<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 JUNE 30, 1996
------------------------
COMMISSION FILE NUMBER 33-86808
------------------------
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 and
has been subject to such filing requirements for the past ninety days.
As of August 10, 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>
JUNE 30, DECEMBER 31,
1996 1995
----------- -------------
<S> <C> <C>
(UNAUDITED) (NOTE)
ASSETS
Investment in Globalstar, L.P.:
Redeemable preferred partnership interests..................... $ 301,508 $ --
Ordinary partnership interests................................. 165,894 173,118
----------- -------------
Total assets..................................................... $ 467,402 $ 173,118
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Interest payable $ 1,676 $ --
Convertible preferred equivalent obligations..................... 299,832 --
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............................................ (19,856) (12,632)
----------- -------------
Total shareholders' equity....................................... 165,894 173,118
----------- -------------
Total liabilities and shareholders' equity....................... $ 467,402 $ 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 SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Equity in net loss of Globalstar,
L.P................................. $ 3,942 $ 2,712 $ 7,224 $ 4,260
Dividend income on Globalstar, L.P.
redeemable preferred partnership
interests........................... (5,295) -- (6,719) --
Interest expense...................... 5,295 -- 6,719 --
------------- ------------- ------------- -------------
Net loss.............................. $ 3,942 $ 2,712 $ 7,224 $ 4,260
========== ========== ========== ==========
Net loss per share.................... $ 0.39 $ 0.27 $ 0.72 $ 0.43
========== ========== ========== ==========
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>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (7,224) $ (4,260)
Equity in net loss of Globalstar, L.P.................... 7,224 4,260
Increase in redemption value of redeemable preferred
partnership interests................................. (332) --
Dividends accrued on redeemable preferred partnership
interests in excess of cash received.................. (1,676) --
Amortization of convertible preferred equivalent
obligations issue costs............................... 332 --
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 (decreased) 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 six months ended June
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 June 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 June 30, 1996 was $19,856,000.
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 in a Rule 144A
Offering of which $102,500,000 principal amount was purchased by Loral
Corporation ("Loral"), see Note 4 -- Merger Agreement. As of June 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
4
<PAGE> 6
GLOBALSTAR TELECOMMUNICATIONS LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 June 30, 1996, GTL has received dividend payments of approximately
$4,758,000 in cash from Globalstar, on the Redeemable Preferred Partnership
Interests. Such amounts were subsequently paid out as interest on the
Securities for the quarter ended June 30, 1996.
4. MERGER AGREEMENT
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 company.
5
<PAGE> 7
Globalstar, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONDENSED BALANCE SHEETS
(In thousands, except partnership interest data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $181,508 $ 71,602
Other current assets....................................... 590 506
-------- --------
Total current assets.................................... 182,098 72,108
Property and equipment, net.................................. 1,647 1,509
Globalstar System Under Construction:
Space segment.............................................. 532,407 348,434
Ground segment............................................. 91,346 51,823
-------- --------
623,753 400,257
Deferred FCC license costs................................... 7,799 7,056
Deferred financing costs..................................... 22,049 24,461
-------- --------
$837,346 $505,391
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable........................................... $ 5,135 $ 2,070
Payable to affiliates...................................... 69,892 47,569
Accrued expenses........................................... 3,302 4,782
-------- --------
Total current liabilities............................... 78,329 54,421
Deferred revenues............................................ 23,652 21,913
Vendor financing liability................................... 82,063 42,219
Commitments and contingencies (Note 4)
Redeemable preferred partnership interests (4,769,230
outstanding at June 30, 1996, $310,000,000 redemption
value)..................................................... 301,508 --
Ordinary partners' capital:
Ordinary partnership interests (47,000,000 outstanding).... 329,193 364,237
Warrants................................................... 22,601 22,601
-------- --------
Total ordinary partners' capital........................ 351,794 386,838
-------- --------
$837,346 $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
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 23, 1994
JUNE 30, JUNE 30, (COMMENCEMENT OF
------------------- ------------------- OPERATIONS) TO
1996 1995 1996 1995 JUNE 30, 1996
------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Development costs............. $13,763 $13,844 $25,140 $30,042 $109,273
Marketing, general and
administrative............. 3,689 3,613 7,713 6,810 31,833
------- ------- ------- ------- --------
Total operating expenses........ 17,452 17,457 32,853 36,852 141,106
Interest income................. 3,079 4,708 4,528 6,867 18,300
------- ------- ------- ------- --------
Net loss........................ 14,373 12,749 28,325 29,985 122,806
------- ------- ------- ------- --------
Preferred distribution and
related increase on redeemable
preferred partnership
interests..................... 5,295 -- 6,719 -- 6,719
------- ------- ------- ------- --------
Net loss applicable to ordinary
partnership interests......... $19,668 $12,749 $35,044 $29,985 $129,525
======= ======= ======= ======= ========
</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
SIX MONTHS ENDED SIX MONTHS ENDED OPERATIONS) TO
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (28,325) $ (29,985) $ (122,806)
Accrued interest receivable on investments... -- (1,966) --
Deferred revenues............................ 1,739 15,080 23,652
Depreciation and amortization................ 2,981 160 3,494
Changes in operating assets and liabilities:
Other current assets......................... (84) (559) (590)
Accounts payable............................. 2,828 672 4,322
Payable to affiliates........................ (4,849) 896 16
Accrued expenses............................. (1,480) 1,430 3,302
---------- ---------- ----------
Net cash used in operating activities.......... (27,190) (14,272) (88,610)
---------- ---------- ----------
Investing activities:
Globalstar System Under Construction......... (223,496) (136,995) (623,753)
Payable to affiliates for Globalstar System
Under Construction........................ 27,172 4,067 61,078
Accounts payable for Globalstar System Under
Construction.............................. 237 (221) 303
Vendor financing liability................... 39,844 9,022 82,063
---------- ---------- ----------
Cash used for Globalstar System.............. (156,243) (124,127) (480,309)
Purchases of property and equipment.......... (457) (170) (2,464)
Deferred FCC license costs................... (743) (1,081) (5,564)
Purchases of investments..................... -- (126,923) (126,923)
Maturity of investments...................... -- 39,258 126,923
Other current assets......................... -- 190 --
---------- ---------- ----------
Net cash used in investing activities........ (157,443) (212,853) (488,337)
---------- ---------- ----------
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
Distribution on redeemable preferred
partnership interests..................... (4,758) -- (4,758)
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.... 294,539 318,630 758,455
---------- ---------- ----------
Net increase in cash and cash equivalents.... 109,906 91,505 181,508
Cash and cash equivalents, beginning of
period.................................... 71,602 73,560 --
Cash and cash equivalents, end of period..... $ 181,508 $ 165,065 $ 181,508
========== ========== ==========
Noncash transactions:
$ 9,308
Payable to affiliates............................................................. ==========
$ 2,400
Accrual of capital raising costs.................................................. ==========
$ 2,235
Deferred FCC license costs........................................................ ==========
$ 22,601
Warrants issued in exchange for debt guarantee.................................... ==========
</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 six months ended June 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 ("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 Loral and Lockheed Martin
Corporation ("Lockheed Martin") 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.
("SS/L") and other affiliated businesses, as well as certain other assets,
have been transferred to Loral Space & Communications Ltd., ("Loral
SpaceCom") 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.
9
<PAGE> 11
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior-year amounts to
the current-year presentation.
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION
THE SPACE SEGMENT
Globalstar has entered into a contract with SS/L, an affiliate of Loral
SpaceCom 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.
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.
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 currently approximates $350 million.
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.
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 Lockheed
Martin, formerly a Loral subsidiary, 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
10
<PAGE> 12
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
incurred, with the remainder payable upon achievement of certain
milestones. Globalstar will own any intellectual property produced under
the contract.
TOTAL SYSTEM COST
At June 30, 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, exercise of warrants, 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. 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 projections due to such risks and
uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, cash and cash equivalents increased to $181.5 million
from $71.6 million at December 31, 1995. The net increase is primarily the
result of the net proceeds of $299.5 million received from the sale of 4,769,230
Redeemable Preferred Partnership Interests ("RPPIs") and interest of $4.5
million on outstanding cash balances, offset by the expenditures for operations,
the Globalstar System Under Construction, and preferred distributions on the
RPPIs.
Accounts payable, payables to affiliates and accrued expenses have
increased by $23.9 million from $54.4 million at December 31, 1995 to $78.3
million at June 30, 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 June 30, 1996, Globalstar incurred costs of approximately $739
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 six months ended June 30, 1996 were approximately $249 million
(including $39.8 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 recognized 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.
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
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
$80 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 June 30, 1996, Globalstar has obtained $780 million of equity (of
which $299.5 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), exercise of warrants, 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 ("Lockheed Martin") 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. ("Loral SpaceCom"). In connection with the merger,
Lockheed Martin assumed $206 million of the guarantee on the Globalstar Credit
Agreement, the balance of $44 million of the guarantee was assumed by various
Globalstar partners. Loral SpaceCom has agreed to indemnify Lockheed Martin for
its liability in excess of $150 million under its guarantee of the Globalstar
Credit Agreement.
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 June 30, 1996, Globalstar has recorded cumulative net losses of
$122.8 million. The net loss for the six months ended June 30, 1996 decreased to
$28.3 million as compared to $30.0 million for the six months ended June 30,
1995, due to a decrease in development costs, offset by an increase in
marketing, general and administrative expenses and a decrease in interest
income. The net loss for the three months ended June 30, 1996 increased to $14.4
from $12.7 million in the prior year due to 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 service operations.
Globalstar has earned interest income of $18.3 million on cash balances and
short term investments since commencement of operations. Interest income during
the six months ended June 30, 1996 was $4.5 million as compared to $6.9 million
for the six months ended June 30, 1995. Interest income for the three months
ended June 30, was $3.1 million and $4.7 million, in 1996 and 1995,
respectively. Interest income for the current periods decreased as a result of
lower average cash balances outstanding.
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Operating Expenses. Development costs of $25.1 million for the six months
ended June 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 $30.0 million of development costs incurred during the comparable
period of 1995. Development costs for the three months ended June 30, was $13.8
million for both 1996 and 1995, reflecting the steady level of activity of
Qualcomm and Globalstar's in-house engineering.
Marketing, general and administrative expenses were $7.7 million for the
six months ended June 30, 1996 as compared to $6.8 million incurred during the
six months ended June 30, 1995. Marketing, general and administrative expenses
for the three months ended June 30, 1996 and 1995 was $3.7 million and $3.6
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 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 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 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 February 14, 1995, 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 Effect
Future Results -- 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 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.
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
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 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.
Globalstar is presently evaluating a plan to purchase long-lead component
parts for possible use in constructing 6 to 12 additional satellites. The
current estimated additional cost for these components is approximately $75 to
$120 million, depending upon the quantity purchased. The plan has two purposes:
(i) to enable Globalstar to have in-orbit at least 38 to 44 satellites during
1999, even in the event of launch failures of up to two launches of 12
satellites each, and (ii) to provide ground spares that would be readily
available to replenish the satellite constellation in the event of satellite
attrition during the first generation or if there are opportunities for
increasing capacity. If Globalstar experiences a launch failure, the
long-leadtime components would be used to build replacement satellites and the
cost associated with the construction and launch of such satellites would be
reimbursed through insurance.
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 productions 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'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 one at present is providing
the same global personal telecommunications service proposed by Globalstar, it
is anticipated that
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
one or more additional competing systems will be launched. If any of
Globalstar's competitors succeed 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.
As land-based telecommunications services expand to regions currently
underserved or not served by wireline or cellular services or as other mobile
telecommunications satellite systems are deployed, demand for Globalstar service
in those regions may be reduced. If such systems are constructed at a more rapid
rate than that anticipated by Globalstar, the demand for Globalstar service may
be reduced at rates higher than those assumed by Globalstar. Globalstar may also
face competition in the future from companies using new technologies and new
satellite systems. New technology could render Globalstar obsolete or less
competitive by satisfying consumer demand in alternative ways or through the
introduction of incompatible telecommunications standards. A number of these new
technologies, even if they are not ultimately successful, could have an adverse
effect on Globalstar. 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 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 had 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1996, at GTL's Annual Meeting of Stockholders, the following
proposals were acted on:
(1) In an uncontested the election the following individuals were elected
to the Board of Directors. The votes were as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
-------- --------
<S> <C> <C>
Bernard L. Schwartz......................................... 7,666,702 143,050
Michael P. DeBlasio......................................... 7,666,452 143,300
Sir Ronald Grierson......................................... 7,665,962 143,790
Robert B. Hodes............................................. 7,666,537 143,215
E. John Peett............................................... 7,666,477 143,275
Michael B. Targoff.......................................... 7,665,902 143,850
A. Robert Towbin............................................ 7,666,537 143,215
</TABLE>
(2) The proposal to fix the minimum and maximum number of directors at
five and nine, respectively, and to deem any vacancies on the Board to
be casual vacancies was ratified. The votes were as follows:
<TABLE>
<S> <C> <C>
For......................................................... 7,568,147
Against..................................................... 151,107
Abstentions................................................. 90,498
</TABLE>
(3) The proposal to issue Globalstar Telecommunications Limited warrants
and Globalstar, L.P. warrants to certain parties and the Company,
respectively, was ratified. The votes were as follows:
<TABLE>
<S> <C> <C>
For......................................................... 4,856,105
Against..................................................... 193,978
Abstentions................................................. 2,759,669
</TABLE>
(4) The selection of Deloitte & Touche, L.L.P. to serve as independent
auditors for the fiscal year ending December 31, 1996, was ratified. The
votes were as follows:
<TABLE>
<S> <C> <C>
For......................................................... 7,802,772
Against..................................................... 3,640
Abstentions................................................. 3,340
</TABLE>
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 Compution of Ratios
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE> 19
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
Date: August 10, 1996 NICHOLAS C. MOREN
-------------------------------------------
Treasurer
(Principal Financial Officer)
and
Registrant's Authorized Officer
18
<PAGE> 20
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>
SIX MONTHS
ENDED
JUNE 30, 1996
-------------
<S> <C>
Earnings:
Net loss...................................................................... $(7,224)
Add:
Equity in loss of Globalstar, L.P........................................ 7,224
Interest expense......................................................... 6,719
-------------
Earnings available to cover fixed charges(1).................................... $ 6,719
==========
Fixed charges -- interest expense............................................... $ 6,719
==========
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
SIX MONTHS (COMMENCEMENT OF
ENDED OPERATIONS) TO
JUNE 30, 1996 JUNE 30, 1996
------------- ----------------
<S> <C> <C>
Net loss..................................................... $ (28,325) $ (122,806)
Dividends on Redeemable Preferred Partnership Interests...... (6,719) (6,719)
------------- ----------------
Deficiency of earnings to cover fixed charges................ $ (35,044) $ (129,525)
========== ==============
</TABLE>
19
<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 JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 467,402
<CURRENT-LIABILITIES> 1,676
<BONDS> 299,832
0
0
<COMMON> 10,000
<OTHER-SE> 155,894
<TOTAL-LIABILITY-AND-EQUITY> 467,402
<SALES> 0
<TOTAL-REVENUES> 6,719
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,719
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,224)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,224)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>
