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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File Number 0-25456
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GLOBALSTAR TELECOMMUNICATIONS LIMITED
Cedar House
41 Cedar Avenue
Hamilton HM12, Bermuda
Telephone: (441) 295-2244
Jurisdiction of incorporation: Bermuda
IRS identification number: 13-3795510
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Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common stock, $1.00 par value....................................... Nasdaq National Market
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The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in the registrant's 1997 definitive proxy statement.
As of February 21, 1997, there were 10,000,000 shares of Globalstar
Telecommunications Limited Common Stock outstanding, and the aggregate market
value of such shares (based on the closing price on the Nasdaq National Market)
held by non-affiliates of the registrant was approximately $522 million.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 definitive proxy statement are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
On November 23, 1994, Globalstar Telecommunications Limited ("GTL" or the
"Company") was incorporated as an exempted company under the Companies Act 1981
of Bermuda. On February 14, 1995, GTL completed an initial public offering of
10,000,000 shares of common stock. Effective February 22, 1995, GTL purchased
10,000,000 ordinary partnership interests from Globalstar, L.P. ("Globalstar"),
a development stage limited partnership. At December 31, 1996, GTL had a 21.3%
ownership interest in the ordinary partnership interests of Globalstar, and its
sole business is acting as a general partner in Globalstar.
Globalstar was founded by Loral Corporation ("Old Loral") and QUALCOMM
Incorporated ("Qualcomm"). Effective April 23, 1996, a merger between Old Loral
and Lockheed Martin Corporation ("Lockheed Martin") was completed. In
conjunction with the merger, Old Loral's space and communications businesses,
including its direct and indirect interests in Globalstar, GTL, Space
Systems/Loral, Inc. ("SS/L") and other affiliated businesses, as well as certain
other assets and liabilities, have been transferred to Loral Space &
Communications Ltd. ("Loral"), a Bermuda company. Globalstar is a Delaware
limited partnership whose managing general partner is 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 and Qualcomm. The managing general partner of LQP is Loral
General Partner, Inc., a Loral subsidiary.
Recent Developments
On February 13, 1997, Globalstar and GTL sold units consisting of $500
million aggregate principal amount of Globalstar's 11 3/8% Senior Notes due 2004
and warrants to purchase 1,032,250 shares of GTL common stock in a private
offering. The net proceeds of approximately $484 million will be used for the
construction and deployment of Globalstar's low-earth orbit satellite-based
digital telecommunications system (the "Globalstar System(TM)").
On February 12, 1997, GTL and the holders of warrants issued to guarantors
of Globalstar's Credit Agreement entered into an arrangement under which GTL
agreed to accelerate the vesting and exercisability of the warrants to purchase
4,185,318 shares of GTL common stock at $26.50 per share and the holders agreed
to exercise such warrants. GTL also agreed to register for resale the GTL common
stock issuable upon exercise of the warrants. In addition, GTL announced its
intention to distribute to the holders of its common stock rights to subscribe
for and purchase 1,131,168 GTL shares for a price of $26.50 per share. Loral
agreed to purchase all shares not purchased upon exercise of the rights. Upon
the exercise of the warrants and the rights, GTL will receive proceeds of
approximately $140.9 million, which it will use to exercise warrants to purchase
5,316,486 Globalstar ordinary partnership interests at $26.50 per interest.
Globalstar will use such proceeds for the construction of the Globalstar System.
BUSINESS SEGMENT
Globalstar plans to operate in one industry segment, telecommunications.
BUSINESS
BUSINESS OVERVIEW
The Globalstar System is designed to enable local service providers to
offer low-cost, high quality wireless voice telephony and data services in
virtually every populated area of the world. To date, Globalstar's designated
service providers have agreed to offer Globalstar service and seek to obtain all
necessary local regulatory approvals in more than 100 different nations,
accounting for approximately 88% of the world's population.
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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
telecommunications 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. The
Globalstar System has been designed to provide services at prices comparable to
today's cellular service and substantially lower than the prices announced by
Globalstar's anticipated satellite-based competitors. Globalstar service
providers will set their own retail pricing in their assigned service
territories and will pay Globalstar approximately $0.35 to $0.55 per minute on a
wholesale basis.
Globalstar users will make and receive calls through a variety of
Globalstar phones, including hand-held and vehicle-mounted units similar to
today's cellular telephones, fixed telephones similar either to phone booths or
ordinary wireline telephones, and data terminals and facsimile machines.
Dual-mode and tri-mode Globalstar Phones will provide access to both the
Globalstar System and the subscriber's land-based cellular service. Each
Globalstar Phone will communicate through one or more satellites to a local
Globalstar service provider's interconnection point (known as a gateway) which
will, in turn, connect into existing telecommunications networks.
As of February 1997, each of the elements of the Globalstar System -- space
and ground segments, digital communications technology, handset supply, service
provider arrangements and licensing -- is on schedule to begin launching
satellites in the second half of 1997, to commence commercial operations in the
second half of 1998 and to have a full constellation of 48 operational
satellites, plus eight in-orbit spares, launched by the end of 1998:
Space Segment. The first Globalstar satellite has been
fully-assembled and is now in pre-flight testing, and another four
satellites are currently being assembled. Production is proceeding on
schedule for the remaining satellites. Three different launch providers
have signed definitive agreements for the launch of the Globalstar
satellite constellation, providing a variety of launch options and
considerable launch flexibility. Mission operations preparations and launch
vehicle production and dispenser development are on schedule.
Ground Segment. The first four Globalstar gateways, which are
currently in advanced development and are to be located in Australia,
France, South Korea and the United States, are currently under
construction. These gateways will support Globalstar's data network,
monitor the initial launch and orbital placement of Globalstar's first
satellites, and serve as prototypes for production gateways that will
support Globalstar service. In addition, Globalstar's Satellite Operations
Control Center ("SOCC") facility has been completed.
Digital Communications Technology. Qualcomm's Code Division Multiple
Access ("CDMA") technology has now been successfully deployed in South
Korea, Hong Kong and cities in the United States supporting terrestrial
personal communications services ("PCS") and digital cellular service, and
its CDMA implementation for Globalstar has been successfully demonstrated
in a simulated satellite environment. This demonstration validated
Globalstar's encoding, modulation, control software, time and frequency
distribution and up/down links between satellites and handsets.
Handset Supply. Qualcomm and two other manufacturers, Ericsson and
TELITAL, are on schedule in their design and development of Globalstar's
handset.
Service Providers. Globalstar and its partners have been seeking
alliances with service providers throughout the world and have entered into
a number of agreements in specific territories. For example, in November
1996, ChinaSat, a subsidiary of China's Ministry of Posts and
Telecommunications, agreed to act as the exclusive distributor of
Globalstar services in China and to support four Globalstar gateways, the
first of which is expected to be operational by 1998. Globalstar has also
formed a joint venture with the principal Russian long distance carrier,
Rostelecom, to provide Globalstar service in that country and is
negotiating a service provider agreement with that joint venture.
Globalstar believes that these relationships with in-country service
providers will facilitate the granting of local regulatory
approvals--particularly where, as is the case in China, the service
provider and the licensing authority are one and the same--as well as
providing local marketing and technical expertise.
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Licensing. In January 1995, the Federal Communications Commission
("FCC") granted authority for the construction, launch and operation of the
Globalstar System and assigned spectrum for its user links. Later that
year, the 1995 World Radiocommunication Conference ("WRC95") allocated
feeder link spectrum on an international basis for mobile satellite
services ("MSS") systems such as Globalstar, and in November 1996 the FCC
authorized Globalstar's feeder links.
Globalstar has raised or received commitments for approximately $2.0
billion in equity, debt and vendor financing, representing 78% of the total
financing currently expected to be required to complete the system and to
achieve worldwide operations. As a result of several recent decisions designed
to assure and upgrade system performance and maintain schedule -- including
procurement of three launches on the Starsem Soyuz launch vehicle, additional
communications system integration testing procedures, development of additional
and enhanced service features, cost growth and other factors -- Globalstar
currently estimates the cost for the design, construction and deployment of the
Globalstar System, including working capital, cash interest on anticipated
borrowings and operating expenses, to be approximately $2.5 billion, as compared
with approximately $2.2 billion estimated at December 31, 1995. In addition,
Globalstar will purchase from SS/L eight additional spare satellites at a cost
of approximately $175 million.
The Globalstar System has been designed to address the substantial and
growing demand for telecommunications services worldwide, particularly in
developing countries. More than three billion people today live without
residential telephone service, many of them in rural areas where the cost of
installing wireline service is prohibitively high. Moreover, even where
telephone infrastructure is available in developing countries, outdated
equipment often leads to unreliable local service and limited international
access. The number of worldwide fixed phone lines has increased from 469 million
in 1988 to 753 million in 1996 and is projected to increase to 1.2 billion by
2002. Nonetheless, during the same period, waiting lists for fixed service have
increased from 30 million to 45 million, resulting in an average waiting time
before installation of approximately one and a half years. Similarly, the
cellular market has grown from four million worldwide subscribers in 1988 to an
estimated 123 million in 1996 and is projected to increase to 334 million by
2001. At that time, it is projected that only 40% of the world's population will
live in areas with cellular coverage. The remaining 60% of the world's
population will have access to wireless telephone service principally through
satellite-based systems like the Globalstar System. Globalstar believes that its
addressable market exceeds 30 million people.
The Globalstar System has been designed with attributes which Globalstar
believes compare favorably to other proposed global MSS systems including: (i)
Globalstar's unique combination of CDMA technology and path diversity through
multiple satellite coverage, which will reduce call interruptions and signal
blockage from obstructions and will use satellite power more efficiently; (ii) a
proven space segment design without complex intersatellite links or on-board
call processing and a ground segment with flexible, low-cost gateways and
competitively priced Globalstar Phones; (iii) lower average wholesale prices
than other proposed MSS systems; and (iv) gateways installed in most major
countries, minimizing tail charges (i.e. amounts charged by carriers other than
the Globalstar service provider for connecting a Globalstar call through its
network), resulting in low costs for domestic and regional calls, which will
account for the vast majority of Globalstar's anticipated usage.
Loral is a principal founder of Globalstar and, through a subsidiary, is
its managing general partner. Following the exercise of the warrants issued to
guarantors of Globalstar's credit agreement, Loral will have invested $269
million directly and indirectly in Globalstar and will own, directly or
indirectly, 33.8% of Globalstar, on a fully diluted basis.
Other Globalstar strategic partners include leading domestic and
international telecommunications service providers and space and
telecommunications equipment manufacturers who have invested an additional $210
million in equity and, together with Loral, committed or obtained $310 million
in vendor financing for Globalstar. In addition, Loral, Lockheed Martin and
certain strategic partners have guaranteed Globalstar's obligations under the
Globalstar credit agreement for which they received warrants to purchase GTL
common stock.
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GLOBALSTAR STRATEGIC PARTNERS
Globalstar has selected strategic partners whose marketing, operating and
technical expertise will enhance Globalstar's capabilities. These partners are
playing key roles in the construction, operation and marketing of the Globalstar
System. Globalstar's founding partners are Loral and Qualcomm, the leading
supplier of CDMA digital telecommunications technology. Globalstar's other
strategic partners are:
TELECOMMUNICATIONS TELECOMMUNICATIONS EQUIPMENT
SERVICE PROVIDERS AND AEROSPACE SYSTEMS MANUFACTURERS
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- AirTouch - Alcatel
- Dacom - Alenia
- France Telecom - DASA
- Vodafone - Finmeccanica
- Hyundai
- SS/L
SS/L is providing the system's satellites under a fixed-price contract that
also requires SS/L to obtain launch services and launch insurance. Qualcomm is
designing and will manufacture Globalstar Phones and gateways and certain ground
support equipment.
BUSINESS STRATEGY
Globalstar's strategy for successful operation is based upon: (i) providing
potential users worldwide with high quality telecommunications services, (ii)
employing a system architecture designed to minimize cost and technological
risks and (iii) leveraging the marketing, operating and technical capabilities
of its strategic partners.
WORLDWIDE HIGH QUALITY SERVICE
To achieve rapid and sustained customer acceptance of the system, the
Globalstar System has been designed to provide a high quality, worldwide service
that combines the best of existing cellular service with the technological
advantages of the Globalstar System as described herein to meet the needs of
individual end users.
Worldwide Coverage and Access. The Globalstar System's worldwide coverage
has been designed to enable its service providers to extend modern
telecommunications services rapidly and economically to significant numbers of
people who currently lack basic telephone services and to enhance wireless
telecommunications in areas underserved or not served by existing or
contemplated cellular systems. Globalstar expects to provide a communications
solution in parts of the world where the build-out of terrestrial systems cannot
be economically justified. The Globalstar System has also been designed to
enable international travelers to make and receive calls at a unique telephone
number through their mobile Globalstar Phone anywhere in the world where
Globalstar service is authorized by local regulatory authorities.
Multiple Satellite Coverage; Soft Handoff. CDMA digital communications
technology combined with continuous multiple satellite coverage and signal path
diversity (a patented SS/L method of signal reception not available to competing
systems) will enable the Globalstar System to provide service to a wide variety
of locations, with less potential for signal blockage from buildings, terrain or
other natural features. Globalstar Phones have been designed to operate with a
single satellite in view, although typically signals from two to four satellites
overhead will be combined to provide service. Therefore, the loss of an
individual satellite is not expected to result in any gap in global coverage.
Each mobile Globalstar Phone has been designed to communicate with as many as
three satellites simultaneously, combining the signals received to ensure
maximum service quality. As satellites are constantly moving in and out of view,
they will be seamlessly added to and removed from the calls in progress, thereby
reducing the risk of call interruption.
Superior Call Quality; Increased Privacy. Based on terrestrial simulations
of the Globalstar System, Globalstar expects that Qualcomm's CDMA digital
technology will enable Globalstar to provide digital voice
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services which will have clarity, quality and privacy similar to those of
existing digital land-based cellular systems. Qualcomm's CDMA technology, which
is available to Globalstar on an exclusive basis for commercial MSS
applications, has also been selected for digital cellular service by 12 of the
15 largest U.S. cellular service providers and the two largest holders of PCS
services in the U.S. (by population served).
Efficient Use of Satellite Resources. The Globalstar System's use of
multiple satellites to communicate with each Globalstar Phone (a patented SS/L
method of signal reception not available to competing systems) has been designed
to allow its communications signals to bypass obstructions. Path diversity is
expected to permit Globalstar to maintain its desired level of service quality
while using less power and satellite resources than would be required in a
system using single path satellites, which attempt to penetrate obstructions by
using higher single satellite power and overall higher link margins.
No Voice Delay. Globalstar satellites' low-earth orbit ("LEO") of 750
nautical miles is expected to result in no perceptible voice delay, as compared
with the noticeable time delay of calls utilizing geosynchronous satellites,
which orbit at an altitude of 22,500 nautical miles. Globalstar believes that
its system will also entail noticeably less voice delay than medium orbit MSS
systems and, in many cases, than LEO systems requiring on-board satellite call
processing to support satellite-to-satellite switching systems.
EMPLOYING A SYSTEM ARCHITECTURE DESIGNED TO MINIMIZE COST AND RISK
Simple, Cost-Effective System Architecture. To achieve low cost, reduce
technological risk and accelerate its deployment, Globalstar has devised a
system architecture using small satellites incorporating well-established design
features, and located the system's call processing and switching operations on
the ground, where they are accessible for maintenance and can benefit from
continuing technological advances. Hand-held and vehicle-mounted Globalstar
Phones are anticipated to be priced comparably and will be similar in function
to current digital cellular telephones. Dual-mode and tri-mode Globalstar Phones
will be able to access both Globalstar and a variety of local land-based analog
and digital cellular services, where available. Multiple manufacturers will be
licensed to manufacture Globalstar Phones in order to promote competition and
reduce prices. Globalstar gateways have been competitively priced in order to
encourage the placement of one or more gateways in each country served, thus
reducing tail charges for the terrestrial portion of each call.
Low-Cost Service. Globalstar intends to offer its service providers
effective average prices substantially lower than those announced by its
anticipated principal competitors. Globalstar's service providers will set their
own retail pricing and will pay to Globalstar wholesale prices generally
expected to range between $0.35 and $0.55 per minute. Another proposed
satellite-based system has proposed retail pricing of more than $3.00 per
minute. As a result of its pricing commitments to its service providers or as a
result of competitive pressures, Globalstar may not be in a position to pass on
to its service providers unexpected increases in the cost of constructing the
Globalstar System. However, Globalstar believes that its low system and
operating costs and high gross margins at target pricing and usage levels
provide it with substantial additional pricing flexibility if necessary to meet
competition.
Simple Space Segment of Proven Design. Globalstar believes its system will
cost less to design and construct and may be the first of the proposed worldwide
systems to provide commercial service. To achieve low cost, reduce technological
risk and accelerate deployment of the Globalstar System, Globalstar's system
architecture uses small satellites incorporating a well-established repeater
design that acts essentially as a simple "bent pipe," relaying signals received
directly to the ground. All of the system's call processing and switching
operations are on the ground, where they are accessible for maintenance and can
benefit from continuing technological advances. The Globalstar space segment is
being manufactured under a fixed-price contract with SS/L. The contract provides
for the construction of 56 satellites meeting designated performance
specifications and for SS/L to obtain launch services and launch insurance.
Flexible, Low-Cost Ground Segment. Globalstar has been designed to offer
local governments and service providers affordable telephone infrastructure
where the cost of build-out of land-based wireline or wireless telephone systems
is either too great or not economically justifiable. By purchasing a single
gateway for approximately $3 million to $8 million (depending on the capacity
desired), a service provider can extend basic telephone service to fixed
terminals on a national basis in countries as large as Saudi Arabia and mobile
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service to cover an area almost as large as Western Europe. As a result of the
low cost of its gateways, Globalstar expects that its service providers will
install gateways in most of the major countries in which they offer service.
Each country with a Globalstar gateway will have access to domestic service
without the imposition of international tail charges on in-country calls,
thereby offering subscribers the lowest possible cost for domestic calls, which
account for the vast majority of all cellular calls today.
Competitively Priced Globalstar Phones. Hand-held and vehicle-mounted
Globalstar Phones are anticipated to be priced comparably and will be similar in
function to current digital cellular telephones. Moreover, mobile Globalstar
Phones will use less power on average than conventional analog cellular
telephones and are therefore expected to enjoy longer battery life. Dual-mode
and tri-mode Globalstar Phones will be able to access both Globalstar and a
variety of local land-based analog and digital cellular services, where
available. Mobile and fixed Globalstar Phones are expected to cost less than
$750 each, and Globalstar public telephone booths are expected to cost between
$1,000 and $2,500, depending upon desired capacity and the number of units
sharing a fixed antenna. Qualcomm is required to license three additional
manufacturers of Globalstar Phones and has recently granted a license to each of
Ericsson and TELITAL for such purpose; Globalstar believes that licensing
multiple manufacturers will spur competition, which will reduce prices. As is
the case with many cellular systems today, service providers may subsidize the
cost of Globalstar Phones to generate additional usage revenue. In addition,
national and local governments may subsidize some or all elements of system
cost, particularly in rural areas, thereby reducing the cost of access to
subscribers.
LEVERAGING THE CAPABILITIES OF GLOBALSTAR'S STRATEGIC PARTNERS
Loral has overall management responsibility for the design, construction,
deployment and operation of the Globalstar System. Globalstar's strategic
partners will play key roles in the design, construction, operation and
marketing of the Globalstar System.
Telecommunications service providers AirTouch, Dacom, France Telecom and
Vodafone are providing in-country marketing and telephony expertise to
Globalstar. Globalstar's strategic partner service providers have been granted
exclusive rights to provide Globalstar service in 71 countries around the world
in which they have particular marketing strength and experience and access to an
established customer base of 60 million subscribers. Six additional service
providers have agreed to offer Globalstar service in 32 additional countries. To
maintain their service provider rights on an exclusive basis, these service
providers and additional service providers are required to make minimum payments
to Globalstar equal to 50% of target revenues. Based upon current targets (which
are subject to adjustment in 1998 based upon an updated market analysis), such
minimum payments total approximately $5 billion through 2005. In order to
accelerate the deployment of gateways around the world prior to the In-Service
Date, Globalstar and the service providers intend to jointly finance the
procurement of 33 gateways for resale to service providers. Globalstar expects
to recover its investment in this gateway financing program from such resales.
There can be no assurance that the service providers will elect to retain their
exclusivity and make such payments or place such orders for Globalstar Phones
and gateways.
Globalstar expects to add additional service providers in order to provide
coverage throughout the world. Each service provider will, subject to obtaining
required local regulatory approvals, market and distribute Globalstar service in
its designated territories and own and operate the gateways necessary to serve
its markets.
Telecommunications equipment and aerospace systems manufacturers SS/L,
Alcatel, Alenia, DASA, Finmeccanica and Hyundai have contracted to design, build
and deploy the Globalstar System. Qualcomm, using its CDMA technology, is
designing and will manufacture Globalstar Phones and gateways and has primary
responsibility, along with Globalstar, for the design and implementation of the
ground operations control centers ("GOCCs"). Qualcomm's CDMA technology is
available to Globalstar on an exclusive basis for commercial MSS satellite
applications. SS/L is performing under a fixed-price contract for the
construction of Globalstar's satellites in conjunction with its alliance
partners, Aerospatiale, Alcatel, DASA and Finmeccanica, and with Hyundai.
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THE GLOBALSTAR SYSTEM
Globalstar intends to offer low-cost, high quality telecommunications
services throughout the world. The Globalstar System will be comprised of its
48-satellite LEO constellation (together with eight in-orbit spare satellites)
and a Ground Segment consisting of two SOCCs and two GOCCs, Globalstar gateways
in each region served, and mobile and fixed Globalstar Phones. Globalstar will
own and operate the satellite constellation, the SOCCs and the GOCCs, as well as
four gateways; the remaining elements of the system will be owned by
Globalstar's service providers and their subscribers. The descriptions of the
Globalstar System are based upon current design and are subject to modification
in light of future technical and regulatory developments.
Globalstar Services and Globalstar Phones. Globalstar's most important
service will be voice telephony service, which Globalstar is expected to offer
through telephone booth-like installations and other fixed telephones located in
areas without any landline or cellular telephone coverage, and through hand-held
and vehicle-mounted Globalstar Phones, similar to existing cellular telephones.
Globalstar is also expected to offer paging, facsimile and messaging services
and position location capabilities, which may be integrated with its voice
services or marketed separately, as well as environmental and asset monitoring
from remote locations and other forms of data transmission.
Voice Services
Based on terrestrial simulations of the Globalstar System, Globalstar
expects that its digital voice services will have clarity, quality and privacy
similar to those of existing digital land-based cellular systems. Moreover, the
system has been designed to minimize call interruptions ("dropped calls")
resulting from movements on the part of the user or the satellites. Globalstar
is expected to offer the full range of voice services provided by modern
land-based telephone networks, including options such as call forwarding,
conferencing, call waiting, call transfer and reverse charging ("collect
calls"). Globalstar's voice services will be digital in nature and therefore
difficult for unauthorized listeners to intercept and decode and, as a result,
will be more secure than those offered by analog systems such as existing
cellular telephones. The Globalstar System will function best when there is an
unobstructed line-of-sight between the user and one or more of the Globalstar
satellites overhead. Competing systems without Globalstar's path diversity
depend on each user maintaining contact with a single satellite. Obstacles such
as buildings, trees or mountainous terrain may degrade service quality, more so
than would be the case with terrestrial cellular systems, and service may not be
available in the core of high-rise buildings.
By planning for volume production and utilizing commercially available
off-the-shelf components where possible, Globalstar expects that its Globalstar
Phones, unlike those of certain other proposed MSS systems, will be priced
comparably to current state-of-the-art digital cellular telephones. Qualcomm has
agreed to design and manufacture a number of versions of Globalstar Phones. It
has granted a license to manufacture Globalstar Phones to each of Ericsson and
TELITAL and has agreed to license at commercially reasonable royalty rates at
least one additional qualified Globalstar Phone manufacturer.
Fixed Globalstar Phones for No-Telephone Areas. The majority of the
world's population does not have access to any of the basic telephone services
that are available to most residents of developed nations. Public installations
of one or more Globalstar Phones, configured as telephone booths and powered by
local generators or solar panels connected to a directional antenna aimed at the
satellites overhead, would be important resources for remote villages currently
lacking basic telephone service. Government officials, among other individuals,
as well as commercial enterprises in remote areas such as mining and logging
operations, are expected to utilize fixed Globalstar Phones which will operate
like landline telephones, but will be connected to directional Globalstar
antennas. Directional antennae also provide for more efficient use of the
system's capacity.
Mobile Globalstar Phones for No-Cellular Areas. In certain regions,
land-based cellular systems cannot be economically justified because of their
population density or geographic characteristics. As a satellite-based system
with worldwide coverage, Globalstar can efficiently offer both hand-held and
vehicle-mounted mobile service in these areas through its single-mode mobile
Globalstar Phones. These units are expected to be
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similar in function and cost to today's full-featured cellular telephones.
Unlike any cellular telephone in existence today, however, these units will have
the ability to operate (both for making and receiving calls) in virtually every
inhabited area of the world where Globalstar service is authorized.
Globalstar mobile terminals will all be equipped with omnidirectional
antennas, similar to cellular telephone antennas, that connect equally well
regardless of the direction in which they are pointed. Each mobile terminal will
communicate with all satellites in view and will have the built-in signal
processing intelligence to constantly seek out and select the strongest signal
transmitted from overhead, combining the signals received to ensure maximum
service quality. Further, Globalstar Phones will automatically vary their power
output as necessary to maintain call quality and connectivity. As a result of
this efficiently-managed power system, mobile Globalstar Phones are expected to
draw less power, on average, than conventional cellular telephones and are
therefore expected to enjoy longer battery life.
Dual-Mode and Tri-Mode Globalstar Phones for Local and Global
Roaming. Current cellular system subscribers who need a mobile telephone that
also works when they travel to areas without compatible cellular coverage (or
that have no cellular coverage at all) will be offered Globalstar service
through dual-mode and tri-mode handsets and vehicle-mounted units. Dual-mode and
tri-mode telephones will also permit the user to access Globalstar service when
cellular access is temporarily blocked by interference, terrain or
over-capacity. Like Globalstar's single-mode mobile telephones, dual-mode and
tri-mode telephones will enable the user to make and receive calls through a
unique access number anywhere in the world where service is authorized.
Dual-mode and tri-mode Globalstar Phones can be programmed by the service
provider to automatically utilize the chosen land-based cellular service
whenever it is available and to otherwise process the call through Globalstar;
they can also be programmed for manual selection between Globalstar and the
land-based cellular system. Dual-mode and tri-mode Globalstar Phones are being
developed for the most widely-based conventional cellular modulation. The
dual-mode pairs are expected to include: Globalstar/CDMA, Globalstar/Advanced
Mobile Phone Systems (AMPS) and Globalstar/Global System for Mobile
Communications (GSM).
Other Services
Messaging and Paging Services. In addition to supporting voice services,
the Globalstar System is also expected to function as a worldwide paging and
alphanumeric messaging service. Hand-held or vehicle-mounted Globalstar Phones
are currently being designed with a built-in paging and messaging feature that
allows the user to receive a page or a short alphanumeric message while the unit
is in a very-low-power "quiet listening only" mode. Separate Globalstar
messaging and paging units may also be developed by Globalstar or by third party
vendors. The Globalstar System can readily support these functions without
taxing system resources since, as compared with voice services, messages and
pages have a relatively low data content and do not require instantaneous,
two-way transmission.
Remote Monitoring. Globalstar data terminals integrated with automatic
sensing equipment of various kinds can provide a continuous stream of valuable
information concerning natural events such as weather conditions, seismic shifts
and forest fires, as well as the condition of remote assets, such as oil and gas
pipelines and electric utility transmission lines.
Facsimile and Other Data Services. The Globalstar System is expected to
support fax traffic, as well as transmissions of digital computer data.
Position Location. Frequent, accurate readings of position location for
large numbers of vehicles is critical information for the efficient management
of fleets of trucks and railcars. Qualcomm's OmniTRACS system, which relays
position location information to a central location and offers messaging
capabilities, is expected to be deployed on the Globalstar System and offered to
Globalstar service providers to address this need.
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SATELLITE CONSTELLATION
Globalstar service will be delivered through a constellation of 48 small,
low-cost LEO satellites orbiting the earth in eight circular inclined planes
with six satellites per plane which will provide a clear communications link
with the Globalstar Phones and gateways below. Each satellite will transmit 16
spot beams, which will generate coverage cells on the surface of the Earth for
links between users and gateways via the satellites. Each satellite's coverage
area will have a typical diameter of 3,600 miles on the Earth's surface,
resulting in an average area covered per satellite of approximately ten million
square miles, an area larger than the area of China or the United States. Each
spot beam will cover an average area of approximately 600,000 square miles, an
area larger than that of any state in the United States or any country in
Western Europe.
Path Diversity from Multiple Satellites. The satellite constellation will
orbit the Earth in a coordinated pattern 750 nautical miles above the surface of
the Earth designed to provide users with continuous overlapping coverage from
multiple satellites with diverse angles of view or "path diversity." The
satellites will provide multiple-satellite global coverage in all areas of the
world except for a small portion of the polar regions. This constellation and
orbital plane design is expected to improve service quality significantly
relative to current analog systems.
LEO satellites are in constant motion overhead, relative to a user on the
Earth's surface, and, as a result, the beam from the satellite transmitting a
call could be blocked at any time by a building or natural obstruction, placing
the user in the beam's shadow and interfering with or interrupting the call.
Similar effects may occur when a mobile user changes position. Globalstar Phones
can operate with a single satellite in view, although typically two to four
satellites will be overhead. This supports the benefits of path diversity for
mobile terminals and also means that, in contrast to medium-earth orbit ("MEO")
systems with fewer satellites and competing LEO systems lacking this feature,
the loss of individual satellites will usually not result in gaps in global
coverage. Globalstar's mobile terminals are designed to communicate with as many
as three satellites simultaneously, combining the signals received to provide
improved call quality and, when another satellite moves into an optimal
position, reliably "handing off" the call to such satellite without
interruption. This combination of path diversity and CDMA is a patented SS/L
technology designed to minimize call fading, resulting in fewer dropped calls
and higher overall call quality.
Low-Cost Satellites. Globalstar has chosen a satellite architecture
designed to offer reliable, high quality service and minimize technological
risks. Globalstar's satellites will incorporate a repeater design which will act
essentially as a "bent pipe," relaying received signals directly to the ground.
This design follows the proven philosophy used in all commercial communications
satellites currently in operation. Globalstar's call processing and switching
operations are on the ground, where they are accessible for maintenance and can
benefit from continuing technological advances. By contrast, competing systems
whose satellites switch calls in space from satellite to satellite require
on-board digital signal processing. Globalstar believes that this design results
in higher system costs and precludes the accessible maintenance and easy upgrade
to reflect technological advances which Globalstar can accomplish on the ground
without a need to launch replacement satellites. Globalstar also believes that
such systems' inherent ability to switch international calls in space, bypassing
local service providers, many of which are state-owned, may limit their
desirability in the eyes of some local regulatory authorities.
In addition to improving Globalstar's service quality, CDMA technology has
enabled Globalstar to reduce satellite costs. Because Globalstar's spectrum
modulation technology uses code division, rather than time division, to identify
and process signals, its transmission timing and orbital pathways need not be so
precisely controlled. Globalstar believes that the novel satellite crosslink and
time division multiple access ("TDMA") duplexing technology proposed by a
competitor requires additional power, transmission, timing and station-keeping
capabilities which Globalstar believes have contributed to that competitor's
higher total system cost.
No Perceptible Voice Delay. Globalstar expects that its combination of a
low-earth orbit and simple repeaters will reduce voice delays over its system to
between 150 and 200 milliseconds, a delay which is not perceptible to the
subscriber in a normal phone conversation. Voice delays are comprised of a
propagation delay, as signals move from the Earth to the satellite and back, and
processing delays on-board the satellite. By
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contrast, geosynchronous satellite communications entail a noticeable voice
delay of approximately 600 milliseconds. Globalstar expects, based on its own
analysis, that MEO systems such as TRW, Inc.'s Odyssey system ("Odyssey") and
Global Communications' ICO system ("ICO") may entail voice delays of between 250
and 300 milliseconds. Although a proposed TDMA system will have an orbit lower
than Globalstar's, thus reducing propagation delay somewhat, Globalstar believes
that in most cases this advantage will be more than offset by the additional
processing delay entailed by the proposed TDMA system's need to decode, recode,
perform echo cancellation and otherwise process signals in space and the need,
in many cases, for satellite-to-satellite linkages, with additional on-board
processing at each step. However, quality differentials may not be of
significant competitive importance in communications markets in developing
countries that currently lack even basic telephone coverage.
Constellation Life. The satellites in the first-generation constellation
are designed to operate at full performance for a minimum of 7 1/2 years, after
which time the cumulative effects of the space environment are expected to
gradually reduce operating performance. The constellation has been designed so
that the loss of a few satellites will, in most cases, not result in gaps in
global coverage. In order to provide additional assurance of system integrity in
the event of premature satellite failure, however, Globalstar plans to launch
eight spare satellites to be relocated in space as required.
Depending on the level of demand for services and the remaining effective
capacity of the first-generation constellation, a second generation of
satellites will be designed, built and launched. Globalstar currently expects to
place a second-generation constellation in service in 2004 and 2005. While the
precise technical capabilities and costs of the second generation of Globalstar
satellites cannot be currently foreseen, the second-generation constellation may
be designed with significantly greater call capacity than the first. In
connection with such an increase in call capacity, Globalstar may be required to
seek additional spectrum allocations from the applicable regulatory authorities.
There is no assurance that such spectrum, if requested, would be obtained.
Implementation and operation of a second-generation system will also require
obtaining U.S. and other regulatory authorizations, and there is no assurance
that these authorizations, if requested, would be obtained.
The Ground Segment
Globalstar's SOCCs will track and control the satellite constellation using
telemetry and command units located in various gateways around the world and
telemetry stations in two locations, at least one of which will be in the United
States. The SOCCs will control satellite orbit positioning, maneuvers and
station keeping, and will monitor satellite health and status in all subsystems.
The SOCCs will also plan and implement satellite lifecycle maintenance
procedures, including orbit adjustment maneuvers.
The GOCCs, which will be in continuous operation 24 hours a day, will be
responsible for planning and controlling satellite utilization by gateway
terminals and coordinating information received from the SOCCs. In addition to
these planning functions, the GOCCs will be responsible for monitoring system
performance, collecting information for billings to service providers and
ensuring that the gateways do not exceed allocated system capacity. The GOCCs
will be responsible for dynamically allocating system capacity among nearby
regions to optimally service changing patterns of demand. The primary SOCC and
primary GOCC will be located at Globalstar's headquarters, with backup
facilities at another location.
The gateway stations are the interconnection points between the Globalstar
satellite constellation and existing land-based telecommunications networks.
Each gateway will contain up to four tracking antennas and radio frequency front
ends that track the satellites orbiting in their view. A typical gateway is
expected to cost between $3 million and $8 million, depending upon the number of
subscribers being serviced by the gateway and assuming that the gateway will be
located at the site of an existing cellular or other appropriate
telecommunications switch. Each nation with at least one gateway within its
borders will have complete control over system access by users within its
territory. A single gateway is expected to be able to provide fixed coverage
over an area larger than Saudi Arabia and mobile coverage over an area almost as
large as Western Europe. As a result of the low cost of its gateways, Globalstar
expects that its service providers will install gateways in most of the major
countries in which they offer service. Each country with a Globalstar gateway
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12
will have access to domestic service without the imposition of international
tail charges, thereby offering subscribers the lowest possible cost for domestic
calls, which account for the vast majority of all cellular calls today. Full
global land-based coverage of virtually all inhabited areas of the globe could
theoretically be achieved with as few as 80 gateways. Globalstar believes,
however, that as many as 100 gateways may be required to minimize land-based
long-distance charges and to respect national boundaries.
Although Globalstar has commissioned the design of the gateways to be used
with the Globalstar System, ownership and operation of the gateways will be the
responsibility of service providers in each country or region in which
Globalstar operations are authorized. The gateway stations will be designed for
Globalstar by Qualcomm and manufacturing rights will be licensed by Qualcomm to
at least one third-party telecommunications equipment manufacturer. Globalstar
will acquire four pre-production gateways from Qualcomm. Further, in order to
accelerate the deployment of gateways around the world prior to the In-Service
Date, Globalstar, Qualcomm and the strategic service providers jointly intend to
finance 33 gateways for resale to service providers.
GLOBALSTAR SYSTEM CAPACITY
The estimated capacity of the Globalstar System is anticipated to be in the
range of approximately 800 million to 1 billion call minutes per month assuming
equal fixed and mobile usage. However, Globalstar's total effective system
capacity will depend on a number of variables. The number of call minutes per
month the system can support will depend primarily on (i) the total bandwidth
available to CDMA MSS systems, (ii) the number of systems sharing that
bandwidth, (iii) the total number of subscribers, (iv) the type of Globalstar
Phones (fixed or mobile) they use and (v) the level of average system
availability required. Capacity will also depend upon a number of other
variables, including (i) the peak hour system utilization pattern, (ii) average
call length and (iii) the distribution of Globalstar Phones in use over the
surface of the Earth.
COMPETITION
Competition in the telecommunications industry is intense, fueled by rapid
and continuous technological advances and alliances between industry
participants on an international scale. Although no present participant is
currently providing the same global personal telecommunications service proposed
by Globalstar, it is anticipated that one or more additional competing MSS
systems will be launched and that the success, or anticipated success, of
Globalstar and its competitors could attract other entrants. If any of
Globalstar's competitors succeed in marketing and deploying its system
substantially earlier than Globalstar, Globalstar's ability to compete in areas
served by such competitor may be adversely affected. A number of satellite-based
telecommunications systems not involved in the MSS proceeding have also been
proposed using geosynchronous satellites and, in one case, the 2 GHz band for a
MEO system.
Globalstar's most direct competitors are the two other MSS applicants which
received FCC licenses, Iridium and Odyssey. ICO was not an applicant or a
licensee in the MSS Proceeding or any other proceedings before the FCC; it is
seeking to operate in a different frequency band not available for use by MSS
systems under current international guidelines in place until 2000. Comsat, the
U.S. signatory to Inmarsat, has applied to the FCC to participate in the
procurement of facilities of the system proposed by ICO. It has also sought FCC
approval of a proposal to extend the scope of services provided by Inmarsat,
currently limited to maritime services, to include telecommunication services to
land-based mobile units. These applications are currently pending before the
FCC. Comsat has been instructed in the past by the U.S. government to seek to
ensure that ICO does not receive preferred access to any market and that
nondiscriminatory access to such areas for all mobile satellite communications
networks be established, subject to spectrum coordination and availability.
Nonetheless, because ICO is affiliated with Inmarsat and because its investors
include the state-owned telecommunications monopolies in a number of countries,
there can be no assurance that ICO might not be given preferential treatment in
the local licensing process in those countries. It is also possible that one or
more of the two pending MSS applicants will demonstrate financial qualifications
sufficient to obtain an FCC license and become a competitor of Globalstar.
Although Iridium has announced plans to launch its first
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satellites within the upcoming months, Globalstar does not believe that Iridium
will be in service substantially earlier than Globalstar's In-Service Date.
Geostationary-based satellite systems, including American Mobile Satellite
Corporation ("AMSC"), Asia Pacific Mobile Telecom ("APMT"), Afro-Asia Satellite
("ASC"), PTAsia Cellular Satellite ("ACeS"), Lockheed Martin's Satphone and
Comsat's Planet-1, plan to provide satellite-based telecommunications services
in areas proposed to be serviced by Globalstar. Certain of these systems are
being proposed by governmental entities. Because some of these systems involve
relatively simple ground control requirements and are expected to deploy no more
than two satellites, they may succeed in deploying and marketing their systems
before Globalstar. In addition, coordination of standards among regional
geostationary systems could enable these systems to provide worldwide service to
their subscriber base, thereby increasing the competition to Globalstar.
It is expected that as land-based telecommunications service expands to
regions currently not served by wireline or cellular services, demand for
Globalstar service in those regions may be reduced. If such systems are
constructed at a more rapid rate than that anticipated by Globalstar, the demand
for Globalstar service may be reduced at rates higher than those assumed by
Globalstar. Globalstar may also face competition in the future from companies
using new technologies and new satellite systems. New technology could render
Globalstar obsolete or less competitive by satisfying consumer demand in
alternative ways, or through the introduction of incompatible telecommunications
standards. A number of these new technologies, even if they are not ultimately
successful, could have an adverse effect on Globalstar as a result of their
initial marketing efforts. Globalstar's business would be adversely affected if
competitors began operations or expanded existing operations in Globalstar's
target markets before completion of its system.
RESEARCH AND DEVELOPMENT
Globalstar has entered into a contract with Qualcomm whereby Qualcomm is
performing certain development tasks related to the Globalstar System. In
addition, Globalstar is performing certain in-house engineering tasks that are
classified as development costs. Total development expenses incurred for the
years ended December 31, 1996 and 1995 and the period from March 23
(commencement of operations) to December 31, 1994 were $42 million, $63 million
and $21 million, respectively.
PATENTS AND PROPRIETARY RIGHTS
In connection with the Globalstar System, Globalstar's design and
development efforts have yielded ten patents issued and 22 patents pending in
the United States, as well as four patents issued and more than 130 patents
pending internationally for various aspects of communication satellite system
design and implementation of CDMA technology relating to the Globalstar System.
Qualcomm has obtained 87 issued patents and 251 patents pending in the United
States applicable to Qualcomm's implementation of CDMA. 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.
There can be no assurance that any of the pending patent applications by
Globalstar will be issued. Moreover, 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 that could result in
issued patents which Globalstar would infringe. In such an event, Globalstar
could be required to redesign its system or satellite, as the case may be, or
pay royalties to obtain a license, which could increase cost or delay
implementation of the system or construction of the satellite, as the case may
be.
EMPLOYEES
As of December 31, 1996, Globalstar had approximately 140 full-time
employees, none of whom is subject to any collective bargaining agreement.
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ITEM 2. PROPERTIES
Globalstar leases approximately 56,000 square feet of office space in San
Jose, California. The lease expires in August 2000, and has options to renew for
up to an additional ten years. In addition, Globalstar leases 12,000 square feet
for its back-up GOCC in El Dorado Hills, California. The lease expires in
November 2006 and has options to renew for up to an additional six years.
Globalstar believes that its facilities are adequate for its current level of
business.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 traded on the Nasdaq National Market ("NNM") under
the symbol "GSTRF". The following table sets forth, for each of the periods
indicated, the high and low sales prices per share of common stock as reported
on the NNM.
MARKET PRICE
-----------------------------
1996 1995
------------ ------------
HIGH LOW HIGH LOW
---- --- ---- ---
Quarter ended:
March 31, (February 14, 1995 to March 31, 1995)........ $65 3/4 $32 $20 1/2 $14 1/4
June 30,............................................... 59 3/4 41 7/8 16 11 1/2
September 30,.......................................... 52 31 24 13 1/8
December 31,........................................... 72 47 1/4 38 1/2 17 3/4
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.
Except for interest payments by GTL on its Convertible Preferred Equivalent
Obligations and distributions by Globalstar on its redeemable preferred
partnership interests, GTL and Globalstar do not currently anticipate paying any
such 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) prior to Globalstar's Full Constellation Date and achievement of
positive cash flow, which is not expected to occur until 1999. GTL is prohibited
from paying dividends on its common stock as long as any interest arrears remain
outstanding on its Convertible Preferred Equivalent Obligations. 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 will
pay GTL's operating expenses related to Globalstar; such expenses are not
expected to be material. To the extent permitted by applicable law and
agreements relating to indebtedness, Globalstar intends to distribute to its
partners, including GTL, its net cash received from operations, less amounts
required to repay outstanding indebtedness, satisfy other liabilities and fund
capital expenditures and contingencies (including funds required for design,
construction and deployment of the second-generation satellite constellation).
The Globalstar Credit Agreement and the indenture related to the $500 million
Senior Notes restrict the ability of Globalstar to pay cash distributions on its
ordinary partnership interests. Cash distributions by Globalstar may also be
restricted by future debt covenants. GTL intends to promptly distribute as
dividends to the holders of its common stock the distributions made to it by
Globalstar, less any amounts required to be retained for the payment of taxes,
for repayment of any liabilities, and to fund contingencies.
(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At February 21, 1997, there were approximately 390 holders of record of
GTL's common stock.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data has been derived from, and should be read in
conjunction with the related financial statements.
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
---------- ----------
STATEMENT OF OPERATIONS DATA:
Equity in net loss of Globalstar, L.P................ $ 15,080 $ 12,632
Net loss............................................. 15,080 12,632
Net loss per share................................... 1.51 1.26
CASH FLOW DATA:
Used in operating activities......................... -- --
Used in investing activities......................... (299,500) (185,750)
Provided by equity transactions...................... -- 185,750
Provided by borrowings............................... 299,500 --
Ratio of Earnings to Fixed Charges..................... 1x N/A
DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ------
BALANCE SHEET DATA:
Investment in Globalstar, L.P........................ $ 482,676 $ 173,118 $ --
Total assets......................................... 482,676 173,118 190
Convertible preferred equivalent obligations......... 300,358 -- --
Shareholders' equity................................. 180,639 173,118 124
Shareholders' equity per share....................... 18.06 17.31 10.33
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GLOBALSTAR, L.P.
(In thousands, except per partnership interest amounts)
YEAR ENDED DECEMBER 31, 1994 CUMULATIVE
---------------------------------
PRE-CAPITAL
SUBSCRIPTION PERIOD(1) MARCH 23 MARCH 23, 1994
--------------------------- (COMMENCEMENT YEARS ENDED DECEMBER (COMMENCEMENT
YEAR ENDED JANUARY 1 TO OF OPERATIONS) TO 31, OF OPERATIONS) TO
DECEMBER 31, MARCH 22, DECEMBER 31, --------------------- DECEMBER 31,
1993 1994 1994 1995 1996 1996
------------ ------------ ----------------- --------- --------- -----------------
STATEMENT OF OPERATIONS DATA:
Revenues........................ -- $ -- $ -- $ -- $ -- $ --
Operating expenses.............. 11.510 6,872 28,027 80,226 61,025 169,278
Interest income................. -- -- 1,783 11,989 6,379 20,151
Net loss applicable to ordinary
partnership interests......... 11,510 6,872 26,244 68,237 71,969 166,450
Net loss per weighted average
ordinary partnership
interest outstanding.......... 0.73 1.50 1.53
Cash distributions per ordinary
partnership interest.......... -- -- --
OTHER DATA:
Deficiency of earnings to cover
fixed charges(2).............. N/A N/A 71,969
CASH FLOW DATA:
Used in operating activities.... -- -- (23,052) (38,368) (46,622) (108,042)
Used in investing activities.... -- -- (50,549) (280,345) (384,264) (715,158)
Provided by partners' capital
transactions.................. -- -- 147,161 318,630 284,714 750,505
Provided by (used in) other
financing activities.......... -- -- -- (1,875) 95,750 93,875
DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 21,180 $ 71,602 $ 73,560
Working capital............................................................ (53,481) 17,687 35,423
Globalstar System under construction....................................... 891,033 400,257 71,996
Total assets............................................................... 942,913 505,391 151,271
Vendor financing liability................................................. 130,694 42,219 --
Borrowings under long-term revolving credit facility....................... 96,077 -- --
Redeemable preferred partnership interests................................. 302,037 -- --
Ordinary partners' capital................................................. 315,186 386,838 112,944
- ---------------
(1) Reflects certain costs incurred by Loral and Qualcomm prior to March 23,
1994, which were reimbursed by Globalstar through a capital subscription
credit or agreement for repayment in connection with the $275.0 million
capital subscription and commencement of Globalstar's operations on March
23, 1994.
(2) The ratio of earnings to fixed charges is not meaningful as Globalstar is in
the development stage and, accordingly, has incurred operating losses.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GTL is a holding company that acts as a general partner of Globalstar and
has no other business. The Company'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. Accordingly, management's
discussion and analysis addresses the financial condition and results of
operations of Globalstar. In its annual and quarterly reports, GTL presents
separate financial statements for GTL and Globalstar.
Except for the historical information contained herein, the matters
discussed in this Management's Discussion and Analysis of Results of Operations
and Financial Condition, and elsewhere in this Form 10-K, are forward-looking
statements that involve risks and uncertainties, many of which may be beyond
Globalstar's control. These may include, but are not limited to, problems
relating to technical development of the system, testing, regulatory compliance,
manufacturing and assembly, the competitive and regulatory environment in which
Globalstar will operate, marketing problems and costs and expenses that may
exceed current estimates. The actual results that Globalstar achieves may differ
materially from any forward-looking projections due to such risks and
uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, cash and cash equivalents decreased to $21.2 million
from $71.6 million at December 31, 1995. The net decrease is primarily a result
of expenditures for the Globalstar System Under Construction of $381.7 million,
the net cash used in operating activities of $46.6 million and distributions on
redeemable preferred partnership interests of $14.8 million, offset by cash
receipts during the year, which consisted of $299.5 million from the sale of
redeemable preferred partnership interests and $96.0 from net borrowings under
the long-term revolving credit facility.
Accounts payable, payables to affiliates and accrued expenses increased by
$20.8 to $75.3 million at December 31, 1996, as compared to the prior year,
reflecting the increased level of activity by Globalstar's contractors and
timing of payments.
Through December 31, 1996, Globalstar incurred costs of approximately $1.0
billion for the design and construction of the space and ground segments. Costs
incurred during fiscal year 1996 were approximately $535 million.
As of February 1997, Globalstar estimates the cost for the design,
construction and deployment of the Globalstar System, including working capital,
cash interest on anticipated borrowings and operating expenses, to be
approximately $2.5 billion, as compared with approximately $2.2 billion
estimated at December 31, 1995. This increase arose primarily from a change in
launch vehicles and additional integration testing procedures to support system
readiness on schedule, scope changes to add features, capabilities and
functions, cost growth and other factors. Actual amounts may vary from this
estimate and additional funds would be required in the event of unforeseen
delays, cost overruns, launch failures, technological risks, adverse regulatory
developments, or to meet unanticipated expenses and for system enhancements and
measures to assure system performance and readiness for the space and ground
segments.
Globalstar and its service provider partners intend to jointly finance the
procurement of 33 gateways for resale to service providers, thereby accelerating
the deployment of gateways around the world prior to the In-Service Date.
Globalstar has agreed to finance approximately $80 million of the cost of these
gateways and expects to recover its cost from the resale of these gateways to
service providers.
In addition, Globalstar has agreed to purchase from SS/L eight additional
spare satellites that will increase Globalstar's ability to have at least 40
satellites in service during 1999, even in the event of launch failures. If the
launch program is successful, the additional satellites will serve as ground
spares, readily available for launch to replenish the constellation as needed to
respond to satellite attrition during the first generation, or to increase
system capacity as required. If Globalstar were to experience a launch failure,
the costs associated with the construction and launch of replacements would be
substantially covered by insurance, and in that event the cost of the additional
satellites used as replacements, currently estimated at $175 million, would be
reimbursed to Globalstar.
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On February 12, 1997, GTL and the holders of the warrants issued in
connection with the Globalstar Credit Agreement, entered into an arrangement
under which GTL agreed to accelerate the vesting and exercisability of the
warrants to purchase 4,185,318 shares of GTL common stock at $26.50 per share
and the holders agreed to exercise such warrants. GTL also agreed to register
for resale the GTL common stock issuable upon exercise of the warrants. In
addition, GTL announced its intention to distribute to the holders of its common
stock rights to subscribe for and purchase 1,131,168 GTL shares for a price of
$26.50 per share. Loral agreed to purchase all GTL shares not purchased upon
exercise of the rights. Upon the exercise of the warrants and the rights, GTL
will receive proceeds of approximately $140.9 million, which it will use to
exercise warrants to purchase 5,316,486 Globalstar ordinary partnership
interests at $26.50 per interest. Globalstar will use such proceeds for the
construction of the Globalstar System.
On February 13, 1997, Globalstar and GTL sold units consisting of $500
million aggregate principal amount of Globalstar's 11 3/8% Senior Notes due 2004
and warrants to purchase 1,032,500 shares of GTL common stock in a private
offering. Net proceeds were approximately $484 million.
As of February 13, 1997, Globalstar had raised or received commitments for
approximately $2.0 billion. Globalstar believes that its current capital, vendor
financing commitments, the availability of the Globalstar Credit Agreement ($154
million available at December 31, 1996) and proceeds from the exercise of the
warrants, issued in connection with the Globalstar Credit Agreement, are
sufficient to fund its requirements into the first quarter 1998. Globalstar
intends to raise the remaining funds required to complete the Globalstar System
from a combination of sources, including debt issuance (which may include an
equity component), financial support from the Globalstar partners, projected
service provider payments, projected net service revenues from initial
operations, anticipated payments from the sale of gateways and Globalstar Phones
and placement of partnership interests with new and existing strategic
investors. Although Globalstar believes it will be able to obtain these
additional funds, there can be no assurance that such funds will be available on
favorable terms or on a timely basis, if at all.
RESULTS OF OPERATIONS
Comparison of Results for the Years Ended December 31, 1996 and 1995
Globalstar is a development stage partnership and has not commenced
commercial operations. For the period March 23, 1994 (commencement of
operations) to December 31, 1996, Globalstar has recorded cumulative net losses
of $166.5 million. The net loss for the year ended December 31, 1996 decreased
to $54.6 million as compared to $68.2 million for the year ended December 31,
1995 due to a decrease in development costs partially offset by a decrease in
interest income. The net loss applicable to ordinary partnership interests was
$72.0 million during the current period reflecting $17.3 million of preferred
distributions on the redeemable preferred partnership interests. Globalstar is
expending significant funds for the design, construction, testing and deployment
of the Globalstar System and expects such losses to continue until commencement
of commercial operations.
Globalstar has earned interest income of $20.2 million on cash balances and
short term investments since commencement of operations. Interest income during
the year ended December 31, 1996 was $6.4 million as compared to $12.0 million
for the year ended December 31, 1995. Interest income for the current period
decreased as a result of lower average cash balances outstanding during 1996.
Operating Expenses. Development costs of $42.2 million for the year ended
December 31, 1996, represent the development of certain technologies under a
cost sharing arrangement in Globalstar's contract with Qualcomm, the development
of Globalstar Phones and Globalstar's continuing in-house engineering. This
compares with $62.9 million of development costs incurred during 1995. The
decline during the current year is primarily the result of the cost sharing
arrangement in Globalstar's contract with Qualcomm reaching its funding limit in
April 1996.
Marketing, general and administrative expenses were $18.9 million for the
year ended December 31, 1996 as compared to $17.4 million incurred during the
year ended December 31, 1995.
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Depreciation. Globalstar intends to capitalize all costs, including
interest as applicable, associated with the design, construction and deployment
of the Globalstar System, except costs associated with the development of the
Globalstar Phones and certain technologies under a cost sharing arrangement with
Qualcomm. Globalstar will not record depreciation expense on the Globalstar
System Under Construction until the commencement of commercial operations, as
assets are placed into service.
Income Taxes. Globalstar was organized as a limited partnership. As such,
no income tax provision (benefit) is included in the accompanying consolidated
financial statements since U.S. income taxes are the responsibility of its
partners. Generally, taxable income (loss), deductions and credits of Globalstar
will be passed through to its partners.
Comparison of Results for the Year Ended December 31, 1995 to the Period March
23, 1994 (commencement of operations) to December 31, 1994
The net loss for the year ended December 31, 1995 increased to $68.2
million from $26.2 million in the period March 23, 1994 (commencement of
operations) to December 31, 1994 (the "Prior Period"), primarily due to
increased operating expenses partially offset by increased interest income.
Interest income for the year ended December 31, 1995 was $12.0 million as
compared to $1.8 million earned during the Prior Period. Interest income
increased significantly from the Prior Period as a result of higher cash
balances invested due to the sale of 10,000,000 partnership interests to GTL for
$185.8 million during the first quarter and the receipt of payments against
capital subscriptions of $133.8 million.
Operating Expenses. Development costs of $62.9 million for the year ended
December 31, 1995, represent the development of certain technologies under a
cost sharing arrangement in Globalstar's contract with Qualcomm, the development
of Globalstar Phones and Globalstar's continuing in-house engineering. This
compares with $21.3 million of development costs incurred during the Prior
Period. The increase as compared to the Prior Period is primarily related to the
technologies being developed under the cost sharing arrangement with Qualcomm.
Marketing, general and administrative expenses were $17.4 million for the
year ended December 31, 1995 as compared to $6.7 million incurred during the
Prior Period. The increase from the Prior Period is a result of both increased
marketing and personnel costs consistent with the higher level of activity at
Globalstar.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report of 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. In addition,
from time to time, Globalstar, GTL or their representatives have made or may
make forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various filings made by
GTL with the Securities and Exchange Commission, press releases or oral
statements made by or with the approval of an authorized executive officer of
GTL or Globalstar. Actual results could differ materially from those projected
or suggested in any forward-looking statements as a result of a wide variety of
factors and conditions, including, but not limited to, the factors summarized
below.
Development Stage Company
Globalstar is a development stage company and has no operating history.
From its inception, Globalstar has incurred net losses and expects such losses
to continue. Globalstar will require expenditures of significant funds for
development, construction, testing and deployment before commercialization of
the Globalstar System. Globalstar does not expect to launch satellites until the
second half of 1997, to commence operations before the second half of 1998 or to
have positive cash flow before 1999. There can be no assurance that Globalstar
will achieve its objectives by the targeted dates.
As of February 1997, Globalstar estimates the cost for the design,
construction and deployment of the Globalstar System, including working capital,
cash interest on anticipated borrowings and operating expenses, to be
approximately $2.5 billion. Actual amounts may vary from this estimate.
Additional funds would be
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required in the event of unforeseen delays, cost overruns, launch failures,
technological risks, adverse regulatory developments, or to meet unanticipated
expenses and for system enhancements and measures to assure system performance
and readiness for the space and ground segments. As of February 13, 1997,
Globalstar had raised or received commitments for approximately $2.0 billion.
Globalstar believes that its current capital, vendor financing commitments, the
availability of the Globalstar credit agreement and the proceeds from the
exercise of the warrants, are sufficient to fund its requirements into the first
quarter of 1998. Globalstar intends to raise the remaining funds required from a
combination of sources including debt issuance (which may include an equity
component), financial support from the Globalstar partners, projected service
provider payments, projected net service revenues from initial operations,
anticipated payments received from the sale of gateways and Globalstar Phones
and placement of partnership interests with new and existing strategic
investors. Although Globalstar believes it will be able to obtain these
additional funds, there can be no assurance that such funds will be available on
favorable terms or on a timely basis, if at all. If there are unforeseen delays,
if technical or regulatory developments result in a need to modify the design of
all or a portion of the Globalstar System, if service provider agreements for
additional territories are not entered into at the times or on the terms
anticipated by Globalstar or if other additional costs are incurred, the risk of
which is substantial, additional capital will be required. The ability of
Globalstar to achieve positive cash flow will depend upon the successful and
timely design, construction and deployment of the Globalstar System, the
successful marketing of its services by service providers and the ability of the
Globalstar System to successfully compete against other satellite-based
telecommunications systems, as to which there can be no assurance. If Globalstar
fails to commence commercial operations in the second half of 1998 or achieve
positive cash flow in 1999, additional capital will be needed.
Globalstar believes it will be able to obtain the additional financing it
requires, but there can be no assurance that the capital required to complete
the Globalstar System will be available from public or private capital markets
or from its existing partners on favorable terms or on a timely basis, if at
all. A substantial shortfall in meeting its capital needs would prevent
completion of the Globalstar System.
Many of the problems, delays and expenses encountered by an enterprise in
Globalstar's stage of development may be beyond Globalstar's control. These may
include, but are not limited to, problems related to technical development of
the system, testing, regulatory compliance, manufacturing and assembly, the
competitive and regulatory environment in which Globalstar will operate,
marketing problems and costs and expenses that may exceed current estimates.
Delay in the timely design, construction, deployment, commercial operation and
achievement of positive cash flow of the Globalstar System could result from a
variety of causes. These include delays in the regulatory process in various
jurisdictions, delay in the integration of the Globalstar System into the
land-based network, changes in the technical specifications of the Globalstar
System made to enhance its features, performance or marketability or in response
to regulatory developments or otherwise, delays encountered in the construction,
integration or testing of the Globalstar System by Globalstar vendors, delayed
or unsuccessful launches, delays in financing, insufficient or ineffective
service provider marketing efforts, slower-than-anticipated consumer acceptance
of Globalstar service and other events beyond Globalstar's control. Substantial
delays in any of the foregoing matters would delay Globalstar's achievement of
profitable operations.
Regulation
The operations of the Globalstar System are and will continue to be subject
to United States and foreign regulation. In order to operate in the United
States and on an international basis, the Globalstar System must be authorized
to provide MSS in each of the markets in which its service providers intend to
operate. Even though a Globalstar affiliate has received a FCC authorization,
there can be no assurance that the further regulatory approvals required for
worldwide operations will be obtained, or that they will be obtained in a timely
manner or in the form necessary to implement Globalstar's proposed operations.
Globalstar's business may also be significantly affected by regulatory changes
resulting from judicial decisions and/or adoption of treaties, legislation or
regulation by the national authorities where the Globalstar System plans to
operate.
Globalstar's FCC license, as modified on November 19, 1996, authorizes the
construction, launch and operation of the satellite constellation and assigns
the system user links and feeder links in the United States.
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Globalstar's feeder link frequencies were allocated internationally at WRC95,
and have been assigned by the FCC for use in the United States in accordance
with the international allocation. However, use of the feeder link frequencies
remains subject to restrictions that may be adopted in a potential FCC
proceeding to adopt the international allocations into the U.S. Table of
Frequency Allocations. The FCC recently adopted rules for the use of a portion
of the frequencies allocated at WRC95 for MSS feeder links (such as
Globalstar's) to a proposed high-speed wireless data service. Although these
rules are intended to preclude harmful interference with other uses of these
bands, they may ultimately permit uses of these frequencies that could diminish
their usefulness for MSS feeder links. Separate licenses must also be obtained
from the FCC for operation of gateways and Globalstar Phones in the United
States.
To the extent that additional MSS systems are authorized by the FCC or
other national regulatory bodies to use the spectrum for which Globalstar has
been authorized, the Globalstar System's capacity would be reduced. In addition,
Globalstar's FCC license is subject to two pending judicial appeals. While
Globalstar believes that these appeals are without merit, there can be no
assurance that these appeals would not result in either reversal or stay of the
FCC's decision to grant Globalstar's FCC license to LQP or ultimately result in
the granting of additional licenses by the FCC or its adoption of an auction
procedure to award licenses, which might materially increase the cost of
obtaining such licenses.
Authorization will be required in each country in which Globalstar Phones
are used and in which Globalstar's gateways are located. Local regulatory
approval for operation of the Globalstar System is the responsibility of the
service providers in each territory. Although many countries have moved to
privatize the provision of telecommunications service and to permit competition
in the provision of such service, some countries continue to require that all
telecommunications service be provided by a government-owned entity. While
service providers have been selected, in part, based upon their perceived
qualifications to obtain the requisite local approvals, there can be no
assurance that they will be successful in doing so, and if they are not
successful, Globalstar service will not be available in such territories. In
that event, depending upon geographical and market considerations, Globalstar
may or may not have the ability to redirect the system capacity that such
territories would have otherwise used to serve markets in which service is
authorized.
Regulatory schemes in countries in which Globalstar or its service
providers seek to operate may impose impediments on Globalstar's operations.
There can be no assurance that such restrictions would not be unduly burdensome.
Glonass, the Russian Global Navigation Satellite System, operates worldwide
in a portion of the frequency band proposed to be used by Globalstar and other
MSS systems for user uplinks. Although Glonass has proposed to migrate to lower
frequencies, interference protection requirements for Glonass receivers are
under consideration, which, if adopted, may render a segment of the MSS spectrum
unusable for MSS user uplinks. While this is not expected to have an adverse
effect on Globalstar's capacity in the United States, a decision to protect
Glonass on the part of regulatory authorities in nations making extensive use of
Globalstar fixed services, could reduce Globalstar's effective system capacity
in such markets.
European Union competition law proscribes agreements that restrict or
distort competition in the European Union. Globalstar and others have responded
to an inquiry from the Commission of the European Union requesting information
regarding their activities. A violation of European Union competition law could
subject Globalstar to fines or enforcement actions that could delay service in
western Europe, and/or depending on the circumstances, adversely affect
Globalstar's contractual rights vis-a-vis its European strategic partners. In
addition, the Commission has proposed legislation which, if adopted, would give
the Commission broad regulatory authority over satellite telecommunications
systems such as the Globalstar System.
Technological Factors
The Globalstar System is exposed to the risks inherent in a large-scale
complex telecommunications system employing advanced technologies which must be
adapted to the Globalstar application and which have never been used as a
commercial whole. Deployment of the Globalstar satellite constellation will
involve volume production and testing of satellites in quantities significantly
higher than those previously prevailing in
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the industry. The integration of a worldwide LEO satellite-based system like
Globalstar has never occurred; there is no assurance that such integration will
be successfully implemented. The operation of the Globalstar System will require
the detailed design and integration of advanced digital communications
technologies in devices from personal handsets and public telephone networks to
gateways in remote regions of the globe and satellites operating in space. The
failure to develop, produce and implement the system, or any of its diverse and
dispersed elements, as required, could delay the In-Service or Full
Constellation Date of the Globalstar System or render it unable to perform at
levels required for commercial success.
Satellite launches are subject to significant risks, including disabling
damage to or loss of the satellites. Historically, launch failure ("hot
failure") rates on low-earth orbit and geostationary satellite launches have
been approximately 10%. However, launch failure rates may vary depending on the
particular launch vehicle. The McDonnell-Douglas Delta launch vehicle, scheduled
to launch the first eight satellites (four per launch) of the Globalstar
satellite constellation, suffered a launch failure on January 17, 1997. The
United States government is currently investigating the cause of this launch
failure, the second in this rocket's last 62 launches. Globalstar's first
launch, which is currently scheduled for September 1997 aboard a Delta II
rocket, could be delayed by this investigation. Nevertheless, Globalstar does
not expect that such delay, if any, in the initial launch date would result in a
delay in the In-Service Date or the Full Constellation Date. The Ukrainian Zenit
launch vehicle, which is proposed to launch 36 Globalstar satellites (12 per
launch), has never been used in commercial applications. Satellite launches of
groups of more than eight commercial satellites have not been attempted before.
Globalstar intends to launch the last 12 satellites of its constellation in
groups of four on three separate launches of the Russian Starsem Soyuz rocket.
There is no assurance that Globalstar satellite launches will be successful or
that its launch failure rate will not exceed the industry average.
Globalstar's Zenit launch contracts provide for relaunches at no additional
charge in the event of a hot failure. However, the launch provider may, because
of financial reasons or otherwise, be unable to provide such relaunches. A
single launch failure would result in a loss of either four or 12 Globalstar
satellites. Although the cost of replacing such satellites and launch vehicles
will in most cases be covered by insurance, a launch failure could result in
delays in the In-Service or the Full Constellation Date.
SS/L has agreed to obtain launch vehicles for Globalstar and arrange for
the launch of all 56 satellites, subject to pricing adjustments in light of
future market conditions, which may, in turn, be influenced by international
political developments. An adverse change in launch vehicle market conditions
which prohibits Globalstar from utilizing the launch vehicles for which it has
contracted could result in an increase in the launch cost payable by Globalstar,
which may be substantial. In addition, there can be no assurance that
replacement launch vehicles will be available in the future at a cost or on
terms acceptable to Globalstar.
Two of Globalstar's launch operators are subject to U.S. export control
regulations. Yuzhnoye, based in Ukraine, has certain ties with Russia and
intends to launch the Zenit rocket from the Baikonur launch site in Kazakhstan.
Arianespace, which will be providing the Soyuz rockets, also intends to launch
from Baikonur. Changes in governmental policies or political leadership in the
United States, Ukraine, Russia or Kazakhstan could affect the cost,
availability, timing or overall advisability of utilizing these launch
providers. While there is no assurance that the necessary export licenses will
be obtained, Globalstar has provided against the risk that such licenses will
not be granted or that the deterioration in the relationships between the United
States and these countries may make the use of such launch providers inadvisable
by procuring options on sufficient launches with a U.S.-based launch provider to
launch all the remaining satellites of the Globalstar constellation. If
Globalstar were to exercise these options for U.S. launches in the wake of the
failure to obtain any necessary export licenses or as a result of adverse
developments in U.S. relations with these countries, the cost of launching the
Globalstar satellite constellation would be significantly increased.
A number of factors will affect the useful lives of Globalstar's
satellites, including the quality of construction, expected gradual
environmental degradation of solar panels and the durability of component parts.
Random failure of satellite components could result in damage to or loss of a
satellite ("cold failures"). In rare cases, satellites could also be damaged or
destroyed by electrostatic storms or collisions with other objects. As a result
of these factors, the first-generation satellite constellation (including
spares) is designed to
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operate at full performance for a minimum of 7 1/2 years, after which
performance is expected to gradually decline. However, there can be no assurance
of the constellation's specific longevity. Globalstar's operating results would
be adversely affected in the event the useful life of the satellites were
significantly shorter than 7 1/2 years. Globalstar anticipates using funds
generated from operations to develop a second generation of satellites. If
sufficient funds from operations are not available and Globalstar is unable to
obtain external financing for the second-generation constellation, Globalstar
will not be able to deploy a second-generation satellite constellation to
replace first-generation satellites at the end of their useful lives. In that
event, the Globalstar System would cease operations at that time.
Globalstar intends to obtain insurance against launch failure which would
cover the cost of relaunch and the replacement cost of lost satellites in the
event of hot failures for 56 satellites in its constellation. SS/L has agreed to
obtain on Globalstar's behalf insurance for the cost of replacing satellites
lost in hot failures, and for any relaunch costs not covered by the applicable
launch contract, in certain circumstances subject to pricing adjustments in
light of future market conditions. An adverse change in insurance market
conditions may result in an increase in the insurance premium paid by
Globalstar, which may be substantial. In addition, there is no assurance that
launch insurance will be available or that, if available, would be at a cost or
on terms acceptable to Globalstar.
Globalstar may self-insure for hot failures for up to 12 such satellites.
Globalstar's contract with SS/L provides for the construction and launch of
eight spare satellites to minimize the effect of any launch or orbital failures.
However, there can be no assurance that additional satellites and launches will
not be required. In such an event, in addition to the replacement costs incurred
by Globalstar, Globalstar's In-Service or Full Constellation Date may be
delayed. In addition, unless otherwise required, Globalstar does not currently
intend to purchase insurance to cover cold failures that may occur once the
satellites have been successfully deployed from the launch vehicle.
The space and communications industries are characterized by rapid
technological advances and innovations. There is no assurance that one or more
of the technologies utilized or under development by Globalstar may not become
obsolete, or that its services will be in demand by the time they are offered.
Globalstar will be dependent upon technologies developed by third parties to
implement key aspects of its strategy to integrate its satellite systems with
terrestrial networks, and there can be no assurance that such technologies will
be available to Globalstar on a timely basis or on reasonable terms.
Future Operating Factors
The availability of Globalstar service in each region or country will
depend upon the cooperation, operational and marketing efficiency,
competitiveness, finances and regulatory status of Globalstar's service provider
in that region or country. The willingness of companies to become service
providers will depend upon a variety of factors, including pricing, local
regulations and Globalstar's competitiveness with other satellite-based
telecommunications systems. Globalstar believes that enlisting the support of
established telecommunications service providers, some of which are the dominant
carriers in their markets, will be essential both to obtaining necessary local
regulatory approvals and to rapidly accessing a broad market of potential users.
Globalstar's strategic service providers have agreed to act as exclusive service
providers in 71 countries although it is anticipated that in many cases these
partners will enter into strategic alliances with local service providers to
provide Globalstar service in these countries. In addition, Globalstar expects
to raise additional funds prior to the Full Constellation Date in the form of
service provider payments from prospective service providers in other
territories throughout the world. Globalstar's business plan assumes that
Globalstar will contract with service providers to provide service in the
remaining territories of the world, in certain cases, on terms more favorable to
Globalstar than those contained in its founding service provider agreements.
There can be no assurance that additional service provider agreements will be
entered into in the future or that this plan will be achieved. If such service
provider payments are not realized, Globalstar will be required to obtain other
sources of financing in order to complete the Globalstar System.
If the service providers fail to obtain the necessary local regulatory
approval or to adequately market and distribute Globalstar's services,
Globalstar's business could be adversely affected. There can be no assurance
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that enough service providers will contract for Globalstar service and procure
and install the gateways and obtain the regulatory licenses necessary for
complete global service. Failure to offer service in any particular region will
eliminate that area's market potential and reduce Globalstar's ability to
service its global roamer market.
Certain strategic partners and other third parties are designing and
constructing the component parts of the Globalstar System. In the event such
parties are unable to perform their obligations, Globalstar's In-Service and
Full Constellation Date may be delayed and its costs may be increased.
Globalstar expects that a substantial portion of its business will be
conducted outside of the United States. Such operations are subject to certain
risks such as changes in domestic and foreign government regulations and
telecommunications standards, tariffs or taxes and other trade barriers.
Accordingly, government actions in foreign countries could have a significant
effect on Globalstar's operations. Political, economic or social instability or
other developments in such countries, including currency fluctuations, could
also adversely affect Globalstar's operations. In addition, Globalstar's
agreements relating to local operations may be governed by foreign law or
enforceable only in foreign jurisdictions. As a result, in the event of a
dispute, it may be difficult for Globalstar to enforce its rights under such
agreements.
Globalstar's largest potential markets are in developing countries or
regions that are substantially underserved and not expected to be served by
existing telecommunications systems. In doing business in such markets,
Globalstar and its local service providers may face market, inflation, interest
rate and currency fluctuation, government policy, price and wage, exchange
control, taxation and social instability, expropriation and other economic,
political or diplomatic conditions that are significantly more volatile than
those commonly experienced in the United States and other industrialized
countries. Although Globalstar anticipates that it will receive payments from
its service providers in U.S. dollars, limited availability of U.S. currency in
these local markets may prevent a service provider from making payments in U.S.
dollars. Moreover, exchange rate fluctuations may affect the price Globalstar
will be entitled to receive for its services.
Globalstar's pricing to service providers will, under certain
circumstances, not be automatically adjusted for inflation; in such cases,
Globalstar will be able to increase its pricing to service providers only if the
service provider increases its prices to subscribers, and it may be required to
lower its pricing if the service provider lowers its prices to subscribers. In
recent years, pricing in the telecommunications industry has trended downward,
in some cases making it difficult for service providers to raise their prices to
compensate for cost inflation. Although Globalstar expects future service
provider agreements to contain pricing terms more favorable to Globalstar than
those contained in its agreements with founding service providers, there can be
no assurance that such terms will be achieved.
Globalstar has entered into an agreement with a bank syndicate for a $250
million credit facility expiring December 15, 2000, and also expects to utilize
$310 million of committed vendor financing. The Globalstar credit agreement
permits Globalstar to incur up to $950 million of indebtedness on a senior
basis, including $500 million aggregate principal amount of Globalstar's 11 3/8%
Senior Notes, to finance the build-out of the Globalstar System; an unlimited
amount of indebtedness may be incurred by Globalstar on a subordinated basis.
Significant additional debt is expected to be incurred in the future. As a
result, Globalstar is expected to become highly leveraged. Globalstar will be
dependent on its cash flow from operations to service this debt. Any delay in
the commencement of Globalstar operations will adversely affect Globalstar's
ability to service its debt obligations. The discretion of Globalstar's
management with respect to certain business matters will be limited by covenants
contained in the Globalstar credit agreement, and future debt instruments. Among
other things, the covenants contained in the Globalstar credit agreement
restrict, condition or prohibit Globalstar from paying cash distributions on its
ordinary partnership interests, creating liens on its assets, making certain
asset dispositions, conducting certain other business and entering into
transactions with affiliates and related persons. In the event the Globalstar
credit agreement ceases to be guaranteed, it will also contain certain financial
covenants limiting the ability of Globalstar to incur additional indebtedness.
There can be no assurance that Globalstar's leverage and such restrictions will
not materially and adversely affect Globalstar's ability to finance its future
operations or capital needs or to engage in other business activities. Moreover,
a failure to comply with the obligations contained in the Globalstar credit
agreement and or any agreements
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with respect to additional financing could result in an event of default under
such agreements, which could permit acceleration of the related debt and
acceleration of debt under future debt agreements that may contain
cross-acceleration or cross-default provisions.
Competition in the telecommunications industry is intense, fueled by rapid
and continuous technological advances and alliances between industry
participants on an international scale. Although no present participant is
currently providing the same global personal telecommunications service proposed
by Globalstar, it is anticipated that one or more additional competing MSS
systems will be launched and that the success, or anticipated success, of
Globalstar and its competitors could attract other entrants. If any of
Globalstar's competitors succeeds in marketing and deploying its system
substantially earlier than Globalstar, Globalstar's ability to compete in areas
served by such competitor may be adversely affected. A number of satellite-based
telecommunications systems not involved in the MSS Proceeding have also been
proposed using geostationary satellites and, in one case, the 2 GHz band for an
MEO system.
Globalstar's most direct competitors are the two other MSS applicants which
received FCC licenses, Iridium and Odyssey. ICO was not an applicant or a
licensee in the MSS Proceeding or any other proceedings before the FCC; it is
seeking to operate in a different frequency band not available for use by MSS
systems under current international guidelines in place until 2000. Comsat, the
U.S. signatory to Inmarsat, has applied to the FCC to participate in the
procurement of facilities of the system proposed by ICO. It has also sought FCC
approval of a proposal to extend the scope of services provided by Inmarsat,
currently limited to maritime services, to include telecommunications services
to land-based mobile units. These applications are currently pending before the
FCC. Comsat has been instructed in the past by the U.S. government to seek to
ensure that ICO does not receive preferred access to any market and that
non-discriminatory access to such areas for all mobile satellite communications
networks be established, subject to spectrum coordination and availability.
Nonetheless, because ICO is affiliated with Inmarsat and because its investors
include state-owned telecommunications monopolies in a number of countries,
there can be no assurance that ICO might not be given preferential treatment in
the local licensing process in those countries. It is also possible that one or
more of the two pending MSS applicants will demonstrate financial qualification
sufficient to obtain an FCC license and become a competitor of Globalstar.
In addition to competing for investment capital, subscribers and service
providers in markets all over the world, the MSS systems, including Globalstar,
also compete with each other for the limited spectrum available for MSS
operations. Unlike CDMA systems such as Globalstar and Odyssey, which permit
multiple systems to operate within the same band, the design of Iridium's TDMA
system requires a separate frequency segment dedicated specifically for its use.
If more than two CDMA systems become operational, CDMA systems like Globalstar
will effectively have a smaller spectrum segment within which to operate their
user uplinks in the U.S. While CDMA does permit spectrum sharing among competing
systems, the capacity of the systems operating within that spectrum will
decrease as the number of systems operating in the band increases. For example,
Globalstar's capacity over a given area would decrease by approximately 25% if
the total number of licensed MSS systems increased from three to four, assuming
that Iridium is one of the licensed systems and the two other CDMA systems
receiving licenses have technical characteristics similar to Globalstar's and
experience the same level of usage.
The FCC has no authorization to extend the U.S. band plan for CDMA and TDMA
Big LEO systems to other countries. However, it has stated that it plans to
express the view in discussions with other administrations that global satellite
systems are more likely to succeed if individual administrations adopt
complementary systems for licensing them.
Geostationary-based satellite systems, including AMSC, APMT, ASC, ACeS,
Lockheed Martin's Satphone and Comsat's Planet-1, plan to provide
satellite-based telecommunications services in areas proposed to be serviced by
Globalstar. Because some of these systems involve relatively simple ground
control requirements and are expected to deploy no more than two satellites,
they may succeed in deploying and marketing their systems before Globalstar. In
addition, coordination of standards among regional geostationary systems could
enable these systems to provide worldwide service to their subscriber bases,
thereby increasing the competition to Globalstar. For example, Comsat has
announced a global mobile satellite service
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(Planet-1) using existing Inmarsat satellites, a six-pound, laptop-size phone,
costing $3,000 with an expected per-minute usage rate of $3.00.
Some of these potential competitors have financial, personnel and other
resources substantially greater than those of Globalstar. Many of these
competitors are raising capital and may compete with Globalstar for service
providers and financing. Technological advances and a continuing trend toward
strategic alliances in the telecommunications industry could give rise to
significant new competitors. There can be no assurance that some of these
competitors will not provide a more efficient or less expensive service.
However, Globalstar believes that based upon the public statements and other
publicly available information of the other MSS applicants, Globalstar will be a
low-cost provider. Depending on the competitive environment, however, pricing
competition could require Globalstar to reduce its anticipated pricing to
service providers, thus adversely affecting its financial performance.
Satellite-based telecommunications systems are characterized by high
up-front costs and relatively low marginal costs of providing service. Several
systems are being proposed and, while the proponents of these systems foresee
substantial demand for the services they will provide, the actual level of
demand will not become known until such systems are constructed, launched and
operational. If the capacity of Globalstar and any competing systems exceeds
demand, price competition could be particularly intense.
Teledesic, Spaceway and Cyberstar have each applied to the FCC for licenses
to operate satellite-based telecommunications and video transmission systems in
the 28 GHz Ka-band. Certain MSS applicants, not including Globalstar, have
applied to use this band for their feeder uplinks, as have proponents of
land-based local multipoint distribution system ("LMDS") for cellular television
services. The FCC is in the process of developing a band-width allocation plan
for use of the available Ka-band spectrum by these services. Globalstar's
primary business will be voice telephony, and its data transmission business
will be focused on small data packet services such as paging and messaging. It
therefore does not regard the television or broadband data services to fixed
terminals proposed by Teledesic, Spaceway and Cyberstar or the wireless cable
and fixed telephony services proposed by the LMDS applicants as competing
services.
It is expected that as land-based telecommunications services expand to
regions currently underserved or not served by wireline or cellular services,
demand for Globalstar service in those regions may be reduced. If such systems
are constructed at a more rapid rate than that anticipated by Globalstar, the
demand for Globalstar service may be reduced at rates higher than those assumed
in Globalstar's market analysis. Globalstar may also face competition in the
future from companies using new technologies and new satellite systems. New
technology could render Globalstar obsolete or less competitive by satisfying
consumer demand in alternative ways or through the introduction of incompatible
telecommunications standards. A number of these new technologies, even if they
are not ultimately successful, could have an adverse effect on Globalstar as a
result of their initial marketing efforts. Globalstar's business would be
adversely affected if competitors begin operations or existing or new
telecommunications service providers penetrate Globalstar's target markets
before completion of the Globalstar System.
Subscriber acceptance of the Globalstar System (both in terms of placement
of Globalstar Phones and subscriber usage thereof) will depend upon a number of
factors, including price, demand for service and the extent of availability of
alternative telecommunications systems. If the level of actual subscriber demand
and usage for Globalstar service is below that expected by Globalstar,
Globalstar's cash flow will be adversely affected. Globalstar's hand-held phone
is expected to be larger and heavier for the same talk time than today's smaller
and lighter pocket-sized, hand-held cellular telephones and is expected to have
a significantly longer and thicker antenna than hand-held cellular telephones.
The Globalstar System will function best when there is an unobstructed
line-of-sight between the user and one or more of the Globalstar satellites.
Obstacles such as buildings, trees or mountainous terrain may degrade service
quality, more so than would be the case with terrestrial cellular systems, and
service may not be available in the core of high-rise buildings. There is no
assurance that these characteristics of the hand-held Globalstar Phone will not
adversely affect subscriber demand for Globalstar service.
There has been adverse publicity concerning alleged health risks associated
with the use of portable hand-held telephones with transmitting antennas
integrated into handsets. On August 1, 1996, the FCC announced
25
27
new guidelines for evaluating environmental radio frequency radiation from
FCC-regulated transmitters based primarily on the exposure criteria recommended
in 1986 by the National Council on Radiation Protection Measurements ("NCRP").
Guidelines applicable to certain portable transmitting devices are based on the
NCRP criteria and the exposure criteria developed by the Institute of Electrical
and Electronic Engineers and recommended in 1992 by the American National
Standards Institute. These guidelines were to become effective as to
applications filed after January 1, 1997; the FCC, however, has deferred the
effective date until September 1, 1997. The handsets Globalstar has contracted
with Qualcomm to develop for use by mobile subscribers will have antennas for
communication with the satellites and, in the case of the dual-mode and tri-mode
hand-held Globalstar Phones, with the land-based cellular system. Because
hand-held Globalstar Phones will use on average lower power to transmit signals
than traditional cellular units, Globalstar does not believe that the proposed
new guidelines will require any significant modifications of the Globalstar
System or of the mobile hand-held Globalstar Phones designed to be used with the
Globalstar System. There can, however, be no assurance that the guidelines, as
adopted, or any associated health concerns, would not have an adverse effect on
Globalstar's mobile handset business.
The success of Globalstar's business will be partially dependent upon the
ability of Globalstar to attract and retain highly qualified technical and
management personnel. None of the employees of Globalstar has an employment
contract with Globalstar nor does Globalstar expect to maintain "key man"
insurance with respect to any such individuals. The loss of any of these
individuals and the subsequent effect on business relationships could have a
material adverse effect on Globalstar's business.
Other Factors
Partners of LQSS, the managing general partner of Globalstar, or their
affiliates are principal suppliers to Globalstar of the major components of the
Globalstar System, and are also expected to engage in the manufacture of system
elements to be sold to service providers and subscribers. During the design,
development and deployment of the Globalstar System, Globalstar will be
substantially dependent upon the management skills of Loral and certain
technologies developed by Loral, Qualcomm and SS/L to design and manufacture the
Globalstar satellite constellation, SOCCs, GOCCs, gateways and Globalstar
Phones. Globalstar has entered into contracts for the design of various segments
of the Globalstar System with affiliates of LQSS, including a fixed-price
satellite production contract with SS/L and a cost-plus-fee contract with
Qualcomm to design the gateways, GOCCs and Globalstar Phones. To the extent that
such contracts have been or will be awarded to partners of Globalstar or LQSS or
their affiliates, such parties will have a conflict of interest with respect to
the terms thereof.
Partners and affiliates of Globalstar, including companies affiliated with
or controlled by Loral, will be among Globalstar's principal service provider
customers and may therefore have conflicts of interest with respect to the terms
of Globalstar's service provider agreements and any proposed amendments thereto.
In addition, if Globalstar is unable to offer Globalstar service to a service
provider on competitive terms in a particular country or region, such a service
provider, which may be a partner of Globalstar, can act as a service provider to
a competing MSS system in such region or country while at the same time serving
as a Globalstar service provider in other markets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information required for this item is set forth in the Company's 1997
definitive proxy statement which is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- ------------------------------------- --- ----------------------------------------------------
Bernard L. Schwartz.................. 71 Chairman and Chief Executive Officer of GTL; Chief
Executive Officer and Chairman of the General
Partners' Committee of Globalstar
Michael B. Targoff................... 52 President, Chief Operating Officer and Director of
GTL; Chief Operating Officer of Globalstar
Michael P. DeBlasio.................. 60 Senior Vice President, Chief Financial Officer and
Director of GTL; Senior Vice President of Globalstar
Nicholas C. Moren.................... 50 Vice President and Treasurer of GTL; Vice President
and Treasurer of Globalstar
Eric J. Zahler....................... 46 Vice President and Secretary of GTL; Vice President
and Secretary of Globalstar
Thomas B. Ross....................... 66 Vice President, Government Relations of GTL; Vice
President, Government Relations of Globalstar
Harvey B. Rein....................... 43 Vice President and Controller of GTL; Vice President
of Globalstar
Douglas G. Dwyre..................... 64 Senior Vice President of GTL; President of
Globalstar
Anthony J. Navarra................... 49 Vice President of GTL; Executive Vice President,
Business Development of Globalstar
Robert A. Hicks...................... 52 Vice President of GTL; Vice President, Operations of
Globalstar
Edward Hirshfield.................... 59 Vice President of GTL; Vice President, Development
and Production of Globalstar
Robert A. Wiedeman................... 59 Vice President of GTL; Vice President, Engineering
of Globalstar
Terry R. Evans....................... 49 Vice President of GTL; Vice President, Business
Planning and Administration of Globalstar
Stephen C. Wright.................... 40 Vice President of GTL; Vice President and Chief
Financial Officer of Globalstar
Joel Schindall....................... 55 Vice President of GTL; Vice President of Systems
Applications for Globalstar
William Adler........................ 50 Assistant Secretary of GTL; Vice President and
General Counsel of Globalstar
Mr. Schwartz has been the Chairman and Chief Executive Officer of GTL since
its initial public offering in 1995 and Chief Executive Officer and Chairman of
the General Partners' Committee of Globalstar since 1994. Mr. Schwartz has been
the Chairman and Chief Executive Officer of Loral since March 1996 and had been
Chairman and Chief Executive Officer of Old Loral since 1972. He has been
Chairman of the Board of Directors of SS/L since February 1991. Mr. Schwartz has
been Vice Chairman and a director of Lockheed Martin since April 1996.
Mr. Targoff has been President and Chief Operating Officer and a director
of GTL and Chief Operating Officer of Globalstar since May 1996. From GTL's
initial public offering in 1995 until May 1996, Mr. Targoff was Senior Vice
President, Secretary and director of GTL, and from 1994 until May 1996, Mr.
Targoff was
27
29
Senior Vice President and Secretary of Globalstar. Mr. Targoff has been
President and Chief Operating Officer of Loral since March 1996 and had been
Senior Vice President and Secretary of Old Loral since 1992. Prior thereto, he
held other executive officer positions with Old Loral. Mr. Targoff is also a
director of SS/L.
Mr. DeBlasio has been Senior Vice President, Chief Financial Officer and
Director of GTL since May 1996 and Senior Vice President of Globalstar since
1994. Mr. DeBlasio has been Senior Vice President and Chief Financial Officer of
Loral since March 1996 and had been Senior Vice President, Finance and Chief
Financial Officer of Old Loral since 1979. Mr. DeBlasio is also a director of
SS/L.
Mr. Moren has been Vice President and Treasurer of GTL since its initial
public offering in 1995 and Vice President and Treasurer of Globalstar since
1994. Mr. Moren has been Vice President and Treasurer of Loral since March 1996
and had been Vice President and Treasurer of Old Loral since April 1991.
Mr. Zahler has been Vice President and Secretary of GTL and Globalstar
since May 1996. From 1994 to May 1996, Mr. Zahler had been Vice President and
Assistant Secretary of Globalstar. Mr. Zahler has been Vice President, Secretary
and General Counsel of Loral since March 1996 and had been Vice President and
General Counsel of Old Loral since 1992. Prior to that time, he was a partner in
the law firm of Fried, Frank, Harris, Shriver & Jacobson.
Mr. Ross has been Vice President, Government Relations of GTL and
Globalstar since November 1996. From June 1995 to November 1996, Mr. Ross was
Vice President, Communications of GTL and Globalstar. Mr. Ross has also been
Vice President, Government Relations of Loral since November 1996. From March
1996 to November 1996, Mr. Ross was Vice President, Communications of Loral.
From April 1994 to May 1995, he served at the White House as Special Assistant
to the President and Senior Director of Public Affairs for the National Security
Council. From January 1992 to April 1994, he was Senior Vice President and
Director of Media Relations for Hill & Knowlton.
Mr. Rein has been Vice President and Controller of GTL and Vice President
of Globalstar since May 1996. Mr. Rein has been Vice President and Controller of
Loral since June 1996 and had been Assistant Controller of Old Loral since 1985.
Mr. Dwyre has been President of Globalstar since March 1994. Mr. Dwyre has
been Senior Vice President of GTL since May 1996 and, prior thereto, had been
Vice President of GTL since its initial public offering in 1995. Mr. Dwyre was
President of Northern Telecom's STC Submarine Systems from 1988 to 1992.
Mr. Navarra has been Executive Vice President, Business Development of
Globalstar since March 1994 and Vice President of GTL since its initial public
offering in 1995. He was Executive Vice President, Business Development at Loral
Aerospace Corp. from 1992 to 1994. He was Vice President of Marketing at
Loral/ROLM MilSpec Corp., a subsidiary of Old Loral, from 1987 to 1992.
Mr. Hicks has been Vice President, Operations of Globalstar and Vice
President of GTL since June 1996. Prior to that time he was Chief Technical
Officer at PacTel and AirTouch.
Mr. Hirshfield has been Vice President, Development and Production of
Globalstar since March 1994 and Vice President of GTL since May 1996. Prior to
that time, he was Manager of Communications Sciences at SS/L.
Mr. Wiedeman has been Vice President, Engineering of Globalstar since March
1994 and Vice President of GTL since May 1996. Prior to that time, he was Vice
President of Loral Aerospace Corp.
Mr. Evans has been Vice President, Business Planning and Administration of
Globalstar since January 1996 and Vice President of GTL since May 1996. From
March 1994 to December 1995, Mr. Evans was Vice President, Finance and
Administration of Globalstar. Prior to that time, he was Manager of Business
Planning and Analysis for SS/L.
Mr. Wright has been Vice President and Chief Financial Officer of
Globalstar since January 1996 and Vice President of GTL since May 1996. He was a
Production Director from April 1995 to December 1995 at SS/L. Prior to that
time, he was a Business Manager at SS/L.
28
30
Mr. Schindall has been Vice President of Systems Applications for
Globalstar since May 1994 and Vice President of GTL since May 1996. Prior to
that time, he was President of Conic, a division of Old Loral.
Mr. Adler has been Vice President and General Counsel of Globalstar since
January 1996 and Assistant Secretary of GTL since May 1996. He was a partner
with Fleschman 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 time, he was the Executive Director of Federal Regulatory
Relations with Pacific Telesis Group.
ITEM 11: EXECUTIVE COMPENSATION
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under Items 11, 12 and 13 is set forth in the
Company's 1997 definitive proxy statement which is incorporated herein by
reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
PAGE
-----
Index to Financial Statements................................................ F-1
Globalstar Telecommunications Limited
Independent Auditors' Report............................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Shareholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
Globalstar, L.P. (A development stage limited partnership)
Independent Auditors' Report............................................... F-12
Consolidated Balance Sheets................................................ F-13
Consolidated Statements of Operations...................................... F-14
Consolidated Statements of Cash Flows...................................... F-15
Consolidated Statements of Ordinary Partners' Capital and Subscriptions
Receivable.............................................................. F-16
Notes to Consolidated Financial Statements................................. F-17
29
31
(a) 3. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
3.1 Memorandum of Association of Globalstar Telecommunications Limited*
3.2 Bye-Laws of Globalstar Telecommunications Limited*
4.1 Indenture dated as of March 6, 1996 relating the Company's 6 1/2% Convertible
Preferred Equivalent Obligations due 2006**
4.2 Indenture dated as of February 15, 1997 relating to Globalstar's 11 3/8% Senior
Notes due 2004+
10.1 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P., dated as
of March 6, 1996, among Loral/Qualcomm Satellite Services, L.P., Globalstar
Telecommunications Limited, AirTouch Satellite Services, San Giorgio S.p.A.,
Hyundai/Dacom, Loral/DASA Globalstar, L.P., Loral Globalstar, L.P., TE.S.A.M. and
Vodastar Limited+
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*
10.3 Subscription Agreement by and between Globalstar, L.P. and Loral/Qualcomm Satellite
Services, L.P.*
10.4 Satellite Procurement Letter Agreement by and among Globalstar, L.P., Hyundai
Electronics Industries Co., Ltd. and Space Systems/Loral, Inc.*
10.5 Contract for OmniTRACS Like Services Agreement between Globalstar, L.P. and Qualcomm
Incorporated*
10.6 Support Agreement by and among Qualcomm Incorporated, Globalstar, L.P. and
Loral/Qualcomm Satellite Services, Inc.*
10.7 Qualcomm Licensee Letter Agreement by and among Globalstar, L.P., Hyundai
Electronics Industries Co., Ltd. and Qualcomm Incorporated.*
10.8 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.*
10.9 Contract for the Development of Certain Portions of the Ground Operations Control
Center between Globalstar and Loral Western Development Laboratories.*
10.10 Contract for the Development of Satellite Orbital Operations Centers between
Globalstar and Loral Aerosys, a division of Loral Aerospace Corporation.*
10.11 1994 Stock Option Plan.*++
10.12 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+
10.13 Registration Rights Agreement dated March 6, 1996 relating to the Company's 6 1/2%
Convertible Preferred Equivalent Obligations due 2006**
10.14 Warrant Agreement dated as of February 19, 1997 relating to Warrants to purchase
1,032,250 shares of Common Stock+
10.15 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 1,032,250
shares of Common Stock issued in connection therewith+
12 Statement Regarding Computation of Ratios+
23.1 Consent of Deloitte & Touche LLP+
27 Financial Data Schedule (EDGAR only)+
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form S-1
(No. 33-86808).
** Incorporated by reference to the Company's Registration Statement on Form S-3
(No. 333-6477).
+ Filed herewith.
++ Management compensation plan.
(b) Reports on Form 8-K
None
30
32
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
By: BERNARD L. SCHWARTZ
------------------------------------
Bernard L. Schwartz
(Chairman of the Board and
Chief Executive Officer)
Date: March 7, 1997
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
- ------------------------------------------ ------------------------------- ------------------
BERNARD L. SCHWARTZ Chairman of the Board and Chief March 7, 1997
- ------------------------------------------ Executive Officer
Bernard L. Schwartz
MICHAEL B. TARGOFF Director and President March 7, 1997
- ------------------------------------------
Michael B. Targoff
SIR RONALD GRIERSON Director March 7, 1997
- ------------------------------------------
Sir Ronald Grierson
ROBERT B. HODES Director March 7, 1997
- ------------------------------------------
Robert B. Hodes
E. JOHN PEETT Director March 7, 1997
- ------------------------------------------
E. John Peett
A. ROBERT TOWBIN Director March 7, 1997
- ------------------------------------------
A. Robert Towbin
MICHAEL P. DEBLASIO Director and Principal March 7, 1997
- ------------------------------------------ Financial Officer
Michael P. DeBlasio
HARVEY B. REIN Principal Accounting Officer March 7, 1997
- ------------------------------------------
Harvey B. Rein
31
33
INDEX TO FINANCIAL STATEMENTS
PAGE
--------------
GLOBALSTAR TELECOMMUNICATIONS LIMITED
Independent Auditors' Report............................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Shareholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
GLOBALSTAR, L.P. (A development stage limited partnership)
Independent Auditors' Report............................................... F-12
Consolidated Balance Sheets................................................ F-13
Consolidated Statements of Operations...................................... F-14
Consolidated Statements of Cash Flows...................................... F-15
Consolidated Statements of Ordinary Partners' Capital and Subscriptions
Receivable.............................................................. F-16
Notes Consolidated to Financial Statements................................. F-17
F-1
34
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Globalstar Telecommunications Limited:
We have audited the accompanying balance sheets of Globalstar
Telecommunications Limited (a Bermuda company) as of December 31, 1996 and 1995
and the related statements of operations, shareholders' equity and cash flows
for the years ended December 31, 1996 and 1995 and for the period November 23,
1994 (date of incorporation) to December 31, 1994. These financial statements
are the responsibility of the Company'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, 1996 and 1995 and the results of its operations and its cash flows
for the years ended December 31, 1996 and 1995, and for the period November 23,
1994 to December 31, 1994 in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
February 24, 1997
F-2
35
GLOBALSTAR TELECOMMUNICATIONS LIMITED
BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
---------------------
1996 1995
-------- --------
ASSETS
Investment in Globalstar, L.P.:
Redeemable preferred partnership interests........................... $302,037 $ --
Ordinary partnership interests....................................... 158,038 173,118
Ordinary partnership warrants........................................ 22,601 --
-------- --------
Total assets...................................................... $482,676 $173,118
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Interest payable..................................................... $ 1,679 $ --
Convertible preferred equivalent obligations ($310,000 principal
amount).............................................................. 300,358 --
Commitments and contingencies (Note 4)
Shareholders' equity:
Common stock, $1.00 par value, 60,000,000 shares authorized;
10,000,000 issued and outstanding................................. 10,000 10,000
Paid-in capital...................................................... 175,750 175,750
Warrants............................................................. 22,601 --
Accumulated deficit.................................................. (27,712) (12,632)
-------- --------
Total shareholders' equity............................................. 180,639 173,118
-------- --------
Total liabilities and shareholders' equity........................ $482,676 $173,118
======== ========
See notes to financial statements.
F-3
36
GLOBALSTAR TELECOMMUNICATIONS LIMITED
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEARS ENDED
DECEMBER 31,
------------------
1996 1995
------- --------
Equity in net loss applicable to ordinary partnership interests of
Globalstar, L.P. ....................................................... $15,080 $ 12,632
Dividend income on Globalstar, L.P. redeemable preferred partnership
interests............................................................... (17,370) --
Interest expense on convertible preferred equivalent obligations.......... 17,370 --
------- --------
Net loss.................................................................. $15,080 $ 12,632
======= ========
Net loss per share........................................................ $ 1.51 $ 1.26
======= ========
Shares used in computing net loss per share............................... 10,000 10,000
======= ========
See notes to financial statements.
F-4
37
GLOBALSTAR TELECOMMUNICATIONS LIMITED
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
COMMON STOCK
----------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL WARRANTS DEFICIT TOTAL
------ ------- ---------- -------- ----------- --------
Incorporation by Globalstar,
L.P., November 23, 1994... 12 $ 12 $ 112 $ 124
------ ------- -------- --------
Balance, December 31,
1994...................... 12 12 112 124
Sale of common stock, net of
offering costs of
$14,250................ 10,000 10,000 175,750 185,750
Repurchase of common stock
from Globalstar, L.P. .... (12) (12) (112) (124)
Net loss.................... $ (12,632) (12,632)
------ ------- -------- -------- --------
Balance, December 31,
1995...................... 10,000 10,000 175,750 (12,632) 173,118
Warrants issued in
connection with the
Globalstar Credit
Agreement................. $ 22,601 22,601
Net loss.................... (15,080) (15,080)
------ ------- -------- ------- -------- --------
Balance, December 31,
1996...................... 10,000 $10,000 $175,750 $ 22,601 $ (27,712) $180,639
====== ======= ======== ======= ======== ========
See notes to financial statements.
F-5
38
GLOBALSTAR TELECOMMUNICATIONS LIMITED
STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER
31, NOVEMBER 23, 1994
----------------------- (DATE OF INCORPORATION) TO
1996 1995 DECEMBER 31, 1994
--------- --------- --------------------------
Cash flows from operating activities:
Net loss..................................... $ (15,080) $ (12,632) $ --
Equity in net loss of Globalstar, L.P........ 15,080 12,632 --
Increase in redemption value of redeemable
preferred partnership interests........... (858) -- --
Dividends accrued on redeemable preferred
interests in excess of cash received...... (1,679) -- --
Amortization of convertible preferred
equivalent obligations issue costs........ 858 -- --
Change in operating liability:
Interest payable.......................... 1,679 -- --
--------- --------- -------
Net cash provided by (used in) operating
activities................................... -- -- --
--------- --------- -------
Investing activities:
Purchase of general partnership interests in
Globalstar, L.P........................... -- (185,750) --
Purchase of redeemable preferred partnership
interests in Globalstar, L.P.............. (299,500) -- --
--------- --------- -------
Net cash used in investing activities.......... (299,500) (185,750) --
--------- --------- -------
Financing activities:
Net proceeds from sale of common stock....... -- 185,750 --
Payment of debt offering costs............... (10,500) -- --
Sale of convertible preferred equivalent
obligations............................... 310,000 -- --
Sale of common stock to Globalstar, L.P...... -- -- 124
Repurchase of common stock from
Globalstar, L.P........................... -- (124) --
Advances from (repayment to) Globalstar,
L.P....................................... -- (66) 66
Deferred costs of initial public offering.... -- -- (190)
Offering proceeds used to repay initial
public offering costs deferred in prior
period.................................... -- 190 --
--------- --------- -------
Net cash provided by financing activities...... 299,500 185,750 --
--------- --------- -------
Net increase (decrease) in cash and cash
equivalents.................................. -- -- --
Cash and cash equivalents, beginning of
period....................................... -- -- --
--------- --------- -------
Cash and cash equivalents, end of period....... $ -- $ -- $ --
========= ========= ==================
Noncash transaction:
Warrants issued in connection with the
Globalstar Credit Agreement............... $ 22,601
=========
Supplemental information:
Interest paid during the year................ $ 14,833
=========
See notes to financial statements.
F-6
39
GLOBALSTAR TELECOMMUNICATIONS LIMITED
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 development stage limited partnership, which is designing,
constructing and will operate a worldwide, low-earth orbit satellite-based
digital telecommunications system (the "Globalstar System"). The Globalstar
System's world-wide 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.
Loral Space & Communications Ltd. ("Loral"), through a subsidiary and
intermediate limited partnerships, is the managing general partner of
Globalstar. At December 31, 1996, Loral had an effective 33.8% interest in the
ordinary partnership interests of Globalstar, including 1,407,144 shares of
GTL's outstanding common stock.
On April 23, 1996, a merger between Loral Corporation ("Old Loral") and
Lockheed Martin Corporation ("Lockheed Martin") was completed. In conjunction
with the merger, Old Loral's direct and indirect interests in GTL and Globalstar
were transferred to Loral.
At December 31, 1996, GTL owns 21.3% of Globalstar's ordinary partnership
interests and 100% of Globalstar's redeemable preferred partnership interests.
As GTL's investment in Globalstar is GTL's only asset, GTL is dependent upon
Globalstar's success and achievement of profitable operations for the recovery
of its investment. Globalstar is a development stage limited partnership which
may encounter problems, delays and expenses, many of which may be beyond
Globalstar's control. These may include, but are not limited to, problems
related to technical development of the system, testing, regulatory compliance,
manufacturing and assembly, the competitive and regulatory environment in which
Globalstar will operate, marketing problems and costs and expenses that may
exceed current estimates. There can be no assurance that substantial delays in
any of the foregoing matters would not delay Globalstar's achievement of
profitable operations and effect the recoverability of GTL's investment. All
expenses necessary to maintain GTL's operations are borne by Globalstar.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Globalstar, L.P.
GTL accounts for its investment in Globalstar's ordinary partnership
interests on the equity basis, recognizing its allocated share of net loss for
each period since its initial investment on February 22, 1995. This investment
includes the fair value of warrants received from Globalstar in 1996 (see Note
4). The excess carrying value of this investment over GTL's interest in
Globalstar's ordinary partners' capital is attributable to the Globalstar System
Under Construction. Amortization of this excess will begin upon Globalstar's
commencement of commercial service. Dividend income on GTL's investment in
Globalstar's redeemable preferred partnership interests includes accretion of
the carrying amount of the investment to redemption value.
Convertible Preferred Equivalent Obligations (CPEOs)
Costs incurred in connection with the issuance of the CPEOs have been
netted against the proceeds of the offering. Interest expense includes accretion
of the carrying value of the CPEOs to redemption value.
F-7
40
GLOBALSTAR TELECOMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," GTL accounts for stock-based awards
to employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Income Taxes
GTL was incorporated in Bermuda. Bermuda does not have an income, profits
or capital gains tax. As a partner in Globalstar, however, GTL will be subject
to U.S. tax on its share of Globalstar's U.S. source income 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. The ultimate realizability of these tax loss carryforwards is dependent
upon the ability of Globalstar to generate U.S. source income, subject to
certain other restrictions imposed by the U.S. Internal Revenue Code.
Accordingly, no provision for Bermuda or U.S. income tax expense or benefit is
included in GTL's Statements of Operations.
3. SALE OF CONVERTIBLE PREFERRED EQUIVALENT OBLIGATIONS AND PURCHASE OF
REDEEMABLE PREFERRED PARTNERSHIP INTERESTS
On March 6, 1996 and April 3, 1996, GTL issued 6,000,000 shares and 200,000
shares, respectively, of its 6 1/2% Convertible Preferred Equivalent Obligations
due 2006, par value $50 per share (the "CPEOs"), for net proceeds of
$299,500,000. As of December 31, 1996, 6,200,000 shares of the CPEOs were
outstanding, of which Loral holds 2,050,000 shares. The fair value of the CPEOs,
based on quoted market prices, was approximately $329 million on December 31,
1996.
The CPEOs are subordinated to existing and future debt obligations of GTL,
are convertible into 4,769,230 shares of GTL Common Stock at a conversion price
of $65.00 per share, subject to adjustment for certain antidilution events, bear
interest at 6 1/2% per annum payable quarterly, are redeemable (at a premium
which declines over time) by GTL beginning in 2000 (or beginning in 1997 if
GTL's stock price exceeds certain defined price ranges), and, if still
outstanding, must be redeemed by GTL on March 1, 2006. Interest and redemption
payments may be made in cash or shares of common stock. In certain limited
circumstances involving a change of control of GTL, as defined, holders may
elect to convert their CPEOs into GTL common stock based on the then average
market price, subject to GTL's option to redeem the CPEOs. The CPEOs are shown
in the accompanying financial statements net of discounts and other offering
costs and are being increased to their redemption value over the term of the
CPEOs.
The net proceeds of $299,500,000 were used by GTL to purchase 4,769,230
redeemable preferred partnership interests in Globalstar. The redeemable
preferred partnership interests will convert to ordinary partnership interests
on a one-for-one basis upon any conversion of the CPEOs into GTL common stock,
will pay a quarterly preferred distribution to GTL of 6 1/2% per annum, will be
allocated losses of the partnership only after all adjusted capital accounts of
the ordinary partnership interests have been reduced to zero, and are redeemable
on terms comparable to the CPEOs. Globalstar may elect to make the quarterly
preferred distribution or redemption payments to GTL in cash or general
partnership interests. If such distribution is made in cash, GTL must make its
interest payment on the CPEOs in cash. Globalstar may elect to defer payment of
the preferred distribution; in such case, GTL may also elect to defer interest
payment on the CPEOs. However, holders of the CPEOs are entitled to certain
representation rights on the General Partners' Committee of Globalstar in the
event six consecutive interest payments are deferred.
F-8
41
GLOBALSTAR TELECOMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. SHAREHOLDERS' EQUITY
On February 14, 1995, GTL completed an initial public offering of
10,000,000 shares of common stock resulting in net proceeds of $185,750,000.
Effective February 22, 1995, GTL purchased 10,000,000 partnership interests from
Globalstar with the net proceeds of the initial public offering. Also on
February 22, 1995, GTL repurchased at original cost, the 12,000 shares of common
stock representing the initial capitalization it had sold to Globalstar in 1994.
Partners in Globalstar have the right to convert their partnership
interests into shares of GTL on a one-for-one basis following the Full
Constellation Date, as defined, of the Globalstar System and after at least two
consecutive quarters of positive net income, subject to certain annual
limitations. GTL has reserved 37,000,000 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 the GTL Board of Directors. The
Committee determines the option price, the option's exercise date and the
expiration date of each option (provided no option shall be exercisable after
the expiration of 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 a one-for-one exchange arrangement.
As described in Note 2, GTL accounts for its stock-based compensation using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. Accordingly, no compensation expense has been recognized in
GTL's financial statements for stock-based compensation.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") requires the disclosure of pro forma net
income and earnings per share had GTL adopted the fair value method as of the
beginning of 1995. 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 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 were
made using the Black-Scholes option pricing model with the following
assumptions: expected life, six months following vesting; stock volatility, 30%;
risk free interest rates, 6.25% in 1996 and 6% in 1995; 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. If the computed fair
values of the 1996 and 1995 awards had been amortized to Globalstar's expense
over the vesting period of the awards, GTL's pro forma net loss would have
increased by $374,000 ($.04 per share) to $15,454,000 ($1.55 per share) in 1996
and would have increased by $33,000 ($.01 per share) to $12,665,000 ($1.27 per
share) in 1995.
F-9
42
GLOBALSTAR TELECOMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the status of the GTL stock option plan at December 31, 1996
and changes during the year then ended is presented below:
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------- -------
Granted in 1995 (weighted average fair value of $5.33 per
share)......................................................... 110,400 $16.625
-------
Outstanding at December 31, 1995................................. 110,400 16.625
Granted (weighted average fair value of $18.04 per share)........ 122,000 54.90
Forfeited........................................................ (1,200) 16.625
-------
Outstanding at December 31, 1996................................. 231,200 36.824
=======
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. All options granted during the year were non-qualified stock
options with an exercise price equal to fair market value at the date of grant.
As of December 31, 1996, 18,800 shares of common stock were available for future
grant under the Plan. The GTL Board of Directors has approved, subject to
shareholder approval, a 375,000 increase in the number of shares available for
grant under the Plan.
The following table summarizes information about GTL's outstanding stock
options at December 31, 1996:
WEIGHTED
AVERAGE
REMAINING
NUMBER CONTRACTUAL
EXERCISE PRICE OUTSTANDING LIFE-YEARS
- ------------------------------------------------------------------ ----------- ----------------
$16.625........................................................... 109,200 8.7
50.375........................................................... 80,000 9.4
63.5313.......................................................... 42,000 9.9
Guarantee Warrants
On December 15, 1995, Globalstar entered into a $250 million credit
agreement (the "Credit Agreement") with a group of banks. Lockheed Martin and
certain Globalstar partners guaranteed $206.3 million and $43.7 million of the
Credit Agreement, respectively. In addition, Loral agreed to indemnify Lockheed
Martin for any liability in excess of $150 million. In exchange for the
guarantee and indemnity, GTL, upon shareholder approval, issued warrants to
purchase 4,185,318 shares of GTL common stock at $26.50 per share as follows:
Loral 942,428 warrants, Lockheed Martin 2,511,190 warrants and certain
Globalstar partners 731,700 warrants. Proceeds received from the exercise of the
warrants will be used to purchase Globalstar ordinary partnership interests
under a one-for-one exchange arrangement. As part of this transaction,
Globalstar issued GTL warrants to purchase an additional 1,131,168 ordinary
partnership interests of Globalstar.
On February 12, 1997, GTL and the holders of the warrants entered into an
arrangement under which GTL agreed to accelerate the vesting and exercisability
of the warrants to purchase 4,185,318 shares of GTL common stock at $26.50 per
share and the holders agreed to exercise such warrants. GTL agreed to register
for resale the GTL common stock issuable upon exercise of the warrants. In
addition, GTL announced its intention to distribute to the holders of its common
stock rights to subscribe for and purchase 1,131,168 GTL shares for a price of
$26.50 per share of which Loral will receive rights to purchase 159,172 shares.
Loral agreed to purchase all shares not purchased upon exercise of the rights.
Upon the exercise of the warrants and the rights, GTL will receive proceeds of
approximately $140.9 million, which it will use to exercise its warrants to
purchase 5,316,486 Globalstar ordinary partnership interests at $26.50 per
interest.
F-10
43
GLOBALSTAR TELECOMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. SUBSEQUENT EVENT
On February 13, 1997, Globalstar and GTL sold units consisting of $500
million principal amount of Globalstar's 11 3/8% Senior Notes due 2004 and
warrants to purchase 1,032,250 shares of GTL common stock in a private offering.
The notes are senior in right of payment to the redeemable preferred partnership
interests, and may not be redeemed prior to February 2002 and are subject to a
prepayment premium prior to 2004. Interest on the notes is payable
semi-annually.
The indenture for the notes contains certain covenants that among other
things limit the ability of Globalstar to incur additional debt, issue preferred
stock, or pay dividends and certain distributions. In certain limited
circumstances involving a change of control of Globalstar, as defined, each note
is redeemable at the option of the holder for 101% of the principal amount plus
accrued interest.
The warrants are exercisable on February 19, 1998 at a price of $69.575 per
share. The warrants represent approximately 1.7% of Globalstar's total
partnership interests on a fully diluted basis. Any proceeds from the exercise
of the warrants will be used to purchase Globalstar ordinary partnership
interests.
Globalstar will use the net proceeds of approximately $484 million from the
offering for the construction and deployment of the Globalstar System.
6. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
--------------------------------------------------------
JUNE
MARCH 31, 30, SEPTEMBER 30, DECEMBER 31,
--------- ------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996:
Equity in loss of Globalstar, L.P............ $(3,282) $(3,942) $(3,345) $ (4,511)
Net loss..................................... (3,282) (3,942) (3,345) (4,511)
Loss per share............................... (0.33) (0.39) (0.33) (0.45)
1995:
Equity in loss of Globalstar, L.P............ $(1,548) $(2,712) $(3,695) $ (4,677)
Net loss..................................... (1,548) (2,712) (3,695) (4,677)
Loss per share............................... (0.15) (0.27) (0.37) (0.47)
F-11
44
INDEPENDENT AUDITORS' REPORT
To the Partners of Globalstar, L.P.:
We have audited the accompanying consolidated balance sheets of Globalstar,
L.P. (a development stage limited partnership) and its subsidiary as of December
31, 1996 and 1995, and the related consolidated statements of operations,
partners' capital and subscriptions receivable and cash flows for the period
from March 23, 1994 (commencement of operations) to December 31, 1994, the years
ended December 31, 1995 and 1996 and cumulative. We have also audited the
accompanying consolidated statement of operations for the period from January 1,
1994 to March 22, 1994 (the pre-capital subscription period). These consolidated
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Globalstar, L.P. and its
subsidiary at December 31, 1996 and 1995, and the results of their operations
and their cash flows for the periods stated above in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
February 24, 1997
F-12
45
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
(In thousands, except partnership interests)
DECEMBER 31,
---------------------
1996 1995
-------- --------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 21,180 $ 71,602
Other current assets................................................. 606 506
------- --------
Total current assets............................................ 21,786 72,108
Property and equipment, net............................................ 1,720 1,509
Globalstar System Under Construction:
Space segment........................................................ 730,513 348,434
Ground segment....................................................... 160,520 51,823
------- --------
891,033 400,257
Deferred FCC license costs............................................. 8,690 7,056
Deferred financing costs............................................... 19,577 24,461
Other assets........................................................... 107 --
------- --------
Total assets.................................................... $942,913 $505,391
======= ========
LIABILITIES and PARTNERS' CAPITAL
Current liabilities:
Accounts payable..................................................... $ 4,401 $ 2,070
Payable to affiliates................................................ 63,937 47,569
Accrued expenses..................................................... 6,929 4,782
------- --------
Total current liabilities....................................... 75,267 54,421
Deferred revenues...................................................... 23,652 21,913
Vendor financing liability............................................. 130,694 42,219
Borrowings under long-term revolving credit facility................... 96,077 --
Commitments and contingencies (Notes 4,6,7,9,10,11 and 12)
Redeemable preferred partnership interests (4,769,230 outstanding at
December 31, 1996, $310,000 redemption value)........................ 302,037 --
Ordinary partners' capital:
Ordinary partnership interests (47,000,000 outstanding).............. 292,585 364,237
Warrants............................................................. 22,601 22,601
------- --------
Total ordinary partners' capital................................ 315,186 386,838
------- --------
Total liabilities and partners' capital......................... $942,913 $505,391
======= ========
See notes to consolidated financial statements.
F-13
46
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
YEAR ENDED DECEMBER 31, 1994
---------------------------------------
PRE-CAPITAL CUMULATIVE
SUBSCRIPTION PERIOD MARCH 23 YEARS ENDED MARCH 23, 1994
-------------------- (COMMENCEMENT OF DECEMBER 31, (COMMENCEMENT OF
JANUARY 1 TO OPERATIONS) TO ---------------- OPERATIONS) TO
MARCH 22, 1994 DECEMBER 31, 1994 1995 1996 DECEMBER 31, 1996
-------------------- ----------------- ------- ------- -----------------
Operating expenses:
Development costs........................ $4,057 $21,279 $62,854 $42,152 $ 126,285
Marketing, general and administrative.... 2,815 6,748 17,372 18,873 42,993
------ ------- ------ ------ -------
Total operating expenses................... 6,872 28,027 80,226 61,025 169,278
Interest income............................ -- 1,783 11,989 6,379 20,151
------ ------- ------ ------ -------
Net loss................................... 6,872 26,244 68,237 54,646 149,127
Preferred distributions and related
increase in redeemable preferred
partnership interests.................... -- -- -- 17,323 17,323
------ ------- ------ ------ -------
Net loss applicable to ordinary partnership
interests................................ $6,872 $26,244 $68,237 $71,969 $ 166,450
====== ======= ====== ====== =======
See notes to consolidated financial statements.
F-14
47
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
MARCH 23, 1994 CUMULATIVE
(COMMENCEMENT OF YEARS ENDED MARCH 23, 1994
OPERATIONS) TO DECEMBER 31, (COMMENCEMENT OF
DECEMBER 31, ---------------------- OPERATIONS) TO
1994 1995 1996 DECEMBER 31, 1996
---------------- --------- --------- -------------------------
Cash flows from operating activities:
Net loss.................................................. $(26,244) $ (68,237) $ (54,646) $(149,127)
Deferred revenues......................................... -- 21,913 1,739 23,652
Stock compensation transactions........................... -- -- 317 317
Depreciation and amortization............................. 115 398 5,858 6,371
Changes in operating assets and liabilities:
Other current assets.................................... -- (506) (100) (606)
Other assets............................................ -- -- (107) (107)
Accounts payable........................................ 638 857 1,723 3,218
Payable to affiliates................................... (1) 4,865 (3,553) 1,311
Accrued expenses........................................ 2,440 2,342 2,147 6,929
-------- --------- --------- ---------
Net cash used in operating activities...................... (23,052) (38,368) (46,622) (108,042)
-------- --------- --------- ---------
Investing activities:
Globalstar System under construction...................... (71,996) (328,261) (490,776) (891,033)
Payable to affiliates for Globalstar System under
construction............................................ 25,042 8,863 19,921 53,826
Capitalized interest payable on long-term revolving credit
facility................................................ -- -- 77 77
Accounts payable.......................................... -- 67 608 675
Vendor financing liability................................ -- 42,219 88,475 130,694
-------- --------- --------- ---------
Cash used for Globalstar System....................... (46,954) (277,112) (381,695) (705,761)
Purchases of property and equipment....................... (1,119) (888) (935) (2,942)
Deferred FCC license costs................................ (2,286) (2,535) (1,634) (6,455)
Purchases of investments.................................. -- (126,923) -- (126,923)
Maturity of investments................................... -- 126,923 -- 126,923
Other current assets...................................... (190) 190 -- --
-------- --------- --------- ---------
Net cash used in investing activities...................... (50,549) (280,345) (384,264) (715,158)
-------- --------- --------- ---------
Financing activities:
Deferred line of credit fees.............................. -- (1,875) (250) (2,125)
Proceeds from capital subscriptions receivable............ 148,661 133,780 -- 282,441
Payment of accrued capital raising costs.................. (1,500) (900) -- (2,400)
Sale of partnership interests to GTL...................... -- 185,750 -- 185,750
Sale of redeemable preferred partnership interests to
GTL..................................................... -- -- 299,500 299,500
Distributions on redeemable preferred partnership
interests............................................... -- -- (14,833) (14,833)
Prepaid interest on redeemable preferred partnership
interests............................................... -- -- 47 47
Borrowings under long-term revolving credit facility...... -- -- 106,000 106,000
Repayment of borrowings under long-term revolving credit
facility................................................ -- -- (10,000) (10,000)
-------- --------- --------- ---------
Net cash provided by financing activities.................. 147,161 316,755 380,464 844,380
-------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... 73,560 (1,958) (50,422) 21,180
Cash and cash equivalents, beginning of period............. -- 73,560 71,602 --
-------- --------- --------- ---------
Cash and cash equivalents, end of period................... $ 73,560 $ 71,602 $ 21,180 $ 21,180
======== ========= ========= =========
Noncash transactions:
Payable to affiliates..................................... $ 9,308 $ 9,308
======== =========
Accrual of capital raising costs.......................... $ 2,400 $ 2,400
======== =========
Deferred FCC license costs................................ $ 2,235 $ 2,235
======== =========
Warrants issued in exchange for debt guarantee............ $ 22,601 $ 22,601
========= =========
Increase in redemption value of preferred partnership
interests............................................... $ 2,537 $ 2,537
========= =========
See notes to consolidated financial statements.
F-15
48
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF ORDINARY PARTNERS' CAPITAL AND SUBSCRIPTIONS
RECEIVABLE
(In thousands)
ORDINARY PARTNERS' CAPITAL
ORDINARY
PARTNERSHIP
INTERESTS WARRANTS TOTAL
----------- -------- --------
Capital subscription, March 23, 1994
General partner (18,000 interests)...................... $ 50,000 $ 50,000
Limited partners (18,000 interests)..................... 225,000 225,000
Cost of raising capital................................... (2,400) (2,400)
Net losses -- pre-capital subscription period:
Year ended December 31, 1993............................ (11,510) (11,510)
January 1, 1994 to March 22, 1994....................... (6,872) (6,872)
Net loss applicable to ordinary partnership
interests -- March 23, 1994 (commencement of operations)
to December 31, 1994.................................... (26,244) (26,244)
Capital subscription, December 31, 1994
(1,000 limited partnership interests)................... 18,750 18,750
----------- --------
Capital balances, December 31, 1994....................... 246,724 246,724
Sale of 10,000 general partnership interests to GTL,
February 22, 1995....................................... 185,750 185,750
Warrant agreement in connection with debt
guarantee............................................... -- $ 22,601 22,601
Net loss applicable to ordinary partnership
interests -- Year ended December 31, 1995............... (68,237) (68,237)
----------- -------- --------
Capital balances -- December 31, 1995..................... 364,237 22,601 386,838
Stock compensation transactions by managing general
partner for the benefit of Globalstar................... 317 317
Net loss applicable to ordinary partnership
interests -- Year ended December 31, 1996............... (71,969) (71,969)
----------- -------- --------
Capital balances -- December 31, 1996..................... $ 292,585 $ 22,601 $315,186
======== ======= ========
SUBSCRIPTIONS RECEIVABLE
Capital subscriptions:
March 23, 1994.......................................... $ 275,000 $275,000
December 31, 1994....................................... 18,750 18,750
----------- --------
Total subscriptions..................................... 293,750 293,750
----------- --------
Cash received........................................... (148,661) (148,661)
Credit for pre-capital subscription costs............... (11,309) (11,309)
----------- --------
(159,970) (159,970)
----------- --------
Subscriptions receivable, December 31, 1994............... 133,780 133,780
Cash received........................................... (133,780) (133,780)
----------- --------
Subscriptions receivable, December 31, 1995 and 1996...... $ -- $ --
======== ========
See notes to consolidated financial statements.
F-16
49
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Globalstar, L.P. ("Globalstar"), a Delaware limited partnership with a
December 31 fiscal year end, was formed in November 1993. It had no activities
until March 23, 1994, when it received capital subscriptions for $275 million
and commenced operations. The accompanying financial statements reflect the
operations of the Partnership from that date. In addition, the statements of
operations for the period January 1, 1994 to March 22, 1994 (the "Pre-Capital
Subscription Period") reflect certain costs incurred by Loral Corporation ("Old
Loral") and QUALCOMM Incorporated ("Qualcomm") and reimbursed by Globalstar
through a capital subscription credit or agreement for reimbursement, as
described in Note 9.
Effective April 23, 1996, a merger between Old Loral and Lockheed Martin
Corporation ("Lockheed Martin") was completed. In conjunction with the merger,
Old Loral's space and communications businesses, including its direct and
indirect interests in Globalstar, Globalstar Telecommunications Limited ("GTL"),
Space Systems/Loral, Inc. ("SS/L") and other affiliated businesses, as well as
certain other assets and liabilities, have been transferred to Loral Space &
Communications Ltd. ("Loral"), a Bermuda company.
The managing general partner of Globalstar is 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 and Qualcomm. The managing general partner of LQP is Loral
General Partner, Inc. ("LGP"), a subsidiary of Loral.
Globalstar was founded to design, construct and operate a worldwide,
low-earth orbit ("LEO") satellite-based 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. On
January 31, 1995, the U.S. Federal Communications Commission ("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.
On November 23, 1994, GTL was incorporated as an exempted company under the
Companies Act 1981 of Bermuda. GTL's sole business is acting as a general
partner of Globalstar. On February 14, 1995, GTL completed an initial public
offering of 10,000,000 shares of common stock resulting in net proceeds of
$185,750,000. Effective February 22, 1995, GTL purchased 10,000,000 partnership
interests from Globalstar with the net proceeds of the initial public offering.
The partners in Globalstar have the right to convert their partnership interests
into shares of GTL common stock on a one-for-one basis following the Full
Coverage Date, as defined, of the Globalstar System and after at least two
consecutive reported fiscal quarters of positive net income, subject to certain
annual limitations.
At December 31, 1996, Loral had an effective 33.8% interest in the ordinary
partnership interests of Globalstar, including 1,407,144 shares of GTL's common
stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development Stage Company
Globalstar is devoting substantially all of its present efforts to the
design, licensing, construction, testing, and financing of the Globalstar
System, and establishing its business. Its planned principal operations have not
commenced. Accordingly, Globalstar is a development stage company as defined in
Statement of Financial Accounting Standards ("SFAS") No. 7 "Accounting and
Reporting by Development Stage Enterprises."
F-17
50
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Globalstar may encounter problems, delays and expenses, many of which may
be beyond Globalstar's control. These may include, but are not limited to,
problems related to technical development of the system, testing, regulatory
compliance, manufacturing and assembly, the competitive and regulatory
environment in which Globalstar will operate, marketing problems and costs and
expenses that may exceed current estimates. There can be no assurance that
substantial delays in any of the foregoing matters would not delay Globalstar's
achievement of profitable operations.
Use of Estimates in Preparation of Financial Statements
The preparation of 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 subsidiary, Globalstar Capital Corporation. All
intercompany accounts and transactions are eliminated.
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.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally three to eight years. Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful lives of the
improvements.
Globalstar System Under Construction
Globalstar System Under Construction expenditures include and will include
progress payments and costs for the design, manufacture, test, launch and launch
insurance for 48 low-earth orbit satellites, plus additional spare satellites
(the "Space Segment"), and ground and satellite operations control centers,
gateways and subscriber terminals (handsets) (the "Ground Segment").
Globalstar intends to depreciate the Space Segment over 7 1/2 years and to
depreciate the Ground Segment over eight years as assets are placed in service.
Service is currently anticipated to commence in 1998.
Costs incurred related to the development of certain technologies, pursuant
to a cost sharing arrangement included in Globalstar's contract with Qualcomm,
and for the engineering and development of subscriber terminals, are being
charged to operations as incurred.
Financing Costs and Interest
Deferred financing costs represent costs incurred in obtaining a long-term
credit facility and the estimated fair value of a warrant agreement in
connection with a guarantee of this facility (see Note 6-Credit Facility). Such
costs are being amortized over the term of the credit facility as interest.
Total amortization of deferred financing costs for the years ended December 31,
1996 and 1995 was approximately $5,134,000 and $15,000, respectively.
F-18
51
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interest costs incurred during the construction of the Globalstar System
are capitalized. Total interest costs capitalized for the years ended December
31, 1996 and 1995 was approximately $9,900,000 and $300,000, respectively. No
interest was capitalized for the period ending December 31, 1994.
FCC License Costs
Expenditures, including license fees, legal fees and direct engineering and
other technical support, for obtaining the required FCC licenses are capitalized
and will be amortized over 7 1/2 years, the expected life of the first
generation satellites.
Deferred Revenues
Advance payments from Globalstar strategic partners to secure exclusive
rights to Globalstar service territories are deferred. These advance payments
are recoverable by the service providers through credits against a portion of
the service fees payable to Globalstar after the commencement of services.
Vendor Financing
Globalstar's contract with SS/L calls for a portion of the contract price
to be deferred as vendor financing and to be repaid, over as long as a five-year
period, commencing upon the initial service and full coverage dates of the
Globalstar System. Amounts deferred as vendor financing are capitalized as costs
of the Globalstar System Under Construction as incurred.
Preferred Partnership Distributions
Distributions accrue on the redeemable preferred partnership interests at
6 1/2% per annum. Globalstar is increasing the carrying value of the redeemable
preferred partnership interests to their ultimate redemption value. The
distributions are recorded as reductions against the ordinary partnership
capital accounts.
Stock-Based Compensation
As permitted by Statement of Financial Standards No. 123, "Accounting for
Stock-Based Compensation," Globalstar accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Net (Loss) Income 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.
Net income is allocated among the partners in proportion to, and to the
extent of, the distributions made to the partners from distributable cash flow
for the period, as defined, then in proportion to and to the extent of negative
adjusted capital account balances and then in accordance with percentage
interests.
Under the terms of the Partnership Agreement, adjusted partners' capital
accounts are calculated in accordance with the principles of U.S. 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.
F-19
52
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Globalstar was organized as a Delaware limited partnership. As such, no
income tax provision (benefit) is included in the accompanying financial
statements since U.S. income taxes are the responsibility of its partners.
Generally, taxable income (loss), deductions and credits of Globalstar will be
passed proportionately through to its partners.
Reclassifications
Certain reclassifications have been made to conform prior-year amounts to
the current-year presentation.
3. PROPERTY AND EQUIPMENT
DECEMBER 31,
------------------
1996 1995
------- ------
(IN THOUSANDS)
Property and equipment consists of:
Leasehold improvements.......................................... $ 473 $ 401
Furniture and office equipment.................................. 2,469 1,606
------- ------
2,942 2,007
Accumulated depreciation and amortization....................... (1,222) (498)
------- ------
$ 1,720 $1,509
======= ======
Depreciation and amortization expense for the years ended December 31, 1996
and 1995, and for the period March 23 to December 31, 1994, was $724,000,
$383,000 and $115,000, respectively.
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION
Total System Cost
As of February 1997, Globalstar estimates the cost for the design,
construction and deployment of the Globalstar System including working capital,
cash interest on anticipated borrowings and operating expenses to be
approximately $2.5 billion, as compared with approximately $2.2 billion
estimated at December 31, 1995. Actual amounts may vary from this estimate and
additional funds would be required in the event of unforeseen delays, cost
overruns, launch failures, technological risks, adverse regulatory developments,
or to meet unanticipated expenses and for system enhancements and measures to
assure system performance and readiness for the space and ground segments.
In addition, Globalstar has agreed to purchase from SS/L eight additional
spare satellites that will increase Globalstar's ability to have at least 40
satellites in service during 1999, even in the event of launch failures. If the
launch program is successful, the additional satellites will serve as ground
spares, readily available for launch to replenish the constellation as needed to
respond to satellite attrition during the first generation, or to increase
system capacity as required. If Globalstar were to experience a launch failure,
the costs associated with the construction and launch of replacements would be
substantially covered by insurance, and in that event the cost of the additional
satellites used as replacements, currently estimated at $175 million, would be
reimbursed to Globalstar.
As of February 13, 1997, Globalstar had raised or received commitments for
approximately $2.0 billion, including the vendor financing arrangements.
Globalstar intends to raise the remaining funds required for the Globalstar
System from a combination of sources, including debt issuance (which may include
an equity
F-20
53
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION (CONTINUED)
component), financial support from the Globalstar partners, projected service
provider payments, projected net service revenues from initial operations,
anticipated payments from the sale of gateways and Globalstar phones and
placement of partnership interests with new and existing strategic investors.
Although Globalstar believes it will be able to obtain these additional funds,
there can be no assurance that such funds will be available on favorable terms
or on a timely basis, if at all.
The Space Segment
Globalstar has entered into a contract with SS/L, an affiliate of Loral and
a limited partner of LQSS, to design, manufacture, test and launch its 56
satellite constellation. The price of the contract consists of three parts, the
first for non-recurring work at a price not to exceed $117.1 million, the second
for recurring work at a fixed price of $15.6 million per satellite (including
certain performance incentives of up to approximately $1.9 million per
satellite) and the third for launch services and insurance. SS/L has agreed to
obtain launch vehicles and arrange for the launch of Globalstar's satellites on
Globalstar's behalf for all 56 satellites, and obtain insurance to cover the
replacement cost of satellites or launch vehicles lost in the event of a launch
failure. In certain circumstances these amounts are subject to equitable
adjustment in light of future market conditions, which may, in turn, be
influenced by international political developments. Any change in such
assumptions may result in an increase in the costs paid by Globalstar, which may
be substantial. Termination by Globalstar of this contract would result in
termination fees, which may be substantial.
During 1996, Globalstar authorized SS/L to alter its original launch plans
and procure three launches of the Starsem Soyuz launch vehicle, which will
launch four Globalstar satellites each. The selection of these launch vehicles
is part of a strategy to place on-orbit a constellation of at least 40
satellites by the first quarter of 1999 even in the event of launch failures. As
a result of this decision, total costs for launch vehicles and insurance are
expected to be approximately $455 million.
SS/L has entered into fixed-price subcontracts aggregating approximately
$650 million, with certain of Globalstar's direct or indirect limited partners.
Some of these contracts are subject to adjustment.
Globalstar's space segment contract with SS/L calls for a portion of the
contract price to be deferred as vendor financing (see Note 5.).
The Ground Segment
Globalstar has entered into a contract with Qualcomm providing for the
design, development, manufacture, installation, testing and maintenance of four
gateways, two ground operations control centers and 100 pre-production
subscriber terminals. The contract provides for reimbursement to Qualcomm,
subject to a cap for certain joint development efforts, for contract costs
incurred, plus a 12% fee thereon. Termination by Globalstar of its contract with
Qualcomm would result in delays and termination fees, which may be substantial.
A portion of the ground operations control center software is being developed by
Globalstar.
Qualcomm is currently preparing a revised estimate of costs under its
contract with Globalstar and has given Globalstar indication that, due to
additional integration testing procedures to support system readiness on
schedule, scope changes to add features, capabilities and functions, cost growth
and other factors, the total cost may increase to $545 million. The Qualcomm
estimate is subject to further review by Globalstar. In addition, Globalstar has
authorized the expenditure of $25 million for the development of additional
service features and $30 million to fund development efforts of additional
handset suppliers.
Globalstar and its strategic service providers intend to jointly finance
the procurement of 33 gateways for resale to service providers, thereby
accelerating the deployment of gateways around the world prior to the
F-21
54
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION (CONTINUED)
In-Service Date. Globalstar has agreed to finance approximately $80 million of
the cost of these gateways and expects to recover its cost from the resale of
these gateways to service providers.
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. In addition, Globalstar will receive a payment of up to $10 on each
Globalstar subscriber terminal sold, until Globalstar funding of that design has
been recovered.
Globalstar has entered into an agreement with Lockheed Martin for the
development and delivery of two satellite operations control centers and 33
telemetry and command units for the Globalstar System. The maximum contract
price is $25.1 million and provides for reimbursement to Lockheed Martin for
contract costs incurred such as labor, materials, travel, license fees,
royalties and general and administrative expenses. Lockheed Martin will receive
a 12% fee under the contract, 6% of which is payable at the time the costs are
incurred, with the remainder payable upon achievement of certain milestones.
Globalstar will own any intellectual property produced under the contract.
5. VENDOR FINANCING LIABILITY
Globalstar's space segment contract with SS/L calls for approximately $310
million of the contract price to be deferred as vendor financing. Of the $310
million, $90 million is interest bearing at the 30-day LIBOR rate plus 3% per
annum. The remaining $220 million of vendor financing is non-interest bearing.
Globalstar will repay the non-interest bearing portions as follows: $49 million
following the launch and acceptance of 24 or more satellites (the "Preliminary
Constellation"), $61 million upon the launch and acceptance of 48 or more
satellites (the "Full Constellation"), and the remainder in equal installments
over the five-year period following acceptance of the Preliminary and Full
Constellations. Payment of the $90 million interest bearing vendor financing
will be deferred until December 31, 1998 or the Full Constellation Date,
whichever is earlier. Thereafter, interest and principal will be repaid in
twenty equal quarterly installments over the next five years. At December 31,
1996 and 1995, approximately $72.0 million and $21.5 million, respectively, of
the vendor financing liability was interest bearing.
6. CREDIT FACILITY
On December 15, 1995, Globalstar entered into a $250 million credit
agreement (the "Credit Agreement") with a group of banks. Lockheed Martin,
Qualcomm, SS/L and another Globalstar partner have guaranteed $206.3 million,
$21.9 million, $11.7 million and $10.1 million of the Credit Agreement,
respectively. In addition, Loral agreed to indemnify Lockheed Martin for any
liability in excess of $150 million. The Credit Agreement provides that
Globalstar may select loans at varying interest rates, including the Eurodollar
rate plus 5/8%. Globalstar pays a commitment fee on the unused portion. The
Credit Agreement contains covenants requiring Globalstar to meet certain
financial ratios including minimum net worth of $200 million and limits
additional indebtedness and the payment of cash distributions. The Credit
Agreement expires on December 15, 2000.
In exchange for the guarantee and indemnity, GTL issued warrants to
purchase 4,185,318 shares of GTL common stock at $26.50 as follows: Loral
942,428 warrants, Lockheed Martin 2,511,190 warrants, Qualcomm 367,131 warrants,
SS/L 195,094 warrants and another Globalstar partner 169,475 warrants. Proceeds
from the exercise of the warrants will be used to purchase Globalstar ordinary
partnership interests under a one-for-one exchange arrangement. As part of this
transaction, Globalstar issued GTL warrants to purchase an additional 1,131,168
ordinary partnership interests of Globalstar. The estimated fair value of the
warrant agreement has been recorded as a deferred financing cost in the
accompanying financial statements. Globalstar has also agreed to pay the
guarantors, other than Lockheed Martin, a fee equal to 1.5% per annum of the
average
F-22
55
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CREDIT FACILITY (CONTINUED)
guaranteed amount outstanding under the Credit Agreement. Such fee will be
deferred and will be paid with interest commencing 90 days after the expiration
of the Credit Agreement.
On February 12, 1997, GTL and the holders of the warrants entered into an
arrangement under which GTL agreed to accelerate the vesting and exercisability
of the warrants to purchase 4,185,318 shares of GTL common stock at $26.50 per
share and the holders agreed to exercise such warrants. GTL also agreed to
register for resale the GTL shares issuable upon exercise of the warrants. In
addition, GTL announced its intention to distribute to the holders of its common
stock rights to subscribe for and purchase 1,131,168 GTL shares for a price of
$26.50 per share of which Loral will receive 159,172 rights. Loral agreed to
purchase all GTL shares not purchased upon exercise of the rights. Upon the
exercise of the warrants and the rights, GTL will receive proceeds of
approximately $140.9 million, which it will use to exercise warrants to purchase
5,316,486 Globalstar ordinary partnership interests at $26.50 per interest.
Globalstar will use such proceeds for the construction of the Globalstar System.
7. COMMITMENTS
The following table presents the future minimum lease payments required
under operating leases that have an initial lease term in excess of one year (in
thousands):
1997................................................ $1,045
1998................................................ 1,067
1999................................................ 1,090
2000................................................ 789
2001................................................ 156
Thereafter.......................................... 767
------
Total minimum payments required..................... $4,914
======
Rent expense for the years ended December 31, 1996 and 1995, and the period
March 23 to December 31, 1994, was approximately $1,067,000, $934,000, and
$373,000, respectively.
8. SALE OF REDEEMABLE PREFERRED PARTNERSHIP INTERESTS
On March 6, 1996 and April 3, 1996, GTL purchased 4,615,385 and 153,845
redeemable preferred partnership interests ("RPPIs"), respectively, in
Globalstar using the net proceeds of $299,500,000 from GTL's sale of its
Convertible Preferred Equivalent Obligations (the "CPEOs"). The RPPIs will
convert to ordinary general partnership interests on a one-for-one basis upon
any conversion of the CPEOs, will pay a quarterly preferred distribution to GTL
of 6 1/2% per annum, will be allocated losses of the partnership only after all
adjusted capital accounts of the ordinary partnership interests have been
reduced to zero, and are redeemable on terms comparable to the CPEOs. If still
outstanding, the RPPIs must be redeemed by Globalstar on March 1, 2006 for the
aggregate amount of $310,000,000 plus all unpaid distributions. Globalstar may
elect to make the quarterly preferred distribution and redemption payments to
GTL in cash or general partnership interests. If such distribution is made in
cash, GTL must make its interest payment on the CPEOs in cash. Globalstar may
elect to defer payment of the preferred distribution; in such case, GTL may also
elect to defer interest payment on the CPEOs, however, holders of the CPEOs are
entitled to certain representation rights on the General Partners' Committee of
Globalstar in the event six consecutive interest payments are deferred. Through
December 31, 1996, all payments have been made in cash on a timely basis.
F-23
56
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ORDINARY PARTNERS' CAPITAL
Initial Capital Subscriptions
Prior to the commencement of Globalstar's operations on March 23, 1994,
Loral and Qualcomm undertook independent efforts at their own risk to explore
the feasibility of a Globalstar-type system. Efforts to develop the Globalstar
System were formalized with the initial funding of Globalstar on March 23, 1994
through capital subscriptions of $50,000,000 for 18,000,000 general partner
interests and $225,000,000 for an aggregate of 18,000,000 limited partner
interests. In connection with the initial capital subscriptions, the partners of
Globalstar agreed to reimburse Loral and Qualcomm for certain expenditures
totaling $18,382,000, incurred related to such efforts from January 1, 1993
through March 22, 1994. These expenditures included development costs and
marketing, general and administrative expenses related to the Globalstar System.
The statements of operations include the costs for these periods under the
heading Pre-Capital Subscription Period.
In addition, costs of $2,235,000 were incurred in connection with the FCC
license application. The aggregate expenditures by Loral and Qualcomm of
$20,617,000 were reimbursed through a credit of $11,309,000 issued to the
general partner as a reduction of its required capital subscription payment and
a payment to Qualcomm of $9,308,000. The reimbursed expenses of $18,382,000 have
been charged to partners' capital as of the date of the capital subscription
agreement and allocated to the partners' capital accounts in accordance with the
partnership agreement. The $2,235,000 of costs relating to the FCC license
application are included in the balance sheet.
Other Arrangements
In connection with service provider arrangements in China, under which
China Telecommunications Broadcast Satellite Corporation ("China Sat") will act
as the sole distributor of Globalstar services in China, China Sat has the
right, under certain circumstances, to acquire up to 1,875,000 ordinary
partnership interests at $20 per partnership interest. China Sat may purchase
one-half of this amount currently and one-half upon reaching certain target
revenue levels.
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, the option's exercise date and the expiration date
of each option (provided no option shall be exercisable after the expiration of
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 a one-for-one exchange arrangement.
In 1995, options to purchase 110,400 shares of GTL common stock and in
1996, options to purchase 122,000 shares of GTL common stock were granted under
the Plan. 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. All options granted in 1995 and 1996 were non-qualified
stock options with a price equal to fair market value at the date of grant. As
of December 31, 1996, 18,800 shares of common stock were available for future
grant under the Plan, no options were exercised or are exercisable and 1,200
have been cancelled.
On September 14, 1995, Loral, in its capacity as managing general partner,
granted certain of its officers options to purchase 140,000 shares of the GTL
common stock owned by Loral at an exercise price of $20.00 per share. On
December 12, 1995 Loral, in its capacity as managing general partner, granted
non-employee
F-24
57
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ORDINARY PARTNER'S CAPITAL (CONTINUED)
directors of Loral options to purchase 200,000 shares of the GTL common stock
owned by Loral at an exercise price of $33.375 per share. Such exercise prices
were greater than or equal to the market price at grant date. These options are
immediately exercisable, and expire 12 years from date of grant; no options were
exercised or cancelled during the year.
On October 9, 1996, Loral, in its capacity as managing general partner,
granted certain of its officers options to purchase 152,000 shares of the GTL
common stock owned by Loral at a price $25.375 below market price on the grant
date. Such options vest over a three year period and expire 10 years from date
of grant; no options were exercised or cancelled during the year.
In April and December 1996, Loral granted certain officers and employees of
Globalstar options to purchase 99,000 shares of Loral common stock at $10.50 per
share and 5,000 shares of Loral common stock at $18.9375 per share,
respectively. Such exercise prices were equal to the market price at grant date.
These options expire ten years from the date of grant and become exercisable
ratably over a five year period.
As described in Note 2, Globalstar accounts for its stock-based
compensation using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
its related interpretations. Except for $317,000 of compensation expense in 1996
related to the below market option grant, no compensation expense has been
recognized in Globalstar's financial statements for stock-based compensation.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") requires the disclosure of pro forma net
income and earnings per share had Globalstar adopted the fair value method as of
the beginning of 1995. 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 restrictions, 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
were made using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, six months following vesting; stock
volatility, 30%; risk free interest rates, 6.25% in 1996 and 6% in 1995; 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.
If the computed fair values of the 1996 and 1995 awards (including the
stock-based awards made by Loral to its officers and directors on Globalstar's
behalf) had been amortized to expense over the vesting period of the awards, the
pro forma net loss applicable to ordinary partnership interests would have
increased by $1,755,000 to $73,724,000 in 1996 and would have increased by
$156,000 to $68,393,000 in 1995.
A summary of the status of the GTL stock option plan at December 31, 1996
and changes during the year then ended is presented below:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
Granted in 1995 (weighted average fair value $5.33 per share).... 110,400 $ 16.625
Outstanding at December 31, 1995................................. 110,400 16.625
Granted (weighted average fair value $18.04 per share)........... 122,000 54.90
Forfeited........................................................ (1,200) 16.625
--------
-
Outstanding at December 31, 1996................................. 231,200 36.824
=========
F-25
58
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ORDINARY PARTNER'S CAPITAL (CONTINUED)
The following table summarizes information about the stock options
outstanding at December 31, 1996:
WEIGHTED AVERAGE
NUMBER REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE-YEARS
------------------------------------------------------- ----------- ----------------------
$16.625 ............................................... 109,200 8.7
50.375 ............................................... 80,000 9.4
63.5313............................................... 42,000 9.9
10. PENSIONS AND OTHER EMPLOYEE BENEFITS
Prior to April 23, 1996, Globalstar employees were eligible to participate
in the employee benefit plans of Old Loral. Globalstar was charged for the
actual costs of these benefits which for the period March 23 through December
31, 1994, amounted to $321,000, including $55,000 relating to pensions and
retiree health care and life insurance benefits. The costs incurred for the year
ended December 31, 1995 amounted to $710,000, including $121,000 relating to
pensions and retiree health care and life insurance benefits. In April 1996,
separate pension, postretirement health care and life insurance and employee
savings plans were established by Globalstar.
Pensions: Globalstar maintains a noncontributory pension plan and a
supplemental pension plan covering certain employees. Eligibility for
participation in these plans vary and benefits are generally based on members'
compensation and years of service. Plan assets are generally invested in U.S.
government and agency obligations and listed stocks and bonds.
Pension cost for the year ended December 31, 1996 includes the following
components (in thousands):
Service cost-benefits earned during the period............................ $ 213
Interest cost on projected benefit obligation............................. 195
Actual return on plan assets.............................................. (134)
Net amortization and deferral............................................. (151)
--------
Total pension cost.............................................. $ 123
========
The following presents the plan's funded status and amounts recognized in
the balance sheet at December 31, 1996 (in thousands):
Actuarial present value of benefit obligations:
Vested benefits......................................................... $ 2,944
========
Accumulated benefits.................................................... $ 3,129
Effect of projected future salary increases............................. 764
--------
Projected benefits...................................................... 3,893
Plan assets at fair value................................................. 4,156
--------
Plan assets in excess of projected benefit obligation..................... 263
Unrecognized net gain..................................................... 386
--------
Pension liability......................................................... $ 123
========
F-26
59
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS (CONTINUED)
The principal actuarial assumptions were:
Discount rate............................................................... 7.75%
Rate of increase in compensation levels..................................... 4.50%
Expected long-term rate of return on plan assets............................ 9.50%
Postretirement Health Care and Life Insurance 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. These benefits are
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.
Postretirement health care and life insurance costs for the year ended
December 31, 1996 include the following components (in thousands):
Service cost -- benefits earned during the period......................... $ 29
Interest cost on accumulated postretirement benefit obligation............ 32
Net amortization and deferral............................................. 26
Return on assets.......................................................... (2)
--------
Total postretirement health care and life insurance costs....... $ 85
========
At December 31, 1996, the total accumulated postretirement benefit
obligation was $641,000. Actuarial assumptions used in determining the
accumulated postretirement benefit obligation include a discount rate of 7.75%
at December 31, 1996, and an assumed health care cost trend rate of 10.6%
decreasing gradually to an ultimate rate of 5.5% by the year 2004. Changing the
assumed health care cost trend by 1% in each year would change the accumulated
postretirement benefit obligation at December 31, 1996 by $110,000 and the
aggregate service and interest cost components by $12,000 for the year ended
December 31, 1996.
11. RELATED PARTY TRANSACTIONS
In addition to the transactions described in Notes 4, 5, 6, 8 and 9,
Globalstar has a number of other transactions with its affiliates. Globalstar
believes that the arrangements are as favorable to Globalstar as 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.
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, 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.
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60
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
A support agreement was entered into among Qualcomm, Loral and Globalstar
pursuant to which Qualcomm agreed to (i) assist Globalstar and SS/L with
Globalstar's system design, (ii) support Globalstar and Loral with respect to
various regulatory matters, including the FCC application and (iii) assist
Globalstar and Loral in their marketing efforts with respect to Globalstar. For
the years ended December 31, 1996 and 1995, and for the period March 23 through
December 31, 1994, Qualcomm has received approximately $1,823,000, $2,712,000
and $2,431,000, respectively, for costs incurred in rendering such support and
assistance.
Certain of Globalstar's limited partners have signed agreements granting
them the right to provide Globalstar System services to users in specific
countries on an exclusive basis, as long as specified minimum levels of
subscribers are met. These service providers will receive certain discounts from
Globalstar's expected pricing schedule generally over a five-year period.
Globalstar has entered into consulting agreements with certain limited
partners. Costs incurred under these arrangements for the years ended December
31, 1996 and 1995, and for the period March 23 through December 31, 1994, were
$496,000, $1,411,000 and $471,000, respectively. Globalstar anticipates that
similar agreements may be entered into with other strategic partners in the
future.
Current payable to affiliates consists of:
DECEMBER 31,
---------------------
1996 1995
------- -------
(IN THOUSANDS)
SS/L................................................... $22,572 $26,126
Qualcomm............................................... 40,903 21,443
Loral.................................................. 462 --
------- -------
Total.................................................. $63,937 $47,569
======= =======
Commencing after the initiation of Globalstar services, LQP, the general
partner of LQSS, will be paid an annual management fee equal to 2.5% of
Globalstar's revenues up to $500 million plus 3.5% of revenues in excess of $500
million. Should Globalstar incur a net loss in any year following commencement
of services, the management fee for that year will be reduced by 50% and LQP
will reimburse Globalstar for management fee payments, if any, received in any
prior quarter of such year, sufficient to reduce its management fee for the year
to 50%. No management fees have been paid to date.
12. REGULATORY MATTERS
Globalstar and its operations are, and will be, subject to substantial U.S.
and international regulation, including required regulatory approvals in each
country in which Globalstar intends to provide service. Globalstar's business
may be significantly affected by regulatory activities.
13. SUBSEQUENT EVENT
On February 13, 1997, Globalstar and GTL sold units consisting of $500
million principal amount of Globalstar's 11 3/8% Senior Notes due 2004 and
warrants to purchase 1,032,250 shares of GTL common stock in a private offering.
The notes are senior in right of payment to the redeemable preferred partnership
interests, may not be redeemed prior to February 2002 and are subject to a
prepayment premium prior to 2004. Interest on the notes is payable
semi-annually.
The indenture for the notes contains certain covenants that among other
things limit the ability of Globalstar to incur additional debt, issue preferred
stock, or pay dividends and certain distributions. In certain
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61
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENT (CONTINUED)
limited circumstances involving a change of control of Globalstar, as defined,
each note is redeemable at the option of the holder for 101% of the principal
amount plus accrued interest.
The warrants are exercisable on February 19, 1998 at a price of $69.575 per
share. The warrants represent approximately 1.7% of Globalstar's total
partnership interests on a fully diluted basis.
Globalstar will use the net proceeds of approximately $484 million from the
offering for the construction and deployment of the Globalstar System.
F-29
62
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
3.1 Memorandum of Association of Globalstar Telecommunications Limited*
3.2 Bye-Laws of Globalstar Telecommunications Limited*
4.1 Indenture dated as of March 6, 1996 relating the Company's 6 1/2% Convertible
Preferred Equivalent Obligations due 2006**
4.2 Indenture dated as of February 15, 1997 relating to Globalstar's 11 3/8% Senior
Notes due 2004+
10.1 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P., dated as
of March 6, 1996, among Loral/Qualcomm Satellite Services, L.P., Globalstar
Telecommunications Limited, AirTouch Satellite Services, San Giorgio S.p.A.,
Hyundai/Dacom, Loral/DASA Globalstar, L.P., Loral Globalstar, L.P., TE.S.A.M. and
Vodastar Limited+
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*
10.3 Subscription Agreement by and between Globalstar, L.P. and Loral/Qualcomm Satellite
Services, L.P.*
10.4 Satellite Procurement Letter Agreement by and among Globalstar, L.P., Hyundai
Electronics Industries Co., Ltd. and Space Systems/Loral, Inc.*
10.5 Contract for OmniTRACS Like Services Agreement between Globalstar, L.P. and Qualcomm
Incorporated*
10.6 Support Agreement by and among Qualcomm Incorporated, Globalstar, L.P. and
Loral/Qualcomm Satellite Services, Inc.*
10.7 Qualcomm Licensee Letter Agreement by and among Globalstar, L.P., Hyundai
Electronics Industries Co., Ltd. and Qualcomm Incorporated.*
10.8 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.*
10.9 Contract for the Development of Certain Portions of the Ground Operations Control
Center between Globalstar and Loral Western Development Laboratories.*
10.10 Contract for the Development of Satellite Orbital Operations Centers between
Globalstar and Loral Aerosys, a division of Loral Aerospace Corporation.*
10.11 1994 Stock Option Plan.*++
10.12 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+
10.13 Registration Rights Agreement dated March 6, 1996 relating to the Company's 6 1/2%
Convertible Preferred Equivalent Obligations due 2006**
10.14 Warrant Agreement dated as of February 19, 1997 relating to Warrants to purchase
1,032,250 shares of Common Stock+
10.15 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 1,032,250
shares of Common Stock issued in connection therewith+
12 Statement Regarding Computation of Ratios+
23.1 Consent of Deloitte & Touche LLP+
27 Financial Data Schedule (EDGAR only)+
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form S-1
(No. 33-86808).
** Incorporated by reference to the Company's Registration Statement on Form S-3
(No. 333-6477).
+ Filed herewith.
++ Management compensation plan.
(b) Reports on Form 8-K
None
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