptcy petition filed on February 15, 2002,
this vendor financing was accelerated and became immediately due and payable and
is included in liabilities subject to compromise.
SS/L provided $344 million of billings deferred under its construction
contracts with Globalstar, which included $120 million of orbital incentives.
The orbital payments on the replacement satellites are due on a per satellite
basis with 50% due when the satellite is placed in storage. The remaining 50% is
due when Globalstar directs SS/L to ship the satellite to the launch base. Until
such time, interest on the remaining 50% accrues at an interest rate of 10% per
annum. As of December 31, 2002, seven of the eight replacement satellites were
placed in storage and payments became due. No payments were made in 2002 and
interest accrued on the remaining 50% through the Petition Date. Total accrued
interest on the orbitals as of December 31, 2002 was $237,000. Payments were
made on the $134 million of non-interest bearing vendor financing through
January 15, 2001. Penalty fees were accrued at LIBOR plus 3%, through the
Petition Date, and total accrued penalties as of December 31, 2002 were $1.2
million. Interest was being accrued at LIBOR plus 3%, through the Petition Date,
and total accrued interest as of December 31, 2002 was $53.7 million. All of the
construction contract amounts owed to SS/L have been included in liabilities
subject to compromise. Claims of Loral and its affiliates are expected to be
resolved as part of the Loral Settlement discussed below (see Note 20). However,
there can be no assurance that the Loral Settlement will be effected.
10. CREDIT FACILITIES
As of December 31, 2002, the credit facilities have been included in the
liabilities subject to compromise (see Note 8). No principal or interest
payments will be made on unsecured pre-petition debt without Bankruptcy Court
approval or until a plan of reorganization providing for the repayment terms has
been confirmed by the Bankruptcy Court and becomes effective. Interest expense
of $39.7 million and $12.1 million has not been accrued on the $500 million
credit facility and on the notes issued to the guarantors of The Chase Manhattan
Bank $250 million credit facility, respectively, from the Petition Date through
December 31, 2002. As a result of Globalstar's bankruptcy petition filed on
February 15, 2002, this credit facility was accelerated and became immediately
due and payable.
$250 Million Credit Agreement
On June 30, 2000, Globalstar's $250 million credit facility with The Chase
Manhattan Bank became due and was repaid in full by its guarantors, including
Lockheed Martin Corporation ("Lockheed Martin"), QUALCOMM, DASA Globalstar
Limited Partner, Inc. ("DASA") and SS/L, who had previously received warrants
for GTL common stock in consideration of their guarantee. Pursuant to the
relevant agreements, Globalstar issued three-year notes in the amounts of $206.3
million, $21.9 million, $11.7 million and $10.1 million to Lockheed Martin,
QUALCOMM, SS/L and DASA, respectively, in
F-34
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
satisfaction of their subrogation rights. The notes are due on June 30, 2003 and
bear interest, on a deferred basis, at a rate of London Interbank Offer Rate
("LIBOR") plus 3%. On the consolidated balance sheet of Globalstar the notes are
presented as liabilities subject to compromise as of December 31, 2002 and notes
payable and notes payable to affiliates as of December 31, 2001.
Lockheed Martin, however, rejected the notes it received and instead
requested that Globalstar issue new securities with additional rights and
enhanced value, without waiving its claim that it is entitled to receive an
immediate cash reimbursement by Globalstar of its $150 million payment to the
bank lenders. Globalstar disputes Lockheed Martin's interpretation of the
relevant agreements. If the dispute is not resolved, Globalstar cannot be sure
that if the matter were litigated, the court would agree with Globalstar's
interpretation of the agreements. Management believes, however, that a court
would agree with Globalstar's interpretation of the relevant agreements. The
notes are unsecured claims in Globalstar's bankruptcy case.
In 2001, an issue was raised as to whether the three-year notes issued to
the guarantors of The Chase Manhattan Bank $250 million credit facility were
prepared in accordance with the recourse provisions of the guarantee
arrangement. Management does not believe the existing notes containing
non-recourse language will need to be replaced with notes not containing the
non-recourse language. If the existing non-recourse notes were replaced with
notes not containing the non-recourse language, the replacement would not impact
Globalstar's results of operations. However, allocations of Globalstar's losses
to general partners would increase by the amount of the increase in recourse
obligations.
Prior to filing Chapter 11, $5.0 million of the notes payable to affiliates
(Loral) were offset with various receivables from Globalstar.
$500 Million Credit Agreement with Affiliates
On August 5, 1999, Globalstar entered into a $500 million credit agreement
with a group of banks. The creditors' interests under the credit facility were
purchased by a wholly owned subsidiary of Loral on November 17, 2000, which had
previously guaranteed the facility. As of December 31, 2002, all amounts under
the $500 million credit agreement were drawn. Borrowings under the facilities
bear interest, at Globalstar's option, at various rates based on margins over
the lead bank's base rate or the LIBOR for periods of one to six months. The
claims of the Loral subsidiary, in respect of this credit agreement constitute
unsecured claims in Globalstar's bankruptcy case.
In consideration for the guarantee by Loral in 1999, Loral and certain
Loral subsidiaries received warrants to purchase an aggregate of 3,450,000
Globalstar partnership interests, valued at $141.1 million, (equivalent to
approximately 13.8 million shares of common stock of GTL) at an exercise price
of $91.00 per partnership interest (equivalent to $22.75 per share of GTL common
stock). The outstanding warrants are vested and expire in 2006. However, in
light of Globalstar's Chapter 11 petition, the warrants are likely to be of
little or no value.
11. SENIOR NOTES AND WARRANTS
As of December 31, 2002, the senior notes have been included in the
liabilities subject to compromise (see Note 8). No principal or interest
payments will be made on unsecured pre-petition debt without Bankruptcy Court
approval or until a plan of reorganization providing for the repayment terms has
been confirmed by the Bankruptcy Court and becomes effective. Therefore,
interest expense of $142.5 million has not been accrued from the Petition Date
through December 31, 2002. Prior to the Petition Date, Globalstar was increasing
the carrying value of the senior notes payable to their ultimate redemption
value over the lives of the notes. On the Petition Date, the note values were
stayed, therefore the carrying value was not increased by $10.0 million for the
period from the Petition Date through December 31, 2002.
F-35
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 2001, Globalstar suspended indefinitely principal and interest
payments on its funded debt in order to conserve cash for operations. Under the
terms of Globalstar's 11 3/8% senior notes due February 15, 2004, its 11 1/4%
senior notes due June 15, 2004, its 10 3/4% senior notes due November 1, 2004,
and its 11 1/2% senior notes due June 1, 2005 (the "Notes"), non-payment of
interest on the Notes when it becomes due, and continuance of non-payment for 30
days, is an "event of default". As a result of Globalstar's bankruptcy petition
filed on February 15, 2002, these Notes were accelerated and became immediately
due and payable.
DECEMBER 31,
----------------------- EFFECTIVE
2002(1) 2001 DUE INTEREST INTEREST
---------- ---------- DATE SOLD PRINCIPAL DATE RATE PAYMENT
(IN THOUSANDS) ------------- ------------ -------- ---------- -------------
11 3/8% Senior
Notes(2)............ $ 489,217 $ 488,642 February 1997 $500,000,000 2004 13.33% Semi-annually
11 1/4% Senior
Notes(2)............ 314,760 314,301 June 1997 325,000,000 2004 13.57% Semi-annually
10 3/4% Senior
Notes(2)............ 322,635 322,545 October 1997 325,000,000 2004 11.63% Semi-annually
11 1/2% Senior
Notes(3)............ 292,671 292,454 May 1998 300,000,000 2005 13.12% Semi-annually
---------- ----------
$1,419,283 $1,417,942
========== ==========
- ---------------
(1) Balance is included as liabilities subject to compromise as of December 31,
2002, and interest was only accrued through the Petition Date.
(2) Notes are subject to a prepayment premium prior to 2004.
(3) Notes may not be redeemed prior to June 2003 and are subject to a prepayment
premium prior to 2005.
As of December 31, 2002, there were outstanding warrants to purchase
3,814,897 shares of GTL common stock which were issued in connection with the
Globalstar's 11 3/8 % Senior Notes, exercisable at a price of $17.394 per share,
which expire on February 15, 2004. However, in light of Globalstar's Chapter 11
petition, the warrants are likely to be of little or no value.
12. ORDINARY PARTNERS' CAPITAL
Capital Contribution
China Telecom has a warrant to acquire 937,500 Globalstar ordinary
partnership interests for $18,750,000. Globalstar had previously granted this
and other warrants to China Telecom in connection with service provider
arrangements in China under which China Telecommunications Broadcast Satellite
Corporation acts as the sole distributor of Globalstar service in China. The
fair value of the warrants issued to China Telecom totaled approximately $31.9
million and has been recorded in the accompanying balance sheet in other assets
and is being amortized over ten years, the expected life of the first generation
of satellites. Accumulated amortization as of December 31, 2002 is $8.6 million.
8% Series A Convertible Redeemable Preferred Partnership Interests
In 1999, Globalstar sold to GTL seven million units (face amount of $50 per
unit) of 8% RPPIs, in connection with GTL's offering of 7 million shares (face
amount of $50 per share) of 8% Series A convertible redeemable preferred stock
due 2011 (the "8% Preferred Stock"). Dividends on the 8% RPPIs and the 8%
Preferred Stock accrue at 8% per annum and are payable quarterly.
In 2002, 2,100 shares of the 8% Preferred Stock were converted into 4,508
shares of GTL common stock. As a result of the conversion, the 2,100 8% RPPIs
were converted into 1,113 Globalstar ordinary partnership interests. The
remaining shares of 8% Preferred Stock outstanding at December 31, 2002 were
convertible into 9,365,807 shares of GTL common stock.
F-36
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each 8% RPPI is convertible into .53085 ordinary partnership interests,
subject to adjustment in the event of subdivision, combination, or
reclassification of the ordinary partnership interests. As of December 31, 2002,
the outstanding 8% RPPIs were convertible into 2,312,546 of ordinary partnership
interests.
The 8% RPPIs rank pari passu with the 9% RPPIs and senior to ordinary
partnership interests and have terms substantially similar to the 8% Preferred
Stock. However, they are subordinate to all existing and future liabilities of
Globalstar, and cash distributions thereon are limited to the amount of the
partnership capital accounts that are maintained for such interests. The 8%
RPPIs will convert to ordinary partnership interests upon any conversion of the
8% Preferred Stock into GTL common stock. Payments due on the 8% RPPIs may be
made in cash, Globalstar ordinary partnership interests or a combination of both
at the option of Globalstar. In January 2001, Globalstar suspended distributions
on the 8% RPPIs. As a result, GTL suspended dividend payments on the 8%
Preferred Stock. The partnership agreement provides that, in the event accrued
and unpaid dividends accumulate to an amount equal to six quarterly dividends on
the 8% Preferred Stock, holders of the majority of the outstanding 8% Preferred
Stock and the holders of any other securities having similar voting rights will
be entitled to elect one additional member to the general partners committee of
Globalstar. As of December 31, 2002, this right has not been exercised.
9% Series B Convertible Redeemable Preferred Partnership Interests
On December 2, 1999, Globalstar sold to GTL three million units (face
amount of $50 per unit) of 9% RPPIs in connection with GTL's offering of 3
million shares (face amount of $50 per share) of 9% Series B convertible
redeemable preferred stock due 2011 (the "9% Preferred Stock"). Dividends on the
9% RPPIs and the 9% Preferred Stock accrue at 9% per annum and are payable
quarterly.
In 2002, 1,303,933 shares of 9% Preferred Stock were converted into
2,511,766 shares of GTL common stock. As a result of such conversions, the
1,303,933 9% RPPIs were converted into 620,189 Globalstar ordinary partnership
interests. As of December 31, 2002, the outstanding 9% Preferred Stock was
convertible into 750,213 shares of GTL common stock.
Each 9% RPPI is convertible into .47562 ordinary partnership interests,
subject to adjustment in the event of subdivision, combination, or
reclassification of the ordinary partnership interests. As of December 31, 2002,
the outstanding 9% Preferred RPPIs were convertible into 185,171 ordinary
partnership interests.
The 9% RPPIs rank pari passu with the 8% RPPIs and senior to ordinary
partnership interests and have terms substantially similar to the 9% Preferred
Stock. However, they are subordinate to all existing and future liabilities of
Globalstar, and cash distributions thereon are limited to the amount of the
partnership capital accounts that are maintained for such interests. The 9%
RPPIs will convert to ordinary partnership interests upon any conversion of the
9% Preferred Stock into GTL common stock. Payments due on the 9% RPPIs may be
made in cash, Globalstar ordinary partnership interests or a combination of both
at the option of Globalstar. In January 2001, Globalstar suspended distributions
on the 9% RPPIs. As a result, GTL suspended dividend payments on the 9%
Preferred Stock. The partnership agreement provides that, in the event accrued
and unpaid dividends accumulate to an amount equal to six quarterly dividends on
the 9% Preferred Stock, holders of the majority of the outstanding 9% Preferred
Stock and the holders of any other securities having similar voting rights will
be entitled to elect one additional member to the general partners committee of
Globalstar. As of December 31, 2002, this right has not been exercised.
F-37
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Arrangements
Officers and employees of Globalstar are eligible to participate in GTL's
1994 Stock Option Plan (the "Plan"), which provides for nonqualified and
incentive stock options. The Plan is administered by a stock option committee
(the "Committee"), appointed by the GTL Board of Directors. The Committee
determines the option price, exercise date and the expiration date of each
option (provided no option shall be exercisable after ten years from the date of
grant). Proceeds received by GTL for options exercised will be used to purchase
Globalstar ordinary partnership interests under an approximate four-for-one
exchange arrangement.
Globalstar issued 6,825 ordinary partnership interests during 2000, in
exchange for proceeds from GTL option exercises. There were no ordinary
partnership interests issued in 2002 and 2001.
Globalstar accounts for its employee stock-based compensation using the
intrinsic value method in accordance with APB 25, Accounting for Stock Issued to
Employees and its related interpretations. Accordingly, no compensation expense
has been recognized in Globalstar's consolidated financial statements for
employee stock-based compensation; except for $95,000 of compensation expense in
2000, related to the below market option grants issued by Loral. There was no
employee stock-based compensation expense in 2002 and 2001. In addition, during
2000, GTL granted stock options to certain non-employees of Globalstar to
purchase 167,000 shares of GTL common stock. The fair value of such options
totaled approximately $290,000. The fair value attributable to the unvested
portion of such options is subject to adjustment based upon the future value of
GTL's common stock.
SFAS 123 requires the disclosure of pro forma net income and earnings per
share as if Globalstar adopted the fair value method. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restriction, which significantly differ from Globalstar's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. Globalstar's calculations (see Note 3) were made using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life, six to twelve months following vesting; stock volatility, 70% for 2002,
2001 and 2000; risk free interest rates, 4.4% to 6.6% based on the date of
grant; and no dividends during the expected term. Globalstar's calculations are
based on a multiple option valuation approach and forfeitures are recognized as
they occur.
F-38
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Plan for the years ended December 31, 2002,
2001 and 2000 is presented below:
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
---------- ---------
Outstanding at January 1, 2000........................ 4,643,800 20.03
Granted (weighted average fair value of $4.04 per
share).............................................. 4,566,250 9.76
Forfeited............................................. (984,750) 16.29
Exercised............................................. (26,300) 10.72
---------- ------
Outstanding at December 31, 2000...................... 8,199,000 14.79
Granted............................................... -- --
Forfeited............................................. (1,745,638) 15.50
Exercised............................................. -- --
---------- ------
Outstanding at December 31, 2001...................... 6,453,362 14.46
Granted............................................... -- --
Forfeited............................................. (1,044,795) 14.09
Exercised............................................. -- --
---------- ------
Outstanding at December 31, 2002...................... 5,408,567 $14.96
========== ======
Outstanding at December 31, 2001...................... 2,425,071 $11.87
========== ======
Outstanding at December 31, 2000...................... 1,123,816 $14.20
========== ======
The options generally expire ten years from the date of grant and become
exercisable over the period stated in each option, generally ratably over a
five-year period except for 4,336,250 options granted in 2000 which become
exercisable ratably over a three-year period. All options granted were
non-qualified stock options with an exercise price equal to fair market value at
the date of grant. As of December 31, 2002, 4,490,733 shares of common stock
were available for future grant under the Plan.
The following table summarizes information about GTL's outstanding stock
options at December 31, 2002:
OUTSTANDING EXERCISABLE
------------------------------------ ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE-YEARS PRICE NUMBER PRICE
- -------------------- --------- ----------- -------- --------- --------
$3.01 to $4.64............... 198,000 4.03 $ 4.11 195,333 $ 4.13
$4.65 to $17.15.............. 3,156,617 6.81 9.73 2,336,892 9.96
$17.16 to $29.03............. 1,809,450 6.12 23.11 1,058,200 23.28
$29.04 to $31.41............. 244,500 6.21 30.98 193,750 31.00
--------- ---------
5,408,567 6.45 $14.96 3,784,175 $14.46
========= =========
13. RESTRUCTURING
Beginning in 2001, Globalstar implemented a number of initiatives designed
to reduce its cost of operations and restructure the company's finances. These
initiatives included reductions in Globalstar's workforce, the development of
financial restructuring plans, negotiations with Globalstar's significant
creditors, and the initiation of Globalstar's Chapter 11 cases on February 15,
2002. As a result of the
F-39
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restructuring efforts, Globalstar has recorded cumulative charges totaling $19.7
million through December 31, 2002. Restructuring and reorganization charges
recorded in the quarter ended December 31, 2002 were $2.3 million, including
$1.4 million in Globalstar advisory fees, $0.7 million in creditor advisory
fees, and $0.2 in employee separation costs. Since the Petition Date, all
advisory fees are expensed as incurred as reorganization charges and interest
income is recognized as a reorganization item, consistent with SOP 90-7.
A summary of the restructuring charges incurred from the beginning of 2001
through December 31, 2002 are as follows (in millions):
AMOUNTS AMOUNTS ACCRUED
EXPENSED PAID LIABILITY
-------- ------- ---------
Globalstar advisory fees............................... $10.3 $ 7.7 $2.6
Creditor advisory fees................................. 4.5 3.6 0.9
Employee separation costs.............................. 5.1 5.1 --
Other restructuring costs.............................. 0.1 0.1 --
----- ----- ----
Total........................................ 20.0 $16.5 $3.5
===== ===== ====
Less interest income................................... 0.3
-----
Total.................................................. $19.7
=====
Globalstar Advisory Fees -- Globalstar has retained financial advisors,
restructuring counsel and other advisors to assist in the development of its
financial restructuring plans, discussions with its various creditor groups and
preparation for its Chapter 11 bankruptcy petition. The remaining $2.6 million
accrued as of December 31, 2002 related to fees that were incurred, but either
not billed by the advisors or fees that were waiting for court approval to be
paid.
Creditor Advisory Fees -- At Globalstar's expense, Globalstar's informal
committee of bondholders and later the official Creditors' Committee retained
financial advisors and restructuring counsel. Globalstar discontinued paying the
informal committee's expenses upon formation of the official Creditors'
Committee. The remaining $0.9 million accrued as of December 31, 2002 related to
fees that were incurred, but either not billed by the advisors or fees that were
waiting for court approval to be paid.
Employee Separation Costs -- Globalstar reduced its workforce from 439
full-time employees as of January 1, 2001 to 146 full-time employees and 2
part-time employees as of December 31, 2002, including 25 GUSA employees added
as of August 19, 2002, primarily through three separate actions in March, July
and September of 2001. Employee separation costs of $4.9 million and $0.2
million were recorded for the year 2001 and 2002, respectively, for employee
severance obligations, payments in accordance with Globalstar's retention bonus
program and fringe benefit costs related to terminated employees.
14. PENSIONS AND OTHER EMPLOYEE BENEFITS
Pensions
Globalstar maintains a pension plan and a supplemental executive retirement
plan. These plans are defined benefit pension plans and members in certain
locations may contribute to the pension plan in order to receive enhanced
benefits. Eligibility for participation in these plans varies and benefits are
based on members' compensation and years of service. Globalstar's funding policy
is to fund the pension plan in accordance with the Internal Revenue Code and
regulations thereon and to fund the supplemental retirement plan on an actuarial
basis, including service cost and amortization amounts. Plan assets are
generally invested in United States government and agency obligations and listed
stocks and bonds.
F-40
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Benefits
In addition to providing pension benefits, Globalstar provides certain
health care and life insurance benefits for retired employees and dependents.
Participants are eligible for these benefits when they retire from active
service and meet the eligibility requirements for Globalstar's pension plan. The
life insurance coverage is provided at no cost to retirees and the health care
coverage is funded primarily on a pay-as-you-go basis with the retiree generally
paying a portion of the cost through contributions, deductibles and coinsurance
provisions.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for 2002 and 2001, and a statement
of the funded status as of December 31, 2002 and 2001, respectively.
PENSION BENEFITS OTHER BENEFITS
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
(IN THOUSANDS)
Reconciliation of benefit obligation
Obligation at January 1..................... $11,328 $ 9,337 $ 1,856 $ 1,407
Service cost................................ 427 695 77 154
Interest cost............................... 831 793 84 129
Participant contributions................... 84 170 37 31
Actuarial (gain) loss....................... 647 893 (471) 147
Benefit payments............................ (459) (560) (29) (12)
------- ------- ------- -------
Obligation at December 31................... $12,858 $11,328 $ 1,554 $ 1,856
------- ------- ------- -------
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1...... $ 7,151 $ 7,760 $ 39 $ 37
Actual return on plan assets................ (683) (666) 1 2
Employer contributions...................... 1,064 447 (8) (19)
Participant contributions................... 84 170 36 31
Benefit payments............................ (459) (560) (29) (12)
------- ------- ------- -------
Fair value of plan assets at December 31.... $ 7,157 $ 7,151 $ 39 $ 39
------- ------- ------- -------
Funded status
Funded (unfunded) status at December 31..... $(5,701) $(4,177) $(1,515) $(1,817)
Unrecognized (gain) loss.................... 4,615 2,629 (116) 334
Unrecognized prior service cost............. -- 328 364
Unrecognized transition obligation
(asset)................................... (133) (173) -- --
------- ------- ------- -------
Net amount recognized in accrued
liabilities............................... $(1,219) $(1,721) $(1,303) $(1,119)
======= ======= ======= =======
F-41
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31, 2002, 2001 and 2000, respectively
(in thousands):
PENSION BENEFITS OTHER BENEFITS
----------------------- --------------------
2002 2001 2000 2002 2001 2000
----- ----- ----- ---- ---- ----
Service cost....................... $ 427 $ 695 $ 532 $ 77 $154 $100
Interest cost...................... 831 793 662 84 129 101
Expected return on plan assets..... (723) (720) (796) (3) (4) (3)
Amortization of net (gain) loss.... (40) (40) (40) 38 38 38
Recognized actuarial (gain) loss... 66 4 (51) (19) 10 4
----- ----- ----- ---- ---- ----
Net periodic benefit cost.......... $ 561 $ 732 $ 307 $177 $327 $240
===== ===== ===== ==== ==== ====
The principal actuarial assumptions were:
2002 2001 2000
---- ---- ----
Discount rate............................................... 6.75% 7.50% 7.75%
Expected return on plan assets.............................. 9.00% 9.50% 9.50%
Rate of compensation increase............................... 4.25% 4.25% 4.25%
Actuarial assumptions used a health care cost trend rate of 11.0%
decreasing gradually to 4.5% by 2009. Assumed health care cost trend rates have
a significant effect on the amounts reported for the health care plans. A 1%
change in assumed health care cost trend rates for 2002 would have the following
effects:
1% INCREASE 1% DECREASE
----------- -----------
Effect on total service and interest cost components of net
periodic postretirement health care benefit cost.......... $ 36,353 $ (28,057)
Effect on the health care component of the accumulated
postretirement benefit obligation......................... 193,216 (152,413)
Employee Savings Plan
In 1996, Globalstar adopted an employee savings plan which provides that
Globalstar match the contributions of participating employees up to a designated
level. Under this plan, the matching contributions were approximately $347,000,
$432,000 and $701,000 for 2002, 2001 and 2000, respectively.
F-42
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. TAXES
Globalstar is organized as a limited partnership with various corporate
subsidiaries. Generally, taxable income or loss, deductions and credits of the
partnership are passed through to its partners. Globalstar's corporate
subsidiaries provision (benefit) for income taxes consists of (in thousands):
YEARS ENDED DECEMBER 31,
------------------------
2002 2001 2000
----- ----- ----
Current
Federal................................................... $ -- $ 37 $186
State..................................................... -- 8 28
Foreign tax............................................... 66 28 32
----- ----- ----
Total.................................................. $ 66 $ 73 $246
----- ----- ----
Deferred
Federal................................................... $ -- $ -- $ --
State..................................................... -- -- --
Foreign tax............................................... -- -- --
Total.................................................. $ -- $ -- $ --
----- ----- ----
Total.................................................. $ 66 $ 73 $246
===== ===== ====
The components of the net deferred income tax assets as of December 31,
were as follows (in thousands):
2002 2001
------- -----
Net operating loss/credit carryforwards..................... $ 1,720 $ 69
Fixed assets................................................ 2,211 412
Accruals and reserves....................................... 2,258 339
------- -----
Gross deferred tax asset.................................... 6,189 820
Valuation allowance......................................... (6,189) (820)
------- -----
Net deferred tax asset.................................... $ -- $ --
======= =====
As of December 31, 2002, Globalstar's corporate subsidiaries have
cumulative net operating loss carryforwards for federal income tax reporting
purposes of approximately $3,271,000. The federal net operating loss
carryforwards expire in varying dates in 2021 and 2022. Under current tax law,
net operating loss carryforwards available in any given year may be limited upon
the occurrence of certain events, including significant changes in ownership
interest resulting from significant stock transactions.
F-43
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actual provision for income taxes differs from the statutory U.S.
federal income tax rate as follows (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
-------- --------- -----------
Provision at U.S. statutory rate of 35%......... $(52,485) $(201,429) $(1,324,985)
Nontaxable partnership income................... 46,680 201,346 1,321,708
State income taxes, net of federal benefit...... (32) 8 29
Change in valuation allowance................... 5,369 65 3,318
Effect of foreign income tax at various rates... 421 16 --
Other........................................... 113 67 176
-------- --------- -----------
Total...................................... $ 66 $ 73 $ 246
======== ========= ===========
16. REVENUE INFORMATION
Globalstar's revenue by subsidiary and affiliated companies is presented
for purposes of disseminating the distribution of Globalstar's revenue and is as
follows (in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
2002 2001(1) 2000(1)
------- ------- -------
Wholesale revenue -- Globalstar, L.P. .................. $ 5,776 $5,994 $3,650
Service provider revenue:
Canada -- Globalstar Canada Satellite Co.............. 15,916 410 --
United States -- Globalstar USA, LLC.................. 6,732 -- --
Europe -- Globalstar Europe Satellite Services,
Ltd. .............................................. 72 -- --
Eliminations............................................ (3,857) -- --
------- ------ ------
Total revenue...................................... $24,639 $6,404 $3,650
======= ====== ======
The following table provides Globalstar, L.P.'s net wholesale revenue by
geographical location for the years ended December 31, 2002, 2001 and 2000 (in
thousands):
YEARS ENDED DECEMBER 31,
--------------------------
2002 2001 2000
------ ------ ------
Canada................................................... $1,436 $1,135 $ 500
Brazil................................................... 857 1,536 356
United States............................................ 773 566 270
East Asia................................................ 645 160 35
Saudi Arabia............................................. 494 320 41
Russia................................................... 363 361 75
Caribbean................................................ 234 192 16
Mexico................................................... 169 243 167
Other(1)................................................. 805 1,481 2,190
------ ------ ------
Service revenue.......................................... $5,776 $5,994 $3,650
====== ====== ======
- ---------------
(1) Includes $0.1 million and $1.5 million of royalty income for 2001 and 2000,
respectively. There was no royalty revenue in 2002.
F-44
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value.
The carrying amounts of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The fair value of the senior
notes is based on market quotations. The fair value of the vendor financing,
notes payable, notes payable to affiliates, and the credit agreement is based on
the ratio of the carrying amount to fair value of the senior notes.
The estimated fair values of Globalstar's financial instruments are as
follows (in thousands):
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
Cash and cash equivalents................. $ 15,284 $15,284 $ 55,625 $55,625
Vendor financing.......................... 880,062 35,202 869,385 56,510
10 3/4% Senior notes...................... 322,635 13,000 322,545 21,125
11 1/4% Senior notes...................... 314,760 13,000 314,301 21,125
11 3/8% Senior notes...................... 489,217 20,000 488,642 32,500
11 1/2% Senior notes...................... 292,671 12,000 292,454 19,500
Notes payable............................. 170,832 6,833 169,787 11,036
Notes payable to affiliates............... 108,204 4,328 107,543 6,990
Revolving credit facility................. 100,000 4,000 100,000 6,500
Term Loan A............................... 100,000 4,000 100,000 6,500
Term Loan B............................... 300,000 12,000 300,000 19,500
18. RELATED PARTY TRANSACTIONS
In addition to the transactions described in Notes 4, 5, 7, 8, 9, 10, 11,
12, 13 and 14, Globalstar has a number of other transactions with its
affiliates. Such transactions have been negotiated on an arms-length basis and
Globalstar believes that the arrangements are no less favorable to Globalstar
than could be obtained from unaffiliated parties. The following describes these
related-party transactions.
Globalstar has granted to SS/L an irrevocable, royalty-free, non-exclusive
license to use certain intellectual property expressly developed in connection
with the SS/L agreement provided that SS/L will not use, or permit others to
use, such license for the purpose of engaging in any business activity that
would be in material competition with Globalstar. Globalstar has similarly
agreed that it will not license such intellectual property if it will be used
for the purpose of designing or building satellites that would be in competition
with SS/L.
On July 17, 2001, the FCC granted Globalstar and seven other applicants
authorizations to construct, launch and operate MSS systems in the 2 GHz band,
subject to strict milestone requirements. Globalstar entered into a
non-contingent contract with SS/L on July 16, 2002. On January 30, 2003, the
FCC's International Bureau declared the 2 GHz license to be null and void.
Globalstar believes that this action by the FCC's staff is inconsistent with the
facts and the law and has requested the full FCC to review and reverse it.
Globalstar has also requested the full FCC to stay the Bureau's decision pending
review. On January 31, 2003, Globalstar instructed SS/L to stop work on the
contract and requested repayment of the balance of the payment that had not been
spent.
In 1998, Globalstar secured twelve-month call-up orders for two additional
Delta launch vehicles from SS/L for the purpose of launching spare satellites.
The call-up date for Delta 8 was September 8, 2002,
F-45
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the call-up date for Delta 9 was March 31, 2002. During 2002, Globalstar
sought and received several no-cost month-to-month deferrals of the call-up
deadline for Delta 9. In October 2002, the launch contractor declined to grant
additional no-cost extensions. Globalstar determined that it would be more
advantageous to terminate the launches than to begin to make the required
progress payments and requested SS/L to terminate the launches if further no
cost extensions could not be secured. Consequently, SS/L terminated the
Globalstar Delta 8 and 9 launches on October 31, 2002.
Globalstar has requested further information from SS/L related to the
termination including SS/L's actual costs related to the termination and the
disposition of Globalstar unique hardware related to these launch vehicles. In
the fourth quarter of 2002, Globalstar wrote off the deposit of $1.2 million
related to the additional Delta launch vehicles. Additionally, SS/L has advised
Globalstar that SS/L will invoice Globalstar for $17.2 million of remaining
termination liability related to these launches. Globalstar believes that this
termination liability will not be classified as an administrative claim in its
bankruptcy case, and has recorded the liability as a pre-petition liability
subject to compromise.
Globalstar has granted to QUALCOMM an irrevocable, non-exclusive, worldwide
perpetual license to intellectual property owned by Globalstar in the Ground
Segment and developed pursuant to the QUALCOMM agreement. QUALCOMM may, pursuant
to such grant, use the intellectual property for applications other than the
Globalstar System provided that QUALCOMM may not for a period of three years
after its withdrawal as a strategic partner or prior to the third anniversary of
the Full Constellation Date (as defined is such grant), whichever is earlier,
engage in any business activity that would be in competition with the Globalstar
System. The grant of intellectual property to QUALCOMM described above is
generally royalty free. Under certain specified circumstances, however, QUALCOMM
will be required to pay a 3% royalty fee on such intellectual property.
Globalstar entered into agreements with certain limited partners, for the
integration and testing of the Globalstar System at certain of the partners'
gateways. Costs incurred under these arrangements for the years ended December
31, 2001 and 2000 were approximately $374,000 and $1,050,000, for 2001 and 2000,
respectively. There were no costs incurred in 2002.
QUALCOMM initially agreed to grant at least one vendor a nonexclusive
worldwide license to use QUALCOMM's intellectual property to manufacture and
sell gateways to Globalstar's service providers. The foregoing license would be
granted by QUALCOMM to one or more such vendors on reasonable terms and
conditions, which will in any event not provide for royalty fees in excess of 7%
of a gateway's sales price (not including the approximately $400,000 per gateway
in recoupment expenses payable to Globalstar). Thus far, no other vendor has
committed to manufacture gateways, and Globalstar does not expect any other
vendor to manufacture gateways. QUALCOMM granted a license to manufacture
Globalstar user terminals to Ericsson and Telit and also agreed to grant a
similar license to at least one additional qualified manufacturer to enable it
to manufacture and sell the Globalstar user terminals to service providers.
However, these rights were granted under the Development Contract, which
QUALCOMM has purported to terminate.
Subsidiaries of Loral have formed joint ventures with partners which have
executed service provider agreements granting the joint ventures exclusive
rights to provide Globalstar service to users in Brazil, Canada, Mexico, and
Russia as long as specified minimum levels of subscribers are met. In December
2001, a subsidiary of Globalstar acquired a majority interest in the Canadian
service provider business. As a result of this transaction, Globalstar and Loral
are now partners in the Canadian joint venture. Because of the consolidation,
all transactions with GCSC are eliminated. Founding service provider agreements
have been entered into with certain of Globalstar's limited partners for
specific countries. These service providers will receive certain discounts from
Globalstar's expected pricing schedule generally over a five-year period.
Globalstar has also agreed to provide QUALCOMM, under certain circumstances,
with
F-46
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capacity on the Globalstar System for its OmniTRACS services at its most
favorable rates and to grant to QUALCOMM the exclusive right to utilize the
Globalstar System to provide OmniTRACS-like services.
On December 30, 2002, the Bankruptcy Court approved a settlement agreement
among Globalstar Services Company, Inc. ("GSCI"), Globalstar, Globalstar
Vodafone Network Pty Ltd. Australia and Globalstar Australia Pty Ltd. Under this
settlement, Globalstar consented to the transfer by Vodafone Satellite Services
Limited ("VSSL") to Localstar of the service provider rights in Australia, and
Globalstar entered into a new service provider agreement with Localstar. VSSL
was the original authorized service provider for Australia and the operator of
three gateways in that country. In conjunction with this transaction, VSSL
agreed to settle certain pre-petition and post-petition debts with Globalstar.
Globalstar received payments totaling $1.7 million from Vodafone in January
2003.
Globalstar has entered into various agreements with other service providers
and gateway operators to provide and receive various services related to the
Globalstar business. Currently, Globalstar is providing retail billing support
to its service providers in Mexico and Brazil, on a cost reimbursable basis.
Additionally, Globalstar has agreements in place to provide, also on cost
reimbursable basis, certain information technology and telecommunications
network related support to GCC, in which it holds a minority interest. Also, GCC
bills Globalstar for the monitoring of gateways in United States, Canada, and
France. In addition, Globalstar is billed for all costs related to the
operations of the gateways located in Canada, as cost recovery mechanism for
GCC. Globalstar also net settles with other service providers roaming charges
that arise from subscribers using gateways other then their home gateway to
complete calls on the Globalstar System. During 2002, Globalstar billed $0.5
million under these agreements.
Total gross receivables due from affiliates for amounts financed under the
production gateway contracts, usage, and other services is as follows (in
thousands):
DECEMBER 31,
------------------
2002 2001
------- -------
SS/L..................................................... $ 1,586 $ 325
Loral.................................................... 4,994 6,535
Other affiliates......................................... 25,682 48,109
------- -------
$32,262 $54,969
======= =======
Total purchases from affiliates is as follows (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
------- ------- --------
SS/L......................................... $ 864 $15,756 $ 74,082
Loral........................................ 704 2,642 3,872
QUALCOMM..................................... 4,056 40,629 99,988
GCC.......................................... 5,831 -- 335
Other affiliates............................. 132 14,078 6,569
------- ------- --------
$11,587 $73,105 $184,846
======= ======= ========
Total usage revenue recognized from other affiliates is $2.3 million, $5.2
million and $1.9 million for the years ended December 31, 2002, 2001, and 2000,
respectively.
Starting with commencement of service by Globalstar and upon receipt of
revenue, LQP, the general partner of LQSS, receives a managing partner's
allocation equal to 2.5% of Globalstar's revenues up to $500 million plus 3.5%
of revenues in excess of $500 million. Loral and QUALCOMM ultimately will
receive 80% and 20%, respectively, of such distribution. Should Globalstar incur
a net loss in any year
F-47
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
following commencement of operations, the allocation for that year will be
reduced by 50% and LQP will reimburse Globalstar for allocation payments, if
any, received in any prior quarter of such year, sufficient to reduce its
management allocation for the year to 50%. The managing partners allocation may
be deferred (with interest at 4% per annum) in any quarter in which Globalstar
would report negative cash flow from operations if the managing partner's
allocation were made. As of December 31, 2002, the managing partner's allocation
of $167,000 has been deferred and $108,000 has been classified as a liability
subject to compromise.
19. COMMITMENTS AND CONTINGENCIES
Globalstar currently has three leases for facilities, two in California and
one in Ontario, Canada. The leases expire in July 2005, November 2006 and
December 2008, respectively. The following table presents the future minimum
lease payments (in thousands):
2003........................................................ $ 3,235
2004........................................................ 3,271
2005........................................................ 3,303
2006........................................................ 3,306
2007........................................................ 3,242
Thereafter.................................................. 3,323
-------
Total minimum lease payments................................ $19,680
=======
Rent expense for 2002, 2001 and 2000, was approximately $3.5 million, $3.9
million, and $4.1 million, respectively. Included in rent expense are payments
to Lockheed Martin of $3.0 million, $3.5 million, and $3.7 million for 2002,
2001 and 2000, respectively.
On February 20, 2001, a purported class action lawsuit was filed against
Globalstar and Globalstar Capital Corporation on behalf of the owners of the
10 3/4% senior notes, due November 2004 (the "10 3/4% Senior Notes") in Superior
Court, New Castle County, Delaware. Globalstar Capital Corporation and
Globalstar issued the 10 3/4% Senior Notes as joint obligors. The complaint
alleges that the defendants repudiated the 10 3/4% Senior Notes' registration
statement, prospectus and indenture, without consent of the holders of the
10 3/4% Senior Notes, when Globalstar announced that it was suspending its
future interest payments on the 10 3/4% Senior Notes. On April 23, 2001, the
defendants moved to dismiss the complaint for failure to state a cause of
action. A second similar class action was filed in Delaware on June 5, 2001. The
defendants have also moved to dismiss this complaint. Plaintiffs subsequently
amended the complaint and defendants again moved to dismiss the amended
complaint for failure to state a cause of action. On December 31, 2001, the
court granted defendants' motion to dismiss in part, dismissing plaintiffs'
claims for principal and interest not yet due, but allowing plaintiffs to
proceed with their breach of contract claim based on the interest payments
already missed at the time the amended complaints were filed. Defendants
answered the complaints on January 17, 2002. These proceedings are now
automatically stayed in accordance with Section 362(a) of the Bankruptcy Code.
On August 7, 2001, Globalstar received a petition filed on July 13, 2001 in
Texas state court by L.E. Creel III, a holder of an 11 3/8% senior note due
February 2004 seeking principal payment of the note plus interest. Globalstar
filed an answer contesting the petition. On December 6, 2001, the parties
participated in court ordered mediation, which failed to lead to a settlement of
plaintiff's claim. This proceeding is also stayed pursuant the Bankruptcy Code.
On February 28, 2001, plaintiff Eric Eismann filed a purported class action
complaint against GTL in the United States District Court for the Southern
District of New York. The other defendants named in the complaint were Loral and
Bernard Schwartz, the former Chief Executive Officer of Globalstar.
F-48
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Globalstar was not a named defendant in these actions. The complaint alleges
that (a) GTL and Mr. Schwartz violated Section 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder, by making material misstatements or failing
to state material facts about GTL's business and prospects and (b) that Loral
and Mr. Schwartz are secondarily liable for these alleged misstatements and
omissions under Section 20(a) of the Exchange Act as alleged "controlling
persons" of GTL. The class of plaintiffs on whose behalf this lawsuit has been
asserted consists of all buyers of GTL common stock from December 6, 1999,
through October 27, 2000, excluding the defendants, officers and directors of
GTL and certain persons affiliated therewith. Eighteen additional purported
class action complaints were subsequently filed in the United States District
Court for the Southern District of New York. These complaints were granted class
action status and consolidated into a case known as In Re Globalstar Securities
Litigation, 01 Civ. 1748 (SHS). On September 26, 2001, the court appointed The
Phillips Family as Lead Plaintiff for the class. On November 13, 2001, Lead
Plaintiff filed a Consolidated Amended Class Action Complaint and a demand for
jury trial. The amended complaint drops the cause of action against certain
individuals and adds causes of action against Globalstar and its wholly-owned
subsidiary, Globalstar Capital. GTL and Globalstar believe that they have
meritorious defenses to these actions and on or about February 25, 2002, filed a
motion to dismiss the complaint. The case against Globalstar and Globalstar
Capital is stayed pursuant to the Bankruptcy Code. There are, however, no
assurances that the defenses to these actions will be successful.
On December 5, 2002, StarMD, LLC ("StarMD") filed a complaint in the
Pennsylvania Court of Common Pleas, Allegheny County, naming GUSA as the
defendant. The complaint alleges four counts: (1) in equity, seeking a mandatory
injunction requiring GUSA to sell to StarMD "as many telephones as its requests
and to provide service to plaintiff's customers . . . ;" (2) in assumpsit, for
lost profits "and related revenue" from the sale of "an estimated 10,800
telephones," in the amount of $31,104,000; (3) in assumpsit, for recovery of the
value of plaintiff's efforts in developing a marketing campaign, for damages "in
excess of $25,000;" and (4) in trespass, for tortiously interfering with
plaintiff's agreement with Globalstar for the development and co-marketing of an
antenna kit for the Globalstar 1600 telephone. In February 2003, GUSA filed
Preliminary Objections requesting the court to dismiss the complaint on grounds
of (1) lack of personal jurisdiction, (2) improper venue, (3) forum non
conveniens, (4) a prior-existing valid and enforceable agreement to arbitrate
and (5) legal insufficiency. The request for dismissal is before the court
awaiting decision.
Any plan of reorganization would likely involve the cancellation of debt in
exchange for equity. The cancellation of debt will give rise to considerable
taxable income that will be allocable to the partners of Globalstar. Under a
certain interpretation of Section 1446 of the Internal Revenue Code of 1986, as
amended, Globalstar may be obligated to pay a 35% withholding tax on all income
allocated to the foreign partners even if they do not receive a cash
distribution. Globalstar believes the imposition of the withholding tax may have
the effect of diverting its assets from its creditors to its foreign partners in
contravention of bankruptcy law. Globalstar expects to enter into an agreement
with the United States Internal Revenue Service pursuant to which, based upon
certain representations and satisfaction of certain terms and conditions,
Globalstar's total withholding obligation on this taxable income will be
significantly reduced. However, there can be no assurances such an agreement
will be reached.
At the time of their respective acquisitions both GCSC and GUSA were
offering service guarantees to portions of their customer base, under which
certain customers are entitled to cash compensation in the event that Globalstar
services do not remain active and available to them for at least one year after
initial activation. Globalstar has assumed these guarantees since the
acquisition and is continuing them only when necessary for certain accounts. As
of December 31, 2002, Globalstar has maximum contingent obligations with respect
to these service guarantees of approximately $3.1 million, that would come due
in the event that Globalstar services were discontinued in Canada or the United
States. Globalstar believes service will continue, therefore no accrual was
recorded.
F-49
GLOBALSTAR, L.P., A DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 21, 2002, an employee incentive program was approved by the
Bankruptcy Court to recognize and retain key employees. The total value of the
program is $2.9 million of which $0.7 million was paid in July 2002. The balance
of the incentive program will be paid upon the successful reorganization of
Globalstar. Under certain conditions, up to $1.0 million of the remaining
payments may be made in common stock of New Globalstar.
20. SUBSEQUENT EVENTS
On March 14, 2003, Loral, the Creditors' Committee and Globalstar signed a
term sheet outlining to the terms and conditions of a comprehensive settlement
of certain contested matters and a release of the claims against Loral (the
"Loral Settlement"). Also on March 14, 2003, Globalstar and the Creditors'
Committee filed a joint motion under Bankruptcy Rule 9019 for an order approving
the Loral Settlement with the Bankruptcy Court. The parties agreed to use their
reasonable best efforts to execute a definitive agreement based on the term
sheet by March 26, 2003. The Loral Settlement, which will be effected in
connection with Globalstar's restructuring and emergence from bankruptcy,
provides the following, among other items: (1) SS/L would transfer to Globalstar
title "as is" to the eight spare satellites that are currently held in storage
by SS/L; (2) certain strategic agreements under which Loral holds exclusive
rights to provide Globalstar services to defense and national security agencies
and in the aviation market would terminate, and a new joint venture company (to
be owned 75% by Globalstar and 25% by Loral) would be formed to pursue the
defense and national security business; (3) L/Q Licensee, a subsidiary of LQP,
would transfer the Federal Communications Commission license held by it to
Globalstar or LQP would transfer operations of L/Q Licensee to Globalstar; (4)
Loral would convey its interests in the Canadian service provider operations to
Globalstar; (5) certain Loral service provider financial obligations would be
settled through a reduction in debt obligations due from GCC to Loral and other
financial obligations involving a Russian joint venture would be restructured;
(6) Loral's general unsecured claims as a creditor in the Globalstar bankruptcy
proceeding would be quantified and allowed; (7) SS/L would return to Globalstar
unused advance prepayments related to the 2 GHz satellite contract; (8) Loral's
designees would resign from Globalstar's General Partners Committee; and (9)
third party claims against Loral, certain Loral affiliates and all six members
of Globalstar's General Partners' Committee, as provided in the term sheet,
would be released. The motion supporting the Loral Settlement is expected to be
heard by the Bankruptcy Court on April 9, 2003.
On March 25, 2003, Globalstar entered into a settlement and release
agreement with Elsacom S.p.A. ("Elsacom") and a gateway asset purchase agreement
(collectively the "Elsacom Settlement") with a wholly owned subsidiary of
Elsacom. Elsacom is the primary Globalstar service provider in Central and
Eastern Europe, the operator of the gateway located in Avezzano, Italy and,
through its affiliate, Globalstar Northern Europe, the former operator of the
gateway located in Karkkila, Finland. Although Elsacom had defaulted on its
gateway contract obligations to Globalstar, Elsacom desired to continue
providing Globalstar service to its customers from Avezzano. Accordingly,
Globalstar and Elsacom agreed to negotiate a mutually acceptable plan for paying
certain of the debt, transferring the equipment in Finland to Globalstar and
maintaining Elsacom's service provider rights. Under the terms of the Elsacom
Settlement, Globalstar will receive cash payments totaling $2.4 million in two
installments to be completed by June 2003 and the release of all past payment
obligations due to Elsacom in exchange for liquidation of the gateway contract
payments due to Globalstar from Elsacom. Additionally, Globalstar will retain
title to the gateway equipment installed in Finland. Globalstar intends to
dismantle the Finland gateway and to place the removable parts, which contain
most of the gateway's electronics, in storage for future deployment.
F-50
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTIONS OF EXHIBIT
- ------- -----------------------
3.1 Memorandum of Association of Globalstar Telecommunications
Limited(1)
3.2 Bye-Laws of Globalstar Telecommunications Limited, as
amended, and including Schedule III annexed there to
regarding the 8% Series A Convertible Redeemable Preferred
Shares due 2011(10)
3.3 Schedule IV to the Bye-laws of Globalstar Telecommunications
Limited regarding the 9% Series B Convertible Redeemable
Preferred Shares due 2001(11)
4.1 Indenture dated as of February 15, 1997 relating to
Globalstar's and Globalstar Capital Corporation's 11 3/8%
Senior Notes due 2004(2)
4.2 Indenture dated as of June 1, 1997 relating to Globalstar's
and Globalstar Capital Corporation's 11 1/4% Senior Notes
due 2004(3)
4.3 Indenture dated as of October 15, 1997 relating to
Globalstar's and Globalstar Capital Corporation's 10 3/4%
Senior Notes due 2004(4)
4.4 Indenture dated as of May 20, 1998 relating to Globalstar's
and Globalstar Capital Corporation's 11 1/2% Senior Notes
due 2005(5)
4.5 Form of note issued to guarantors of Globalstar's $250
million credit facility(14)
10.1 Amended and Restated Agreement of Limited Partnership of
Globalstar L.P., dated as of January 26, 1999, among
Loral/QUALCOMM Satellite Services, L.P., Globalstar
Telecommunications Limited, AirTouch Satellite Services,
Inc., Dacom Corporation, Dacom International, Inc., Hyundai
Corporation, Hyundai Electronics Industries Co., Ltd.,
Loral/DASA Globalstar, L.P., Loral Space & Communications
Ltd., San Giorgio S.p.A., Telesat Limited, TE. SA. M., and
Vodafone Satellite Services Limited(10)
10.1.2 Amendment dated as of December 8, 1999 to the Amended and
Restated Agreement of Limited Partnership of Globalstar,
L.P.(11)
10.1.3 Amendment dated as of February 1, 2000 to the Amended and
Restated Agreement of Limited Partnership of Globalstar,
L.P.(13)
10.2 Subscription Agreements by and between Globalstar, L.P., and
each of AirTouch Communications, Alcatel Spacecom, Loral
General Partner, Inc., Hyundai/Dacom and Vodastar Limited(1)
10.3 Subscription Agreement by and between Globalstar, L.P. and
Loral/QUALCOMM Satellite Services, L.P.(1)
10.4 Subscription Agreement by and between Globalstar, L.P. and
Finmeccanica S.p.A.(1)
10.5 Subscription Agreement by and between Globalstar, L.P. and
China Telecommunications Broadcast Satellite Corporation(10)
10.6 Form of Service Provider Agreements by and between
Globalstar, L.P. and each of AirTouch Satellite Services,
Inc., Finmeccanica S.p.A., Loral Globalstar, L.P.,
Loral/DASA Globalstar, L.P., Hyundai/Dacom, TE. SA. M., and
Vodastar Limited(1)
10.7 Development Agreement by and between QUALCOMM Incorporated
and Globalstar, L.P.(1)
10.8 Contract between Globalstar, L.P. and Space Systems/Loral,
Inc.(1)
10.9 Contract for the Development of Certain Portions of the
Ground Operations Control Center between Globalstar and
Loral Western Development Laboratories(1)
10.10 Contract for the Development of Satellite Orbital Operations
Centers between Globalstar and Loral Aerosys, a division of
Loral Aerospace Corporation(1)
10.11 1994 Stock Option Plan(6)+
10.12 Amendment to 1994 Stock Option Plan(7)+
10.12.2 Amendment No. 2 to 1994 Stock Option Plan.(13)+
EXHIBIT
NUMBER DESCRIPTIONS OF EXHIBIT
- ------- -----------------------
10.13 Revolving Credit Agreement dated as of December 15, 1995, as
amended on March 25, 1996, among Globalstar, certain banks
parties thereto and Chemical Bank, as Administrative
Agent(2)
10.14 Second Amendment to Revolving Credit Agreement dated July
31, 1997 among Globalstar, certain banks parties thereto and
The Chase Manhattan Bank, as Administrative Agent(4)
10.15 Third Amendment to Revolving Credit Agreement dated as of
October 15, 1997 among Globalstar, certain banks parties
thereto and The Chase Manhattan Bank, as Administrative
Agent(4)
10.16 Fourth Amendment to Revolving Credit Agreement dated as of
November 13, 1998 among Globalstar, certain banks parties
thereto and The Chase Manhattan Bank, as Administrative
Agent(10)
10.17 Exchange and Registration Rights Agreement, dated as of
December 31, 1994, among Globalstar, L.P. and AirTouch
Satellite Services, Inc., Finmeccanica S.p.A., Loral
Globalstar, L.P., Loral/DASA Globalstar, L.P.,
Hyundai/Dacom, TE. SA. M., and Vodastar Limited(1)
10.18 Amendment to the Exchange and Registration Rights Agreement,
dated as of April 8, 1998, among Globalstar, L.P.,
Globalstar Telecommunications Limited and Telesat
Limited(10)
10.19 Warrant Agreement dated as of February 19, 1997 relating to
Warrants to purchase 4,129,000 shares of Common Stock of
Globalstar Telecommunications Limited(2)
10.20 Registration Rights Agreement dated February 19, 1997
relating to Globalstar's 11 3/8% Senior Notes due 2004 and
the Company's Warrants to purchase 4,129,000 shares of
Common Stock issued in connection therewith(2)
10.21 Registration Rights Agreement dated June 13, 1997 relating
to Globalstar's and Globalstar Capital Corporation's 11 1/4%
Senior Notes due 2004(3)
10.22 Registration Rights Agreement dated October 29, 1997
relating to Globalstar's and Globalstar Capital
Corporation's 10 3/4% Senior Notes due 2004(4)
10.23 Registration Rights Agreement dated May 20, 1998 relating to
Globalstar's and Globalstar Capital Corporation's 11 1/2%
Senior Notes due 2005(5)
10.24 Registration Rights Agreement dated as of July 6, 1998
relating to 8,400,000 shares of Common Stock by and among
Globalstar Telecommunications Limited, Loral Space &
Communications Ltd., Quantum Partners LDC, Quasar Strategic
Partners LDC and Quantum Industrial Partners LDC.(8)
10.25 Exchange Agreement dated as of September 28, 1998 relating
to 717,600 shares of Common Stock by and between Loral Space
& Communications Ltd., DACOM Corporation and DACOM
International, Inc.(9)
10.26 Registration Rights Agreement dated as of January 26, 1999
relating to the Company's 8% Convertible Redeemable
Preferred Stock(10)
10.27 Credit Agreement dated August 5, 1999 among Globalstar,
L.P., Bank of America, National Association, as
Administration Agent, Banc of America Securities LLC, as
Sole Lead Arranger and Sole Book Manager, Credit Lyonnais,
New York Branch, as Syndication Agent and Lehman Commercial
Paper Inc., as Documentation Agent(12)
10.28 Registration Rights Agreement dated December 8, 1999
relating to GTL's 9% Series B Preferred Stock due 2011(11)
10.29 Fee Agreement dated as of April 19, 1996 by and among
Globalstar, Globalstar Telecommunications Limited, Loral
Corporation, Loral Space & Communications Ltd., QUALCOMM
Limited Partner, Inc., Space Systems/Loral, Inc. and DASA
Globalstar Limited Partner, Inc.(14)
EXHIBIT
NUMBER DESCRIPTIONS OF EXHIBIT
- ------- -----------------------
10.30 Intercreditor Agreement dated as of April 19, 1996 by and
among Globalstar, Globalstar Telecommunications Limited,
Loral Corporation, Loral Space & Communications Ltd.,
QUALCOMM Limited Partner, Inc., Space Systems/Loral, Inc,
Inc. and DASA Globalstar Limited Partner, Inc.(14)
10.31 Waiver and Amendment dated as of June 30, 2000 to the Credit
Agreement, dated as of August 5, 2000 by and among
Globalstar, Bank of America, National Association, as
administrative agent, and the several banks and other
financial institutions from time to time thereto.(14)
10.32 Forbearance and Waiver Agreement dated as of June 30, 2000
between Globalstar and QUALCOMM Incorporated.(14)
10.33 Purchase Agreement dated as of September 18, 2000 among
Globalstar Telecommunications Limited, Globalstar, L.P. and
Bear Sterns International Limited.(15)
10.34 Subscription Agreement dated September 22, 2000 between
Globalstar Telecommunications Limited and Loral Space &
Communications Ltd.(16)
10.35 Assignment, Amendment and Release Agreement dated as of
November 17, 2000 by and among the lenders parties to the
Globalstar Credit Agreement, Loral Satellite, Inc., Loral
Satcom Ltd., Loral Space & Communications Ltd., Loral Space
& Communications Corporation, Globalstar, L.P. and Bank of
America, National Association.(17)
10.36 Plan Support Agreement Between Loral and Columbia Ventures
Corp., Loeb Partners Corp., Stonehill Capital Management,
LLC and Blue River LLC.(18)
10.37 Memorandum Of Understanding -- Proposed Restructuring
Between Loral and Columbia Ventures Corp., Loeb Partners
Corp., Stonehill Capital Management, LLC and Blue River
LLC.(18)
10.38 Investment Agreement with New Valley Corporation pursuant to
which New Valley would invest $55 million as part of a plan
of reorganization.(19)
10.39 Debtor-in-possession credit agreement with New Valley
Corporation.(19)
10.40 Debtor-in-possession credit agreement with Blue River
Capital LLC, Columbia Ventures Corporation, ICO Investment
Corp, Iridium Investors, LLC and Loeb Partners
Corp.(collectively, the "DIP Lenders"), subject to final
Bankruptcy Court approval, for the DIP lenders to make $10
million available to Globalstar.*
12 Statement Regarding Computation of Ratios*
21 List of Subsidiaries of the Registrant*
23 Consent of Deloitte & Touche LLP*
- ---------------
(1) Incorporated by reference to GTL's Registration Statement on Form S-1 (No.
33-86808).
(2) Incorporated by reference to GTL's and Globalstar's Annual Report on Form
10-K for the Year Ended December 31, 1996.
(3) Incorporated by reference to Globalstar's Registration Statement on Form
S-4 (No. 333-25461).
(4) Incorporated by reference to Globalstar's Registration Statement on Form
S-4 (No. 333-41229).
(5) Incorporated by reference to Globalstar's Registration Statement on Form
S-4 (No. 333-57749).
(6) Incorporated by reference to GTL's Registration Statement on Form S-3 (No.
333-6477).
(7) Incorporated by reference to GTL's and Globalstar's Annual Report on Form
10-K for the Year Ended December 31, 1997.
(8) Incorporated by reference to Schedule 13D filed by Loral Space &
Communications Ltd. on August 3, 1998.
(9) Incorporated by reference to Schedule 13D filed by Loral Space &
Communications Ltd. on February 10, 1999.
(10) Incorporated by reference to GTL's and Globalstar's Annual Report on Form
10-K for the Year Ended December 31, 1998.
(11) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on December 21, 1999.
(12) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on August 6, 1999.
(13) Incorporated by reference to GTL's and Globalstar's Annual Report on Form
10-K for the Year Ended December 31, 1999.
(14) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on July 7, 2000.
(15) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on September 19, 2000.
(16) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on September 25, 2000.
(17) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on November 20, 2000.
(18) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on February 19, 2002.
(19) Incorporated by reference to GTL's and Globalstar's Current Report on Form
8-K filed on January 15, 2003 and February 4, 2003.
* Filed herewith.
+ Management compensation plan.