<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
------------------------
COMMISSION FILE NUMBER 33-86808
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GLOBALSTAR TELECOMMUNICATIONS LIMITED
Cedar House
41 Cedar Avenue
Hamilton HM12, Bermuda
Telephone: (809) 295-2244
Jurisdiction of incorporation: Bermuda
IRS identification number: 13-3795510
------------------------
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 or
such shorter period as the registrant was required to file such reports.
As of October 23, 1996, there were 10,000,000 shares of Globalstar
Telecommunications Limited Common Stock outstanding.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
GLOBALSTAR TELECOMMUNICATIONS LIMITED
CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
SEPTEMBER 30, ------------
1996 (Note)
-------------
(Unaudited)
<S> <C> <C>
ASSETS
Investment in Globalstar, L.P.:
Redeemable preferred partnership interests....................... $ 301,771 $ --
Ordinary partnership interests................................... 162,549 173,118
-------- --------
$ 464,320 $173,118
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Interest payable................................................. $ 1,676 $ --
Convertible preferred equivalent obligations....................... 300,095 --
Commitments and contingencies (Note 3)
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
Accumulated deficit.............................................. (23,201) (12,632)
-------- --------
Total shareholders' equity......................................... 162,549 173,118
-------- --------
$ 464,320 $173,118
======== ========
</TABLE>
- ---------------
Note: The December 31, 1995 balance sheet has been derived from audited
financial statements at that date.
See notes to condensed financial statements.
1
<PAGE> 3
GLOBALSTAR TELECOMMUNICATIONS LIMITED
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Equity in net loss of Globalstar, L.P.................. $ 3,345 $ 3,695 $10,569 $ 7,955
Dividend income on Globalstar, L.P. redeemable
preferred partnership interests...................... (5,300) -- (12,019) --
Interest expense....................................... 5,300 -- 12,019 --
------- ------- -------- -------
Net loss............................................... $ 3,345 $ 3,695 $10,569 $ 7,955
======= ======= ======== =======
Net loss per share..................................... $ 0.33 $ 0.37 $ 1.06 $ 0.80
======= ======= ======== =======
Shares used in computing net loss per share............ 10,000 10,000 10,000 10,000
======= ======= ======== =======
</TABLE>
See notes to condensed financial statements.
2
<PAGE> 4
GLOBALSTAR TELECOMMUNICATIONS LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $ (10,569) $ (7,955)
Equity in net loss of Globalstar, L.P.............................. 10,569 7,955
Increase in redemption value of redeemable preferred partnership
interests....................................................... (595) --
Dividends accrued on redeemable preferred partnership interests in
excess of cash received......................................... (1,676) --
Amortization of convertible preferred equivalent obligations issue
costs........................................................... 595 --
Change in operating liability:
Interest payable................................................ 1,676 --
-------- --------
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:
Repurchase of common stock from Globalstar, L.P.................... -- (124)
Repayment of advances from Globalstar, L.P......................... -- (66)
Offering proceeds used to repay initial public offering costs
deferred in prior period........................................ -- 190
Net proceeds from sale of common stock............................. -- 185,750
Payment of debt offering costs..................................... (10,500) --
Sale of convertible preferred equivalent obligations............... 310,000 --
-------- --------
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............................. $ -- $ --
======== ========
</TABLE>
See notes to condensed financial statements.
3
<PAGE> 5
GLOBALSTAR TELECOMMUNICATIONS LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed financial statements have been prepared
by Globalstar Telecommunications Limited (the "Company" or "GTL") pursuant to
the rules of the Securities and Exchange Commission ("SEC") and, in the opinion
of the Company, include all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of financial position, results of
operations and cash flows. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC rules.
The Company believes that the disclosures made are adequate to keep the
information presented from being misleading. The results of operations for the
three and nine months ended September 30, 1996 are not necessarily indicative of
the results to be expected for the full year. It is suggested that these
financial statements be read in conjunction with the audited financial
statements and notes thereto included in the Company's latest Annual Report on
Form 10-K.
2. ORGANIZATION AND BUSINESS
On November 23, 1994, GTL was incorporated as an exempted company under the
Companies Act 1981 of Bermuda. On February 14, 1995, the Company 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, the Company purchased
10,000,000 general partnership interests from Globalstar, L.P. ("Globalstar"),
with the net proceeds of the initial public offering. GTL's financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America.
The Company's sole business is acting as a general partner of Globalstar, a
development stage limited partnership, which is building and is preparing to
launch and operate a worldwide, low-earth orbit satellite-based wireless digital
telecommunications system.
At September 30, 1996, GTL held 21.3% of the ordinary partnership interests
and 100% of the Redeemable Preferred Partnership Interests in Globalstar, see
Note 3 -- Sale of Convertible Preferred Equivalent Obligations. The Company
accounts for its investment in Globalstar on an equity accounting basis,
recognizing its allocated share of net loss in the period incurred. The
Company's allocated share of Globalstar's net loss from the period February 22,
1995 through September 30, 1996 was $23,201,000.
3. SALE OF CONVERTIBLE PREFERRED EQUIVALENT OBLIGATIONS
On March 6, 1996 and April 3, 1996, GTL issued 6,000,000 shares and 200,000
shares, respectively, of Convertible Preferred Equivalent Obligations, par value
$50 per share, (the "Securities") for $310,000,000 principal amount in a Rule
144A Offering of which $102,500,000 principal amount was purchased by Loral
Corporation ("Old Loral"), see Note 4 -- Merger Agreement. As of September 30,
1996, 6,200,000 shares of the Securities were outstanding.
The Securities 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, 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.
GTL has filed a Registration Statement with the SEC covering the Securities. The
Securities 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 Securities.
The net proceeds of $299,500,000 from the sale of the Securities 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
Securities 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 Securities.
Globalstar
4
<PAGE> 6
GLOBALSTAR TELECOMMUNICATIONS LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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 Securities 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 Securities, however, holders of the
Securities are entitled to certain representation rights on the General
Partners' Committee of Globalstar in the event six consecutive interest payments
are deferred.
As of September 30, 1996, GTL has received total dividend payments of
approximately $9,795,000 in cash from Globalstar, on the Redeemable Preferred
Partnership Interests. Such amounts have been paid out as interest on the
Securities.
4. MERGER AGREEMENT
On April 23, 1996, the merger between Old Loral and Lockheed Martin
Corporation 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. and other affiliated businesses, as
well as certain other assets and liabilities, have been transferred to Loral
Space & Communications Ltd., a Bermuda company.
5
<PAGE> 7
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONDENSED BALANCE SHEETS
(In thousands, except partnership interest data)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
SEPTEMBER 30, ------------
1996 (Note)
-------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 64,657 $ 71,602
Other current assets............................................... 646 506
-------- --------
Total current assets....................................... 65,303 72,108
Property and equipment, net.......................................... 1,660 1,509
Globalstar System Under Construction:
Space segment...................................................... 632,833 348,434
Ground segment..................................................... 122,324 51,823
-------- --------
755,157 400,257
Deferred FCC license costs........................................... 8,181 7,056
Deferred financing costs............................................. 20,813 24,461
-------- --------
$ 851,114 $505,391
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable................................................... $ 4,062 $ 2,070
Payable to affiliates.............................................. 70,662 47,569
Accrued expenses................................................... 4,359 4,782
-------- --------
Total current liabilities.................................. 79,083 54,421
Deferred revenues.................................................... 23,652 21,913
Vendor financing liability........................................... 110,536 42,219
Commitments and contingencies (Note 4)
Redeemable preferred partnership interests (4,769,230 outstanding at
September 30, 1996, $310,000,000 redemption value)................. 301,771 --
Ordinary partners' capital:
Ordinary partnership interests (47,000,000 outstanding)............ 313,471 364,237
Warrants........................................................... 22,601 22,601
-------- --------
Total ordinary partners' capital........................... 336,072 386,838
-------- --------
$ 851,114 $505,391
======== ========
</TABLE>
- ---------------
Note: The December 31, 1995 balance sheet has been derived from audited
financial statements at that date.
See notes to condensed financial statements.
6
<PAGE> 8
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS CUMULATIVE
ENDED SEPTEMBER NINE MONTHS ENDED MARCH 23, 1994
30, SEPTEMBER 30, (COMMENCEMENT OF
----------------- ----------------- OPERATIONS) TO
1996 1995 1996 1995 SEPTEMBER 30, 1996
------- ------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Development costs...................... $ 7,257 $15,820 $32,397 $45,862 $ 116,530
Marketing, general and
administrative...................... 4,687 4,861 12,400 11,671 36,520
------- ------- ------- ------- --------
Total operating expenses....... 11,944 20,681 44,797 57,533 153,050
Interest income.......................... 1,522 3,314 6,050 10,181 19,822
------- ------- ------- ------- --------
Net loss................................. 10,422 17,367 38,747 47,352 133,228
Preferred distribution and related
increase on redeemable preferred
partnership interests.................. 5,300 -- 12,019 -- 12,019
------- ------- ------- ------- --------
Net loss applicable to ordinary
partnership interests.................. $15,722 $17,367 $50,766 $47,352 $ 145,247
======= ======= ======= ======= ========
</TABLE>
See notes to condensed financial statements.
7
<PAGE> 9
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
MARCH 23, 1994
NINE MONTHS ENDED SEPTEMBER 30, (COMMENCEMENT OF
OPERATIONS) TO
--------------------------------------- SEPTEMBER 30,
1996 1995 1996
------------------ ------------------ ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $ (38,747) $ (47,352) $ (133,228)
Deferred revenues.......................................... 1,739 17,139 23,652
Depreciation and amortization.............................. 4,412 257 4,925
Changes in operating assets and liabilities:
Other current assets..................................... (140) (506) (646)
Accounts payable......................................... 2,513 1,897 4,007
Payable to affiliates.................................... (9,972) 3,877 (5,107)
Accrued expenses......................................... (423) 1,468 4,359
--------- --------- ---------
Net cash used in operating activities............... (40,618) (23,220) (102,038)
--------- --------- ---------
Investing activities:
Globalstar System Under Construction....................... (354,900) (223,074) (755,157)
Payable to affiliates for Globalstar System Under
Construction............................................. 33,065 14,933 66,461
Accounts payable for Globalstar System Under
Construction............................................. (521) (579) 55
Vendor financing liability................................. 68,317 16,339 110,536
--------- --------- ---------
Cash used for Globalstar System............................ (254,039) (192,381) (578,105)
Purchases of property and equipment........................ (665) (412) (2,672)
Deferred FCC license costs................................. (1,125) (1,727) (5,946)
Purchases of investments................................... -- (126,923) (126,923)
Maturity of investments.................................... -- 126,923 126,923
Other current assets....................................... -- 190 --
--------- --------- ---------
Net cash used in investing activities............... (255,829) (194,330) (586,723)
--------- --------- ---------
Financing activities:
Deferred financing costs................................... (250) -- (2,125)
Proceeds of capital subscriptions receivable............... -- 133,780 282,441
Payment of accrued capital raising costs................... -- (900) (2,400)
Sale of partnership interests to Globalstar
Telecommunications Limited -- 185,750 185,750
Sale of redeemable preferred partnership interests......... 299,500 -- 299,500
Distributions on redeemable preferred partnership
interests................................................ (9,795) -- (9,795)
Prepaid interest on redeemable preferred partnership
interests................................................ 47 -- 47
Borrowings on line of credit............................... 10,000 -- 10,000
Repayment of borrowings on line of credit.................. (10,000) -- (10,000)
--------- --------- ---------
Net cash provided by financing activities........... 289,502 318,630 753,418
--------- --------- ---------
Net increase in cash and cash equivalents.................... (6,945) 101,080 64,657
Cash and cash equivalents, beginning of period............... 71,602 73,560 --
--------- --------- ---------
Cash and cash equivalents, end of period..................... $ 64,657 $ 174,640 $ 64,657
========= ========= =========
Noncash transactions:
Payable to affiliates...................................... $ 9,308
=========
Accrual of capital raising costs........................... $ 2,400
=========
Deferred FCC license costs................................. $ 2,235
=========
Warrants issued in exchange for debt guarantee............. $ 22,601
=========
Increase in redemption value of preferred partnership
interests................................................ $ 2,271 $ 2,271
========= =========
</TABLE>
See notes to condensed financial statements.
8
<PAGE> 10
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed financial statements have been prepared
by Globalstar, L.P. ("Globalstar") pursuant to the rules of the Securities and
Exchange Commission ("SEC") and, in the opinion of Globalstar, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of financial position, results of operations and cash flows.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such SEC rules. Globalstar believes
that the disclosures made are adequate to keep the information presented from
being misleading. The results of operations for the three and nine months ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto included in
the Annual Report on Form 10-K for Globalstar Telecommunications Limited
("GTL").
2. ORGANIZATION AND BUSINESS
Globalstar, founded by Loral Corporation ("Old Loral") and QUALCOMM
Incorporated ("Qualcomm"), is building, and is preparing to launch and operate a
worldwide, low-earth orbit satellite-based wireless digital telecommunications
system (the "Globalstar System").
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
Globalstar from that date.
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.
3. 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 No. 7 "Accounting and Reporting by
Development Stage Enterprises".
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.
Preferred Partnership Distribution
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.
Reclassifications
Certain reclassifications have been made to conform prior-year amounts to
the current-year presentation.
9
<PAGE> 11
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION
The Space Segment
Globalstar has entered into a contract with SS/L, an affiliate of Loral and
a limited partner of Loral/ Qualcomm Satellite Services, L.P., the managing
general partner of Globalstar, 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 $115.7 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. The total contract
price reflects certain scope of work claims negotiated with SS/L during 1995.
Termination by Globalstar of this contract would result in termination fees,
which may be substantial.
Globalstar's space segment contract with SS/L calls for a portion of the
contract price to be deferred as vendor financing and repaid over as long as a
five-year period, commencing upon the initial service and full coverage dates of
the Globalstar satellite constellations. Globalstar has agreements for
approximately $310 million of vendor financing from SS/L and its subcontractors,
$90 million of which is interest bearing.
Globalstar is presently evaluating a proposal to construct eight additional
satellites that would increase Globalstar's ability to have at least 40
satellites in service during 1999, even in the event of the failure of as many
as two 12-satellite launches. If the launch program is successful, the
additional satellites would 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 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. Globalstar has
authorized expenditures of $10 million for start-up efforts pending further
evaluation and approval of this plan.
Globalstar has authorized SS/L to procure three launches of the Starsem
Soyuz launch vehicle, which will launch four Globalstar satellites each. The
selection of these proven reliable launchers is part of a strategy to place
on-orbit a robust constellation of at least 40 satellites by the first quarter
of 1999 even in the event of launch failures. The three Soyuz launches will also
afford Globalstar additional flexibility in the launch and placement of its
satellite constellation, and will enable Globalstar to defer use of the Long
March 2E launch vehicle, which had been scheduled to launch its last 12
satellites. As a result of this decision, total costs for launch vehicles and
insurance will increase by $68 million to $462 million.
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 preliminary 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 still subject to further review by Globalstar.
Globalstar and its strategic service providers intend to jointly finance
the procurement of at least the first 25 gateways for resale to service
providers, thereby accelerating the deployment of gateways around the world
prior to the In-Service Date. The cost of this program before financing costs is
expected to be approximately
10
<PAGE> 12
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
$160 million, of which Globalstar has agreed to finance approximately $80
million. Globalstar expects to recover its investment in this gateway financing
program from the resale of these gateways to service providers.
Globalstar has entered into an agreement with a subsidiary of 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 the
Lockheed Martin subsidiary for contract costs incurred such as labor, materials,
travel, license fees, royalties and general and administrative expenses. The
Lockheed Martin subsidiary 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.
Total System Cost
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.
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.
As of September 30, 1996, Globalstar had raised or received commitments for
approximately $1.4 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 component), exercise of warrants, 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. GTL and Globalstar are currently considering
offering the holders of their outstanding warrants the opportunity to accelerate
the exercisability of their warrants and immediately purchase shares of GTL
common stock with registration rights. There are currently 5.3 million warrants
outstanding with an exercise price of $26.50 per share, which were issued in
connection with guarantees of Globalstar's $250 million bank credit agreement.
Although Globalstar believes it will be able to obtain these funds, there can be
no assurance that these funds will be available on favorable terms or on a
timely basis, if at all.
5. PARTNER'S CAPITAL
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 Convertible
Preferred Equivalent Obligations (the "Securities"). The RPPIs will convert to
ordinary general partnership interests on a one-for-one basis upon any
conversion of the Securities, 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 Securities. 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 Securities 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 Securities, however, holders of the
Securities are entitled to certain representation rights on the General
Partners' Committee of Globalstar in the event six consecutive interest payments
are deferred.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Financial Condition
and Results of Operations, and elsewhere in this Form 10-Q, 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 statements due to such risks and
uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, cash and cash equivalents decreased to $64.7 million
from $71.6 million at December 31, 1995. The net decrease is primarily the
result of the expenditures for operations, the Globalstar System Under
Construction, and preferred distributions on the Redeemable Preferred
Partnership Interests ("RPPIs") offset by the net proceeds of $299.5 million
received from the sale of 4,769,230 RPPIs and interest of $6.1 million earned on
outstanding cash balances during the period.
Accounts payable, payables to affiliates and accrued expenses have
increased by $24.7 million from $54.4 million at December 31, 1995 to $79.1
million at September 30, 1996, as a result of the timing of payments to
Globalstar contractors.
Through September 30, 1996, Globalstar incurred costs of approximately $907
million (excluding capitalized interest of approximately $7.0 million) for the
design and construction of the satellite constellation, launch vehicle payments
and portions of the two SOCCs, two GOCCs, Globalstar Phones and four gateways
that make up part of the Globalstar ground segment, operating expenses, net cash
interest expense and preferred distributions. Costs incurred during the nine
months ended September 30, 1996 were approximately $401 million (including $68.3
million accrued under vendor financing arrangements and excluding capitalized
interest of approximately $6.7 million) as satellite production activities
continued, including pre-production model construction and test, parts
procurement and subassembly construction of the satellites. Expenditures for the
GOCCs and SOCCs included costs for software integration and test. Total 1996
system costs are expected to approximate $566 million and include an estimated
$90 million of accrued costs under vendor financing arrangements. Satellite
production, integration and testing will continue during the year. Ground
Segment activities in 1996 will include the development of laboratory prototypes
of the Globalstar Phones and the completion of SOCC installation and checkout.
Globalstar and its strategic service providers intend to jointly finance
the procurement of at least the first 25 gateways for resale to service
providers, thereby accelerating the deployment of gateways around the world
prior to the In-Service Date. The cost of this program before financing costs is
expected to be approximately $160 million, of which Globalstar has agreed to
finance approximately $80 million. Globalstar expects to recover its investment
in this gateway financing program from the resale of these gateways to service
providers.
Globalstar has authorized SS/L to procure three launches of the Starsem
Soyuz launch vehicle, which will launch four Globalstar satellites each. The
selection of these proven reliable launchers is part of a strategy to place
on-orbit a robust constellation of at least 40 satellites by the first quarter
of 1999 even in the event of launch failures. The three Soyuz launches will also
afford Globalstar additional flexibility in the launch and placement of its
satellite constellation, and will enable Globalstar to defer use of the Long
March 2E launch
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
vehicle, which had been scheduled to launch its last 12 satellites. As a result
of this decision, total costs for launch vehicles and insurance will increase by
$68 million to $462 million.
Globalstar is currently evaluating a proposal to construct eight additional
satellites that would increase Globalstar's ability to have at least 40
satellites in service during 1999, even in the event of the failure of as many
as two 12-satellite launches. If the launch program is successful, the
additional satellites would 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 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. Globalstar has
authorized expenditures of $10 million for start-up efforts pending further
evaluation and approval of this plan.
Qualcomm is currently preparing a revised estimate of costs under its
contracts with Globalstar and has given Globalstar a preliminary 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, those costs may increase to $545
million. The Qualcomm estimate is still subject to further review by Globalstar.
Globalstar currently estimates that 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.
As of September 30, 1996, Globalstar had raised or received commitments for
approximately $1.4 billion. Globalstar believes that its current capital, vendor
financing commitments and the availability of the Globalstar Credit Agreement
are sufficient to fund its requirements into the first quarter 1997. Of such
financing commitments, a substantial portion of the vendor financing will not be
utilized until 1997 and 1998. Globalstar intends to raise the remaining funds
required from a combination of sources, including debt issuance (which may
include an equity component), exercise of warrants, 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 funds, there can be no assurance that these funds will be available
on favorable terms or on a timely basis, if at all.
GTL and Globalstar are currently considering offering the holders of their
outstanding warrants the opportunity to accelerate the exercisability of their
warrants and immediately purchase shares of GTL common stock with registration
rights. There are currently 5.3 million warrants outstanding with an exercise
price of $26.50 per share, which were issued in connection with guarantees of
Globalstar's $250 million bank credit agreement. Loral and certain other
warrantholders have indicated their intentions of accepting such an offer, if
made, and exercising their warrants for approximately $70 million, subject to
agreement on final terms, and the other warrantholders are considering their
positions. Such a transaction would not affect the fully-diluted, ownership of
GTL, and would increase the equity and cash of Globalstar by as much as $140
million, if all warrantholders elect to exercise.
RESULTS OF OPERATIONS
Globalstar is a development stage partnership and has not commenced
commercial operations. For the period March 23, 1994 (commencement of
operations) to September 30, 1996, Globalstar has recorded
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
cumulative net losses of $133.2 million. The net loss for the nine months ended
September 30, 1996 decreased to $38.7 million as compared to $47.4 million for
the nine months ended September 30, 1995. The net loss for the three months
ended September 30, 1996 decreased to $10.4 from $17.4 million in the prior
year. The net loss declined during the current periods due to a decrease in
development costs partially offset by a decrease in interest income. 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 $19.8 million on cash balances and
short term investments since commencement of operations. Interest income during
the nine months ended September 30, 1996 was $6.1 million as compared to $10.2
million for the nine months ended September 30, 1995. Interest income for the
three months ended September 30, 1996 was $1.5 million as compared to $3.3
million for the three months ended September 30, 1995. Interest income for the
current periods decreased as a result of lower average cash balances outstanding
during 1996.
Operating Expenses. Development costs of $32.4 million for the nine months
ended September 30, 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 $45.9 million of development costs incurred
during the comparable period of 1995. Development costs for the three months
ended September 30, 1996 and 1995 were $7.3 million and $15.8 million,
respectively. The decline during the current periods is primarily the result of
the cost sharing arrangement in Globalstar's contract with Qualcomm reaching its
funding limit in April of 1996.
Marketing, general and administrative expenses were $12.4 million for the
nine months ended September 30, 1996 as compared to $11.7 million incurred
during the nine months ended September 30, 1995. Marketing, general and
administrative expenses for the three months ended September 30, 1996 and 1995
were $4.7 million and $4.9 million, respectively.
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 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report of Form 10-Q 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. These factors and other factors and conditions have been described in the
section of GTL's Prospectus, dated September 18, 1996, entitled "Risk Factors,"
the section of Loral Space & Communications Ltd.'s Annual Report on Form 10-K
for the year ended March 31, 1996 entitled "Certain Factors That May Affect
Future Results -- Globalstar," and other documents that GTL and its affiliates
file from time to time with the Securities and Exchange Commission including
GTL's annual reports on
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
the shareholder is specifically referred to these documents with regard to the
factors and conditions that may affect future results.
GTL's and Globalstar's future results are subject to substantial risks and
uncertainties. 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 achieve positive cash flow before 1999. There can be no assurance that
Globalstar will achieve its objectives by the targeted dates. In addition, upon
deployment and commencement of operations, any failure to manage effectively the
growth of Globalstar may have an adverse effect on the business of Globalstar.
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 the industry. The integration of a
worldwide low-earth orbit 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 commercial operation of the Globalstar
System or render it unable to perform at the quality and capacity levels
required for success.
Launches of the Globalstar satellites are subject to significant risks,
including disabling damage to or loss of the satellites ("hot failures"). There
is no assurance that Globalstar satellite launches will be successful or that
its launch failure rate will not exceed industry averages.
A number of factors will affect the useful lives of Globalstar's
satellites. Random failure of satellite components could result in damage to or
loss of a satellite ("cold failures"). The first-generation satellite
constellation (including spares) is designed to 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 was shorter than 7 1/2 years.
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. 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 that enough service providers will contract for Globalstar's service
and procure and install the gateways and obtain the regulatory licenses
necessary for complete global service.
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 to be
provided 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 their system
substantially earlier than Globalstar, Globalstar's ability to compete in areas
served by such competitor may be adversely affected.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 effects. 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 has entered into contracts for the design of various segments of
the Globalstar System with affiliates of the managing general partner, including
a fixed-price satellite production contract with SS/L and a cost-plus-fee
contract with Qualcomm to design the gateways, ground operations control systems
and Globalstar Phones. To the extent that such contracts have been or will be
awarded to partners of Globalstar 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 Space & Communications Ltd., 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.
16
<PAGE> 18
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
Exhibit 12 -- Statement Regarding Computation of Ratios
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBALSTAR TELECOMMUNICATIONS LIMITED
--------------------------------------
REGISTRANT
NICHOLAS C. MOREN
--------------------------------------
Treasurer
(Principal Financial Officer)
and
Registrant's Authorized Officer
Date: October 23, 1996
17
<PAGE> 19
EXHIBIT INDEX
-------------
Exhibit
No. Description
- -------- -----------
12 Statement Regarding Computation of Ratios
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 12
STATEMENT REGARDING COMPUTATION OF RATIOS
(In thousands, except ratios)
GLOBALSTAR TELECOMMUNICATIONS LIMITED
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1996
------------------
<S> <C>
Earnings:
Net loss.................................................................. $(10,569)
Add:
Equity in loss of Globalstar, L.P.................................... 10,569
Interest expense..................................................... 12,019
------
Earnings available to cover fixed charges(1)................................ $ 12,019
======
Fixed charges -- interest expense........................................... $ 12,019
======
Ratio of earnings to fixed charges.......................................... 1x
======
</TABLE>
- ---------------
(1) The earnings of GTL available to cover fixed charges, consist solely of
dividends from Globalstar, L.P. on the Redeemable Preferred Partnership
Interests held by GTL.
GLOBALSTAR, L.P.
DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES
<TABLE>
<CAPTION>
CUMULATIVE
MARCH 23, 1994
NINE MONTHS (COMMENCEMENT OF
ENDED OPERATIONS) TO
SEPTEMBER 30, SEPTEMBER 30,
1996 1996
------------------ ----------------
<S> <C> <C>
Net loss..................................................... $(38,747) $ (133,228)
Dividends on Redeemable Preferred Partnership Interests...... (12,019) (12,019)
-------- ---------
Deficiency of earnings to cover fixed charges................ $(50,766) $ (145,247)
======== =========
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GLOBALSTAR TELECOMMUNICATIONS LIMITED FOR THE QUARTER
ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 464320
<CURRENT-LIABILITIES> 1676
<BONDS> 300095
0
0
<COMMON> 10000
<OTHER-SE> 152549
<TOTAL-LIABILITY-AND-EQUITY> 464320
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10569)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10569)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10569)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
