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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
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The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or
such shorter period as the registrant was required to file such reports.
As of May 10, 1996, there were 10,000,000 shares of Globalstar
Telecommunications Limited Common Stock outstanding.
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PART I. FINANCIAL INFORMATION
GLOBALSTAR TELECOMMUNICATIONS LIMITED
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Investment in Globalstar, L.P.:
Redeemable preferred partnership interests........................ $ 291,424 $ --
Ordinary partnership interests.................................... 169,836 173,118
----------- ------------
$ 461,260 $173,118
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Interest payable.................................................. $ 1,354 $ --
Convertible preferred equivalent obligations........................ 290,070 --
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............................................... (15,914) (12,632)
----------- ------------
Total shareholders' equity.......................................... 169,836 173,118
----------- ------------
Total liabilities and shareholders' equity.......................... $ 461,260 $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
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GLOBALSTAR TELECOMMUNICATIONS LIMITED
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
------------------ ------------------
<S> <C> <C>
Equity in net loss of Globalstar, L.P................... $ 3,282 $ 1,548
Dividend income on Globalstar, L.P. Redeemable Preferred
Partnership Interests................................. (1,424) --
Interest expense........................................ 1,424 --
------- -------
Net loss................................................ $ 3,282 $ 1,548
======= =======
Net loss per share...................................... $ 0.33 $ 0.15
======= =======
Shares used in computing net loss per share............. 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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $ (3,282) $ (1,548)
Equity in net loss of Globalstar, L.P................. 3,282 1,548
Dividend income on Redeemable Preferred Partnership
Interests.......................................... (1,424) --
Amortization of Convertible Preferred Equivalent
Obligations issue costs............................ 70 --
Change in operating liability:
Interest payable................................... 1,354 --
--------- ---------
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................................. (290,000) --
--------- ---------
Net cash used in investing activities................... (290,000) (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........................ (10,000) --
Sale of Convertible Preferred Equivalent
Obligations........................................ 300,000 --
--------- ---------
Net cash provided by financing activities............... 290,000 185,750
--------- ---------
Net increase 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 months ended March 31, 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 in the Company's latest annual report.
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 March 31, 1996, GTL held 21.3% of the ordinary partnership interests and
100% of the Redeemable Preferred Partnership Interests in Globalstar, see
Footnotes 3 and 4 -- 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 March 31, 1996 was $15,914,000.
3. SALE OF CONVERTIBLE PREFERRED EQUIVALENT OBLIGATIONS
On March 6, 1996, GTL issued 6,000,000 shares of Convertible Preferred
Equivalent Obligations, par value $50 per share, (the "Securities") for
$300,000,000 in a private placement of which $100,000,000 principal amount was
purchased by Loral Corporation ("Loral") (See Note 4 -- Subsequent Events). The
Securities are subordinated to existing and future debt obligations of GTL, are
convertible into 4,615,385 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
agreed to file a Registration Statement with the SEC covering the securities
within 120 days. 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 $290,000,000 were used by GTL to purchase 4,615,385
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, 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 may elect to make the quarterly
preferred distribution to GTL in cash or general partnership interests. If such
distribution is made in cash, GTL must make its interest
4
<PAGE> 6
GLOBALSTAR TELECOMMUNICATIONS LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
3. SALE OF CONVERTIBLE PREFERRED EQUIVALENT OBLIGATIONS -- (CONTINUED)
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.
4. SUBSEQUENT EVENTS
Sale of Convertible Preferred Equivalent Obligations
On April 3, 1996, GTL issued an additional 200,000 shares of its 6 1/2%
Convertible Preferred Equivalent Obligations for $10,000,000 of which $2,500,000
principal amount was purchased by Loral. The net proceeds of $9,500,000 from the
issuance of the Securities were used by the Company to purchase 153,846
Redeemable Preferred Partnership Interests in Globalstar. All obligations and
rights are consistent with the original offering.
Effective Date of the Merger
On April 23, 1996, the merger between Loral and Lockheed Martin Corporation
was completed. In conjunction with the merger, 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, have been transferred to Loral Space & Communications Ltd., a
Bermuda corporation.
5
<PAGE> 7
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PARTNERSHIP INTEREST DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $247,108 $ 71,602
Other current assets.......................................... 3,230 506
------------ ------------
Total current assets..................................... 250,338 72,108
Property and equipment, net...................................... 1,597 1,509
Globalstar System Under Construction:
Space segment................................................. 441,345 348,434
Ground segment................................................ 67,477 51,823
------------ ------------
508,822 400,257
Deferred FCC license costs....................................... 7,632 7,056
Deferred financing costs......................................... 23,285 24,461
------------ ------------
Total assets............................................. $791,674 $505,391
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Payable to affiliates......................................... $ 36,961 $ 49,639
Accrued expenses.............................................. 6,591 4,782
------------ ------------
Total current liabilities................................ 43,552 54,421
Deferred revenues................................................ 23,652 21,913
Vendor financing liability....................................... 61,584 42,219
Commitments and contingencies (Note 4)
Partners' capital:
Redeemable preferred partnership interests
(4,615,385 outstanding at March 31, 1996)................... 291,424 --
Ordinary partnership interests (47,000,000 outstanding)....... 348,861 364,237
Warrants...................................................... 22,601 22,601
------------ ------------
Total partners' capital.................................. 662,886 386,838
------------ ------------
Total liabilities and partners' capital.................. $791,674 $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>
CUMULATIVE
MARCH 23, 1994
(COMMENCEMENT OF
THREE MONTHS ENDED THREE MONTHS ENDED OPERATIONS) TO
MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996
------------------ ------------------ ----------------
<S> <C> <C> <C>
Operating expenses:
Development costs........................ $ 11,377 $ 16,198 $ 95,510
Marketing, general and administrative.... 4,024 3,197 28,144
------- ------- --------
Total operating expenses................... 15,401 19,395 123,654
Interest income............................ 1,449 2,159 15,221
------- ------- --------
Net loss................................... 13,952 17,236 108,433
------- ------- --------
Preferred distribution and related increase
on Redeemable Preferred Partnership
Interests................................ 1,424 -- 1,424
------- ------- --------
Net loss applicable to ordinary partnership
interests................................ $ 15,376 $ 17,236 $109,857
======= ======= ========
</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
(COMMENCEMENT OF
THREE MONTHS ENDED THREE MONTHS ENDED OPERATIONS) TO
MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996
------------------ ------------------ ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $ (13,952) $ (17,236) $ (108,433)
Deferred revenues......................... 1,739 -- 23,652
Depreciation and amortization............. 1,568 73 2,081
Changes in operating assets and liabilities:
Other current assets...................... (2,724) (985) (3,230)
Payable to affiliates..................... (4,225) 6,476 2,134
Accrued expenses.......................... 1,809 294 6,591
--------- --------- ---------
Net cash used in operating activities....... (15,785) (11,378) (77,205)
--------- --------- ---------
Investing activities:
Globalstar System Under Construction...... (108,565) (42,511) (508,822)
Payable to affiliates for Globalstar
System Under Construction.............. (8,453) (2,340) 25,519
Vendor financing liability................ 19,365 -- 61,584
--------- --------- ---------
Cash used for Globalstar System........ (97,653) (44,851) (421,719)
Purchases of property and equipment....... (230) (73) (2,237)
Deferred FCC license costs................ (576) (539) (5,397)
Purchases of investments.................. -- (127,734) (126,923)
Maturity of investments................... -- -- 126,923
Other current assets...................... -- 190 --
--------- --------- ---------
Net cash used in investing activities....... (98,459) (173,007) (429,353)
--------- --------- ---------
Financing activities:
Deferred financing costs.................. (250) -- (2,125)
Proceeds of capital subscriptions
receivable............................. -- 131,980 282,441
Payment of accrued capital raising
costs.................................. -- -- (2,400)
Sale of partnership interests to
Globalstar Telecommunications
Limited................................ -- 185,750 185,750
Sale of Redeemable Preferred Partnership
Interests.............................. 290,000 -- 290,000
--------- --------- ---------
Net cash provided by financing activities... 289,750 317,730 753,666
--------- --------- ---------
Net increase in cash and cash equivalents... 175,506 133,345 247,108
Cash and cash equivalents, beginning of
period.................................... 71,602 73,560 --
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 247,108 $ 206,905 $ 247,108
========= ========= =========
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
=========
</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 months ended March 31,
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 of Globalstar Telecommunications Limited (the "Company" or "GTL").
2. ORGANIZATION AND BUSINESS
Globalstar, founded by Loral Corporation ("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.
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, in addition Globalstar is increasing the carrying value to its
ultimate redeemable value. The distributions are recorded as reductions against
the ordinary partnership capital accounts.
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION
The Space Segment
Globalstar has entered into a contract with Space Systems/Loral, Inc.
("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
9
<PAGE> 11
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION -- (CONTINUED)
$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.
SS/L has agreed to obtain launch vehicles and arrange for the launch of
Globalstar's satellites on Globalstar's behalf at an estimated total cost of
$302 million for all 56 satellites, and obtain insurance to cover the
replacement cost of satellites or launch vehicles lost in the event of a launch
failure for an estimated cost of $92 million. In certain circumstances these
amounts are subject to equitable adjustment in light of future market
conditions, which may, in turn, be influenced by international political
developments. Any change in such assumptions may result in an increase in the
costs paid by Globalstar, which may be substantial. SS/L has entered into
subcontracts with certain of Globalstar's limited partners or affiliates
thereof. The design and manufacture of the payload modules will be performed by
Alcatel Espace at a fixed price of approximately $208 million, subject to
certain adjustments. Fixed price subcontracts in the amounts of $202 million,
$178 million and $41 million have also been awarded to Alenia Spazio S.p.A.,
Daimler-Benz Aerospace AG and Aerospatiale, respectively. Globalstar, SS/L and
Hyundai Electronics Industries Co. Ltd. ("Hyundai") have entered into a
subcontract providing work for Hyundai in an amount of approximately $44
million. Globalstar and SS/L have further agreed to support Hyundai in its
efforts as a satellite vendor, including providing training and transferring
certain technology know-how to Hyundai for compensation to be agreed upon among
the parties.
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.
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 and is currently estimated to total $350
million. The contract also includes a cost sharing arrangement for certain
technologies being developed by Qualcomm. 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.
A letter agreement among Qualcomm, Globalstar and Hyundai grants to Hyundai
an option to become a licensee authorized to manufacture and sell Globalstar
subscriber terminals to service providers. Should Hyundai choose to exercise
this option, it would, for a five year period following Globalstar's In-Service
date, be the exclusive licensee authorized to manufacture and sell subscriber
terminals in South and North Korea.
Globalstar will receive from Qualcomm or its licensee(s) a payment of
approximately $400,000 for each installed gateway sold to a Globalstar service
provider. In addition, Globalstar will receive a payment of up to $10 on each
Globalstar subscriber terminal sold, until Globalstar's funding of that design
has been recovered.
Globalstar has entered into an agreement with a subsidiary of Loral 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 Loral subsidiary
for contract
10
<PAGE> 12
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION -- (CONTINUED)
costs incurred such as labor, materials, travel, license fees, royalties and
general and administrative expenses. The Loral 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
At March 31, 1996, Globalstar had estimated the cost for the design,
construction and deployment of the Globalstar System, excluding working capital,
cash interest on anticipated borrowings and operating expenses to be
approximately $1.8 billion. Actual amounts may vary from this estimate and
additional funds would be required in the event of unforeseen delays, cost
overruns, launch failures or other technological risks or adverse regulatory
developments, or to meet unanticipated expenses.
Additional funds to complete the Globalstar System are expected to be
obtained through a combination of debt issuance, which may include an equity
component, projected service provider payments, projected net service revenues
from initial operations, anticipated payments received from the sale of gateways
and Globalstar subscriber terminals and placements of limited partnership
interests with new and existing strategic investors. Although Globalstar
believes it will be able to obtain this additional financing, there can be no
assurance that the financing will be available on favorable terms or on a timely
basis, if at all.
5. PARTNERS' CAPITAL
Sale of Redeemable Preferred Partnership Interests
On March 6, 1996, GTL purchased 4,615,385 Redeemable Preferred Partnership
Interests ("RPPIs") in Globalstar with the net proceeds of GTL's sale of
Convertible Preferred Equivalent Obligations (the "Securities") in the amount of
$290,000,000. 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
$300,000,000, plus all unpaid distributions. Globalstar may elect to make the
quarterly preferred distribution 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.
6. SUBSEQUENT EVENTS
Sale of Redeemable Preferred Partnership Interests
On April 3, 1996, GTL purchased an additional 153,846 RPPIs in Globalstar
with the net proceeds from the additional sale of the Securities in the amount
of $9,700,000. All obligations and rights are consistent with the original
offering, see Note 5 -- Partners' Capital.
Effective Date of the Merger
On April 23, 1996, the merger between Loral and Lockheed Martin Corporation
was completed. In conjunction with the merger, Loral's space and communications
businesses, including its direct and indirect interests in Globalstar, GTL, SS/L
and other affiliated businesses, as well as certain other assets, have been
transferred to Loral Space & Communications Ltd., a Bermuda corporation.
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 projections due to such risks and
uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, cash and cash equivalents increased to $247.1 million
from $71.6 million at December 31, 1995. The net increase is a result of the
receipt of $290.0 million from the sale of 4,615,385 Redeemable Preferred
Partnership Interests, advance payments received for option territories of $1.7
million and interest on outstanding cash balances of $1.4 million, offset by the
expenditures for operations and the Globalstar System Under Construction.
Payables to affiliates and accrued expenses decreased by $10.8 million from
$54.4 million to $43.6 million during the three months ended March 31, 1996, as
a result of the timing of payments to Globalstar contractors.
Globalstar anticipates that the cost for the design, construction and
deployment of the Globalstar System, excluding working capital, cash interest on
anticipated borrowings and operating expenses to be approximately $1.8 billion.
Actual amounts may vary from this estimate and additional funds would be
required in the event of unforeseen delays, cost overruns, launch failures or
other technological risks or adverse regulatory developments, or to meet
unanticipated expenses.
Through March 31, 1996, Globalstar incurred costs of approximately $612
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. Costs incurred
during the first quarter 1996 were approximately $121 million (including $19.4
million accrued under vendor financing arrangements) 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 $90.1 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.
In addition to the above capital requirements, Globalstar will require
funds for its working capital, interest and preferred distributions on the
Redeemable Preferred Partnership Interests and future financings, repayment of a
portion of vendor financing and operating expenses through the Full
Constellation Date, currently estimated to be approximately $293 million.
Globalstar and its strategic service providers intend to jointly finance
the procurement of 25 gateways and long-lead parts for 25 additional 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
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
million. Globalstar expects to recover its investment in this gateway financing
program from the resale of these gateways to service providers.
This information represents Globalstar's current anticipated cash
requirements. Actual amounts may vary from these estimates and additional funds
would be required in the event of unforeseen delays, cost overruns, launch
failures or other technological risks or adverse regulatory developments, or to
meet unanticipated expenses.
Through March 31, 1996, Globalstar has obtained $770 million of equity from
its partners (of which $290 million represents the sale of the Redeemable
Preferred Partnership Interests to GTL, which was purchased by GTL with the
proceeds from the issuance of the 6 1/2% Convertible Preferred Equivalent
Obligations), a $250 million credit facility (the "Globalstar Credit
Agreement"), guaranteed by certain parties, and commitments for approximately
$310 million of vendor financing. In addition, Globalstar had received
approximately $24 million of advance payments associated with certain Globalstar
service territories.
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. Additional funds to complete the Globalstar System are expected to be
obtained through a combination of debt issuance (which may include an equity
component), projected service provider payments, projected net service revenues
from initial operations, anticipated payments received from the sale of gateways
and Globalstar Phones and placement of limited partnership interests with new
and existing strategic investors. Although Globalstar believes it will be able
to obtain this additional financing, there can be no assurance that the
financing will be available on favorable terms or on a timely basis, if at all.
On April 23, 1996, the merger between Loral Corporation and Lockheed Martin
Corporation was completed. In conjunction with the merger, Loral's space and
communications businesses, including its direct and indirect interests in
Globalstar, GTL, SS/L and other affiliated businesses, as well as certain other
assets, have been transferred to Loral Space & Communications Ltd. In connection
with the merger, Lockheed Martin assumed $150 million of the guarantee on the
Globalstar Credit Agreement, and the balance of the guarantee was assumed by
various Globalstar partners.
RESULTS OF OPERATIONS
Globalstar is a development stage partnership and has not commenced
commercial service operations. For the period March 23, 1994 (commencement of
operations) to March 31, 1996, Globalstar has recorded cumulative net losses of
$108.4 million. The net loss for the quarter ended March 31, 1996 decreased to
$14.0 million from $17.2 million in the quarter ended March 31, 1995 as a result
of timing of payments to Globalstar contractors. 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
service operations.
Globalstar has earned interest income of $15.2 million since commencement
of operations on cash balances and short term investments. Interest income for
the quarter ended March 31, 1996 was $1.4 million as compared to $2.2 million
earned during the quarter ended March 31, 1995. Interest income has decreased
from the quarter ended March 31, 1995 as a result of lower cash balances within
the quarter ended March 31, 1996.
Operating Expenses. Development costs of $11.4 million for the quarter
ended March 31, 1996, represent the development of certain technologies under a
cost sharing arrangement in Globalstar's contract with Qualcomm, the development
of Globalstar Phones and Globalstar's continuing in-house engineering. This
compares with $16.2 million of development costs incurred during the quarter
ended March 31, 1995.
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Marketing, general and administrative expenses were $4.0 million for the
quarter ended March 31, 1996 as compared to $3.2 million incurred during the
quarter ended March 31, 1995. The increase from the quarter ended March 31, 1995
is a result of both increased marketing and personnel costs, consistent with the
higher level of activity at Globalstar.
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 initial service 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 on 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 fillings made by
GTL with the Securities and Exchange Commission, press releases or oral
statements made 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 limed to, the factors summarized
below. These factors and other factors and conditions have been described in the
section of GTL's Prospectus, dated February 14, 1995, entitled, "Risk Factors,"
the section of Loral Space & Communications Ltd.'s Information Statement, dated
April 12, 1996, entitled, "Risk Factors -- Globalstar," and other documents GTL
files from time to time with the Securities and Exchange Commission including
GTL's annual reports on 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 until commercial service operations have commenced.
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 in 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.
Globalstar expects to require total capital of approximately $2.2 billion.
Globalstar has raised or received commitments for approximately $1.4 billion.
Globalstar believes that its current capital base is sufficient to fund
Globalstar's requirements into the first quarter of 1997. Additional funds to
complete the Globalstar System are expected to be obtained from a combination of
sources. There can be no assurance that additional funds required to complete
the Globalstar System will be available on favorable terms or on a timely basis,
if at all. If there are unforeseen delays, if technical or regulatory
developments result in a need to modify the design of all or a portion of the
Globalstar System, if service provider agreements for additional territories are
not entered into at the times or on the terms anticipated by Globalstar or if
other additional costs are incurred, the risk of which is substantial in view of
the early stage of Globalstar's development, additional capital will be
required. The ability of Globalstar to achieve positive cash flow will depend
upon the successful and timely
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
design, construction and deployment of the Globalstar System, as to which there
can be no assurance. If Globalstar fails to commence commercial operations in
1998 or achieve positive cash flow in 1999, additional capital will be needed.
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 tested or 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 in the commercial marketplace; 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 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 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 one at present is providing
the same global personal telecommunications service proposed by Globalstar, it
is anticipated that one or more additional competing systems will be launched.
If any of Globalstar's competitors succeeds in marketing and deploying its
system earlier than Globalstar or at a lower cost, Globalstar's ability to
compete in areas served by such competitor may be adversely affected.
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
by Globastar. 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. 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.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Subscriber acceptance of the Globalstar System will depend upon a number of
factors, including the quality of the service provided and the cost to the
subscriber. 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
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBALSTAR TELECOMMUNICATIONS LIMITED
Registrant
Date: May 10, 1996 NICHOLAS C. MOREN
------------------------------------------
Treasurer
(Principal Financial Officer)
and
Registrant's Authorized Officer
17
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF Globalstar Telecommunications Limited FOR THE THREE
MONTHS ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
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<RECEIVABLES> 0
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<CURRENT-ASSETS> 0
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<TOTAL-ASSETS> 461,260
<CURRENT-LIABILITIES> 1,354
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<TOTAL-LIABILITY-AND-EQUITY> 461,260
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