Attached files
| file | filename |
|---|---|
| 8-K - Globalstar, Inc. | v188424_8k.htm |
| EX-99.4 - Globalstar, Inc. | v188424_ex99-4.htm |
| EX-99.3 - Globalstar, Inc. | v188424_ex99-3.htm |
| EX-99.1 - Globalstar, Inc. | v188424_ex99-1.htm |
This
Management Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our consolidated financial
statements and notes thereto in Item 8 of this Report.
Overview
We are a
provider of mobile voice and data communication services via satellite. Our
communications platform extends telecommunications beyond the boundaries of
terrestrial wireline and wireless telecommunications networks to serve our
customer’s desire for connectivity. Using in-orbit satellites and ground
stations, which we call gateways, we offer voice and data communications
services to government agencies, businesses and other customers in over 120
countries.
Material Trends and
Uncertainties. Our satellite communications business, by
providing critical mobile communications to our subscribers, serves principally
the following markets: government, public safety and disaster relief; recreation
and personal; oil and gas; maritime and fishing; natural resources, mining and
forestry; construction; utilities; and transportation. Our industry has been
growing as a result of:
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favorable market reaction to new
pricing plans with lower service
charges;
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awareness of the need for remote
communication
services;
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increased
demand for communication services by disaster and relief agencies and
emergency first responders;
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improved
voice and data transmission
quality;
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a
general reduction in prices of user equipment;
and
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innovative
data products and services.
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Nonetheless,
as further described under “Risk Factors,” we face a number of challenges and
uncertainties, including:
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Constellation life and
health. Our current satellite constellation is aging.
We successfully launched our eight spare satellites in 2007. All of our
satellites launched prior to 2007 have experienced various anomalies over
time, one of which is a degradation in the performance of the solid-state
power amplifiers of the S-band communications antenna subsystem (our
“two-way communication issues”). The S-band antenna provides the downlink
from the satellite to a subscriber’s phone or data terminal. Degraded
performance of the S-band antenna amplifiers reduces the availability of
two-way voice and data communication between the affected satellites and
the subscriber and may reduce the duration of a call. When the S-band
antenna on a satellite ceases to be functional, two-way communication is
impossible over that satellite, but not necessarily over the constellation
as a whole. We continue to provide two-way subscriber service because some
of our satellites are fully functional but at certain times in any given
location it may take longer to establish calls and the average duration of
calls may be reduced. There are periods of time each day during which no
two-way voice and data service is available at any particular location.
The root cause of our two-way communication issues is unknown, although we
believe it may result from irradiation of the satellites in orbit caused
by the space environment at the altitude that our satellites
operate.
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The
decline in the quality of two-way communication does not affect adversely our
one-way Simplex data transmission services, including our SPOT satellite GPS
messenger products and services, which utilize only the L-band uplink from a
subscriber’s Simplex terminal to the satellites. The signal is transmitted back
down from the satellites on our C-band feeder links, which are functioning
normally, not on our S-band service downlinks.
We
continue to work on plans, including new products and services and pricing
programs to mitigate the effects of reduced service availability upon our
customers and operations until our second-generation satellites are deployed.
See “Risk Factors” — Our satellites have a limited life and some have
failed, which causes our network to be compromised and which materially and
adversely affects our business, prospects and profitability.”
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Launch delays.
A major earthquake in Italy in April 2009 damaged Thales’
satellite component fabrication facility in L’Aquila, Italy. Although none
of our satellites or components were damaged, the delivery of some of our
satellites has been delayed. We believe that this delay will not have a
material adverse effect on our operations and business plan because we are
able to defer a significant portion of our capital expense unrelated to
the launch and construction of our satellites. We currently expect the
first of four launches of six second-generation satellites each to take
place in the late summer of 2010 and the fourth launch to be completed in
the late spring or early summer of
2011.
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The economy.
The current recession and its effects on credit markets and
consumer spending is adversely affecting sales of our products and
services and our access to
capital.
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Competition and pricing
pressures. We face increased competition from both the
expansion of terrestrial-based cellular phone systems and from other
mobile satellite service providers. For example, Inmarsat plans to
commence offering satellite services to handheld devices in the United
States in 2010, and several competitors, such as ICO Global and TerreStar,
are constructing or have launched geostationary satellites that provide
mobile satellite service. Increased numbers of competitors, and the
introduction of new services and products by competitors, increases
competition for subscribers and pressures all providers, including us, to
reduce prices. Increased competition may result in loss of subscribers,
decreased revenue, decreased gross margins, higher churn rates, and,
ultimately, decreased profitability and
cash.
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Technological changes.
It is difficult for us to respond promptly to major
technological innovations by our competitors because substantially
modifying or replacing our basic technology, satellites or gateways is
time-consuming and very expensive. Approximately 76% of our total assets
at December 31, 2009 represented fixed assets. Although we plan to procure
and deploy our second- generation satellite constellation and upgrade our
gateways and other ground facilities, we may nevertheless become
vulnerable to the successful introduction of superior technology by our
competitors.
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Capital Expenditures.
We have incurred significant capital expenditures from 2007
through 2009, and we expect to incur additional significant expenditures
through 2013 to complete and launch our second-generation constellation
and related upgrades.
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Introduction of new
products. We work continuously with the manufacturers
of the products we sell to offer our customers innovative and improved
products. Prior to our recent acquisition of Axonn’s assets, virtually all
engineering, research and development costs of these new products have
been paid by the manufacturers. However, to the extent the costs are
reflected in increased inventory costs to us, and we are unable to raise
our prices to our subscribers correspondingly, our margins and
profitability would be
reduced.
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Simplex Products (Personal Tracking
Services and Emergency Messaging). In early November 2007, we
introduced the SPOT satellite GPS messenger, aimed at attracting both the
recreational and commercial markets that require personal tracking, emergency
location and messaging solutions for users that require these services beyond
the range of traditional terrestrial and wireless communications. Using the
Globalstar Simplex network and web-based mapping software, this device provides
consumers with the capability to trace or map the location of the user on Google
Maps TM . The
product enables users to transmit messages to specific preprogrammed email
addresses, phone or data devices, and to request assistance in the event of an
emergency. We are continuing to work on additional SPOT-like
applications.
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SPOT
Satellite GPS Messenger Addressable
Market
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We
believe the addressable market for our SPOT satellite GPS messenger products and
services in North America alone is approximately 50 million units consisting
primarily of outdoor enthusiasts. Our objective is to capture 2-3% of that
market in the next few years. The reach of our Simplex system, on which our SPOT
satellite GPS messenger products and services rely, covers approximately 60% of
the world population. We intend to market our SPOT satellite GPS messenger products and services aggressively in our overseas markets
including South and Central America, Western Europe, and through independent
gateway operators in their respective territories.
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SPOT
Satellite GPS Messenger
Pricing
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We intend
the pricing for SPOT satellite GPS messenger products and services and equipment
to be very attractive in the consumer marketplace. Annual service fees,
depending whether they are for domestic or international service, currently
range from $99.99 to approximately $150.00 for our basic level plan, and $149.98
to approximately $168.00 with additional tracking capability. The equipment is
sold to end users at $149.99 to approximately $225.00 per unit (subject to
foreign currency exchange rates). Our distributors set their own retail prices
for SPOT satellite GPS messenger equipment.
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SPOT
Satellite GPS Messenger
Distribution
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We are
distributing and selling our SPOT satellite GPS messenger through a variety of
existing and new distribution channels. We have distribution relationships with
a number of “Big Box” retailers and other similar distribution channels
including Amazon.com, Bass Pro Shops, Best Buy, Pep Boys, Big 5 Sporting Goods,
Big Rock Sports, Cabela’s, Campmor, London Drugs, Gander Mountain, REI,
Sportsman’s Warehouse, Wal-Mart.com, West Marine, DBL Distributing, D.H.
Distributing, and CWR Electronics. We currently sell SPOT satellite GPS
messenger products through approximately 10,000 distribution points. We also
sell directly using our existing sales force into key vertical markets and
through our direct e-commerce website ( www.findmespot.com
).
SPOT
satellite GPS messenger products and services have been on the market for only
twenty-three months in North America and their commercial introduction and their
commercial success globally cannot be assured.
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Fluctuations in currency
rates. A substantial portion of our revenue (33% and
40% for 2009 and 2008, respectively) is denominated in foreign currencies.
In addition, certain obligations under the contracts for our
second-generation constellation and related control network facility are
denominated in Euros. Any decline in the relative value of the U.S. dollar
may adversely affect our revenues and increase our capital expenditures.
See “Item 3. Quantitative and Qualitative Disclosures about Market Risk”
for additional information.
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Ancillary Terrestrial
Component (ATC). ATC is the integration of a
satellite-based service with a terrestrial wireless service resulting in a
hybrid mobile satellite service. The ATC network would extend our services
to urban areas and inside buildings in both urban and rural areas where
satellite services currently are impractical. We believe we are at the
forefront of ATC development and we are the first market entrant through
our contract with Open Range described below. We are considering a range
of additional options for rollout of our ATC services. We are exploring
selective opportunities with a variety of media and communication
companies to capture the full potential of our spectrum and U.S. ATC
license.
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In
October 2007, we entered into an agreement with Open Range, Inc. that permits
Open Range to deploy service in certain rural geographic markets in the United
States under our ATC authority. Open Range will use our S-band spectrum to offer
dual mode mobile satellite based and terrestrial wireless WiMAX services to over
500 rural American communities. In December 2008, we amended our agreement with
Open Range. The amended agreement reduced our preferred equity commitment to
Open Range from $5 million to $3 million (which investment was made in the form
of bridge loans that converted into preferred equity at the closing of Open
Range’s equity financing). Under the agreement as amended, Open Range will have
the right to use a portion of our spectrum within the United States and, if Open
Range so elects, it can use the balance of our spectrum authorized for ATC
services, to provide these services. Open Range has options to expand this
relationship over the next six years, some of which are conditional upon Open
Range electing to use all of the licensed spectrum covered by the agreement.
Commercial availability is began in selected markets in the last quarter of
2009. The initial term of the agreement of up to 30 years is co-extensive with
our ATC authority and is subject to renewal options exercisable by Open Range.
Either party may terminate the agreement before the end of the term upon the
occurrence of certain events, and Open Range may terminate it at any time upon
payment of a termination fee that is based upon a percentage of the remaining
lease payments. Based on Open Range’s business plan used in support of its $267
million loan under a federally authorized loan program, the fixed and variable
payments to be made by Open Range over the initial term of 30 years indicate a
value for this agreement between $0.30 and $0.40/MHz/POP. Open Range satisfied
the conditions to implementation of the agreement on January 12, 2009 when it
completed its equity and debt financing, consisting of a $267 million broadband
loan from the Department of Agriculture Rural Utilities Program and equity
financing of $100 million. Open Range has remitted to us its initial down
payment of $2 million. Open Range’s annual payments in the first six years of
the agreement will range from approximately $0.6 million to up to $10.3 million,
assuming it elects to use all of the licensed spectrum covered by the agreement.
The amount of the payments that we will receive from Open Range will depend on a
number of factors, including the eventual geographic coverage of and the number
of customers on the Open Range system.
In
addition to our agreement with Open Range, we hope to exploit additional ATC
monetization strategies and opportunities in urban markets or in suburban areas
that are not the subject of our agreement with Open Range. Our system is
flexible enough to allow us to use different technologies and network
architectures in different geographic areas.
Service and Subscriber Equipment
Sales Revenues. The table below sets forth amounts and
percentages of our revenue by type of service and equipment sales for 2009, 2008
and 2007 (in thousands):
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Year Ended
December 31, 2009
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Year Ended
December 31, 2008
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Year Ended
December 31, 2007
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Revenue
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% of
Total
Revenue
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Revenue
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% of
Total
Revenue
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Revenue
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% of
Total
Revenue
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Service
Revenue:
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Mobile
(voice and data)
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$ | 26,573 | 42 | % | $ | 41,883 | 49 | % | $ | 60,920 | 62 | % | ||||||||||||
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Fixed
(voice and data)
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2,331 | 4 | 3,506 | 4 | 5,369 | 5 | ||||||||||||||||||
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Data
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613 | 1 | 784 | 1 | 1,649 | 2 | ||||||||||||||||||
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Simplex
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13,430 | 21 | 6,362 | 7 | 2,407 | 2 | ||||||||||||||||||
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Independent
gateway operators
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1,191 | 2 | 3,098 | 4 | 4,465 | 5 | ||||||||||||||||||
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Other (1)
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6,090 | 8 | 6,161 | 7 | 3,503 | 4 | ||||||||||||||||||
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Total
Service Revenue
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50,228 | 78 | 61,794 | 72 | 78,313 | 80 | ||||||||||||||||||
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Subscriber
Equipment Sales:
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Mobile
equipment
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2,402 | 4 | 8,095 | 9 | 11,931 | 12 | ||||||||||||||||||
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Fixed
equipment
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183 | — | 1,164 | 1 | 2,160 | 2 | ||||||||||||||||||
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Data
and Simplex
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7,619 | 12 | 10,170 | 12 | 1,946 | 2 | ||||||||||||||||||
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Accessories/misc.
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3,847 | 6 | 4,832 | 6 | 4,048 | 4 | ||||||||||||||||||
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Total
Subscriber Equipment Sales
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14,051 | 22 | 24,261 | 28 | 20,085 | 20 | ||||||||||||||||||
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Total
Revenue
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$ | 64,279 | 100 | % | $ | 86,055 | 100 | % | $ | 98,398 | 100 | % | ||||||||||||
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(1)
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Includes activation fees and
engineering service revenue.
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Subscribers and ARPU for 2009, 2008
and 2007. The following table set forth our average number of
subscribers and ARPU for retail, IGO and Simplex customers for 2009, 2008 and
2007. The following numbers are subject to immaterial rounding inherent in
calculating averages.
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Year Ended December 31,
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2009
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2008
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% Net Change
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Average
number of subscribers for the period:
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Retail
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111,784 | 118,580 | (6 | )% | ||||||||
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IGO
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70,018 | 79,202 | (12 | ) | ||||||||
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Simplex
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189,819 | 118,072 | 61 | |||||||||
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ARPU
(monthly):
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Retail
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$ | 25.22 | $ | 35.19 | (28 | )% | ||||||
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IGO
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$ | 1.42 | $ | 3.26 | (56 | ) | ||||||
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Simplex
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$ | 5.85 | $ | 4.48 | 31 | |||||||
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Year Ended December 31,
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2008
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2007
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% Net
Change
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Average
number of subscribers for the period:
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Retail
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118,580 | 122,709 | (3 | )% | ||||||||
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IGO
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79,202 | 90,254 | (12 | ) | ||||||||
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Simplex
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118,072 | 64,034 | 84 | |||||||||
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ARPU
(monthly):
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Retail
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$ | 35.19 | $ | 46.26 | (24 | )% | ||||||
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IGO
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$ | 3.26 | $ | 4.12 | (21 | ) | ||||||
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Simplex
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$ | 4.48 | $ | 3.11 | 44 | |||||||
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December 31,
2009
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December 31,
2008
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% Net
Change
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Ending
number of subscribers:
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Retail
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106,974 | 115,371 | (7 | )% | ||||||||
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IGO
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64,723 | 73,763 | (12 | ) | ||||||||
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Simplex
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218,897 | 155,196 | 41 | |||||||||
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Total
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390,594 | 344,330 | 13 | % | ||||||||
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December 31,
2008
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December 31,
2007
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% Net
Change
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Ending
number of subscribers:
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Retail
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115,371 | 118,747 | (3 | )% | ||||||||
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IGO
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73,763 | 87,930 | (16 | ) | ||||||||
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Simplex
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155,196 | 77,449 | 100 | |||||||||
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Total
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344,330 | 284,126 | 21 | % | ||||||||
The total
number of net subscribers increased from approximately 344,000 at December 31,
2008 to approximately 391,000 at December 31, 2009. Although we experienced a
net increase in our total customer base of 13% from December 31, 2008 to
December 31, 2009, our total service revenue decreased for the same period. This
is due primarily to lower contributions from subscribers in addition to the
change in our subscriber mix.
Independent
Gateway Acquisition Strategy
Currently,
14 of the 27 gateways in our network are owned and operated by unaffiliated
companies, which we call independent gateway operators, some of whom operate
more than one gateway. Except for the new gateway in Nigeria, in which we hold a
30% equity interest, we have no financial interest in these independent gateway
operators other than arms’ length contracts for wholesale minutes of service.
Some of these independent gateway operators have been unable to grow their
businesses adequately due in part to limited resources. Old Globalstar initially
developed the independent gateway operator acquisition strategy to establish
operations in multiple territories with reduced demands on its capital. In
addition, there are territories in which for political or other reasons, it is
impractical for us to operate directly. We sell services to the independent
gateway operators on a wholesale basis and they resell them to their customers
on a retail basis.
We have
acquired, and intend to continue to pursue the acquisition of, independent
gateway operators when we believe we can do so on favorable terms and the
current independent operator has expressed a desire to sell its assets to us,
subject to capital availability. We believe that these acquisitions can enhance
our results of operations in three respects. First, we believe that, with our
greater financial and technical resources, we can grow our subscriber base and
revenue faster than some of the independent gateway operators. Second, we
realize greater margin on retail sales to individual subscribers than we do on
wholesale sales to independent gateway operators. Third, we believe expanding
the territory we serve directly will better position us to market our services
directly to multinational customers who require a global communications
provider.
However,
acquisitions of independent gateway operators do require us to commit capital,
as well as management resources and working capital to support the gateway
operations, and therefore increase our risk in operating in these territories
directly rather than through the independent gateway operators. In addition,
operating the acquired gateways increases our marketing, general and
administrative expenses. Our Facility Agreement limits to $25.0 million the
aggregate amount of cash we may invest in foreign acquisitions without the
consent of our lenders and requires us to satisfy certain conditions in
connection with any acquisition.
In March
2008, we acquired an independent gateway operator that owned three satellite
gateway ground stations in Brazil for $6.5 million, paid in shares of our common
stock. We also incurred transaction costs of $0.3 million related to this
acquisition. In June 2009, we entered into a business transfer agreement with LG
Dacom, the independent gateway operator in South Korea, to acquire its gateway
and other Globalstar assets for approximately $1 million in cash. No closing has
been set for the South Korean acquisition.
We are
unable to predict the timing or cost of further acquisitions because independent
gateway operations vary in size and value.
Performance
Indicators
Our
management reviews and analyzes several key performance indicators in order to
manage our business and assess the quality of and potential variability of our
earnings and cash flows. These key performance indicators include:
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total
revenue, which is an indicator of our overall business
growth;
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subscriber
growth and churn rate, which are both indicators of the satisfaction of
our customers;
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average
monthly revenue per unit, or ARPU, which is an indicator of our pricing
and ability to obtain effectively long-term, high-value customers. We
calculate ARPU separately for each of our retail, IGO and Simplex
businesses;
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operating
income, which is an indication of our
performance;
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EBITDA,
which is an indicator of our financial performance;
and
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capital
expenditures, which are an indicator of future revenue growth potential
and cash requirements.
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Seasonality
Our
results of operations are subject to seasonal usage changes. April through
October are typically our peak months for service revenues and equipment sales.
Government customers in North America tend to use our services during summer
months, often in support of relief activities after events such as hurricanes,
forest fires and other natural disasters.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements requires us to make
estimates and judgments that affect our revenues and expenses for the periods
reported and the reported amounts of our assets and liabilities, including
contingent assets and liabilities, as of the date of the financial statements.
We evaluate our estimates and judgments, including those related to revenue
recognition, inventory, long-lived assets, income taxes, derivative instruments
and stock-based compensation, on an on-going basis. We base our estimates and
judgments on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from our estimates under different assumptions or conditions. We believe the
following accounting policies are most important to understanding our financial
results and condition and require complex or subjective judgments and
estimates.
Revenue
Recognition
We bill
monthly access fees to retail customers and resellers, representing the minimum
monthly charge for each line of service based on its associated rate plan on the
first day of each monthly bill cycle. We bill airtime minute fees in excess of
the monthly access fees in arrears on the first day of each monthly billing
cycle. To the extent that billing cycles fall during the course of a given month
and a portion of the monthly services has not been delivered at month end, we
prorate fees and defer fees associated with the undelivered portion of a given
month. Under certain annual plans, where customers prepay for minutes, we defer
revenue until the minutes are used or the prepaid time period expires. Unused
minutes accumulate until they expire, usually one year after activation. In
addition, we offer other annual plans under which the customer is charged an
annual fee to access our system. We recognize these fees on a straight-line
basis over the term of the plan. In some cases, we charge a per minute rate
whereby we recognize the revenue when each minute is used.
Occasionally
we have granted credits to customers which are expensed or charged against
deferred revenue when granted.
Subscriber
acquisition costs include items such as dealer commissions, internal sales
commissions and equipment subsidies and are expensed at the time of the related
sale.
We also
provide certain engineering services to assist customers in developing new
technologies related to our system. We record the revenues associated with these
services when the services are rendered, and we record the expenses when
incurred. We record revenues and costs associated with long term engineering
contracts on the percentage-of-completion basis of accounting.
We own
and operate our satellite constellation and earn a portion of our revenues
through the sale of airtime minutes on a wholesale basis to independent gateway
operators. We recognize revenue from services provided to independent gateway
operators based upon airtime minutes used by their customers and contractual fee
arrangements. If collection is uncertain, we recognize revenue when cash payment
is received.
During
the second quarter of 2007, we introduced an unlimited airtime usage service
plan (the Unlimited Loyalty plan) which allows existing and new customers to use
unlimited satellite voice minutes for anytime calls for a fixed monthly or
annual fee. The unlimited loyalty plan incorporates a declining price schedule
that reduces the fixed monthly fee at the completion of each calendar year
through the duration of the customer agreement, which ends on June 30, 2010.
Customers have an option to extend their customer agreement by one year at the
fixed price. We record revenue for this plan on a monthly basis based on a
straight line average derived by computing the total fees charged over the term
of the customer agreement and dividing it by the number of the months. If a
customer cancels prior to the ending date of the customer agreement, we
recognize the balance in deferred revenue.
We sell
SPOT satellite GPS messenger services as annual plans and bill them to the
customer at the time the customer activates the service. We defer revenue on
such annual service plans upon activation and recognize it ratably over the
service term.
At
December 31, 2009 and 2008, our deferred revenue aggregated approximately $22.5
million (with $2.6 million included in non-current liabilities) and $20.6
million (with $1.3 million included in non-current liabilities),
respectively.
Subscriber
equipment revenue represents the sale of fixed and mobile user terminals,
accessories and our SPOT satellite GPS messenger product. We recognize revenue
upon shipment provided title and risk of loss have passed to the customer,
persuasive evidence of an arrangement exists, the fee is fixed and determinable
and collection is probable.
Inventory
Inventory
consists of purchased products, including fixed and mobile user terminals,
accessories and gateway spare parts. We state inventory transactions at the
lower of cost or market. At the end of each quarter, we review product sales and
returns from the previous twelve months and write off any excess and obsolete
inventory. Cost is computed using the first-in, first-out (FIFO) method. We
record inventory allowances for inventories with a lower market value or that
are slow moving in the period of determination.
Globalstar
System, Property and Equipment
Our
Globalstar System assets include costs for the design, manufacture, test and
launch of a constellation of low earth orbit satellites, including eight
satellites previously held as ground spares which we launched in May and October
2007, which we refer to as the space segment, and primary and backup terrestrial
control centers and gateways, which we refer to as the ground segment. We
recognize a loss from an in-orbit failure of a satellite as an expense in the
period it is determined that the satellite is not recoverable. We regard these
recently launched satellites as part of the second-generation constellation
which will be supplemented by the second-generation satellites currently being
constructed. We estimate the second-generation satellites scheduled to be
launched in 2010 and 2011 will have an in-orbit life of 15 years.
We review
the carrying value of the Globalstar System for impairment whenever events or
changes in circumstances indicate that the recorded value of the space segment
and ground segment may not be recoverable. We look to current and future
undiscounted cash flows, excluding financing costs, as primary indicators of
recoverability. If we determine an impairment exists, we calculate any related
impairment loss based on fair value. We believe our two-way telecommunications
services, or duplex services, after the launch of our second-generation
constellation, and Simplex services will generate sufficient undiscounted cash
flow after our second-generation system becomes operational, to justify our
carrying value for our second-generation costs.
We began
depreciating the satellites previously recorded as spare satellites and
subsequently incorporated into the Globalstar System on the date each satellite
was placed into service (the “In-Service Date”) over an estimated life of eight
years.
Income
Taxes
Until
January 1, 2006, we and our U.S. operating subsidiaries were treated as
partnerships for U.S. tax purposes. Generally, taxable income or loss,
deductions and credits of a partnership are passed through to its partners.
Effective January 1, 2006, we elected to be taxed as a C corporation for U.S.
tax purposes and began accounting for income taxes as a
corporation.
As of
December 31, 2009 and 2008, we had gross deferred tax assets of approximately
$148.4 million and $122.6 million, respectively. We established a valuation
reserve of $148.4 million and $122.6 million as of December 31, 2009 and 2008
respectively due to our concern that it may be more likely than not that we may
not be able to utilize the deferred tax assets.
Derivative
Instruments
Prior to
December 10, 2008, we utilized a derivative instrument in the form of an
interest rate swap agreement. We used the interest rate swap agreement to manage
risk and not for trading or other speculative purposes. At the
end of each accounting period, we recorded the derivative instrument on our
balance sheet as either an asset or a liability measured at fair value. The
interest rate swap agreement did not qualify for hedge accounting treatment.
Changes in the fair value of the interest rate swap agreement were recognized as
“Derivative gain (loss)” over the life of the agreements. We terminated the
interest swap agreement on December 10, 2008 by making a payment of
approximately $9.2 million.
In June
2009, in connection with entering into the Facility Agreement, which provides
for interest at a variable rate, we entered into ten-year interest rate cap
agreements. The interest rate cap agreements reflect a variable notional amount
ranging from $586.3 million to $14.8 million at interest rates that provide us
coverage for exposure resulting from escalating interest rates over the term of
the Facility Agreement. The interest rate cap provides limits on the 6-month
Libor rate (“Base Rate”) used to calculate the coupon interest on outstanding
amounts on the Facility Agreement of 4.00% from the date of issuance through
December 2012. Thereafter, the Base Rate is capped at 5.50% should the Base Rate
not exceed 6.5%. Should the Base Rate exceed 6.5%, our Base Rate will be 1% less
than the then 6-month Libor rate.
We
recorded the conversion rights and features embedded within the 8.00%
Convertible Senior Unsecured Notes (8.00% Notes) as a compound embedded
derivative liability within Other Non-Current Liabilities on our Consolidated
Balance Sheet with a corresponding debt discount which is netted against the
face value of the 8.00% Notes. We are accreting the debt discount associated
with the compound embedded derivative liability to interest expense over the
term of the 8.00% Notes using the effective interest rate method. The fair value
of the compound embedded derivative liability will be marked-to-market at the
end of each reporting period, with any changes in value reported as “Derivative
gain (loss)” in the Consolidated Statements of Operations. We determine the fair
value of the compound embedded derivative on a quarterly basis using a Monte
Carlo simulation model based upon a risk-neutral stock price model.
Due to
the cash settlement provisions and reset features in the warrants issued with
the 8.00% Notes, we recorded the warrants as Other Long Term Liabilities on our
Consolidated Balance Sheet with a corresponding debt discount which is netted
against the face value of the 8.00% Notes. We are accreting the debt discount
associated with the warrant liability to interest expense over the term of the
warrants using the effective interest rate method. The fair value of the warrant
liability will be marked-to-market at the end of each reporting period, with any
changes in value reported as “Derivative gain (loss)” in the Consolidated
Statements of Operations. We determine the fair value of the Warrant derivative
at each reporting date using a Monte Carlo simulation model based upon a
risk-neutral stock price model.
We
determined that the warrants issued in conjunction with the availability fee for
the Contingent Equity Agreement, were a liability and recorded it as a component
of Other Non-Current Liabilities, at issuance. The corresponding benefit is
recorded in prepaid and other current assets and is being amortized over the
one-year availability period. The fair value of the warrant liability will be
marked-to-market at the end of each reporting period, with any changes in value
reported as “Derivative gain (loss)” in our Consolidated Statements of
Operations. We determine the fair value of the Warrant derivative at each
reporting date using a risk-neutral binomial model. See Note 15 to our
Consolidated Financial Statements for further information.
Stock-Based
Compensation
U.S. GAAP
requires us to recognize compensation expense in the financial statements for
both employee and non-employee share-based awards based on the grant date fair
value of those awards. To measure compensation expense, we use complex models
which require estimates such as, forfeitures, vesting terms (calculated based on
market conditions associated with a certain award), volatility, risk free
interest rates. Additionally, stock-based compensation expense is recognized
over the requisite service periods of the awards on a straight-line basis, which
is generally commensurate with the vesting term.
Results
of Operations
Comparison
of Results of Operations for the Years Ended December 31, 2009 and
2008
|
Statements of Operations
|
Year Ended
December 31,
2009
|
Year Ended
December 31,
2008
|
%
Change
|
|||||||||
|
|
(In
thousands)
|
|
||||||||||
|
Revenue:
|
||||||||||||
|
Service
revenue
|
$ | 50,228 | $ | 61,794 | (19 | )% | ||||||
|
Subscriber
equipment sales
|
14,051 | 24,261 | (42 | ) | ||||||||
|
Total
Revenue
|
64,279 | 86,055 | (25 | ) | ||||||||
|
Operating
Expenses:
|
||||||||||||
|
Cost
of services (exclusive of depreciation and amortization shown separately
below)
|
36,204 | 37,132 | 3 | |||||||||
|
Cost
of subscriber equipment sales:
|
||||||||||||
|
Cost
of subscriber equipment sales
|
9,881 | 17,921 | 45 | |||||||||
|
Cost
of subscriber equipment sales – Impairment of
assets
|
913 | 405 | (125 | ) | ||||||||
|
Total
cost of subscriber equipment sales
|
10,794 | 18,326 | 41 | |||||||||
|
Marketing,
general and administrative
|
49,210 | 61,351 | 20 | |||||||||
|
Depreciation
and amortization
|
21,862 | 26,956 | 19 | |||||||||
|
Total
Operating Expenses
|
118,070 | 143,765 | 18 | |||||||||
|
Operating
loss
|
(53,791 | ) | (57,710 | ) | (7 | ) | ||||||
|
Gain
on extinguishment of debt
|
— | 41,411 | N/A | |||||||||
|
Interest
income
|
502 | 4,713 | (89 | ) | ||||||||
|
Interest
expense
|
(6,730 | ) | (5,733 | ) | (17 | ) | ||||||
|
Derivative
loss, net
|
(15,585 | ) | (3,259 | ) | (378 | ) | ||||||
|
Other
|
665 | (4,497 | ) | N/A | ||||||||
|
Loss
Before Income Taxes
|
(74,939 | ) | (25,075 | ) | (199 | ) | ||||||
|
Income
tax benefit
|
(16 | ) | (2,283 | ) | (99 | ) | ||||||
|
Net
Loss
|
$ | (74,923 | ) | $ | (22,792 | ) | (229 | ) | ||||
Revenue.
Total revenue decreased $21.8 million, or approximately 25%, to
$64.3 million for 2009, from $86.1 million for 2008. We attribute this decrease
mainly to lower service revenue which we believe stems from lower price service
plans introduced in order to maintain our subscriber base despite our two-way
communication issues and from reductions in sales of our duplex equipment. Our
retail ARPU during 2009 decreased by 28% to $25.22 from $35.19 in 2008. We added
approximately 46,000 net subscribers during 2009.
Service Revenue.
Service revenue decreased $11.6 million, or approximately 19%, to
$50.2 million for 2009, from $61.8 million for 2008. Although our subscriber
base grew 13% during 2009 to approximately 391,000, we experienced decreased
retail ARPU resulting in lower service revenue. The primary reason for this
decrease in our service revenue was the reduction of our prices in response to
our two-way communication issues.
Subscriber Equipment Sales.
Subscriber equipment sales decreased $10.2 million, or approximately
42%, to $14.1 million for 2009, from $24.3 million for 2008. We attribute this
decrease to reduced sales of our duplex products.
Operating
Expenses. Total operating expenses decreased $25.7 million,
or approximately 18%, to $118.1 million for 2009, from $143.8 million for 2008.
This decrease was due primarily to lower marketing, general and administrative
costs due in part to our reductions in headcount, lower cost of goods sold as a
result of lower equipment sales related to our duplex products and reduced
depreciation and amortization costs. These reductions were partially offset by
higher research and development expenses.
Cost of Services.
Our cost of services for 2009 and 2008 were $36.2 million and $37.1
million, respectively. Our cost of services is comprised primarily of network
operating costs, which are generally fixed in nature. The decrease in the cost
of services during 2009 is due primarily to lower contract labor and other
operating expenses partially offset by higher research and development expenses
related to our second-generation ground component development.
Cost of Subscriber Equipment
Sales. Cost of subscriber equipment sales decreased
approximately $7.5 million, or approximately 41%, to $10.8 million for 2009,
from $18.3 million for 2008. This decrease was due primarily to lower sales of
our duplex products.
Marketing, General and
Administrative. Marketing, general and administrative
expenses decreased $12.2 million, or approximately 20%, to $49.2 million for
2009, from $61.4 million for 2008. This decrease was due primarily to lower
marketing and advertising costs, reduced stock based compensation costs and
lower commissions related to the reduced revenue.
Depreciation and
Amortization. Depreciation and amortization expense decreased
approximately $5.1 million, or 19%, to $21.9 million for 2009, from $27.0
million for 2008. This decrease was due primarily to the first-generation
satellite constellation reaching fully-depreciated status at December 31,
2008.
Operating
Loss. Operating loss decreased approximately $3.9 million, to
$53.8 million for 2009, from $57.7 million for 2008. The decrease was due to
lower marketing, general and administrative costs due to various cost savings
measures including the reduction of headcount during 2009 and lower depreciation
and amortization costs due to our first generation satellite constellation being
fully depreciated in 2008.
Interest Income.
Interest income decreased by $4.2 million to $0.5 million for 2009,
from $4.7 million for 2008. This decrease was due to lower average cash balances
on hand and lower interest rates as compared to the prior year.
Interest Expense.
Interest expense increased by $1.0 million, to $6.7 million for 2009
from $5.7 million for 2008. This increase resulted from higher expenses due to
the amortization of our deferred financing costs related to our financing in
June 2009.
Derivative Loss, net.
For 2009, derivative loss was $15.6 million compared to $3.3 million
in 2008. This increased loss resulted from fair market value adjustments related
to the derivatives from our 8% Notes, the adjustment of the exercise price of
our warrants associated with our 8% Notes, which resulted in the number of
shares of common stock subject to the warrants increasing by 16.2 million due to
the issuance of stock as part of our acquisition of the assets of Axonn, and a
decrease in the fair value of our interest rate cap agreement as a result of a
decrease in market interest rates.
Other Income (Expense).
Other income (expense) generally consists of foreign exchange
transaction gains and losses. Other income increased by $5.2 million for 2009 as
compared to 2008 This change resulted primarily from an expense in 2008 due to
unfavorable exchange rate on the euro denominated escrow account for our
second-generation constellation procurement contract resulting from the
appreciation of the U.S dollar in 2008. The gain in 2009 was due primarily to
the favorable change in the exchange rate of the Canadian dollar.
Income Tax Benefit.
Income tax benefit for 2009 was approximately $16,000 compared to an
income tax benefit of approximately $2.3 million for 2008. The change between
periods was primarily a result of benefits from the conversion of our 5.75%
Notes into shares of our common stock during 2008.
Net Loss.
Our net loss increased approximately $52.1 million to a loss of
$74.9 million for 2009, from a net loss of $22.8 million for 2008. This increase
in net loss primarily resulted from a $41.4 million gain on the extinguishment
of debt in 2008, from our lower service and equipment sales revenue during 2009
when compared to 2008, decreases in interest income and increased derivative
losses as described above.
Comparison
of Results of Operations for the Years Ended December 31, 2008 and
2007
|
Statements of Operations
|
Year Ended
December 31,
2008
|
Year Ended
December 31,
2007
|
%
Change
|
|||||||||
|
|
(In thousands)
|
|
||||||||||
|
Revenue:
|
||||||||||||
|
Service
revenue
|
$ | 61,794 | $ | 78,313 | (21 | )% | ||||||
|
Subscriber
equipment sales (1)
|
24,261 | 20,085 | 21 | |||||||||
|
Total
Revenue
|
86,055 | 98,398 | (13 | ) | ||||||||
|
Operating
Expenses:
|
||||||||||||
|
Cost
of services (exclusive of depreciation and amortization shown separately
below)
|
37,132 | 27,775 | 34 | |||||||||
|
Cost
of subscriber equipment sales:
|
||||||||||||
|
Cost
of subscriber equipment sales (2)
|
17,921 | 13,863 | 29 | |||||||||
|
Cost
of subscriber equipment sales – Impairment of
assets
|
405 | 19,109 | (98 | ) | ||||||||
|
Total
cost of subscriber equipment sales
|
18,326 | 32,972 | (44 | ) | ||||||||
|
Marketing,
general and administrative
|
61,351 | 49,146 | 25 | |||||||||
|
Depreciation
and amortization
|
26,956 | 13,137 | 105 | |||||||||
|
Total
Operating Expenses
|
143,765 | 123,030 | 17 | |||||||||
|
Operating
loss
|
(57,710 | ) | (24,632 | ) | 134 | |||||||
|
Gain
on extinguishment of debt
|
41,411 | — | N/A | |||||||||
|
Interest
income
|
4,713 | 3,170 | 49 | |||||||||
|
Interest
expense
|
(5,733 | ) | (9,023 | ) | (36 | ) | ||||||
|
Derivative
loss, net
|
(3,259 | ) | (3,232 | ) | 1 | |||||||
|
Other
|
(4,497 | ) | 8,656 | N/A | ||||||||
|
Loss
Before Income Taxes
|
(25,075 | ) | (25,061 | ) | 1 | |||||||
|
Income
tax expense (benefit)
|
(2,283 | ) | 2,864 | N/A | ||||||||
|
Net
Loss
|
$ | (22,792 | ) | $ | (27,925 | ) | (18 | ) | ||||
|
(1)
|
Includes related party amounts of
$0 and $59 for 2008 and 2007, respectively.
|
|
(2)
|
Includes related party amounts of
$0 and $46 for 2008 and 2007,
respectively.
|
Revenue.
Total revenue decreased by $12.3 million, or approximately 13%, to
$86.1 million for 2008, from $98.4 million for 2007. This decrease is
attributable to lower service revenues as a result of our two-way communication
issues. Our service revenue was lower primarily due to price reductions aimed at
maintaining our subscriber base despite our two-way communication issues. Our
subscriber equipment sales increased during 2008 as compared to 2007 as a result
of the launch of our SPOT satellite GPS messenger product and services. Our
retail ARPU during 2008, decreased by 24% to $35.19 from $46.26 for 2007. We
added approximately 60,000 net subscribers in 2008 compared to 21,000 net
subscriber additions in 2007.
Service Revenue.
Service revenue decreased $16.5 million, or approximately 21%, to
$61.8 million for 2008, from $78.3 million for 2007. Although our subscriber
base grew 21% during 2008 to approximately 344,000, we experienced decreased
retail ARPU resulting in lower service revenue. The primary reason for this
decrease in our service revenue was the reduction of our prices in response to
our two-way communication issues.
Subscriber Equipment Sales.
Subscriber equipment sales increased by $4.2 million, or
approximately 21%, to $24.3 million for 2008, from $20.1 million for 2007. The
increase was due primarily to sales in 2008 of our SPOT satellite GPS messenger
product and services.
Operating
Expenses. Total operating expenses increased $20.7 million,
or approximately 17%, to $143.8 million for 2008, from $123.0 million for 2007.
This increase was due to higher cost of goods sold related to our new SPOT
satellite GPS messenger product, increased marketing, general and administrative
expenses due to our commencing sales of SPOT satellite products and services in
late 2007, as well as higher depreciation and amortization expenses related to
our eight spare satellites launched in 2007, all of which were partially offset
by a $19.1 million asset impairment charge recognized in 2007. In 2008, we
incurred a $0.4 million asset impairment charge.
Cost of Services.
Our cost of services for 2008 and 2007 were $37.1 million and $27.8
million, respectively. Our cost of services is comprised primarily of network
operating costs. Although our costs are generally fixed in nature, these costs
were higher in 2008 as a result of our recently acquired subsidiary in Brazil
and higher research and development expenses related to our second generation
ground component development.
Cost of Subscriber Equipment
Sales. Cost of subscriber equipment sales decreased
approximately $14.6 million, or approximately 44%, to $18.3 million for 2008,
from $33.0 million for 2007. This decrease was due primarily to the absence in
2008 of a $19.1 million impairment charge recorded in 2007 offset by higher
costs from the launch of our SPOT satellite GPS messenger product, which began
in November 2007.
Marketing, General and
Administrative. Marketing, general and administrative
expenses increased $12.2 million, or approximately 25%, to $61.4 million for
2008, from $49.1 million for 2007. This increase was due primarily to higher
sales and marketing costs related to our SPOT satellite GPS messenger product,
costs associated with the acquisition of our subsidiary in Brazil, and increased
labor and fringe costs.
Depreciation and
Amortization. Depreciation and amortization expense increased
approximately $13.8 million, or 105%, to $27.0 million for 2008, from $13.1
million for 2007. This increase was due primarily to the additional depreciation
associated with placing into service all of our spare satellites launched in
2007.
Operating Income
(Loss). Operating loss increased approximately $33.1 million,
to $57.7 million for 2008, from $24.6 million for 2007. The increase was due to
the higher operating costs described above and lower service
revenue.
Gain on Extinguishment of
Debt. We recognized $41.4 million in gains from the
conversions of 5.75% Notes into common stock during 2008.
Interest Income.
Interest income increased by $1.5 million to $4.7 million for 2008,
from $3.2 million for the same period in 2007. This increase was due to
increased average cash and restricted cash balances on hand.
Interest Expense.
Interest expense decreased by $3.3 million, to $5.8 million for 2008
from $9.0 million for 2007. This decrease was due primarily to the expensing, in
2007, of our deferred debt issuance costs of $8.1 million as a result of Thermo
Funding assuming all of the obligations of the administrative agent and the
lenders under our credit agreement with Wachovia Investment Holdings, LLC and
the other lenders parties thereto. In 2008, we expensed $1.9 million in deferred
financing costs.
Derivative Loss, net.
For 2008, interest rate derivative loss was $3.3 million compared to
$3.2 million in 2007. This increase was due to the unfavorable change in fair
value in our interest rate swap agreement which we terminated during the fourth
quarter of 2008.
Other Income (Expense).
Other income (expense) generally consists of foreign exchange
transaction gains and losses. Other income decreased by $13.2 million for 2008
as compared to 2007 due to an unfavorable exchange rate on the Euro denominated
escrow account and a decline in the Canadian dollar during 2008.
Income Tax Expense (Benefit).
Income tax benefit for 2008 was $2.3 million compared to expense of
$2.9 million during 2007. The change between periods was primarily a result of
benefits resulting from conversion of our 5.75% Notes into shares of common
stock during 2008.
Net Loss.
Our net loss decreased approximately $5.1 million to a loss of $22.8
million for 2008, from a net loss of $27.9 million for 2007. This decrease was
due to the gain on extinguishment of debt, partially offset by increases in
costs related to Brazil, higher depreciation and lower service
revenue.
Liquidity
and Capital Resources
The
following table shows our cash flows from operating, investing and financing
activities for 2009, 2008 and 2007 (in thousands):
|
Statements of Cash Flows
|
Year Ended
December 31,
2009
|
Year Ended
December 31,
2008
|
Year Ended
December 31,
2007
|
|||||||||
|
Net
cash used in operating activities
|
$ | (18,423 | ) | $ | (30,585 | ) | $ | (7,669 | ) | |||
|
Net
cash used in investing activities
|
(311,692 | ) | (258,581 | ) | (183,378 | ) | ||||||
|
Net
cash from financing activities
|
386,756 | 252,533 | 193,489 | |||||||||
|
Effect
of exchange rate changes on cash
|
(1,117 | ) | 11,436 | (8,586 | ) | |||||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
$ | 55,524 | $ | (25,197 | ) | $ | (6,144 | ) | ||||
At
January 1, 2010, our principal short-term liquidity needs were:
|
•
|
to make payments to procure our
second-generation satellite constellation and construct the Control
Network Facility, in a total amount not yet determined, but which will
include approximately €110.6 million payable to Thales Alenia Space by
December 31, 2010 under the purchase contract for our second-generation
satellites and €1.3 million payable to Thales Alenia Space by June 2010
under the contract for construction of the Control Network
Facility;
|
|
•
|
to make payments related to the
launch of our second-generation satellite constellation of approximately
$44.7 million payable to our Launch Provider by December 31,
2010;
|
|
•
|
to make payments related to the
construction of our second-generation ground component of approximately
$15.7 million by December 31, 2010;
and
|
|
•
|
to fund our working
capital.
|
During
2009, 2008 and 2007, our principal sources of liquidity were:
|
Year Ended
December 31,
2009
|
Year Ended
December 31,
2008
|
Year Ended
December 31,
2007
|
||||||||||
|
|
(Dollars in millions)
|
|||||||||||
|
Cash
on-hand at beginning of period
|
$ | 12.4 | $ | 37.6 | $ | 43.7 | ||||||
|
Net
proceeds from 5.75% Notes
|
$ | — | $ | 145.1 | $ | — | ||||||
|
Net
proceeds from 8.00% Notes
|
$ | 51.3 | $ | — | $ | — | ||||||
|
Borrowings
under Thermo Funding credit agreement, net
|
$ | 35.0 | $ | 116.1 | $ | 50.0 | ||||||
|
Proceeds
from Thermo equity purchases
|
$ | 1.0 | $ | — | $ | 152.7 | ||||||
|
Borrowings
under Facility Agreement
|
$ | 371.2 | $ | — | $ | — | ||||||
We plan
to fund our short-term liquidity requirements from the following
sources:
|
•
|
cash from our Facility Agreement
($215.1 million was available at December 31, 2009);
and
|
|
•
|
cash on hand at December 31,
2009.
|
Our
principal long-term liquidity needs are:
|
•
|
to pay the remaining costs of
procuring and deploying the remainder of our second-generation satellite
constellation and upgrading our gateways and other ground
facilities;
|
|
•
|
to fund our working capital,
including any growth in working capital required by growth in our
business;
|
|
•
|
to fund the cash requirements of
our independent gateway operator acquisition strategy, in an amount not
determinable at this time;
and
|
|
•
|
to fund repayment of our
indebtedness when due.
|
Sources
of long-term liquidity may include, if necessary, a $34.3 million debt service
reserve account and related $12.5 million guarantee and a $60.0 million
contingent equity account established in connection with the Facility Agreement
and additional debt and equity financings which have not yet been arranged. We
also expect cash flow from operations to be a source of long-term liquidity once
we have deployed our second-generation satellite constellation.
Based on
our operating plan combined with our borrowing capacity under our Facility
Agreement, we believe we will have sufficient resources to meet our cash
obligations for at least the next 12 months.
Net
Cash used in Operating Activities
Net cash
used in operating activities for 2009 decreased to a cash outflow of $18.4
million from an outflow of $30.6 million for 2008. This decrease was due
primarily to cost savings efforts in our general and administrative areas and
reduced inventory purchases.
Net cash
used in operating activities for 2008 increased to a cash outflow of $30.6
million from an outflow of $7.7 million for 2007. This increase was due
primarily to lower revenues, lower inventory turnover and higher operating
expenses during 2008 as compared to 2007.
Net
Cash used in Investing Activities
Cash used
in investing activities was $311.7 million for 2009, compared to $258.6 million
in 2008. This increase was primarily the result of increased payments related to
the construction of our second-generation satellite constellation.
Cash used
in investing activities was $258.6 million for 2008, compared to $183.4 million
in 2007. This increase was primarily the result of capital expenditures
associated with construction expenses for our second-generation satellite
constellation.
Net
Cash from Financing Activities
Net cash
provided by financing activities increased by $134.3 million to $386.8 million
in 2009 from $252.5 million in 2008. This is a direct result of our increased
borrowings, primarily from our Facility Agreement and 8% Notes, in
2009.
Net cash
provided by financing activities increased by $59.0 million to $252.5 million in
2008 from $193.5 million in 2007. The increase was primarily due to $116.1
million, net drawn on the credit agreement with Thermo Funding and the $145.1
million from the issuance of our 5.75% Notes.
Capital
Expenditures
We have
incurred significant capital expenditures from 2007 through 2009, and we expect
to incur additional significant expenditures through 2013 to complete and launch
our second-generation constellation and related upgrades.
The
amount of actual and contractual capital expenditures related to the
construction of the second-generation constellation and satellite operations
control centers, ground component and related costs and the launch services
contracts is presented in the table below (in millions):
|
Contract
|
Currency
of
Payment
|
Payments
through
December
31,
2009
|
2010
|
2011
|
Thereafter
|
Total
|
||||||||||||||||
|
Thales
Alenia Second Generation Constellation
|
EUR
|
€ | 358 | € | 110 | € | 88 | € | 123 | € | 679 |
(1)
|
||||||||||
|
Thales
Alenia Satellite Operations Control Centers
|
EUR
|
€ | 9 | € | 1 | € | — | € | — | € | 10 |
(1)
|
||||||||||
|
Arianespace
Launch Services
|
USD
|
$ | 157 | $ | 45 | $ | 14 | $ | — | $ | 216 | |||||||||||
|
Hughes
second-generation ground component (including research and development
expense)
|
USD
|
$ | 35 | $ | 15 | $ | 37 | $ | 16 | $ | 103 | |||||||||||
|
Ericsson
|
USD
|
$ | 1 | $ | 1 | $ | 8 | $ | 18 | $ | 28 | |||||||||||
|
(1)
|
Of these amounts, all but €227
million is payable at a fixed exchange rate of €1.00 = $1.42. See Item 7A
for an analysis of our foreign currency
exposure.
|
Cash
Position and Indebtedness
As of
December 31, 2009, our total cash and cash equivalents were $67.9 million and we
had total indebtedness of $465.8 million, compared to total cash and cash
equivalents and total indebtedness at December 31, 2008 of $12.4 million and
$271.9 million, respectively.
Facility
Agreement
On June
5, 2009, we entered into a $586.3 million senior secured facility agreement (the
Facility Agreement) with a syndicate of bank lenders, including BNP Paribas,
Natixis, Société Générale, Caylon, Crédit Industriel et Commercial as arrangers
and BNP Paribas as the security agent and COFACE agent. Ninety-five percent of
our obligations under the agreement are guaranteed by COFACE, the French export
credit agency. The initial funding process of the Facility Agreement began on
June 29, 2009 and was completed on July 1, 2009. The new facility is comprised
of:
|
•
|
a $563.3 million tranche for
future payments to and to reimburse us for amounts we previously paid to
Thales Alenia Space for construction of our second-generation satellites.
Such reimbursed amounts will be used by us (a) to make payments to the
Launch Provider for launch services, Hughes for ground network equipment,
software and satellite interface chips and Ericsson for ground system
upgrades, (b) to provide up to $150 million for our working capital and
general corporate purposes and (c) to pay a portion of the insurance
premium to COFACE; and
|
|
•
|
a $23.0 million tranche that will
be used to make payments to Arianespace for launch services and to pay a
portion of the insurance premium to
COFACE.
|
The
facility will mature 96 months after the first repayment date. Scheduled
semi-annual principal repayments will begin the earlier of eight months after
the launch of the first 24 satellites from the second generation constellation
or December 15, 2011. The facility bears interest at a floating LIBOR rate,
capped at 4%, plus 2.07% through December 2012, increasing to 2.25% through
December 2017 and 2.40% thereafter. Interest payments will be due on a
semi-annual basis.
The
Facility Agreement requires that:
|
•
|
we not permit our capital
expenditures (other than those funded with cash proceeds from insurance
and condemnation events, equity issuances or the issuance of our stock to
acquire certain assets) to exceed $391.0 million in 2009 and $234.0
million in 2010 (with unused amounts permitted to be carried over to
subsequent years)
|
|
•
|
after the second scheduled
interest payment, we maintain a minimum liquidity of $5.0
million;
|
|
•
|
we achieve for each period the
following minimum adjusted consolidated EBITDA as defined in the
agreement:
|
|
Period
|
Minimum Amount
|
|
|
1/1/09 – 12/31/09
|
$(25.0)
million
|
|
|
7/1/09 – 6/30/10
|
$(21.0)
million
|
|
|
1/1/10 – 12/31/10
|
$(10.0)
million
|
|
|
7/1/10 – 6/30/11
|
$10.0
million
|
|
|
1/1/11 – 12/31/11
|
$25.0
million
|
|
|
7/1/11 – 6/30/12
|
$35.0
million
|
|
|
1/1/12 – 12/31/12
|
$55.0
million
|
|
|
7/1/12 – 6/30/12
|
$65.0
million
|
|
|
1/1/13 – 12/31/13
|
$78.0
million
|
|
•
|
beginning in 2011, we maintain a
minimum debt service coverage ratio of 1.00:1, gradually increasing to a
ratio of 1.50:1 through
2019;
|
|
•
|
beginning in 2012, we maintain a
maximum net debt to adjusted consolidated EBITDA ratio of 9.90:1,
gradually decreasing to 2.50:1 through
2019.
|
At
December 31, 2009, we were in compliance with the covenants of the Facility
Agreement.
Our
obligations under the Facility Agreement are guaranteed on a senior secured
basis by all of our domestic subsidiaries and are secured by a first priority
lien on substantially all of our assets and those of our domestic subsidiaries
(other than FCC licenses), including patents and trademarks, 100% of the equity
of our domestic subsidiaries and 65% of the equity of certain foreign
subsidiaries.
We are
required to make principal payments on the borrowings on the last day of each
interest period after the full facility has been borrowed or the earlier of
seven months after the launch of the second generation constellation or November
15, 2011, but amounts repaid may not be reborrowed. We must repay the loans (a)
in full upon a change in control or (b) partially (i) if there are excess cash
flows on certain dates, (ii) upon certain insurance and condemnation events and
(iii) upon certain asset dispositions. In addition to the financial covenants
described above, the Facility Agreement places limitations on our ability and
our subsidiaries to incur debt, create liens, dispose of assets, carry out
mergers and acquisitions, make loans, investments, distributions or other
transfers and capital expenditures or enter into certain transactions with
affiliates.
See “Note
15: Borrowings” of the Consolidated Financial Statements in this report for
descriptions of our other debt agreements.
Contractual
Obligations and Commitments
At
December 31, 2009, we have a remaining commitment to purchase a total of $58.5
million of mobile phones, services and other equipment under various commercial
agreements with Qualcomm. We expect to fund this remaining commitment from our
working capital, funds generated by our operations, and, if necessary,
additional capital from the issuance of equity or debt or a combination thereof.
In August 2009, we and Qualcomm amended our agreement to extend the term for
five additional months and defer delivery of mobile phones and related equipment
until January 2012.
In June
2009, we and Thales Alenia Space entered into an amended and restated contract
for the construction of our second-generation low-earth orbit satellites to
incorporate prior amendments, acceleration requests and make other non-material
changes to the contract entered into in November 2006. The total contract price,
including subsequent additions, is approximately €678.9 million.
In March
2007, we and Thales Alenia Space entered into an agreement for the construction
of the Satellite Operations Control Centers, Telemetry Command Units and In
Orbit Test Equipment (collectively, the “Control Network Facility”) for our
second-generation satellite constellation. The total contract price for the
construction and associated services is €9.8 million consisting of €4.1 million
for the Satellite Operations Control Centers, €3.6 million for the Telemetry
Command Units and €2.1 million for the In Orbit Test Equipment, with payments to
be made on a quarterly basis through final acceptance of the Control Network
Facility scheduled for April 2010.
In
September 2007, we and Arianespace (the Launch Provider) entered into an
agreement for the launch of our second-generation satellites and certain pre and
post-launch services. Pursuant to the agreement, the Launch Provider agreed to
make four launches of six satellites each, and we had the option to require the
Launch Provider to make four additional launches of six satellites each. The
total contract price for the first four launches is approximately $216.1
million. In July 2008, we amended our agreement with the Launch Provider for the
launch of our second-generation satellites and certain pre and post-launch
services. Under the amended terms, we could defer payment on up to 75% of
certain amounts due to the Launch Provider. The deferred payments incurred
annual interest at 8.5% to 12% and became payable one month from the
corresponding launch date. As of December 31, 2009 and 2008, we had
approximately none and $47.3 million, respectively, in deferred payments
outstanding to the Launch Provider. In June 2009 we amended the agreement
further to, among other things, reduce the Launch Provider’s commitment for
optional launches from four to one.
In May
2008, we and Hughes Network Systems, LLC (Hughes) entered into an agreement
under which Hughes will design, supply and implement the Radio Access Network
(RAN) ground network equipment and software upgrades for installation at a
number of our satellite gateway ground stations and satellite interface chips to
be a part of the User Terminal Subsystem (UTS) in our various next-generation
devices. In January 2010, we issued an authorization to proceed on $2.7 million
of new features which will result in a revised total contract purchase price of
approximately $103.5 million, payable in various increments over a period of 57
months. we have the option to purchase additional RANs and other software and
hardware improvements at pre-negotiated prices. In August 2009, we and Hughes
amended our agreement extending the performance schedule by 15 months and
revising certain payment milestones. Costs associated with certain projects
under this contract are being capitalized because we have determined that
technological feasibility has been achieved. As of December 31, 2009, we had
made payments of $35.0 million under this contract.
In
October 2008, we signed an agreement with Ericsson Federal Inc., a leading
global provider of technology and services to telecom operators. In December
2009, we amended this contract by $5.1 million for additional deliverables and
features. According to the $27.8 million contract, Ericsson will work with us to
develop, implement and maintain a ground interface, or core network, system that
will be installed at our satellite gateway ground stations.
Long-term
obligations at December 31, 2009, assuming borrowing of the entire $586 million
under our Facility Agreement, are as follows:
|
Contractual Obligations:
|
Less than
1 Year
|
1 – 3 Years
|
3 – 5 Years
|
More Than
5 Years
|
Total
|
|||||||||||||||
|
|
(In millions)
|
|||||||||||||||||||
|
Long-term
debt obligations (1)
(2)
|
$ | 2.3 | $ | 126.2 | $ | 135.8 | $ | 421.0 | $ | 685.3 | ||||||||||
|
Operating
lease obligations
|
1.6 | 2.9 | 0.3 | — | 4.8 | |||||||||||||||
|
Purchase
obligations (3)
|
219.9 | 378.4 | 13.9 | — | 612.2 | |||||||||||||||
|
Pension
obligations
|
0.3 | 2.6 | 1.7 | — | 4.6 | |||||||||||||||
|
Total
|
$ | 224.1 | $ | 510.1 | $ | 151.7 | $ | 421.0 | $ | 1,306.9 | ||||||||||
Payments
due by period:
|
(1)
|
Does not include interest on debt
obligations. Approximately $586 million of our debt bears interest at a
floating rate and, accordingly, we are unable to predict interest costs in
future years.
|
|
(2)
|
All of the indebtedness may be
accelerated upon default of related covenants. See “Note 15: Borrowings”
of the Consolidated Financial Statements in this
report.
|
|
(3)
|
The purchase obligations for the
construction of our low-earth satellites and the Control Network facility
are converted to U.S. dollars using an exchange rate of €1.00 =
$1.42.
|
Off-Balance
Sheet Transactions
We have
no material off-balance sheet transactions.
Recently
Issued Accounting Pronouncements
See “Note
2: Summary of Accounting Policies” of the Consolidated Financial Statements in
this report.