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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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GLOBALSTAR TELECOMMUNICATIONS LIMITED
Cedar House
41 Cedar Avenue
Hamilton HM12, Bermuda
Telephone: (441) 295-2244
Commission File Number 0-25456
Jurisdiction of incorporation: Bermuda
IRS identification number: 13-3795510
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GLOBALSTAR, L.P.
3200 Zanker Road
San Jose, California 95134
Telephone: (408) 933-4000
Commission File Number: 333-25461
Jurisdiction of Incorporation: Delaware
IRS identification number: 13-3759824
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Securities registered pursuant to Section 12(g) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Globalstar Telecommunications Limited
common stock, $1.00 par value Nasdaq National Market
</TABLE>
The registrants have 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 have been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in Globalstar Telecommunications Limited's 1998 definitive proxy
statement.
As of February 27, 1998, there were 30,640,702 shares of Globalstar
Telecommunications Limited Common Stock outstanding, and the aggregate market
value of such shares (based on the closing price on the Nasdaq National Market)
held by non-affiliates of Globalstar Telecommunications Limited was
approximately $1.7 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Globalstar Telecommunications Limited's 1998 definitive proxy
statement are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
On November 23, 1994, Globalstar Telecommunications Limited ("GTL") was
incorporated as an exempted company under the Companies Act 1981 of Bermuda. On
February 14, 1995, GTL completed an initial public offering of 20,000,000 shares
of common stock (as adjusted for two-for-one stock split -- see Recent
Developments). Effective February 22, 1995, GTL purchased 10,000,000 ordinary
partnership interests from Globalstar, L.P. ("Globalstar"), a development stage
limited partnership. At December 31, 1997, GTL had a 29.3% ownership interest in
the ordinary partnership interests of Globalstar, and its sole business is
acting as a general partner in Globalstar.
Globalstar was founded by Loral Corporation ("Old Loral") and QUALCOMM
Incorporated ("Qualcomm"). Effective April 23, 1996, a merger between Old Loral
and Lockheed Martin Corporation ("Lockheed Martin") was completed. In
conjunction with the merger, Old Loral's space and communications businesses,
including its direct and indirect interests in Globalstar, GTL, Space
Systems/Loral, Inc. ("SS/L") and other affiliated businesses, as well as certain
other assets and liabilities, were transferred to Loral Space & Communications
Ltd. ("Loral"), a Bermuda company. Globalstar is a Delaware limited partnership
whose managing general partner is Loral/QUALCOMM Satellite Services, L.P.
("LQSS"); the general partner of LQSS is Loral/QUALCOMM Partnership, L.P.
("LQP"), a Delaware limited partnership which includes subsidiaries of Loral and
Qualcomm. The managing general partner of LQP is Loral General Partner, Inc., a
subsidiary of Loral.
Recent Developments
On May 28, 1997, GTL issued a two-for-one stock split. Prior to the
two-for-one split, GTL's equity securities and convertible securities were
represented by equivalent Globalstar partnership interests on an approximate
one-for-one basis. Globalstar's partnership interests were not affected by the
GTL stock split and, accordingly, GTL's equity securities and convertible
securities are now represented by equivalent Globalstar partnership interests on
an approximate two-for-one basis.
On February 14, 1998, the first four Globalstar satellites were launched
aboard a Boeing Delta II rocket and were successfully deployed in orbit.
BUSINESS SEGMENT
Globalstar will operate in one industry segment, telecommunications.
BUSINESS
BUSINESS OVERVIEW
The Globalstar System is designed to enable local service providers to
offer low-cost, high quality wireless voice telephony and data services in
virtually every populated area of the world. To date, Globalstar's designated
service providers have agreed to offer Globalstar service and seek to obtain all
necessary local regulatory approvals in more than 100 different nations,
accounting for approximately 88% of the world's population.
The Globalstar System's worldwide coverage is designed to enable its
service providers to extend modern telecommunications services to millions of
people who currently lack basic telephone service and to enhance wireless
telecommunications in areas underserved or not served by existing or future
cellular systems, providing a telecommunications solution in parts of the world
where the build-out of terrestrial systems cannot be economically justified. The
Globalstar System has been designed to provide services at prices comparable to
today's cellular service and substantially lower than the prices announced by
Globalstar's principal
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competitors. Globalstar service providers will set their own retail pricing in
their assigned service territories and will pay Globalstar approximately $0.35
to $0.55 per minute on a wholesale basis.
Globalstar users will make and receive calls through a variety of
Globalstar phones, including hand-held and vehicle-mounted units similar to
today's cellular telephones, fixed telephones similar either to phone booths or
ordinary wireline telephones, and data terminals and facsimile machines.
Dual-mode and tri-mode Globalstar phones will provide access to both the
Globalstar System and the subscriber's land-based cellular service. Each
Globalstar phone will communicate through one or more satellites to a local
Globalstar service provider's interconnection point (known as a gateway) which
will, in turn, connect into existing telecommunications networks.
As of February 27, 1998, each of the elements of the Globalstar
System -- space and ground segments, digital communications technology, user
terminal supply, service provider arrangements and licensing -- is on schedule
to commence commercial operations in early 1999 following the launch of 44
satellites in 1998. The remaining 12 satellites, including eight in-orbit
spares, will be launched in early 1999.
Space Segment. On February 14, 1998, Globalstar launched its first
four satellites. The next four Globalstar satellites, which will be
launched on a Boeing Delta II launch vehicle, are at the Cape Canaveral
launch site and are expected to be launched in late April 1998. In
addition, satellite and major subsystem assembly, integration and testing
necessary for the first launch on an Ukranian Zenit launch vehicle are
underway. Production is proceeding for the remaining satellites to meet
scheduled launch dates. Globalstar's launch providers have signed
definitive agreements for the launch of the Globalstar satellite
constellation, providing a variety of launch options and considerable
launch flexibility. Mission operations preparations and launch vehicle
production and dispenser development are on schedule.
Ground Segment. Globalstar purchased 38 gateways under contracts
totaling approximately $340 million. Globalstar has entered into contracts
and discussions to resell such gateways to its partners and service
providers. The first four Globalstar gateways, which are located in
Australia, France, South Korea and the United States, are completed. These
gateways will support Globalstar's data network, monitor the initial launch
and orbital placement of Globalstar's first satellites, and serve as
prototypes for production gateways that will support Globalstar service.
Construction of the remaining 34 gateways is proceeding on schedule for the
initiation of commercial service in 1999. In addition, Globalstar's
satellite operations control center ("SOCC") facility has been completed.
Digital Communications Technology. Qualcomm's CDMA technology has now
been successfully deployed in South Korea, Hong Kong and cities in the
United States supporting terrestrial personal communications services and
digital cellular service, and its CDMA implementation for Globalstar has
been successfully demonstrated in a simulated satellite environment. This
demonstration validated Globalstar's encoding, modulation, control
software, time and frequency distribution and up/down links between
satellites, gateways and handsets.
User Terminal Supply. Qualcomm/Sony and two other manufacturers,
Ericsson and TELITAL, are developing Globalstar's user terminals and
production orders were issued in the fourth quarter of 1997. In December
1997, an order for 40,000 fixed access terminals totalling $84 million was
placed with Ericsson. Globalstar expects to recover this cost through the
resale of these terminals to vendors.
Service Providers. Globalstar and its partners have been seeking
alliances with service providers throughout the world and have entered into
a number of agreements in specific territories. Globalstar believes that
these relationships with in-country service providers will facilitate the
granting of local regulatory approvals -- particularly where the service
provider and the licensing authority are one and the same -- as well as
provide local marketing and technical expertise.
Licensing. In January 1995, the FCC granted authority for the
construction, launch and operation of the Globalstar System and assigned
spectrum for its user links. Later that year, the 1995 World
Radiocommunications Conference ("WRC95") allocated feeder link spectrum on
an international basis for mobile satellite services ("MSS") systems such
as Globalstar, and in November 1996 the FCC authorized Globalstar's feeder
links.
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Globalstar's current budgeted expenditures for the cost of the design,
construction and deployment of the Globalstar System, including working capital,
cash interest on borrowings and operating expenses, are approximately $2.7
billion. Globalstar has raised or received commitments for approximately $2.6
billion in equity, debt and vendor financing.
In addition, Globalstar has agreed to purchase from SS/L its satellite
contractor eight additional spare satellites at a cost of approximately $175
million. Further, in order to accelerate the deployment of gateways around the
world, Globalstar has agreed to finance approximately $80 million of the cost of
up to 32 of the initial 38 gateways. Globalstar expects to recover this
financing upon resale of such gateways to its partners and service providers.
The Globalstar System has been designed to address the substantial and
growing demand for telecommunications services worldwide, particularly in
developing countries. More than three billion people today live without
residential telephone service, many of them in rural areas where the cost of
installing wireline service is prohibitively high. Moreover, even where
telephone infrastructure is available in developing countries, outdated
equipment often leads to unreliable local service and limited international
access. The number of worldwide fixed phone lines has increased from 469 million
in 1988 to 753 million in 1996 and is projected to increase to 1.2 billion by
2002. Nonetheless, during the same period, waiting lists for fixed service have
increased from 30 million to 45 million, resulting in an average waiting time
before installation of approximately one and a half years. Similarly, the
cellular market has grown from four million worldwide subscribers in 1988 to an
estimated 123 million in 1996 and is projected to increase to 334 million by
2001. At that time, it is projected that only 40% of the world's population will
live in areas with cellular coverage. The remaining 60% of the world's
population will have access to wireless telephone service principally through
satellite-based systems like the Globalstar System. Globalstar believes that its
addressable market exceeds 30 million people.
The Globalstar System has been designed with attributes which Globalstar
believes compare favorably to other proposed global MSS systems including:
Globalstar's unique combination of CDMA technology and path diversity through
multiple satellite coverage, which will reduce call interruptions and signal
blockage from obstructions and will use satellite power more efficiently; a
proven space segment design without complex intersatellite links or on-board
call processing and a ground segment with flexible, low-cost gateways and
competitively priced Globalstar phones; lower average wholesale prices than
other proposed MSS systems; and gateways installed in most major countries,
minimizing tail charges (i.e. amounts charged by carriers other than the
Globalstar service provider for connecting a Globalstar call through its
network), resulting in low costs for domestic and regional calls, which will
account for the vast majority of Globalstar's anticipated usage.
Loral is a principal founder of Globalstar and, through a subsidiary, is
its managing general partner. Loral owns, directly or indirectly, approximately
40% (38% on a fully diluted basis) of Globalstar.
Other Globalstar strategic partners include leading domestic and
international telecommunications service providers and space and
telecommunications equipment manufacturers.
GLOBALSTAR STRATEGIC PARTNERS
Globalstar has selected strategic partners whose marketing, operating and
technical expertise will enhance Globalstar's capabilities. These partners are
playing key roles in the construction, operation and marketing of the Globalstar
System. Globalstar's founding partners are Loral and Qualcomm, the leading
supplier of CDMA digital telecommunications technology. Globalstar's other
strategic partners are:
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TELECOMMUNICATIONS TELECOMMUNICATIONS EQUIPMENT
SERVICE PROVIDERS AND AEROSPACE SYSTEMS MANUFACTURERS
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- AirTouch - Alcatel
- Dacom - Alenia
- France Telecom - DASA
- Vodafone - Finmeccanica
- Hyundai
- SS/L
</TABLE>
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SS/L is providing the system's satellites under a fixed-price contract that
also requires SS/L to obtain launch services and launch insurance. Qualcomm is
designing and will manufacture Globalstar phones and gateways and certain ground
support equipment. In addition to their initial investments, these strategic
partners, together with SS/L, committed or obtained $453 million in vendor
financing for Globalstar. Loral, Lockheed Martin and certain strategic partners
have also guaranteed Globalstar's obligations under the Globalstar credit
agreement.
BUSINESS STRATEGY
Globalstar's strategy for successful operation is based upon: providing
potential users worldwide with high quality telecommunications services,
employing a system architecture designed to minimize cost and technological
risks and leveraging the marketing, operating and technical capabilities of its
strategic partners.
WORLDWIDE HIGH QUALITY SERVICE
To achieve rapid and sustained customer acceptance of the system, the
Globalstar System has been designed to provide a high quality, worldwide service
that combines the best of existing cellular service with the technological
advantages of the Globalstar System as described herein to meet the needs of
individual end users.
Worldwide Coverage and Access. The Globalstar System's worldwide coverage
has been designed to enable its service providers to extend modern
telecommunications services rapidly and economically to significant numbers of
people who currently lack basic telephone services and to enhance wireless
telecommunications in areas underserved or not served by existing or
contemplated cellular systems. Globalstar expects to provide a communications
solution in parts of the world where the build-out of terrestrial systems cannot
be economically justified. The Globalstar System has also been designed to
enable international travelers to make and receive calls through a unique access
number with their mobile Globalstar phone anywhere in the world where Globalstar
service is authorized by local regulatory authorities.
Multiple Satellite Coverage; Soft Handoff. CDMA digital communications
technology combined with continuous multiple satellite coverage and signal path
diversity (a patented SS/L method of signal reception not available to competing
systems) will enable the Globalstar System to provide service to a wide variety
of locations, with less potential for signal blockage from buildings, terrain or
other natural features. Globalstar phones have been designed to operate with a
single satellite in view, although typically signals from two to four satellites
overhead will be combined to provide service. Therefore, the loss of an
individual satellite is not expected to result in any gap in global coverage.
Each mobile Globalstar phone has been designed to communicate with as many as
three satellites simultaneously, combining the signals received to ensure
maximum service quality. As satellites are constantly moving in and out of view,
they will be seamlessly added to and removed from the calls in progress, thereby
reducing the risk of call interruption.
Superior Call Quality; Increased Privacy. Based on terrestrial simulations
of the Globalstar System, Globalstar expects that Qualcomm's CDMA digital
technology will enable Globalstar to provide digital voice services which will
have clarity, quality and privacy similar to those of existing digital
land-based cellular systems. Qualcomm's CDMA technology has also been selected
for digital cellular service by 12 of the 15 largest U.S. cellular service
providers and the two largest holders of PCS services in the U.S. (by population
served).
Efficient Use of Satellite Resources. The Globalstar System's use of
multiple satellites to communicate with each Globalstar phone (a patented SS/L
method of signal reception not available to competing systems) has been designed
to allow its communications signals to bypass obstructions. Path diversity is
expected to permit Globalstar to maintain its desired level of service quality
while using less power and satellite resources than would be required in a
system using single path satellites, which attempt to penetrate obstructions by
using higher single satellite power and overall higher link margins.
No Voice Delay. Globalstar satellites' low-earth orbit ("LEO") of 750
nautical miles is expected to result in no perceptible voice delay, as compared
with the noticeable time delay of calls utilizing geosynchro-
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nous satellites, which orbit at an altitude of 22,500 nautical miles. Globalstar
believes that its system will also entail noticeably less voice delay than
medium orbit MSS systems and, in many cases, than LEO systems requiring on-board
satellite call processing to support satellite-to-satellite switching systems.
EMPLOYING A SYSTEM ARCHITECTURE DESIGNED TO MINIMIZE COST AND RISK
Simple, Cost-Effective System Architecture. To achieve low cost, reduce
technological risk and accelerate its deployment, Globalstar has devised a
system architecture using small satellites incorporating well-established design
features, and located the system's call processing and switching operations on
the ground, where they are accessible for maintenance and can benefit from
continuing technological advances. Hand-held and vehicle-mounted Globalstar
phones are anticipated to be priced competitively and will be similar in
function to current digital cellular telephones. Dual-mode and tri-mode
Globalstar phones will be able to access both Globalstar and a variety of local
land-based analog and digital cellular services, where available. Multiple
manufacturers have been licensed to manufacture Globalstar phones in order to
promote competition and reduce prices.
Low-Cost Service. Globalstar intends to offer its service providers
effective average prices substantially lower than those announced by its
anticipated principal competitors. Globalstar's service providers will set their
own retail pricing and will pay to Globalstar wholesale prices generally
expected to range between $0.35 and $0.55 per minute. As a result of its pricing
commitments to its service providers or as a result of competitive pressures,
Globalstar may not be in a position to pass on to its service providers
unexpected increases in the cost of constructing the Globalstar System. However,
Globalstar believes that its low system and operating costs and high gross
margins at target pricing and usage levels provide it with substantial
additional pricing flexibility if necessary to meet competition.
Simple Space Segment of Proven Design. Globalstar believes its system will
cost less to design and construct and will be the first or second of the
proposed worldwide systems to provide commercial service. To achieve low cost,
reduce technological risk and accelerate deployment of the Globalstar System,
Globalstar's system architecture uses small satellites incorporating a
well-established repeater design that acts essentially as a simple "bent pipe,"
relaying signals received directly to the ground. The Globalstar space segment
is being manufactured under a fixed-price contract with SS/L. The contract
provides for the construction of 56 satellites, including eight in-orbit spares,
meeting designated performance specifications and for SS/L to obtain launch
services and launch insurance. In addition, Globalstar has agreed to purchase
from SS/L eight additional spare satellites that will increase Globalstar's
ability to have at least 40 satellites in service during 1999, even in the event
of launch failures.
Flexible, Low-Cost Ground Segment. Globalstar has been designed to offer
local governments and service providers affordable telephone infrastructure
where the cost of build-out of land-based wireline or wireless telephone systems
is either too great or not economically justifiable. By purchasing a single
gateway for approximately $5 million to $10 million (depending on the capacity
desired), a service provider can extend basic telephone service to fixed
terminals on a national basis in countries as large as Saudi Arabia and mobile
service to cover an area almost as large as Western Europe. Each country with a
Globalstar gateway will have access to domestic service without the imposition
of international tail charges on in-country calls, thereby offering subscribers
the lowest possible cost for domestic calls, which account for the vast majority
of all cellular calls today.
Competitively Priced Globalstar Phones. Hand-held and vehicle-mounted
Globalstar phones are anticipated to be priced competitively and will be similar
in function to current digital cellular telephones. Moreover, mobile Globalstar
phones will use less power on average than conventional analog cellular
telephones and are therefore expected to enjoy longer battery life. Dual-mode
and tri-mode Globalstar phones will be able to access both Globalstar and a
variety of local land-based analog and digital cellular services, where
available. After initial production runs, mobile and fixed Globalstar phones are
expected to cost less than $750 each, and Globalstar public telephone booths are
expected to cost between $4,000 and $6,000, depending upon desired capacity and
the number of units sharing a fixed antenna. Qualcomm is required to license
three additional manufacturers of Globalstar phones and has recently granted a
license to each of
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Ericsson and TELITAL for such purpose; Globalstar believes that licensing
multiple manufacturers will spur competition, which will reduce prices. As is
the case with many cellular systems today, service providers may subsidize the
cost of Globalstar phones to generate additional usage revenue. In addition,
national and local governments may subsidize some or all elements of system
cost, particularly in rural areas, thereby reducing the cost of access to
subscribers.
LEVERAGING THE CAPABILITIES OF GLOBALSTAR'S STRATEGIC PARTNERS
Loral has overall management responsibility for the design, construction,
deployment and operation of the Globalstar System. Globalstar's strategic
partners will play key roles in the design, construction, operation and
marketing of the Globalstar System.
Telecommunications service providers AirTouch, Dacom, France Telecom and
Vodafone are providing in-country marketing and telephony expertise to
Globalstar. Globalstar's strategic partner service providers have been granted
exclusive rights to provide Globalstar service in 71 countries around the world
in which they have particular marketing strength and experience and access to an
established customer base of 60 million subscribers. Eight additional service
providers have agreed to offer Globalstar service in 35 additional countries. To
maintain their service provider rights on an exclusive basis, these service
providers and additional service providers are required to make minimum payments
to Globalstar quarterly or annually, depending upon the pricing option selected,
equal to 50% of target revenues. Based upon current targets (which are subject
to adjustment in 1998 based upon an updated market analysis), such minimum
payments total approximately $5 billion through 2005. In order to accelerate the
deployment of gateways around the world, Globalstar has agreed to finance
approximately $80 million of the cost of up to 32 of the initial 38 gateways.
Globalstar expects to recover this financing upon resale of such gateways to its
partners and service providers. There can be no assurance that the service
providers will elect to retain their exclusivity and make such payments or place
such orders for Globalstar phones and gateways.
Globalstar expects to add additional service providers in order to provide
coverage throughout the world. Each service provider will, subject to obtaining
required local regulatory approvals, market and distribute Globalstar service in
its designated territories and own and operate the gateways necessary to serve
its markets.
Telecommunications equipment and aerospace systems manufacturers SS/L,
Alcatel, Alenia, DASA, Finmeccanica and Hyundai have contracted to design, build
and deploy the Globalstar System. Qualcomm, using its CDMA technology, is
designing and will manufacture Globalstar phones and gateways. SS/L is
performing under a fixed-price contract for the construction of Globalstar's
satellites in conjunction with Aerospatiale, Alcatel, DASA, Finmeccanica, and
Hyundai.
THE GLOBALSTAR SYSTEM
Globalstar intends to offer low-cost, high quality telecommunications
services throughout the world. The Globalstar System will be comprised of a
56-satellite LEO constellation, including eight in-orbit spares, and a Ground
Segment consisting of two SOCCs and two ground operations control centers
("GOCCs"), Globalstar gateways in each region served, and mobile and fixed
Globalstar phones. Globalstar will own and operate the satellite constellation,
the SOCCs and the GOCCs. The remaining elements of the system will be owned by
Globalstar's service providers and their subscribers. The descriptions of the
Globalstar System are based upon current design and are subject to modification
in light of future technical and regulatory developments.
GLOBALSTAR SERVICES AND GLOBALSTAR PHONES
Globalstar's most important service will be voice telephony service, which
Globalstar is expected to offer through telephone booth-like installations and
other fixed telephones located in areas without any landline or cellular
telephone coverage, and through hand-held and vehicle-mounted Globalstar phones,
similar to existing cellular telephones. Globalstar is also expected to offer
paging, facsimile and messaging services and position location capabilities,
which may be integrated with its voice services or marketed separately, as well
as environmental and asset monitoring from remote locations and other forms of
data transmission.
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Voice Services
Based on terrestrial simulations of the Globalstar System, Globalstar
expects that its digital voice services will have clarity, quality and privacy
similar to those of existing digital land-based cellular systems. Moreover, the
system has been designed to minimize call interruptions ("dropped calls")
resulting from movements on the part of the user or the satellites. Globalstar
is expected to offer the full range of voice services provided by modern
land-based telephone networks, including options such as call forwarding,
conferencing, call waiting, call transfer and reverse charging ("collect
calls"). Globalstar's voice services will be digital in nature and therefore
difficult for unauthorized listeners to intercept and decode and, as a result,
will be more secure than those offered by analog systems such as existing
cellular telephones. The Globalstar System will function best when there is an
unobstructed line-of-sight between the user and one or more of the Globalstar
satellites overhead. Competing systems without Globalstar's path diversity
depend on each user maintaining contact with a single satellite. Obstacles such
as buildings, trees or mountainous terrain may degrade service quality, more so
than would be the case with terrestrial cellular systems, and service may not be
available in the core of high-rise buildings.
By planning for volume production and utilizing commercially available
off-the-shelf components where possible, Globalstar expects that its Globalstar
phones, unlike those of certain other proposed MSS systems, will be priced
competitively to current state-of-the-art digital cellular telephones. Qualcomm
has agreed to design and manufacture a number of versions of Globalstar phones.
It has granted a license to manufacture Globalstar phones to each of Ericsson
and TELITAL and has agreed to license at commercially reasonable royalty rates
at least one additional qualified Globalstar phone manufacturer.
Fixed Globalstar Phones for No-Telephone Areas. The majority of the
world's population does not have access to any of the basic telephone services
that are available to most residents of developed nations. Public installations
of one or more Globalstar phones, configured as telephone booths and powered by
local generators or solar panels connected to a directional antenna aimed at the
satellites overhead, would be important resources for remote villages currently
lacking basic telephone service. Government officials, among other individuals,
as well as commercial enterprises in remote areas such as mining and logging
operations, are expected to utilize fixed Globalstar phones which will operate
like landline telephones, but will be connected to directional Globalstar
antennas. Directional antennae also provide for more efficient use of the
system's capacity.
Mobile Globalstar Phones for No-Cellular Areas. In certain regions,
land-based cellular systems cannot be economically justified because of their
population density or geographic characteristics. As a satellite-based system
with worldwide coverage, Globalstar can efficiently offer both hand-held and
vehicle-mounted mobile service in these areas through its single-mode mobile
Globalstar phones. These units are expected to be similar in function and cost
to today's full-featured cellular telephones. Unlike any cellular telephone in
existence today, however, these units will have the ability to operate (both for
making and receiving calls) in virtually every inhabited area of the world where
Globalstar service is authorized.
Globalstar mobile terminals will all be equipped with omnidirectional
antennas, similar to cellular telephone antennas, that connect equally well
regardless of the direction in which they are pointed. Each mobile terminal will
communicate with all satellites in view and will have the built-in signal
processing intelligence to constantly seek out and select the strongest signal
transmitted from overhead, combining the signals received to ensure maximum
service quality. Further, Globalstar phones will automatically vary their power
output as necessary to maintain call quality and connectivity. As a result of
this efficiently-managed power system, mobile Globalstar phones are expected to
draw less power, on average, than conventional cellular telephones and are
therefore expected to enjoy longer battery life.
Dual-Mode and Tri-Mode Globalstar Phones for Local and Global
Roaming. Current cellular system subscribers who need a mobile telephone that
also works when they travel to areas without compatible cellular coverage (or
that have no cellular coverage at all) will be offered Globalstar service
through dual-mode and tri-mode handsets and vehicle-mounted units. Dual-mode and
tri-mode telephones will also permit the user to access Globalstar service when
cellular access is temporarily blocked by interference, terrain or
over-capacity.
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Like Globalstar's single-mode mobile telephones, dual-mode and tri-mode
telephones will enable the user to make and receive calls through a unique
access number anywhere in the world where service is authorized.
Dual-mode and tri-mode Globalstar phones can be programmed by the service
provider to automatically utilize the chosen land-based cellular service
whenever it is available and to otherwise process the call through Globalstar;
they can also be programmed for manual selection between Globalstar and the
land-based cellular system. Dual-mode and tri-mode Globalstar phones are being
developed for the most widely-based conventional cellular modulation. The
dual-mode pairs are expected to include: Globalstar/CDMA, Globalstar/ Advanced
Mobile Phone Systems (AMPS) and Globalstar/Global System for Mobile
Communications (GSM).
Other Services
Messaging and Paging Services. In addition to supporting voice services,
the Globalstar System is also expected to function as a worldwide paging and
alphanumeric messaging service. Hand-held or vehicle-mounted Globalstar phones
are currently being designed with a built-in paging and messaging feature that
allows the user to receive a page or a short alphanumeric message while the unit
is in a very-low-power "quiet listening only" mode. Separate Globalstar
messaging and paging units may also be developed by Globalstar or by third party
vendors. The Globalstar System can readily support these functions without
taxing system resources since, as compared with voice services, messages and
pages have a relatively low data content and do not require instantaneous,
two-way transmission.
Remote Monitoring. Globalstar data terminals integrated with automatic
sensing equipment of various kinds can provide a continuous stream of valuable
information concerning natural events such as weather conditions, seismic shifts
and forest fires, as well as the condition of remote assets, such as oil and gas
pipelines and electric utility transmission lines.
Facsimile and Other Data Services. The Globalstar System is expected to
support fax traffic, as well as transmissions of digital computer data.
Position Location. Frequent, accurate readings of position location for
large numbers of vehicles is critical information for the efficient management
of fleets of trucks and railcars. Qualcomm's OmniTRACS system, which relays
position location information to a central location and offers messaging
capabilities, is expected to be deployed on the Globalstar System and offered to
Globalstar service providers.
SATELLITE CONSTELLATION
Globalstar service will be delivered through a constellation of 48 small,
low-cost LEO satellites orbiting the earth in eight circular inclined planes
with six satellites per plane which will provide a clear communications link
with the Globalstar phones and gateways below. Each satellite will transmit 16
spot beams, which will generate coverage cells on the surface of the Earth for
links between users and gateways via the satellites. Each satellite's coverage
area will have a typical diameter of 3,600 miles on the Earth's surface,
resulting in an average area covered per satellite of approximately ten million
square miles, an area larger than the area of China or the United States. Each
spot beam will cover an average area of approximately 600,000 square miles, an
area larger than that of any state in the United States or any country in
Western Europe.
Path Diversity from Multiple Satellites. The satellite constellation will
orbit the Earth in a coordinated pattern 750 nautical miles above the surface of
the Earth designed to provide users with continuous overlapping coverage from
multiple satellites with diverse angles of view or "path diversity." The
satellites will provide multiple-satellite global coverage in all areas of the
world except for a small portion of the polar regions. This constellation and
orbital plane design is expected to improve service quality significantly
relative to current analog systems.
LEO satellites are in constant motion overhead, relative to a user on the
Earth's surface, and, as a result, the beam from the satellite transmitting a
call could be blocked at any time by a building or natural obstruction, placing
the user in the beam's shadow and interfering with or interrupting the call.
Similar effects may occur when a mobile user changes position. Globalstar phones
can operate with a single satellite in view,
8
<PAGE> 10
although typically two to four satellites will be overhead. This supports the
benefits of path diversity for mobile terminals and also means that, in contrast
to medium-earth orbit ("MEO") systems with fewer satellites and competing LEO
systems lacking this feature, the loss of individual satellites will usually not
result in gaps in global coverage. Globalstar's mobile terminals are designed to
communicate with as many as three satellites simultaneously, combining the
signals received to provide improved call quality and, when another satellite
moves into an optimal position, reliably "handing off" the call to such
satellite without interruption. This combination of path diversity and CDMA is a
patented SS/L technology designed to minimize call fading, resulting in fewer
dropped calls and higher overall call quality.
Low-Cost Satellites. Globalstar has chosen a satellite architecture
designed to offer reliable, high quality service and minimize technological
risks. Globalstar's satellites will incorporate a repeater design which will act
essentially as a "bent pipe," relaying received signals directly to the ground.
This design follows the proven philosophy used in all commercial communications
satellites currently in operation. Globalstar's call processing and switching
operations are on the ground, where they are accessible for maintenance and can
benefit from continuing technological advances. By contrast, competing systems
whose satellites switch calls in space from satellite to satellite require
on-board digital signal processing. Globalstar believes that this design results
in higher system costs and precludes the accessible maintenance and easy upgrade
to reflect technological advances which Globalstar can accomplish on the ground
without a need to launch replacement satellites. Globalstar also believes that
such systems' inherent ability to switch international calls in space, bypassing
local service providers, many of which are state-owned, may limit their
desirability in the eyes of some local regulatory authorities.
No Perceptible Voice Delay. Globalstar expects that its combination of a
low-earth orbit and simple repeaters will reduce voice delays over its system to
between 150 and 200 milliseconds, a delay which is not perceptible to the
subscriber in a normal phone conversation. Voice delays are comprised of a
propagation delay, as signals move from the Earth to the satellite and back, and
processing delays on-board the satellite. By contrast, geosynchronous satellite
communications entail a noticeable voice delay of approximately 600
milliseconds. Globalstar expects, based on its own analysis, that MEO systems
such as Global Communications' ICO system ("ICO") may entail voice delays of
between 250 and 300 milliseconds. Although a proposed TDMA system will have an
orbit lower than Globalstar's, thus reducing propagation delay somewhat,
Globalstar believes that in most cases this advantage will be more than offset
by the additional processing delay entailed by the proposed TDMA system's need
to decode, recode, perform echo cancellation and otherwise process signals in
space and the need, in many cases, for satellite-to-satellite linkages, with
additional on-board processing at each step. However, quality differentials may
not be of significant competitive importance in communications markets in
developing countries that currently lack even basic telephone coverage.
Constellation Life. The satellites in the first-generation constellation
are designed to operate at full performance for a minimum of 7 1/2 years, after
which time the cumulative effects of the space environment are expected to
gradually reduce operating performance. The constellation has been designed so
that the loss of a few satellites will, in most cases, not result in gaps in
global coverage. In order to provide additional assurance of system integrity in
the event of premature satellite failure, however, Globalstar plans to launch
eight spare satellites to be relocated in space as required.
Depending on the level of demand for services and the remaining effective
capacity of the first-generation constellation, a second generation of
satellites will be designed, built and launched. Globalstar currently expects to
place a second-generation constellation in service in 2005 and 2006. While the
precise technical capabilities and costs of the second generation of Globalstar
satellites cannot be currently foreseen, the second-generation constellation may
be designed with significantly greater call capacity than the first. In
connection with such an increase in call capacity, Globalstar may be required to
seek additional spectrum allocations from the applicable regulatory authorities.
There is no assurance that such spectrum, if requested, would be obtained.
Implementation and operation of a second-generation system will also require
obtaining U.S. and other regulatory authorizations, and there is no assurance
that these authorizations, if requested, would be obtained.
9
<PAGE> 11
The Ground Segment
Globalstar's SOCCs will track and control the satellite constellation using
telemetry and command units located in various gateways around the world and
telemetry stations in two locations in the United States. The SOCCs will control
satellite orbit positioning, maneuvers and station keeping, and will monitor
satellite health and status in all subsystems. The SOCCs will also plan and
implement satellite lifecycle maintenance procedures, including orbit adjustment
maneuvers.
The GOCCs, which will be in continuous operation 24 hours a day, will be
responsible for planning and controlling satellite utilization by gateway
terminals and coordinating information received from the SOCCs. In addition to
these planning functions, the GOCCs will be responsible for monitoring system
performance, collecting information for billings to service providers and
ensuring that the gateways do not exceed allocated system capacity. The GOCCs
will be responsible for dynamically allocating system capacity among nearby
regions to optimally service changing patterns of demand. The primary SOCC and
primary GOCC will be located at Globalstar's headquarters, with backup
facilities at another location.
The gateway stations are the interconnection points between the Globalstar
satellite constellation and existing land-based telecommunications networks.
Each gateway will contain up to four tracking antennas and radio frequency front
ends that track the satellites orbiting in their view. A typical gateway is
expected to cost between $5 million and $10 million, depending upon the number
of subscribers being serviced by the gateway and assuming that the gateway will
be located at the site of an existing cellular or other appropriate
telecommunications switch. The Globalstar System is designed to prevent
unauthorized use in those countries that have not licensed a Globalstar service
provider. A single gateway is expected to be able to provide fixed coverage over
an area larger than Saudi Arabia and mobile coverage over an area almost as
large as Western Europe. As a result of the low cost of its gateways, Globalstar
expects that its service providers will install gateways in most of the major
traffic-generating countries in which they offer service. Each country with a
Globalstar gateway will have access to domestic service without the imposition
of international tail charges, thereby offering subscribers the lowest possible
cost for domestic calls, which account for the vast majority of all cellular
calls today. Full global land-based coverage of virtually all inhabited areas of
the globe could be achieved with as few as 60 gateways.
Although Globalstar has commissioned the design of the gateways to be used
with the Globalstar System, ownership and operation of the gateways will be the
responsibility of service providers in each country or region in which
Globalstar operations are authorized. The gateway stations will be designed for
Globalstar by Qualcomm. Globalstar purchased 38 gateways under contracts
totaling approximately $340 million. Globalstar has entered into contracts and
discussions to resell such gateways to its partners and service providers. In
order to accelerate the deployment of gateways around the world, Globalstar has
agreed to finance approximately $80 million of the cost of up to 32 of the
initial 38 gateways. Globalstar expects to recover this financing upon resale of
such gateways to its partners and service providers.
GLOBALSTAR SYSTEM CAPACITY
The estimated capacity of the Globalstar System is anticipated to be in the
range of approximately 800 million to 1 billion call minutes per month assuming
equal fixed and mobile usage. However, Globalstar's total effective system
capacity will depend on a number of variables. The number of call minutes per
month the system can support will depend primarily on the total bandwidth
available to CDMA MSS systems, the number of systems sharing that bandwidth, the
total number of subscribers, the type of Globalstar phones (fixed or mobile)
they use and the level of average system availability required. Capacity will
also depend upon a number of other variables, including the peak hour system
utilization pattern, average call length and the distribution of Globalstar
phones in use over the surface of the Earth.
COMPETITION
Competition in the telecommunications industry is intense, fueled by rapid
and continuous technological advances and alliances between industry
participants on an international scale. Although no present participant is
currently providing the same global personal telecommunications service proposed
by Globalstar,
10
<PAGE> 12
it is anticipated that one or more additional competing MSS systems will be
launched and that the success, or anticipated success, of Globalstar and its
competitors could attract other entrants. If any of Globalstar's competitors
succeed in marketing and deploying its system substantially earlier than
Globalstar, Globalstar's ability to compete in areas served by such competitor
may be adversely affected. A number of satellite-based telecommunications
systems not involved in the MSS proceeding have also been proposed using
geosynchronous satellites and, in one case, the 2 GHz band for a MEO system.
Globalstar's most direct competitors are the three other MSS applicants
which currently hold FCC licenses, Iridium, MCHI/Ellipso and Constellation. TRW
announced on December 17, 1997, that it would not construct its previously
licensed Odyssey system, but would instead invest in ICO Global Communications.
As of March 30, 1998, Iridium has launched 56 of its 66 satellites. ICO was not
an applicant or a licensee in the MSS proceeding. ICO has, however, filed a
request with the FCC to operate in a different frequency band not available for
use by MSS systems under current international guidelines in place until 2000.
Comsat, the U.S. signatory to Inmarsat, has applied to the FCC to participate in
the procurement of facilities of the system proposed by ICO. It has also sought
FCC approval of a proposal to extend the scope of services provided by Inmarsat,
currently limited to maritime services, to include telecommunication services to
land-based mobile units. These applications are currently pending before the
FCC. Comsat has been instructed in the past by the U.S. government to seek to
ensure that ICO does not receive preferred access to any market and that
nondiscriminatory access to such areas for all mobile satellite communications
networks be established, subject to spectrum coordination and availability.
Nonetheless, because ICO is affiliated with Inmarsat and because its investors
include the state-owned telecommunications monopolies in a number of countries,
there can be no assurance that ICO might not be given preferential treatment in
the local licensing process in those countries.
Constellation and MCHI were granted FCC licenses in July 1997 after the FCC
waived its financial qualification requirements with respect to such applicants.
In granting such licenses, the FCC found that such applicants had failed to
demonstrate that they are financially qualified, and it is not certain that they
will be able to raise sufficient funds to construct, launch and operate their
proposed systems. Even if ultimately built, such systems are not planned to
enter the market until significantly after Globalstar's targeted in-service
date.
Geostationary-based satellite systems, including American Mobile Satellite
Corporation ("AMSC") and Comsat's Planet-1 are providing, and other proposed
geostationary-based satellite systems, including Asia Pacific Mobile Telecom
("APMT"), Afro-Asia Satellite ("ASC"), PTAsia Cellular Satellite ("ACeS"),
Thuraya and Satphone, plan to provide satellite-based telecommunications
services in areas proposed to be serviced by Globalstar. Certain of these
systems are being proposed by governmental entities. Because some of these
systems involve relatively simple ground control requirements and are expected
to deploy no more than two satellites, they may succeed in deploying and
marketing their systems before Globalstar. In addition, coordination of
standards among regional geostationary systems could enable these systems to
provide worldwide service to their subscriber base, thereby increasing the
competition to Globalstar.
It is expected that as land-based telecommunications service expands to
regions currently not served by wireline or cellular services, demand for
Globalstar service in those regions may be reduced. If such systems are
constructed at a more rapid rate than that anticipated by Globalstar, the demand
for Globalstar service may be reduced at rates higher than those assumed by
Globalstar. Globalstar may also face competition in the future from companies
using new technologies and new satellite systems. New technology could render
Globalstar obsolete or less competitive by satisfying consumer demand in
alternative ways, or through the introduction of incompatible telecommunications
standards. A number of these new technologies, even if they are not ultimately
successful, could have an adverse effect on Globalstar as a result of their
initial marketing efforts. Globalstar's business would be adversely affected if
competitors began operations or expanded existing operations in Globalstar's
target markets before completion of its system.
RESEARCH AND DEVELOPMENT
Globalstar has entered into a contract with Qualcomm whereby Qualcomm is
performing certain development tasks related to the Globalstar System. In
addition, Globalstar is performing certain in-house
11
<PAGE> 13
engineering tasks that are classified as development costs. Total development
expenses incurred for the years ended December 31, 1997, 1996 and 1995 were $62
million, $42 million, and $62 million, respectively.
PATENTS AND PROPRIETARY RIGHTS
In connection with the Globalstar System, Globalstar's design and
development efforts have yielded nine patents issued and 30 patents pending in
the United States, as well as 13 patents issued and more than 152 patents
pending internationally for various aspects of communication satellite system
design and implementation of CDMA technology relating to the Globalstar System.
Qualcomm has obtained 149 issued patents and 380 patents pending in the United
States applicable to Qualcomm's implementation of CDMA. The issued patents
cover, among other things, Globalstar's process of combining signals received
from multiple satellites to improve the signal received and minimize call
fading.
There can be no assurance that any of the pending patent applications by
Globalstar will be issued. Moreover, because the U.S. patent application process
is confidential, there can be no assurance that third parties, including
competitors of Globalstar, do not have patents pending that could result in
issued patents which Globalstar would infringe. In such an event, Globalstar
could be required to redesign its system or satellites, as the case may be, or
pay royalties to obtain a license, which could increase cost or delay
implementation of the system or construction of the satellites, as the case may
be.
EMPLOYEES
As of December 31, 1997, Globalstar had approximately 200 full-time
employees, none of whom is subject to any collective bargaining agreement.
ITEM 2. PROPERTIES
Globalstar leases approximately 79,000 square feet of office space in San
Jose, California. The lease expires in August 2000, and has options to renew for
up to an additional ten years. In addition, Globalstar leases 12,000 square feet
for its back-up GOCC in El Dorado Hills, California. The lease expires in
November 2006 and has options to renew for up to an additional six years.
Management believes that the facilities are sufficient for Globalstar's
operations.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
12
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(A) MARKET PRICE AND DIVIDEND INFORMATION
GTL's common stock is traded on the Nasdaq National Market ("NNM") under
the symbol "GSTRF". The following table sets forth, for each of the periods
indicated, the high and low sales prices per share of common stock as reported
on the NNM, as adjusted for the two-for-one stock split.
<TABLE>
<CAPTION>
MARKET PRICE
--------------------------
1997 1996
----------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Quarter ended:
March 31,............................................ $35 5/8 $25 $32 7/8 $16
June 30,............................................. 33 1/2 23 3/4 29 7/8 20 15/16
September 30,........................................ 53 1/2 27 26 15 1/2
December 31,......................................... 59 1/2 39 36 23 5/8
</TABLE>
GTL has not declared or paid any cash dividends on its common stock, and
Globalstar has not made any distributions on its ordinary partnership interests.
Except for interest payments by GTL on its Convertible Preferred Equivalent
Obligations and distributions by Globalstar on its redeemable preferred
partnership interests, GTL and Globalstar do not currently anticipate paying any
such dividends or distributions (other than to the extent that Globalstar's
payment of GTL's operating expenses related to Globalstar would be treated as a
distribution) prior to Globalstar's full constellation date and achievement of
positive cash flow, which is not expected to occur until 1999. GTL is prohibited
from paying dividends on its common stock as long as any interest arrears remain
outstanding on its Convertible Preferred Equivalent Obligations. GTL is a
holding company, the sole asset of which is its partnership interests in
Globalstar; GTL has no independent means of generating revenues. Globalstar will
pay GTL's operating expenses related to Globalstar; such expenses are not
expected to be material. To the extent permitted by applicable law and
agreements relating to indebtedness, Globalstar intends to distribute to its
partners, including GTL, its net cash received from operations, less amounts
required to repay outstanding indebtedness, satisfy other liabilities and fund
capital expenditures and contingencies (including funds required for design,
construction and deployment of the second-generation satellite constellation).
The Globalstar Credit Agreement and the indentures related to the 11 3/8% Senior
Notes, the 11 1/4% Senior Notes and the 10 3/4% Senior Notes restrict the
ability of Globalstar to pay cash distributions on its ordinary partnership
interests. Cash distributions by Globalstar may also be restricted by future
debt covenants. GTL intends to promptly distribute as dividends to the holders
of its common stock the distributions made to it by Globalstar, less any amounts
required to be retained for the payment of taxes, for repayment of any
liabilities, and to fund contingencies.
(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At February 27, 1998, there were approximately 500 holders of record of
GTL's common stock.
13
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data has been derived from, and should be read in
conjunction with the related financial statements.
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Equity in net loss applicable to
ordinary partnership interests of
Globalstar, L.P.................... $ 24,152 $ 15,080 $ 12,632
Net loss.............................. 24,152 15,080 12,632
Net loss per share -- basic and
diluted............................ 0.86 0.75 0.63
CASH FLOW DATA:
Used in investing activities.......... (153,140) (299,500) (185,750)
Provided by equity transactions....... 153,140 185,750
Provided by borrowings................ 299,500
Dividends paid per common share.......
Ratio of Earnings to Fixed Charges...... 1x 1x N/A
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in Globalstar, L.P......... $ 612,716 $ 482,676 $ 173,118 $ --
Total assets.......................... 612,716 482,676 173,118 190
Convertible preferred equivalent
obligations........................ 301,410 300,358
Shareholders' equity.................. 309,627 180,639 173,118 124
Shareholders' equity per share........ 10.11 9.03 8.66 5.17
</TABLE>
14
<PAGE> 16
GLOBALSTAR, L.P.
(In thousands, except per partnership interest amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
--------------------------------
CUMULATIVE PRE-CAPITAL
MARCH 23, 1994 MARCH 23 SUBSCRIPTION PERIOD(1)
(COMMENCEMENT (COMMENCEMENT ---------------------------
OF OPERATIONS) TO YEARS ENDED DECEMBER 31, OF OPERATIONS) TO JANUARY 1 TO YEAR ENDED
DECEMBER 31, --------------------------------- DECEMBER 31, MARCH 22, DECEMBER 31,
1997 1997 1996 1995 1994 1994 1993
----------------- --------- ---- ---- ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses... 257,349 88,071 61,025 80,226 28,027 6,872 11,510
Interest income...... 40,636 20,485 6,379 11,989 1,783
Net loss applicable
to ordinary
partnership
interests.......... 255,238 88,788 71,969 68,237 26,244 6,872 11,510
Net loss per weighted
average ordinary
partnership
interest
outstanding -- basic
and diluted........ 1.74 1.53 1.50 0.73
Cash distributions
per ordinary
partnership
interest...........
OTHER DATA:
Deficiency of
earnings to cover
fixed charges(2)... 184,683 81,869 N/A N/A
CASH FLOW DATA:
Used in operating
activities......... 210,304 97,128 51,756 38,368 23,052
Used in investing
activities......... 1,301,049 591,025 379,130 280,345 50,549
Provided by partners'
capital
transactions....... 883,495 132,990 284,714 318,630 147,161
Provided by (used in)
other financing
activities......... 1,092,012 998,137 95,750 (1,875)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 464,154 $ 21,180 $ 71,602 $ 73,560
Globalstar System under construction...................... 1,527,688 891,033 400,257 71,996
Total assets.............................................. 2,149,053 942,913 505,391 151,271
Vendor financing liability................................ 197,723 130,694 42,219
Debt...................................................... 1,099,531 96,000
Redeemable preferred partnership interests................ 303,089 302,037
Ordinary partners' capital................................ 380,828 315,186 386,838 112,944
</TABLE>
- ---------------
(1) Reflects certain costs incurred by Loral and Qualcomm prior to March 23,
1994, which were reimbursed by Globalstar through a capital subscription
credit or agreement for repayment in connection with the $275.0 million
capital subscription and commencement of Globalstar's operations on March
23, 1994.
(2) The ratio of earnings to fixed charges is not meaningful as Globalstar is in
the development stage and, accordingly, has incurred operating losses.
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GTL is a holding company that acts as a general partner of Globalstar and
has no other business. The Company's sole asset is its investment in Globalstar
and GTL's results of operations reflect its share of the results of operations
of Globalstar on an equity accounting basis. Accordingly, management's
discussion and analysis addresses the financial condition and results of
operations of Globalstar. In its annual and quarterly reports, GTL presents
separate financial statements for GTL and Globalstar.
Except for the historical information contained herein, the matters
discussed in this Management's Discussion and Analysis of Results of Operations
and Financial Condition, and elsewhere in this Form 10-K, are forward-looking
statements that involve risks and uncertainties, many of which may be beyond
Globalstar's control. These may include, but are not limited to, problems
relating to technical development of the system, testing, regulatory compliance,
manufacturing and assembly, the competitive and regulatory environment in which
Globalstar will operate, marketing problems and costs and expenses that may
exceed current estimates. The actual results that Globalstar achieves may differ
materially from any forward-looking projections due to such risks and
uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, cash and cash equivalents increased to $464.2 million
from $21.2 million at December 31, 1996. The net increase is a result of the net
proceeds of $1.1 billion received from issuance of Globalstar's 11 3/8%, 11 1/4%
and 10 3/4% Senior Notes, $12.2 million received from the sale of warrants to
GTL and, $140.9 million received from the exercise of certain warrants issued in
connection with the Globalstar credit agreement and subscription rights issued
by GTL, offset by expenditures for the Globalstar System under construction of
$488.2 million, expenditures for the additional spare satellites of $99.2
million, the net cash used in operating activities of $97.1 million, preferred
distributions on the Redeemable Preferred Partnership Interests of $20.2 million
and net repayments of debt of $96.0 million.
Accounts payable, payables to affiliates, accrued expenses and accrued
interest on senior notes payable increased by $68.5 as compared to the prior
year, to $143.8 million at December 31, 1997, as a result of the timing of
payments to Globalstar contractors and accrued interest on the senior notes.
Through December 31, 1997, Globalstar incurred costs of approximately $1.7
billion for the design and construction of the space and ground segments. Costs
incurred during fiscal year 1997 were approximately $700 million.
As of December 31, 1997, Globalstar estimates the cost for the design,
construction and deployment of the Globalstar System, including working capital,
cash interest on borrowings and operating expenses to be approximately $2.7
billion, as compared with approximately $2.5 billion estimated at December 31,
1996. Actual amounts may vary from this estimate and additional funds would be
required in the event of unforeseen delays, cost overruns, launch failures,
technological risks, adverse regulatory developments, or to meet unanticipated
expenses and for system enhancements and measures to assure system performance
and readiness for the space and ground segments.
In order to accelerate the deployment of gateways around the world,
Globalstar has agreed to finance approximately $80 million of the cost of up to
32 of the initial 38 gateways. Globalstar expects to recover this financing upon
resale of such gateways to its partners and service providers.
In addition, Globalstar has agreed to purchase from SS/L eight additional
spare satellites for approximately $175 million that will increase Globalstar's
ability to have at least 40 satellites in service during 1999, even in the event
of launch failures. If the launch program is successful, the additional
satellites will serve as ground spares, readily available for launch to
replenish the constellation as needed to respond to satellite attrition during
the first generation, or to increase system capacity as required. If Globalstar
were to experience a launch failure, the costs associated with the construction
and launch of replacements would be substantially covered by insurance.
16
<PAGE> 18
In December 1997, an order for 40,000 fixed access terminals totalling $84
million was placed with Ericsson. Globalstar expects to recover the cost of
these terminals through resale to vendors.
On March 25, 1997, holders of warrants issued in connection with the
Globalstar credit agreement exercised warrants to purchase 8,370,636 shares of
GTL common stock for $13.25 per share. GTL received proceeds of approximately
$110.9 million. On May 5, 1997, GTL received proceeds of approximately $30
million as a result of the exercise of rights issued to purchase 2,262,336
shares of GTL common stock for $13.25 per share. GTL used the total proceeds of
$140.9 million to purchase 5,316,486 Globalstar ordinary partnership interests
for $26.50 per interest. Net proceeds from the exercise of the warrants and
rights will be used for the construction and deployment of the Globalstar
System.
On February 13, 1997, Globalstar and GTL sold units consisting of $500
million aggregate principal amount of Globalstar's 11 3/8% Senior Notes due 2004
and warrants to purchase 2,064,500 shares of GTL common stock in a private
offering (as adjusted for two-for-one stock split). On June 13, 1997 and October
29, 1997, Globalstar sold $325 million principal amount of 11 1/4% Senior Notes
and $325 million principal amount of 10 3/4% Senior Notes, respectively, both
due 2004. Net proceeds from these offerings and the issuance of the warrants
totalled $1.1 billion and will be used for the construction and deployment of
the Globalstar System.
As of December 31, 1997 Globalstar had raised or received commitments for
approximately $2.6 billion. Globalstar believes that its current capital, vendor
financing commitments and the availability of the Globalstar credit agreement
($250 million available at December 31, 1997), are sufficient to fund its
requirements into the fourth quarter of 1998. Globalstar intends to raise the
remaining funds required to complete the Globalstar System from a combination of
sources, including debt issuance (which may include an equity component),
financial support from the Globalstar partners, projected service provider
payments, projected net service revenues from initial operations, and
anticipated payments from the sale of gateways and Globalstar subscriber
terminals. Although Globalstar believes it will be able to obtain these
additional funds, there can be no assurance that such funds will be available on
favorable terms or on a timely basis, if at all.
RESULTS OF OPERATIONS
Comparison of Results for the Years Ended December 31, 1997 and 1996
Globalstar is a development stage partnership and has not commenced
commercial operations. For the period March 23, 1994 (commencement of
operations) to December 31, 1997, Globalstar has recorded cumulative net losses
applicable to ordinary partnership interests of $255.2 million. The net loss for
the year ended December 31, 1997 increased to $67.6 million as compared to $54.6
million for the year ended December 31, 1996 due to an increase in total
operating costs partially offset by an increase in interest income. The net loss
applicable to ordinary partnership interests was $88.8 million during the
current period reflecting $21.2 million of preferred distributions on the
redeemable preferred partnership interests. Globalstar is expending significant
funds for the design, construction, testing and deployment of the Globalstar
System and expects such losses to continue until commencement of commercial
operations.
Globalstar has earned interest income of $40.6 million on cash balances and
short term investments since commencement of operations. Interest income during
the year ended December 31, 1997 was $20.5 million as compared to $6.4 million
for the year ended December 31, 1996. Interest income for the current period
increased as a result of higher average cash balances available for investment
during 1997.
Operating Expenses. Development costs of $62.5 million for the year ended
December 31, 1997 represent the development of Globalstar user terminals and
Globalstar's continuing in-house engineering. This compares with $42.2 million
of development costs incurred during 1996. The increase during 1997 is primarily
the result of the increased activity in the development of the Globalstar user
terminals.
Marketing, general and administrative expenses were $25.6 million for the
year ended December 31, 1997 as compared to $18.9 million incurred during the
year ended December 31, 1996. The increase in marketing, general and
administrative expenses is primarily the result of an increase in the number of
employees, as Globalstar gears up for operations and increased advertising
costs.
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Depreciation. Globalstar intends to capitalize all costs, including
interest as applicable, associated with the design, construction and deployment
of the Globalstar System, except costs associated with the development of the
Globalstar Phones and certain technologies under a cost sharing arrangement with
Qualcomm. Globalstar will not record depreciation expense on the Globalstar
System Under Construction until the commencement of commercial operations, as
assets are placed into service.
Income Taxes. Globalstar was organized as a limited partnership. As such,
no income tax provision (benefit) is included in the accompanying consolidated
financial statements since U.S. income taxes are the responsibility of its
partners. Generally, taxable income (loss), deductions and credits of Globalstar
will be passed through to its partners.
COMPARISON OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
The net loss for the year ended December 31, 1996 decreased to $54.6
million as compared to $68.2 million for the year ended December 31, 1995 due to
a decrease in development costs partially offset by a decrease in interest
income. The net loss applicable to ordinary partnership interests was $72.0
million during 1996 reflecting $17.3 million of preferred distributions on the
redeemable preferred partnership interests.
Interest income during the year ended December 31, 1996 was $6.4 million as
compared to $12.0 million for the year ended December 31, 1995. Interest income
for 1996 decreased as a result of lower average cash balances available for
investment during 1996.
Operating Expenses. Development costs of $42.2 million for the year ended
December 31, 1996, represent the development of certain technologies under a
cost sharing arrangement in Globalstar's contract with Qualcomm, the development
of Globalstar phones and Globalstar's continuing in-house engineering. This
compares with $62.9 million of development costs incurred during 1995. The
decline during 1996 is primarily the result of the cost sharing arrangement in
Globalstar's contract with Qualcomm reaching its funding limit in April 1996.
Marketing, general and administrative expenses were $18.9 million for the
year ended December 31, 1996 as compared to $17.4 million incurred during the
year ended December 31, 1995.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report of Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, Globalstar, GTL or their representatives have made or may
make forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various filings made by
GTL with the Securities and Exchange Commission, press releases or oral
statements made by or with the approval of an authorized executive officer of
GTL or Globalstar. Actual results could differ materially from those projected
or suggested in any forward-looking statements as a result of a wide variety of
factors and conditions, including, but not limited to, the factors summarized
below.
Development Stage Company
Globalstar is a development stage company and has no operating history.
From its inception, Globalstar has incurred net losses and expects such losses
to continue. Globalstar requires expenditure of significant funds for
development, construction, testing and deployment before commercialization of
the Globalstar System. Globalstar expects to commence commercial operations in
early 1999 and to have positive cash flow in the second half of 1999. There can
be no assurance that Globalstar will achieve its objectives by the targeted
dates.
As of December 31, 1997, Globalstar estimates the cost for the design,
construction and deployment of the Globalstar System, including working capital,
cash interest on borrowings and operating expenses, to be approximately $2.7
billion. Actual amounts may vary from this estimate and additional funds would
be required in the event of unforeseen delays, cost overruns, launch failures,
technological risks or adverse
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regulatory developments, or to meet unanticipated expenses. Ground segment
costs, most of which are incurred under a cost-plus contract with Qualcomm, have
increased as a result of added enhanced capabilities, additional test
requirements and cost growth in the development of the ground system. As of
December 31, 1997, Globalstar had raised or received commitments for
approximately $2.6 billion in equity, debt and vendor financing. 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 fourth quarter of 1998. Globalstar intends to raise the
remaining funds required from a combination of sources including debt issuance
(which may include an equity component), financial support from the Globalstar
partners, projected service provider payments, projected net service revenues
from initial operations and anticipated payments received from the sale of
gateways and Globalstar subscriber terminals. Although Globalstar believes it
will be able to obtain these additional funds, there can be no assurance that
such funds will be available on favorable terms or on a timely basis, if at all.
If there are unforeseen delays, if technical or regulatory developments result
in a need to modify the design of all or a portion of the Globalstar System, if
service provider agreements for additional territories are not entered into at
the times or on the terms anticipated by Globalstar or if other additional costs
are incurred, the risk of which is substantial, additional capital will be
required. A substantial shortfall in meeting its capital needs would prevent
completion of the Globalstar System. The ability of Globalstar to achieve
positive cash flow will depend upon the successful and timely construction and
deployment of the Globalstar System, the successful marketing of its services by
service providers and the ability of the Globalstar System to successfully
compete against other satellite-based telecommunications systems, as to which
there can be no assurance.
Many of the problems, delays and expenses encountered by an enterprise in
Globalstar's stage of development may be beyond Globalstar's control. These may
include, but are not limited to, problems related to technical development of
the system, testing, regulatory compliance, manufacturing and assembly, the
competitive and regulatory environment in which Globalstar will operate,
marketing problems and costs and expenses that may exceed current estimates.
Delay in the timely construction, deployment, commercial operation and
achievement of positive cash flow of the Globalstar System could result from a
variety of causes. These include delays in the regulatory process in various
jurisdictions, delay in the integration of the Globalstar System into the
land-based network, changes in the technical specifications of the Globalstar
System made to enhance its features, performance or marketability or in response
to regulatory developments or otherwise, delays encountered in the construction,
integration or testing of the Globalstar System by Globalstar vendors, delayed
or unsuccessful launches, delays in financing, insufficient or ineffective
service provider marketing efforts, slower-than-anticipated consumer acceptance
of Globalstar service and other events beyond Globalstar's control. Substantial
delays in any of the foregoing matters would delay Globalstar's achievement of
profitable operations.
Regulation
The operations of the Globalstar System are and will continue to be subject
to United States and foreign regulation. In order to operate in the United
States and on an international basis, the Globalstar System must be authorized
to provide MSS in each of the markets in which its service providers intend to
operate. Even though a Globalstar affiliate has received a FCC authorization,
there can be no assurance that the further regulatory approvals required for
worldwide operations will be obtained, or that they will be obtained in a timely
manner or in the form necessary to implement Globalstar's proposed operations.
Globalstar's business may also be significantly affected by regulatory changes
resulting from judicial decisions and/or adoption of treaties, legislation or
regulation by the national authorities where the Globalstar System plans to
operate.
Globalstar's FCC license, as modified on November 19, 1996, authorizes the
construction, launch and operation of the satellite constellation and assigns
the system user links and feeder links in the United States. Globalstar's feeder
link frequencies were allocated internationally at WRC'95, and have been
assigned by the FCC for use in the United States in accordance with the
international allocation. However, use of the feeder link frequencies remains
subject to restrictions that may be adopted in a potential FCC proceeding to
adopt the international allocations into the U.S. Table of Frequency
Allocations. In January 1997, the FCC adopted rules for the use of a portion of
the frequencies allocated at WRC'95 for MSS feeder links (such as
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Globalstar's) to a proposed high-speed wireless data service. Although these
rules are intended to preclude harmful interference with other uses of these
bands, they may ultimately permit uses of these frequencies that could diminish
their usefulness for MSS feeder links. Separate licenses must also be obtained
from the FCC for operation of gateways and Globalstar Phones in the United
States.
To the extent that other recently licensed MSS systems that use the
spectrum for which Globalstar has been authorized acquire the financial
resources necessary to construct and launch their proposed systems and such
systems become operational, the Globalstar System's capacity would be reduced.
In addition, Globalstar's FCC license is subject to a pending judicial appeal.
While Globalstar believes that this appeal is without merit, there can be no
assurance that this appeal will not result in either reversal or stay of the
FCC's decision to grant Globalstar's FCC license to LQP or ultimately result in
the granting of additional licenses by the FCC or its adoption of an auction
procedure to award licenses, which might materially increase the cost of
obtaining such licenses.
Authorization will be required in each country in which Globalstar user
terminals are used and in which Globalstar's gateways are located. Local
regulatory approval for operation of the Globalstar System is the responsibility
of the service providers in each territory. Although many countries have moved
to privatize the provision of telecommunications service and to permit
competition in the provision of such service, some countries continue to require
that all telecommunications service be provided by a government-owned entity.
While service providers have been selected, in part, based upon their perceived
qualifications to obtain the requisite local approvals, there can be no
assurance that they will be successful in doing so, and if they are not
successful, Globalstar service will not be available in such territories. In
that event, depending upon geographical and market considerations, Globalstar
may or may not have the ability to redirect the system capacity that such
territories would have otherwise used to serve markets in which service is
authorized.
Regulatory schemes in countries in which Globalstar or its service
providers seek to operate may impose impediments on Globalstar's operations.
There can be no assurance that such restrictions would not be unduly burdensome.
Glonass, the Russian Global Navigation Satellite System, operates worldwide
in a portion of the frequency band proposed to be used by Globalstar and other
MSS systems for user uplinks. Although Glonass has proposed to migrate to lower
frequencies, there can be no assurance that such migration will be implemented
in a manner fully acceptable to Globalstar. In addition, there are requirements
for interference protection between Globalstar and Glonass under consideration,
which, if adopted, may render a segment of the MSS spectrum unusable for MSS
user uplinks. While any likely limitation is not expected to have a material
adverse effect on Globalstar's capacity, nevertheless, these actions may have
the effect of reducing Globalstar capacity in some markets.
European Union competition law proscribes agreements that restrict or
distort competition in the European Union. Globalstar and others have responded
to an inquiry from the Commission of the European Union requesting information
regarding their activities. A violation of European Union competition law could
subject Globalstar to fines or enforcement actions that could delay service in
western Europe, and/or depending on the circumstances, adversely affect
Globalstar's contractual rights vis-a-vis its European strategic partners. In
addition, the Commission has proposed legislation which, if adopted, would give
the Commission broad regulatory authority over satellite telecommunications
systems such as the Globalstar System.
Technological Factors
The Globalstar System is exposed to the risks inherent in a large-scale
complex telecommunications system employing advanced technologies which must be
adapted to the Globalstar application and which have never been used as a
commercial whole. Deployment of the Globalstar satellite constellation involves
volume production and testing of satellites in quantities significantly higher
than those previously prevailing in the industry. The integration of a worldwide
LEO satellite-based system like Globalstar has never occurred; there is no
assurance that such integration will be successfully implemented. The operation
of the Globalstar System will require integration of advanced digital
communications technologies in devices from personal handsets
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and public telephone networks to gateways in remote regions of the globe and
satellites operating in space. The failure to develop, produce and implement the
system, or any of its diverse and dispersed elements, as required, could delay
the in-service or full constellation date of the Globalstar System or render it
unable to perform at levels required for commercial success.
Satellite launches are subject to significant risks, including disabling
damage to or loss of the satellites. Satellite launches of groups of more than
eight commercial satellites have not been attempted before. Historically, launch
failure ("hot failure") rates on low-earth orbit and geostationary satellite
launches have been approximately 15%. However, launch failure rates vary
depending on the particular launch vehicle. There is no assurance that
Globalstar satellite launches will be successful or that its launch failure rate
will not exceed the industry average. The Boeing Delta II launch vehicle,
scheduled to launch the next four satellites, suffered a launch failure on
January 17, 1997, its second failure in 64 launches to that date. Boeing resumed
Delta operations in May 1997 and has not had any additional failures. On
February 14, 1998, the first four Globalstar satellites were launched aboard a
Boeing Delta II rocket and were successfully deployed in orbit. The Ukrainian
Zenit launch vehicle, which is proposed to launch 36 Globalstar satellites (12
per launch), has never been used in commercial applications. A Zenit launch
vehicle carrying a Russian military satellite suffered a launch failure on May
20, 1997. Yuzhnoye, the Zenit manufacturer, in conjunction with Russian space
agencies, has investigated, but not yet released its report regarding the cause
of this failure, the fourth in this rockets last 28 launches. Two launches are
planned on the Zenit prior to Globalstar's initial launch on this vehicle.
Globalstar intends to launch the last 12 satellites of its constellation in
groups of four on three separate launches of the Russian Starsem Soyuz rocket.
The Zenit launch contracts provide for relaunches at no additional charge
in the event of a hot failure. However, the launch provider may, because of
financial reasons or otherwise, be unable to provide such relaunches. A single
launch failure would result in a loss of either four or 12 Globalstar
satellites. Although the cost of replacing such satellites and launch vehicles
will in most cases be covered by insurance, a launch failure could result in
delays in the in-service or the full constellation date.
SS/L has agreed to obtain launch vehicles for Globalstar and arrange for
the launch of all 56 satellites, subject to pricing adjustments in light of
future conditions, which may, in turn, be influenced by international political
developments. An adverse change in launch vehicle market conditions which
prohibits Globalstar from utilizing the launch vehicles for which it has
contracted could result in an increase in the launch cost payable by Globalstar,
which may be substantial. In addition, there can be no assurance that
replacement launch vehicles will be available in the future at a cost or on
terms acceptable to Globalstar.
Two of the launch operators are subject to U.S. export control regulations.
Yuzhnoye, based in Ukraine, has certain ties with Russia and intends to launch
the Zenit rocket from the Baikonur launch site in Kazakhstan. Arianespace, which
will be providing the Soyuz rockets, also intends to launch from Baikonur.
Changes in governmental policies or political leadership in the United States,
Ukraine, Russia or Kazakhstan could affect the cost, availability, timing or
overall advisability of utilizing these launch providers. While there is no
assurance that the necessary export licenses will be obtained, Globalstar has
provided against the risk that such licenses will not be granted or that the
deterioration in the relationships between the United States and these countries
may make the use of such launch providers inadvisable by procuring options on
sufficient launches with a U.S.-based launch provider to launch all the
remaining satellites of the Globalstar constellation. If Globalstar were to
exercise these options for U.S. launches in the wake of the failure to obtain
any necessary export licenses or as a result of adverse developments in U.S.
relations with these countries, the cost of launching the Globalstar satellite
constellation would be significantly increased.
A number of factors will affect the useful lives of Globalstar's
satellites, including the quality of construction, expected gradual
environmental degradation of solar panels and the durability of component parts.
Random failure of satellite components could result in damage to or loss of a
satellite ("cold failures"). In rare cases, satellites could also be damaged or
destroyed by electrostatic storms or collisions with other objects. As a result
of these factors, the first-generation satellite constellation (including
spares) is designed to 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
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results would be adversely affected in the event the useful life of the
satellites were significantly shorter than 7 1/2 years. Globalstar anticipates
using funds generated from operations to develop a second generation of
satellites. If sufficient funds from operations are not available and Globalstar
is unable to obtain external financing for the second-generation constellation,
Globalstar will not be able to deploy a second-generation satellite
constellation to replace first-generation satellites at the end of their useful
lives. In that event, the Globalstar System would cease operations at that time.
Globalstar intends to obtain insurance against launch failure which would
cover the cost of relaunch and the replacement cost of lost satellites in the
event of hot failures for 48 satellites in its constellation and the eight
in-orbit spares. SS/L has agreed to obtain on Globalstar's behalf insurance for
the cost of replacing satellites lost in hot failures, and for any relaunch
costs not covered by the applicable launch contract, in certain circumstances
subject to pricing adjustments in light of future market conditions. An adverse
change in insurance market conditions may result in an increase in the insurance
premium paid by Globalstar, which may be substantial. In addition, there is no
assurance that launch insurance will be available or that, if available, would
be at a cost or on terms acceptable to Globalstar.
Globalstar's contract with SS/L provides for the construction and launch of
eight spare satellites and construction of eight ground spares to minimize the
effect of any launch or orbital failures. However, there can be no assurance
that additional satellites and launches will not be required. In such an event,
in addition to the replacement costs incurred by Globalstar, Globalstar's
in-service or full constellation date may be delayed. In addition, unless
otherwise required, Globalstar does not currently intend to purchase insurance
to cover cold failures that may occur once the satellites have been successfully
deployed from the launch vehicle.
The space and communications industries are characterized by rapid
technological advances and innovations. There is no assurance that one or more
of the technologies utilized or under development by Globalstar may not become
obsolete, or that its services will be in demand by the time they are offered.
Globalstar is dependent upon technologies developed by third parties to
implement key aspects of its strategy to integrate its satellite systems with
terrestrial networks, and there can be no assurance that such technologies will
continue to be available to Globalstar on a timely basis or on reasonable terms.
Future Operating Factors
The availability of Globalstar service in each region or country will
depend upon the cooperation, operational and marketing efficiency,
competitiveness, finances and regulatory status of Globalstar's service provider
in that region or country. The willingness of companies to become service
providers will depend upon a variety of factors, including pricing, local
regulations and Globalstar's competitiveness with other satellite-based
telecommunications systems. Globalstar believes that enlisting the support of
established telecommunications service providers, some of which are the dominant
carriers in their markets, will be essential both to obtaining necessary local
regulatory approvals and to rapidly accessing a broad market of potential users.
Globalstar's strategic service providers have agreed to act as exclusive service
providers in 71 countries although it is anticipated that in many cases these
partners will enter into strategic alliances with local service providers to
provide Globalstar service in these countries. Globalstar's partnership
agreement restricts its limited partners from possessing certain interests in
business activities operating mobile satellite services similar to Globalstar
for voice telephony. In addition, the service provider agreements between
Globalstar and its current service providers preclude any service provider, its
affiliates and certain joint ventures in which such service provider owns an
equity interest from acting as a service provider or a distributor for a similar
satellite service in any territory in respect of which Globalstar has agreed to
make Globalstar service available to such service provider or as a distributor
for a similar satellite service in any territory in which one or more service
providers are ready, willing and able to permit such service provider to act as
a distributor therefor on terms no less favorable than those offered to other
distributors, subject to certain exceptions. Except as provided above,
Globalstar's service providers may enter into certain agreements or
relationships with competitors of Globalstar. Globalstar currently has no
knowledge of any agreements between its service providers and Globalstar's
competitors in the satellite-based personal telecommunications business.
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Globalstar expects to raise additional funds prior to the full
constellation date in the form of service provider payments from prospective
service providers in other territories throughout the world. Globalstar's
business plan assumes that Globalstar will contract with service providers to
provide service in the remaining territories of the world, in certain cases, on
terms more favorable to Globalstar than those contained in its founding service
provider agreements. There can be no assurance that additional service provider
agreements will be entered into in the future or that this plan will be
achieved. If such service provider payments are not realized, Globalstar will be
required to obtain other sources of financing in order to complete the
Globalstar System.
If the service providers fail to obtain the necessary local regulatory
approval or to adequately market and distribute Globalstar's services,
Globalstar's business could be adversely affected. There can be no assurance
that enough service providers will contract for Globalstar service and procure
and install the gateways and obtain the regulatory licenses necessary for
complete global service. Failure to offer service in any particular region will
eliminate that area's market potential and reduce Globalstar's ability to
service its global roamer market.
Certain strategic partners and other third parties are constructing the
component parts of the Globalstar System. In the event such parties are unable
to perform their obligations, Globalstar's in-service and full constellation
date may be delayed and its costs may be increased.
Globalstar expects that a substantial portion of its business will be
conducted outside of the United States. Such operations are subject to certain
risks such as changes in domestic and foreign government regulations and
telecommunications standards, tariffs or taxes and other trade barriers.
Accordingly, government actions in foreign countries could have a significant
effect on Globalstar's operations. Political, economic or social instability or
other developments in such countries, including currency fluctuations, could
also adversely affect Globalstar's operations. In addition, Globalstar's
agreements relating to local operations may be governed by foreign law or
enforceable only in foreign jurisdictions. As a result, in the event of a
dispute, it may be difficult for Globalstar to enforce its rights under such
agreements.
Globalstar's largest potential markets are in developing countries or
regions that are substantially underserved and not expected to be served by
existing telecommunications systems. In doing business in such markets,
Globalstar and its local service providers may face market, inflation, interest
rate and currency fluctuation, government policy, price and wage, exchange
control, taxation and social instability, expropriation and other economic,
political or diplomatic conditions that are significantly more volatile than
those commonly experienced in the United States and other industrialized
countries. Although Globalstar anticipates that it will receive payments from
its service providers in U.S. dollars, limited availability of U.S. currency in
these local markets may prevent a service provider from making payments in U.S.
dollars. Moreover, exchange rate fluctuations may affect the price Globalstar
will be entitled to receive for its services.
Globalstar's pricing to service providers will, under certain
circumstances, not be automatically adjusted for inflation; in such cases,
Globalstar will be able to increase its pricing to service providers only if the
service provider increases its prices to subscribers, and it may be required to
lower its pricing if the service provider lowers its prices to subscribers. In
recent years, pricing in the telecommunications industry has trended downward,
in some cases making it difficult for service providers to raise their prices to
compensate for cost inflation. Although Globalstar expects future service
provider agreements to contain pricing terms more favorable to Globalstar than
those contained in its agreements with founding service providers, there can be
no assurance that such terms will be achieved.
Globalstar has entered into an agreement with a bank syndicate for a $250
million credit facility (the "Globalstar Credit Agreement") expiring December
15, 2000, and also expects to utilize approximately $353 million of committed
vendor financing. Existing indebtedness includes the $500 million aggregate
principal amount of Globalstar's 11 3/8% Senior Notes issued in February 1997
(the "11 3/8% Senior Notes"), the $325 million aggregate principal amount of
Globalstar's 11 1/4% Senior Notes issued in June 1997 (the "11 1/4% Senior
Notes") and the $325 million aggregate principal amount of Globalstar's 10 3/4%
Senior Notes issued in October 1997 (the "10 3/4% Senior Notes"). As a result,
Globalstar is highly leveraged. Globalstar will be dependent on its cash flow
from operations to service this debt. Any delay in the commencement of
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Globalstar operations will adversely affect Globalstar's ability to service its
debt obligations. The discretion of Globalstar's management with respect to
certain business matters will be limited by covenants contained in the
Globalstar Credit Agreement, the indenture (the "11 3/8% Indenture") governing
the 11 3/8% Senior Notes, the indenture (the 11 1/4% Indenture") governing the
11 1/4% Senior Notes, the indenture (the "10 3/4% Indenture") governing the
10 3/4% Senior Notes and future debt instruments. Among other things, the
covenants contained in the Globalstar Credit Agreement, the 11 3/8% Indenture,
the 11 1/4% Indenture and the 10 3/4% Indenture restrict, condition or prohibit
Globalstar from paying cash distributions on its ordinary partnership interests,
creating liens on its assets, making certain asset dispositions, conducting
certain other business and entering into transactions with affiliates and
related persons. In the event the Globalstar Credit Agreement ceases to be
guaranteed, it will also contain certain financial covenants limiting the
ability of Globalstar to incur additional indebtedness. There can be no
assurance that Globalstar's leverage and such restrictions will not materially
and adversely affect Globalstar's ability to finance its future operations or
capital needs or to engage in other business activities. Moreover, a failure to
comply with the obligations contained in the Globalstar Credit Agreement, the
11 3/8% Indenture, the 11 1/4% Indenture and the 10 3/4% Indenture or any
agreements with respect to additional financing could result in an event of
default under such agreements, which could permit acceleration of the related
debt and acceleration of debt under future debt agreements that may contain
cross-acceleration or cross-default provisions.
Competition in the telecommunications industry is intense, fueled by rapid
and continuous technological advances and alliances between industry
participants on an international scale. Although no present participant is
currently providing the same global personal telecommunications service proposed
by Globalstar, it is anticipated that one or more additional competing MSS
systems will be launched and that the success, or anticipated success, of
Globalstar and its competitors could attract other entrants. If any of
Globalstar's competitors succeeds in marketing and deploying its system
substantially earlier than Globalstar, Globalstar's ability to compete in areas
served by such competitor may be adversely affected. A number of satellite-based
telecommunications systems not involved in the MSS proceeding have also been
proposed using geostationary satellites and, in one case, the 2 GHz band for an
MEO system.
Globalstar's most direct competitors are the three other MSS applicants
which currently hold FCC licenses, Iridium, MCHI/Ellipso and Constellation. On
December 17, 1997, TRW announced that it would not construct its previously
licensed Odyssey system but would instead invest in ICO. As of March 30, 1998,
Iridium has launched 56 of its 66 satellites. ICO was not an applicant or a
licensee in the MSS proceeding. ICO has, however, filed a request with the FCC
to operate in a different frequency band not available for use by MSS systems
under current international guidelines in place until 2000. Comsat, the U.S.
signatory to Inmarsat, has applied to the FCC to participate in the procurement
of facilities of the system proposed by ICO. It has also sought FCC approval of
a proposal to extend the scope of services provided by Inmarsat, currently
limited to maritime services, to include telecommunications services to
land-based mobile units. These applications are currently pending before the
FCC. Comsat has been instructed in the past by the U.S. government to seek to
ensure that ICO does not receive preferred access to any market and that non-
discriminatory access to such areas for all mobile satellite communications
networks be established, subject to spectrum coordination and availability.
Nonetheless, because ICO is affiliated with Inmarsat and because its investors
include state-owned telecommunications monopolies in a number of countries,
there can be no assurance that ICO might not be given preferential treatment in
the local licensing process in those countries.
Constellation and MCHI were granted FCC licenses in July 1997, after the
FCC waived its financial qualification requirements with respect to such
applicants. In granting such licenses, the FCC found that such applicants had
failed to demonstrate that they are financially qualified, and it is not certain
that they will be able to raise sufficient funds to construct, launch and
operate their proposed systems. Even if ultimately built, such systems are not
planned to enter the market until significantly after Globalstar's targeted
in-service date.
In addition to competing for investment capital, subscribers and service
providers in markets all over the world, the MSS systems, including Globalstar,
also compete with each other for the limited spectrum available for MSS
operations. Unlike CDMA systems such as Globalstar, MCHI and Constellation,
which permit multiple systems to operate within the same band, the design of
Iridium's TDMA system requires a separate frequency segment dedicated
specifically for its use. If more than two CDMA systems become
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operational, CDMA systems like Globalstar will effectively have a smaller
spectrum segment within which to operate their user uplinks in the U.S. While
CDMA permits spectrum sharing among competing systems, the capacity available to
each system sharing such spectrum decreases as the number of systems operating
in the band increases. The degree of decrease depends on a number of complex
technological factors associated with each system's particular design including
transmitter polarization and efficiency of spectrum usage. If the total number
of operating MSS systems in the CDMA portion of the L-band (e.g., 1610-1626.5
Mhz) and S-band (i.e., 2483.5-2500 Mhz) increases from two to three and the
other two operating CDMA systems have technical characteristics similar to
Globalstar's and all such systems experience full capacity usage, then
Globalstar estimates that its capacity over a given area would decrease by
approximately 25%.
The FCC has no authority to extend the U.S. band plan for CDMA and TDMA Big
LEO systems to other countries. However, it has stated that it plans to express
the view in discussions with other administrations that global satellite systems
are more likely to succeed if individual administrations adopt complementary
systems for licensing them. The Conference of European Regulators (CEPT)has
recommended a band plan virtually identical to the U.S. band plan.
Geostationary-based satellite systems, including AMSC and Comsat's
Planet-1, are providing, and other proposed geostationary-based satellite
systems, including APMT, ASC, ACeS, Thuraya and Satphone, plan to provide
satellite-based telecommunications services in areas proposed to be serviced by
Globalstar. Because some of these systems involve relatively simple ground
control requirements and are expected to deploy no more than two satellites,
they may succeed in deploying and marketing their systems before Globalstar. In
addition, coordination of standards among regional geostationary systems could
enable these systems to provide worldwide service to their subscriber bases,
thereby increasing the competition to Globalstar. For example, Comsat has
announced a global mobile satellite service (Planet-1) using existing Inmarsat
satellites, a six-pound, laptop-size phone, costing $3,000 with an expected
per-minute usage rate of $3.00.
Some of these potential competitors have financial, personnel and other
resources substantially greater than those of Globalstar. Many of these
competitors are raising capital and may compete with Globalstar for service
providers and financing. Technological advances and a continuing trend toward
strategic alliances in the telecommunications industry could give rise to
significant new competitors. There can be no assurance that some of these
competitors will not provide a more efficient or less expensive service.
However, Globalstar believes that based upon the public statements and other
publicly available information of the other MSS applicants, Globalstar will be a
low-cost provider. Depending on the competitive environment, however, pricing
competition could require Globalstar to reduce its anticipated pricing to
service providers, thus adversely affecting its financial performance.
Satellite-based telecommunications systems are characterized by high
up-front costs and relatively low marginal costs of providing service. Several
systems are being proposed and, while the proponents of these systems foresee
substantial demand for the services they will provide, the actual level of
demand will not become known until such systems are constructed, launched and
operational. If the capacity of Globalstar and any competing systems exceeds
demand, price competition could be particularly intense.
Projects such as Teledesic, Spaceway and Cyberstar have each received
licenses to operate satellite-based telecommunications and video transmission
systems in the 28 GHz Ka-band or higher frequencies. Certain MSS applicants, not
including Globalstar, have applied to use this band for their feeder uplinks, as
have proponents of land-based local multipoint distribution systems ("LMDS") for
cellular television services. The FCC has recently concluded developing service
rules and a band-width allocation plan for use of the available Ka-band spectrum
by these services. Globalstar's primary business will be voice telephony, and
its data transmission business will be focused on small data packet services
such as paging and messaging. It therefore does not regard the television or
broadband data services to fixed terminals proposed by Teledesic, Spaceway and
Cyberstar or the wireless cable and fixed telephony services proposed by the
LMDS applicants as competing services.
It is expected that as land-based telecommunications services expand to
regions currently underserved or not served by wireline or cellular services,
demand for Globalstar service in those regions may be reduced. If such systems
are constructed at a more rapid rate than that anticipated by Globalstar, the
demand for
25
<PAGE> 27
Globalstar service may be reduced at rates higher than those assumed in
Globalstar's market analysis. Globalstar may also face competition in the future
from companies using new technologies and new satellite systems. New technology
could render Globalstar obsolete or less competitive by satisfying consumer
demand in alternative ways or through the introduction of incompatible
telecommunications standards. A number of these new technologies, even if they
are not ultimately successful, could have an adverse effect on Globalstar as a
result of their initial marketing efforts. Globalstar's business would be
adversely affected if competitors begin operations or existing or new
telecommunications service providers penetrate Globalstar's target markets
before completion of the Globalstar System.
Subscriber acceptance of the Globalstar System (both in terms of placement
of Globalstar phones and subscriber usage thereof) will depend upon a number of
factors, including price, demand for service and the extent of availability of
alternative telecommunications systems. If the level of actual subscriber demand
and usage for Globalstar service is below that expected by Globalstar,
Globalstar's cash flow will be adversely affected. Globalstar's hand-held phone
is expected to be larger and heavier for the same talk time than today's smaller
and lighter pocket-sized, hand-held cellular telephones and is expected to have
a significantly longer and thicker antenna than hand-held cellular telephones.
The Globalstar System will function best when there is an unobstructed
line-of-sight between the user and one or more of the Globalstar satellites.
Obstacles such as buildings, trees or mountainous terrain may degrade service
quality, more so than would be the case with terrestrial cellular systems, and
service may not be available in the core of high-rise buildings. There is no
assurance that these characteristics of the hand-held Globalstar phone will not
adversely affect subscriber demand for Globalstar service.
There has been adverse publicity concerning alleged health risks associated
with the use of portable hand-held telephones with transmitting antennas
integrated into handsets. On August 1, 1996, the FCC announced new guidelines
for evaluating environmental radio frequency radiation from FCC-regulated
transmitters based primarily on the exposure criteria recommended in 1986 by the
National Council on Radiation Protection Measurements ("NCRP"). Guidelines
applicable to certain portable transmitting devices are based on the NCRP
criteria and the exposure criteria developed by the Institute of Electrical and
Electronic Engineers and recommended in 1992 by the American National Standards
Institute. These guidelines were to become effective as to applications filed
after January 1, 1997; the FCC, however, has deferred the effective date. The
handsets Globalstar has contracted with Qualcomm to develop for use by mobile
subscribers will have antennas for communication with the satellites and, in the
case of the dual-mode and tri-mode hand-held Globalstar phones, with the
land-based cellular system. Because hand-held Globalstar phones will use on
average lower power to transmit signals than traditional cellular units,
Globalstar does not believe that the proposed new guidelines will require any
significant modifications of the Globalstar System or of the mobile hand-held
Globalstar phones designed to be used with the Globalstar System. There can,
however, be no assurance that the guidelines, as adopted, or any associated
health concerns, would not have an adverse effect on Globalstar's mobile handset
business.
The success of Globalstar's business will be partially dependent upon the
ability of Globalstar to attract and retain highly qualified technical and
management personnel. None of the employees of Globalstar has an employment
contract with Globalstar nor does Globalstar expect to maintain "key man"
insurance with respect to any such individuals. The loss of any of these
individuals and the subsequent effect on business relationships could have a
material adverse effect on Globalstar's business.
Other Factors
Partners of LQSS, the managing general partner of Globalstar, or their
affiliates are principal suppliers to Globalstar of the major components of the
Globalstar System, and are engaged in the manufacture of system elements to be
sold to service providers and subscribers. During the development and deployment
of the Globalstar System, Globalstar will be substantially dependent upon the
management skills of Loral and certain technologies developed by Loral, Qualcomm
and SS/L to design and manufacture the Globalstar satellite constellation,
SOCCs, GOCCs, gateways and Globalstar phones. Globalstar has entered into
contracts for the design of various segments of the Globalstar System with
affiliates of LQSS, including a fixed-price satellite production contract with
SS/L and a cost-plus-fee contract with Qualcomm to design the
26
<PAGE> 28
gateways, and Globalstar phones. To the extent that such contracts have been or
will be awarded to partners of Globalstar or LQSS or their affiliates, such
parties will have a conflict of interest with respect to the terms thereof.
Partners and affiliates of Globalstar, including companies affiliated with
or controlled by Loral, will be among Globalstar's principal service provider
customers and may therefore have conflicts of interest with respect to the terms
of Globalstar's service provider agreements and any proposed amendments thereto.
In addition, if Globalstar is unable to offer Globalstar service to a service
provider on competitive terms in a particular country or region, such a service
provider, which may be a partner of Globalstar, can act as a service provider to
a competing MSS system in such region or country while at the same time serving
as a Globalstar service provider in other markets.
YEAR 2000 ISSUE
Globalstar is evaluating the potential effect of the year 2000 on its
information processing systems. It is not known at this time what modifications,
if any, will be required. All costs associated with any modification will be
expensed as incurred.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information required for this item is set forth in GTL's 1998 definitive
proxy statement which is incorporated herein by reference.
EXECUTIVE OFFICERS OF GTL
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bernard L. Schwartz 72 Chairman and Chief Executive Officer
Gregory J. Clark 55 Vice Chairman and President
Michael P. DeBlasio 61 Senior Vice President, Chief Financial Officer and
Director
Douglas G. Dwyre 65 Senior Vice President
William Adler 51 Vice President and Assistant Secretary
Jeanette Clonan 49 Vice President -- Communications and Investor
Relations
Nicholas C. Moren 51 Vice President and Treasurer
Anthony J. Navarra 50 Vice President
Harvey B. Rein 44 Vice President and Controller
Thomas B. Ross 68 Vice President -- Government Relations
Stephen C. Wright 41 Vice President
Eric J. Zahler 47 Vice President and Secretary
</TABLE>
EXECUTIVE OFFICERS OF GLOBALSTAR
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bernard L. Schwartz 72 Chief Executive Officer and Chairman of the General
Partners' Committee
Gregory J. Clark 55 Vice Chairman of the General Partners' Committee
Douglas G. Dwyre 65 President
John Klineberg 59 Executive Vice President -- Satellite Constellation
Establishment
Anthony J. Navarra 50 Executive Vice President -- Strategic Development
Joel Schindall 57 Senior Vice President -- Systems Development
William F. Adler 52 Vice President and General Counsel
Robert A. Weideman 59 Vice President -- Systems and Regulatory
Engineering
Stephen C. Wright 41 Vice President and Chief Financial Officer
</TABLE>
Mr. Schwartz has been the Chairman and Chief Executive Officer of GTL and
Chief Executive Officer and Chairman of the General Partners' Committee of
Globalstar since 1994. Mr. Schwartz has been the Chairman and Chief Executive
Officer of Loral since January 1996 and had been Chairman and Chief Executive
Officer of Old Loral since 1972.
28
<PAGE> 30
Dr. Clark has been the Vice Chairman and President of GTL and Vice Chairman
of the General Partners' Committee of Globalstar since March 1998. Since January
1998, he has been the President and Chief Operating Officer of Loral. Prior to
that time, Dr. Clark was President of News Technology Group, a division of News
Corporation since September 1994. Prior to that, Dr. Clark was Director of
Science and Technology of IBM in Australia since 1988.
Mr. DeBlasio has been Senior Vice President, Chief Financial Officer and
Director of GTL since May 1996. Mr. DeBlasio has been First Senior Vice
President of Loral since February 1998 and Senior Vice President and Chief
Financial Officer of Loral since March 1996 and had been Senior Vice President,
Finance and Chief Financial Officer of Old Loral since 1979.
Mr. Dwyre has been President of Globalstar since March 1994. Mr. Dwyre has
been Senior Vice President of GTL since May 1996 and, prior thereto, had been
Vice President of GTL since its initial public offering in 1995. Mr. Dwyre was
President of Northern Telecom's STC Submarine Systems from 1988 to 1992.
Mr. Adler has been Vice President and General Counsel of Globalstar since
January 1996. He has been Vice President of GTL since January 1996 and Assistant
Secretary of GTL since May 1996. He was a partner with Fleschman and Walsh,
L.L.P. from May 1994 to November 1995, specializing in domestic and
international telecommunications law, regulation legislation and policy. Prior
to that time, he was the Executive Director of Federal Regulatory Relations with
Pacific Telesis Group.
Ms. Clonan has been Vice President, Communications and Investor Relations
of GTL since March 1998. Ms. Clonan has also been Vice President, Communications
and Investor Relations of Loral since November 1996. Prior to that, Ms. Clonan
was Director -- Corporate Communications from June 1996. Prior to that, Ms.
Clonan was Vice President -- Corporate Relations of Jamaica Water Securities
since September 1992.
Mr. Moren has been Vice President and Treasurer of GTL since its initial
public offering in 1995. Mr. Moren has been Senior Vice President of Loral since
February 1998 and Vice President and Treasurer of Loral since March 1996 and had
been Vice President and Treasurer of Old Loral since April 1991.
Mr. Navarra has been Executive Vice President of Strategic Development of
Globalstar since March 1994 and Vice President of GTL since its initial public
offering in 1995. He was Executive Vice President, Business Development at Loral
Aerospace Corp. from 1992 to 1994.
Mr. Rein has been Vice President and Controller of GTL since May 1996. Mr.
Rein has been Vice President and Controller of Loral since April 1996 and had
been Assistant Controller of Old Loral since 1985.
Mr. Ross has been Vice President, Government Relations of GTL since
November 1996. From June 1995 to November 1996, Mr. Ross was Vice President,
Communications of GTL. Mr. Ross has also been Vice President, Government
Relations of Loral since November 1996. From April 1996 to November 1996, Mr.
Ross was Vice President, Communications of Loral. From April 1994 to May 1995,
he served at the White House as Special Assistant to the President and Senior
Director of Public Affairs for the National Security Council.
Mr. Wright has been Vice President and Chief Financial Officer of
Globalstar since January 1996 and Vice President of GTL since May 1996. He was a
Production Director from April 1995 to December 1995 at SS/L. Prior to that
time, he was a Business Manager at SS/L.
Mr. Zahler has been Vice President and Secretary of GTL and Globalstar
since May 1996. Mr. Zahler has been Senior Vice President of Loral since
February 1998 and Vice President, Secretary and General Counsel of Loral since
March 1996 and had been Vice President and General Counsel of Old Loral since
1992. Prior to that time, he was a partner in the law firm of Fried, Frank,
Harris, Shriver & Jacobson.
Dr. Klineberg has been Executive Vice President of Satellite Constellation
Establishment of Globalstar since January 1998. Dr. Klineberg was Executive Vice
President, Globalstar Program at SS/L from 1995 to January 1998. Prior to that
time, Dr. Klineberg held a variety of technical and management positions with
NASA, including Director of the Goddard Space Flight Center and NASA's Lewis
Research Center.
29
<PAGE> 31
Mr. Schindall has been Senior Vice President of Systems Development for
Globalstar since May 1997. Prior to that time, Mr. Schindall was Vice President
of Systems Applications for Globalstar since May 1994. Prior to that time, he
was President of Conic, a division of Old Loral.
Mr. Wiedeman has been Vice President of Systems and Regulatory Engineering
since March 1994. Prior to that time, he was Vice President of Loral Aerospace
Corp.
ITEM 11: EXECUTIVE COMPENSATION
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under Items 11, 12 and 13 is set forth in GTL's 1998
definitive proxy statement which is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index to Financial Statements............................... F-1
Globalstar Telecommunications Limited (A General Partner of
Globalstar, L.P.)
Independent Auditors' Report.............................. F-2
Balance Sheets............................................ F-3
Statements of Operations.................................. F-4
Statements of Shareholders' Equity........................ F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
Globalstar, L.P. (A development stage limited partnership)
Independent Auditors' Report.............................. F-13
Consolidated Balance Sheets............................... F-14
Consolidated Statements of Operations..................... F-15
Consolidated Statements of Cash Flows..................... F-16
Consolidated Statements of Ordinary Partners' Capital and
Subscriptions Receivable............................... F-17
Notes to Consolidated Financial Statements................ F-18
</TABLE>
30
<PAGE> 32
(a) 3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
3.1 Memorandum of Association of Globalstar Telecommunications
Limited*
3.2 Bye-Laws of Globalstar Telecommunications Limited*
4.1 Indenture dated as of March 6, 1996 relating to Globalstar
Telecommunications Limited's 6 1/2% Convertible Preferred
Equivalent Obligations due 2006**
4.2 Indenture dated as of February 15, 1997 relating to
Globalstar's and Globalstar Capital Corporation's 11 3/8%
Senior Notes due 2004***
4.3 Indenture dated as of June 1, 1997 relating to Globalstar's
and Globalstar Capital Corporation's 11 1/4% Senior Notes
due 2004.****
4.4 Indenture dated as of October 15, 1997 relating to
Globalstar's and Globalstar Capital Corporation's 10 3/4%
Senior Notes due 2004.*****
10.1 Amended and Restated Agreement of Limited Partnership of
Globalstar L.P., dated as of March 6, 1996, among
Loral/Qualcomm Satellite Services, L.P., Globalstar
Telecommunications Limited, AirTouch Satellite Services, San
Giorgio S.p.A., Hyundai/Dacom, Loral/DASA Globalstar, L.P.,
Loral Globalstar, L.P., TE.S.A.M. and Vodastar Limited***
10.2 Subscription Agreements by and between Globalstar, L.P., and
each of AirTouch Communications, Alcatel Spacecom, Loral
General Partner, Inc., Hyundai/Dacom and Vodastar Limited*
10.3 Subscription Agreement by and between Globalstar, L.P. and
Loral/Qualcomm Satellite Services, L.P.*
10.4 Contract between Globalstar, L.P. and Space Systems/Loral,
Inc.*
10.5 Contract for the Development of Certain Portions of the
Ground Operations Control Center between Globalstar and
Loral Western Development Laboratories.*
10.6 Contract for the Development of Satellite Orbital Operations
Centers between Globalstar and Loral Aerosys, a division of
Loral Aerospace Corporation.*
10.7 1994 Stock Option Plan.**
10.8 Amendment to 1994 Stock Option Plan+++
10.9 Revolving Credit Agreement dated as of December 15, 1995, as
amended on March 25, 1996, among Globalstar, certain banks
parties thereto and Chemical Bank, as Administrative
Agent***
10.10 Second Amendment to Revolving Credit Agreement dated July
31, 1997 among Globalstar, certain banks parties thereto and
The Chase Manhattan Bank, as Administrative Agent.*****
10.11 Third Amendment to Revolving Credit Agreement dated as of
October 15, 1997 among Globalstar, certain banks parties
thereto and The Chase Manhattan Bank, as Administrative
Agent.*****
10.12 Warrant Agreement dated as of February 19, 1997 relating to
Warrants to purchase shares of Common Stock of Globalstar
Telecommunications Limited.***
10.13 Registration Rights Agreement dated March 6, 1996 relating
to the Globalstar Telecommunications Limited's 6 1/2%
Convertible Preferred Equivalent Obligations due 2006**
10.14 Registration Rights Agreement dated February 19, 1997
relating to Globalstar's 11 3/8% Senior Notes due 2004 and
the Company's Warrants to purchase 1,032,250 shares of
Common Stock issued in connection therewith.***
10.15 Registration Rights Agreement dated June 13, 1997 relating
to Globalstar's and Globalstar Capital Corporation's 11 1/4%
Senior Notes due 2004.****
10.16 Registration Rights Agreement dated October 29, 1997
relating to Globalstar's and Globalstar Capital
Corporation's 10 3/4% Senior Notes due 2004.*****
12 Statement Regarding Computation of Ratios+
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
23 Consent of Deloitte & Touche LLP+
27 Financial Data Schedule (EDGAR only)+
</TABLE>
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-86808).
** Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-6477).
*** Incorporated by reference to the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1996.
**** Incorporated by reference to Globalstar's Registration Statement on Form
S-4 (No. 333-25461).
***** Incorporated by reference to Globalstar's Registration Statement on Form
S-4 (No. 333-41229).
+ Filed herewith.
++ Management compensation plan.
(b) Reports on Form 8-K
Form 8-K filed on October 31, 1997 reporting the issuance of $325 million
of 10 3/4% Senior Notes due 2004.
32
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Globalstar Telecommunications Limited
By: BERNARD L. SCHWARTZ
------------------------------------
(Chairman of the Board and
Chief Executive Officer)
Date: March 30, 1998
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
BERNARD L. SCHWARTZ Chairman of the Board and March 30, 1998
- --------------------------------------------------- Chief Executive Officer
Bernard L. Schwartz
GREGORY J. CLARK Director and President March 30, 1998
- ---------------------------------------------------
Gregory J. Clark
SIR RONALD GRIERSON Director March 30, 1998
- ---------------------------------------------------
Sir Ronald Grierson
ROBERT B. HODES Director March 30, 1998
- ---------------------------------------------------
Robert B. Hodes
E. JOHN PEETT Director March 30, 1998
- ---------------------------------------------------
E. John Peett
MICHAEL B. TARGOFF Director March 30, 1998
- ---------------------------------------------------
Michael B. Targoff
A. ROBERT TOWBIN Director March 30, 1998
- ---------------------------------------------------
A. Robert Towbin
MICHAEL P. DEBLASIO Director and March 30, 1998
- --------------------------------------------------- Principal Financial Officer
Michael P. DeBlasio
HARVEY B. REIN Principal Accounting Officer March 30, 1998
- ---------------------------------------------------
Harvey B. Rein
</TABLE>
33
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of New
York, State of New York, on March 30, 1998.
GLOBALSTAR, L.P.
By: Loral/QUALCOMM Satellite Services,
L.P.,
its General Partner
By: Loral/QUALCOMM Partnership, L.P.,
its General Partner
By: Loral General Partner, Inc.,
its General Partner
By: /s/ BERNARD L. SCHWARTZ
------------------------------------
Bernard L. Schwartz
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ BERNARD L. SCHWARTZ Chairman of the Board and Chief Executive March 30, 1998
- ------------------------------------ Officer
Bernard L. Schwartz
/s/ GREGORY J. CLARK Director March 30, 1998
- ------------------------------------
Gregory J. Clark
/s/ ERIC J. ZAHLER Director March 30, 1998
- ------------------------------------
Eric J. Zahler
</TABLE>
34
<PAGE> 36
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GLOBALSTAR TELECOMMUNICATIONS LIMITED (A General Partner of
Globalstar, L.P.)
Independent Auditors' Report.............................. F-2
Balance Sheets............................................ F-3
Statements of Operations.................................. F-4
Statements of Shareholders' Equity........................ F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
GLOBALSTAR, L.P. (A development stage limited partnership)
Independent Auditors' Report.............................. F-13
Consolidated Balance Sheets............................... F-14
Consolidated Statements of Operations..................... F-15
Consolidated Statements of Cash Flows..................... F-16
Consolidated Statements of Ordinary Partners' Capital and
Subscriptions Receivable............................... F-17
Notes to Consolidated Financial Statements................ F-18
</TABLE>
F-1
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Globalstar Telecommunications Limited:
We have audited the accompanying balance sheets of Globalstar
Telecommunications Limited (a Bermuda company and a General Partner of
Globalstar, L.P.) as of December 31, 1997 and 1996 and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Globalstar Telecommunications Limited as of
December 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
March 6, 1998
F-2
<PAGE> 38
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
-------- ------------
<S> <C> <C>
ASSETS
Investment in Globalstar, L.P.:
Redeemable preferred partnership interests................ $303,089 $302,037
Ordinary partnership interests............................ 297,417 158,038
Ordinary partnership warrants............................. 12,210 22,601
-------- --------
Total assets........................................... $612,716 $482,676
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Interest payable.......................................... $ 1,679 $ 1,679
Convertible preferred equivalent obligations ($310,000
principal amount)......................................... 301,410 300,358
Commitments and contingencies (Note 3)
Shareholders' equity:
Common stock, $1.00 par value, 200,000,000 shares
authorized (30,638,152 and 10,000,000 issued and
outstanding at December 31, 1997 and 1996,
respectively).......................................... 30,638 10,000
Paid-in capital........................................... 318,643 175,750
Warrants.................................................. 12,210 22,601
Accumulated deficit....................................... (51,864) (27,712)
-------- --------
Total shareholders' equity.................................. 309,627 180,639
-------- --------
Total liabilities and shareholders' equity............. $612,716 $482,676
======== ========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 39
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Equity in net loss applicable to ordinary partnership
interests of
Globalstar, L.P........................................... $24,152 $15,080 $ 12,632
Dividend income on Globalstar, L.P. redeemable preferred
partnership interests..................................... (21,202) (17,370)
Interest expense on convertible preferred equivalent
obligations............................................... 21,202 17,370
------- ------- --------
Net loss.................................................... $24,152.. $15,080 $ 12,632
======= ======= ========
Net loss per share -- basic and diluted..................... $ 0.86 $ 0.75 $ 0.63
======= ======= ========
Weighted average shares outstanding -- basic and diluted.... 27,962 20,000 20,000
======= ======= ========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 40
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK
----------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL WARRANTS DEFICIT TOTAL
------ ------ ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994...... 12 $ 12 $ 112 $ 124
Sale of common stock, net of
offering costs of $14,250..... 10,000 10,000 175,750 185,750
Repurchase of common stock from
Globalstar, L.P............... (12) (12) (112) (124)
Net loss........................ $(12,632) (12,632)
------ -------- -------- ------- -------- --------
Balance, December 31, 1995...... 10,000 10,000 175,750 (12,632) 173,118
Warrants issued in connection
with the Globalstar Credit
Agreement..................... $22,601 22,601
Net loss........................ (15,080) (15,080)
------ -------- -------- ------- -------- --------
Balance, December 31, 1996...... 10,000 10,000 175,750 22,601 (27,712) 180,639
Exercise of warrants in March
1997.......................... 4,185 4,185 129,327 (22,601) 110,911
Exercise of rights in May
1997.......................... 1,131 1,131 28,845 29,976
Stock split..................... 15,317 15,317 (15,317)
Exercise of stock options....... 5 5 38 43
Warrants issued in connection
with Globalstar, L.P.'s
11 3/8% Senior Notes.......... 12,210 12,210
Net loss........................ (24,152) (24,152)
------ -------- -------- ------- -------- --------
Balance, December 31, 1997...... 30,638 $ 30,638 $318,643 $12,210 $(51,864) $309,627
====== ======== ======== ======= ======== ========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 41
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss.................................................. $ (24,152) $ (15,080) $ (12,632)
Equity in net loss applicable to ordinary partnership
interests of Globalstar, L.P............................ 24,152 15,080 12,632
Increase in redemption value of redeemable preferred
partnership interests................................... (1,052) (858)
Dividends accrued on redeemable preferred partnership
interests in excess of cash received.................... (1,679)
Amortization of convertible preferred equivalent
obligations issue costs................................. 1,052 858
Change in operating liability -- Interest payable......... 1,679
--------- --------- ---------
Net cash provided by (used in) operating activities......... -- -- --
--------- --------- ---------
Investing activities:
Purchase of ordinary partnership interests in Globalstar,
L.P..................................................... (140,930) (185,750)
Purchase of redeemable preferred partnership interests in
Globalstar, L.P......................................... (299,500)
Purchase of warrants in Globalstar, L.P................... (12,210) --
--------- --------- ---------
Net cash used in investing activities....................... (153,140) (299,500) (185,750)
--------- --------- ---------
Financing activities:
Net proceeds from sale of common stock.................... 43 185,750
Payment of debt offering costs............................ (10,500)
Sale of convertible preferred equivalent obligations...... 310,000
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
Proceeds from issuance of warrants in connection with sale
of Globalstar, L.P.'s 11 3/8% Senior Notes.............. 12,210
Proceeds from exercise of guarantee warrants.............. 110,911
Proceeds from exercise of rights.......................... 29,976
--------- --------- ---------
Net cash provided by financing activities................... 153,140 299,500 185,750
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ -- -- --
Cash and cash equivalents, beginning of period.............. -- -- --
--------- --------- ---------
Cash and cash equivalents, end of period.................... $ -- $ -- $ --
========= ========= =========
Noncash transaction:
Warrants issued in connection with the Globalstar credit
agreement............................................... $ 22,601
=========
Supplemental information:
Interest paid during the year............................. $ 20,150 $ 14,833
========= =========
</TABLE>
See notes to financial statements.
F-6
<PAGE> 42
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
On November 23, 1994, Globalstar Telecommunications Limited ("GTL") was
incorporated as an exempted company under the Companies Act 1981 of Bermuda.
GTL's financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America.
GTL's sole business is acting as a general partner of Globalstar, L.P.
("Globalstar"), a development stage limited partnership, which is designing,
constructing and will operate a worldwide, low-earth orbit satellite-based
digital telecommunications system (the "Globalstar System"). The Globalstar
System's world-wide coverage is designed to enable its service providers to
extend modern telecommunications services to millions of people who currently
lack basic telephone service and to enhance wireless communications in areas
underserved or not served by existing or future cellular systems, providing a
telecommunications solution in parts of the world where the build-out of
terrestrial systems cannot be economically justified.
Loral Space & Communications Ltd. ("Loral"), through a subsidiary and
intermediate limited partnerships, is the managing general partner of
Globalstar. At December 31, 1997, Loral had a direct and indirect ownership of
20,962,211 (40.1%) ordinary partnership interests of Globalstar, including
5,439,678 shares of GTL's outstanding common stock.
On April 23, 1996, a merger between Loral Corporation ("Old Loral") and
Lockheed Martin Corporation ("Lockheed Martin") was completed. In conjunction
with the merger, Old Loral's direct and indirect interests in GTL and Globalstar
were transferred to Loral.
At December 31, 1997, GTL owns 15,319,076 (29.3%) of Globalstar's
outstanding ordinary partnership interests and 100% of Globalstar's Redeemable
Preferred Partnership Interests. As GTL's investment in Globalstar is GTL's only
asset, GTL is dependent upon Globalstar's success and achievement of profitable
operations for the recovery of its investment. Globalstar is a development stage
limited partnership which may encounter problems, delays and expenses, many of
which may be beyond Globalstar's control. These may include, but are not limited
to, problems related to technical development of the system, testing, regulatory
compliance, manufacturing and assembly, the competitive and regulatory
environment in which Globalstar will operate, marketing problems and costs and
expenses that may exceed current estimates. There can be no assurance that
substantial delays in any of the foregoing matters would not delay Globalstar's
achievement of profitable operations and affect the recoverability of GTL's
investment. All expenses necessary to maintain GTL's operations are borne by
Globalstar.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in Globalstar, L.P.
GTL accounts for its investment in Globalstar's ordinary partnership
interests on the equity basis, recognizing its allocated share of net loss for
each period since its initial investment on February 22, 1995. This investment
includes the fair value of warrants received or acquired from Globalstar in 1996
and 1997 (see Notes 4 and 5). The excess carrying value of this investment over
GTL's interest in Globalstar's ordinary partners' capital is attributable to the
Globalstar System Under Construction. Amortization of this excess will begin
upon Globalstar's commencement of commercial service. Dividend income on GTL's
investment in Globalstar's Redeemable Preferred Partnership Interests includes
accretion of the carrying amount of the investment to redemption value.
Convertible Preferred Equivalent Obligations (CPEOs)
Costs incurred in connection with the issuance of the CPEOs have been
netted against the proceeds of the offering. Interest expense includes accretion
of the carrying value of the CPEOs to redemption value.
F-7
<PAGE> 43
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," ("SFAS 123") GTL accounts for
stock-based awards to employees using the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25").
Income Taxes
GTL was incorporated in Bermuda. Bermuda does not have an income, profits
or capital gains tax. As a partner in Globalstar, however, GTL will be subject
to U.S. tax on its share of Globalstar's U.S. source income and may be subject
to tax in some foreign jurisdictions on portions of its share of the
partnership's foreign source income. Commencing with its investment in
Globalstar, GTL has been allocated its proportionate share of partnership tax
losses. The ultimate realizability of these tax loss carryforwards is dependent
upon the ability of Globalstar to generate U.S. source income, subject to
certain other restrictions imposed by the U.S. Internal Revenue Code.
Accordingly, no provision for Bermuda or U.S. income tax expense or benefit is
included in GTL's Statements of Operations.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Dilutive
earnings per share is very similar to the previously reported fully diluted
earnings per share. The adoption of SFAS 128 had no effect on reported net loss
per share. Due to GTL's net losses for the years ended December 31, 1997, 1996
and 1995, diluted weighted average shares outstanding excludes assumed
conversion of GTL's Convertible Preferred Equivalent Obligations and the assumed
exercise of outstanding options and warrants as their effect would have been
anti-dulutive. Accordingly, basic and diluted weighted average shares
outstanding is based on the weighted average common shares outstanding for the
years ended December 31, 1997, 1996 and 1995.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), and in February 1998, issued statement No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. SFAS 131 establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. SFAS 132 expands and
standardizes the disclosure requirements for pensions and other postretirement
benefits. GTL is required to adopt SFAS 130, 131 and 132 in 1998 and the
financial statements of GTL will reflect the appropriate disclosures.
F-8
<PAGE> 44
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SALE OF CONVERTIBLE PREFERRED EQUIVALENT OBLIGATIONS AND PURCHASE OF
REDEEMABLE PREFERRED PARTNERSHIP INTERESTS
During 1996, GTL issued 6.2 million shares of its 6 1/2% Convertible
Preferred Equivalent Obligations due 2006, par value $50 per share (the
"CPEOs"), for net proceeds of $299.5 million. As of December 31, 1997, 6.2
million shares of the CPEOs were outstanding, of which Loral holds 2.05 million
shares. The fair value of the CPEOs, based on quoted market prices, was
approximately $522.4 and $329 million on December 31, 1997 and 1996,
respectively.
The CPEOs are subordinated to existing and future debt obligations of GTL,
are convertible into 10,061,668 shares of GTL common stock at a conversion price
of $30.81 per share, subject to adjustment for certain antidilution events, bear
interest at 6 1/2% per annum, payable quarterly, are currently redeemable (at a
premium which declines over time) by GTL, and, if still outstanding, must be
redeemed by GTL on March 1, 2006. Interest and redemption payments may be made
in cash or shares of common stock. In certain limited circumstances involving a
change of control of GTL, as defined, holders may elect to convert their CPEOs
into GTL common stock based on the then average market price, subject to GTL's
option to redeem the CPEOs. The CPEOs are shown in the accompanying financial
statements net of discounts and other offering costs and are being increased to
their redemption value over the term of the CPEOs.
The net proceeds of $299,500,000 were used by GTL to purchase 4,769,230
Redeemable Preferred Partnership Interests ("RPPIs") in Globalstar. The RPPIs
will convert to ordinary partnership interests on a one-for-one basis upon any
conversion of the CPEOs into GTL common stock, will pay a quarterly preferred
distribution to GTL of 6 1/2% per annum, will be allocated losses of the
partnership only after all adjusted capital accounts of the ordinary partnership
interests have been reduced to zero, and are redeemable on terms comparable to
the CPEOs. Globalstar may elect to make the quarterly preferred distribution or
redemption payments to GTL in cash or general partnership interests. If such
distribution is made in cash, GTL must make its interest payment on the CPEOs in
cash. Globalstar may elect to defer payment of the preferred distribution; in
such case, GTL may also elect to defer interest payment on the CPEOs. However,
holders of the CPEOs are entitled to certain representation rights on the
General Partners' Committee of Globalstar in the event six consecutive interest
payments are deferred. At December 31, 1997, the RPPIs were subordinated to
Globalstar's existing indebtedness of approximately $1.2 billion principal
amount.
4. SENIOR NOTES AND WARRANTS
On February 13, 1997, GTL and Globalstar sold units consisting of $500
million aggregate principal amount of Globalstar's 11 3/8% Senior Notes due 2004
and warrants to purchase 2,064,500 shares of GTL common stock in a private
offering. GTL was allocated $12,210,000 of the offering proceeds for these
warrants which were used to purchase warrants for Globalstar's ordinary
partnership interests.
The warrants are exercisable on or after February 19, 1998 at a price of
$34.787 per share and expire on February 15, 2004. The warrants represent
approximately 1.8% of Globalstar's total partnership interests on a fully
diluted basis. Any proceeds from the exercise of the warrants will be used to
purchase Globalstar ordinary partnership interests.
5. SHAREHOLDERS' EQUITY
On May 28, 1997, GTL issued a two-for-one stock split to shareholders of
record on May 12, 1997 in the form of a 100% stock dividend. Accordingly, all
GTL share and per share amounts, excluding the balance sheet and statements of
shareholders' equity, have been restated to reflect the stock split. Prior to
the two-for-one stock split, GTL's equity securities and convertible securities
were represented by equivalent Globalstar partnership interests on an
approximate one-for-one basis. Globalstar's partnership interests were not
affected
F-9
<PAGE> 45
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
by the GTL stock split and, accordingly, GTL's equity securities and convertible
securities are now represented by equivalent Globalstar partnership interests on
an approximate two-for-one basis.
On February 14, 1995, GTL completed an initial public offering of 20
million shares of common stock (as adjusted for two-for-one stock split)
resulting in net proceeds of $185,750,000. Effective February 22, 1995, GTL
purchased 10 million ordinary partnership interests from Globalstar with the net
proceeds of the initial public offering. Also on February 22, 1995, GTL
repurchased at original cost, the 24,000 shares of common stock representing the
initial capitalization it had sold to Globalstar in 1994.
Partners in Globalstar have the right to convert their partnership
interests into shares of GTL on a one-for-two basis following the Full
Constellation Date, as defined, of the Globalstar System and after at least two
consecutive quarters of positive net income, subject to certain annual
limitations. GTL has reserved 74 million shares for this purpose.
Guarantee Warrants
On December 15, 1995, Globalstar entered into a $250 million credit
agreement (the "Globalstar Credit Agreement") with a group of banks. Lockheed
Martin and certain Globalstar partners guaranteed $206.3 million and $43.7
million of the Globalstar Credit Agreement, respectively. In addition, Loral
agreed to indemnify Lockheed Martin for any liability in excess of $150 million.
In exchange for the guarantee and indemnity, GTL issued warrants to purchase
8,370,636 shares of GTL common stock at $13.25 per share as follows: Loral and
SS/L 2,275,044 warrants, Lockheed Martin 5,022,380 warrants and certain
Globalstar partners 1,073,212 warrants. As part of this transaction, Globalstar
issued GTL warrants to purchase an additional 1,131,168 ordinary partnership
interests of Globalstar. In February 1997, GTL accelerated the vesting and
exercisability of these warrants and the holders exercised such warrants. In
addition, GTL distributed to the holders of its common stock rights to subscribe
for and purchase 2,262,336 GTL shares for a price of $13.25 per share of which
Loral received rights to purchase 318,344 shares and Loral agreed to purchase
all shares not purchased upon exercise of the rights. In March 1997, the
warrants to purchase 8,370,636 shares of GTL common stock were exercised for
proceeds of approximately $110.9 million. In May 1997, GTL shareholders
exercised the rights to purchase 2,262,336 shares of GTL common stock (including
350,348 shares purchased by Loral) for $13.25 per share for proceeds of $30.0
million. GTL used the total proceeds of $140.9 million to purchase 5,316,486
Globalstar ordinary partnership interests for $26.50 per interest.
Stock Option Arrangements
Officers, directors and employees of Globalstar are eligible to participate
in GTL's 1994 Stock Option Plan (the "Plan"), which provides for nonqualified
and incentive stock options. The plan is administered by a stock option
committee (the "Committee"), appointed by the GTL Board of Directors. The
Committee determines the option price, the option's exercise date and the
expiration date of each option (provided no option shall be exercisable after
the expiration of ten years from the date of grant). Proceeds received by GTL
for options exercised will in turn be used to purchase Globalstar ordinary
partnership interests under a two-for-one exchange arrangement.
As described in Note 2, GTL accounts for its stock-based compensation using
the intrinsic value method in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and its related interpretations. Accordingly, no
compensation expense based on the fair value method has been recognized in GTL's
financial statements for stock-based compensation.
F-10
<PAGE> 46
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
SFAS No. 123 requires the disclosure of pro forma net income and earnings
per share as though GTL had adopted the fair value method. Under SFAS 123, the
fair value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from GTL's stock option awards. These
models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. GTL's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions: expected life, six months
following vesting; stock volatility, 30%; risk free interest rates, 5.76% to
6.58% based on date of grant in 1997, 6.25% in 1996 and 6% in 1995; and no
dividends during the expected term. GTL's calculations are based on a multiple
option valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1997, 1996 and 1995 awards had been amortized to
Globalstar's expense over the vesting period of the awards, GTL's pro forma net
loss would have increased by $685,000 ($0.03 per share) to $24,837,000 ($0.89
per share) in 1997, $223,000 ($0.01 per share) to $15,303,000 ($0.76 per share)
in 1996 and $33,000 to $12,665,000 ($0.63 per share) in 1995.
A summary of the status of the GTL stock option plan for the years ended
December 31, 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------- ---------
<S> <C> <C>
Granted in 1995 (weighted average fair value of $2.665 per
share).................................................... 220,800 $ 8.3125
------- --------
Outstanding at December 31, 1995............................ 220,800 8.3125
Granted (weighted average fair value of $9.02 per share).... 244,000 27.4500
Forfeited................................................... (2,400) 8.3125
------- --------
Outstanding at December 31, 1996............................ 462,400 18.4120
Granted (weighted average fair value of $14.20 per share)... 263,900 43.9300
Forfeited................................................... (29,400) 22.3220
Exercised................................................... (5,180) 8.3125
------- --------
Outstanding at December 31, 1997............................ 691,720 $28.0570
======= ========
Options exercisable at December 31, 1997.................... 47,620 $ 8.3125
======= ========
At December 31, 1996 and 1995 no options were exercisable.
</TABLE>
The options generally expire ten years from the date of grant and become
exercisable over the period stated in each option, generally ratably over a
five-year period. All options granted during the year were non-qualified stock
options with an exercise price equal to fair market value at the date of grant.
As of December 31, 1997, 553,100 shares of common stock were available for
future grant under the Plan.
F-11
<PAGE> 47
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about GTL's outstanding stock
options at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE-YEARS PRICE NUMBER PRICE
-------------------- ----------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 8.3125................... 201,820 7.70 $ 8.3125 47,620 $8.3125
$25.1875 to $32.75......... 289,400 8.69 27.144
$49.25..................... 200,500 9.75 49.25
------- -------- ------ -------
691,720 $ 28.057 47,620 $8.3125
======= ======== ====== =======
</TABLE>
Stock Option Transactions
The Company and Globalstar have agreed that upon the exercise of options
under the GTL 1994 Stock Option Plan by optionees who are employees of
Globalstar or any of its controlling entities, Globalstar will issue to the
Company one Globalstar ordinary partnership interest for every two shares of
common stock issued to the optionee. During 1997, the Company issued 5,180
shares of common stock to optionees at a price of $8.3125 per share. The Company
purchased 2,590 Globalstar ordinary partnership interests with the proceeds from
the issuance of the common stock.
6. QUARTERLY FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
--------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997:
Equity in net loss applicable to ordinary
partnership interests of Globalstar, L.P..... $4,380 $6,323 $7,278 $6,171
Net loss....................................... 4,380 6,323 7,278 6,171
Net loss per share -- basic and diluted........ 0.21 0.21 0.24 0.20
1996:
Equity in net loss applicable to ordinary
partnership interests of Globalstar, L.P..... $3,282 $3,942 $3,345 $4,511
Net loss....................................... 3,282 3,942 3,345 4,511
Net loss per share -- basic and diluted........ 0.16 0.20 0.17 0.23
</TABLE>
F-12
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
To the Partners of Globalstar, L.P.:
We have audited the accompanying consolidated balance sheets of Globalstar,
L.P. (a development stage limited partnership) and its subsidiaries
(collectively the "Partnership") as of December 31, 1997 and 1996, and the
related consolidated statements of operations, partners' capital and
subscriptions receivable and cash flows for each of the three years in the
period ended December 31, 1997 and cumulative. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Partnership at December 31,
1997 and 1996, and the results of its operations and its cash flows for the
periods stated above in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Jose, California
March 6, 1998
F-13
<PAGE> 49
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
(In thousands, except partnership interests)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 464,154 $ 21,180
Other current assets...................................... 29,626 606
---------- ----------
Total current assets.............................. 493,780 21,786
Property and equipment, net................................. 2,574 1,720
Globalstar System under construction:
Space segment............................................. 1,153,344 730,513
Ground segment............................................ 374,344 160,520
---------- ----------
1,527,688 891,033
Additional satellite spares................................. 99,225
Deferred FCC license costs.................................. 10,342 8,690
Deferred financing costs.................................... 14,631 19,577
Other assets................................................ 813 107
---------- ----------
Total assets...................................... $2,149,053 $ 942,913
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.......................................... $ 1,272 $ 4,401
Payable to affiliates..................................... 105,357 63,937
Accrued expenses.......................................... 8,312 6,929
Accrued interest on senior notes.......................... 28,869
---------- ----------
Total current liabilities.............................. 143,810 75,267
Deferred revenues........................................... 23,652 23,652
Vendor financing liability.................................. 197,723 130,694
Borrowings under long-term revolving credit facility........ 96,000
Deferred interest payable................................... 420 77
11 3/8% Senior notes payable ($500,000 principal amount).... 475,579
11 1/4% Senior notes payable ($325,000 principal amount).... 303,641
10 3/4% Senior notes payable ($325,000 principal amount).... 320,311
Commitments and contingencies (Notes 4,6,7,9,11 and 13)
Redeemable preferred partnership interests (4,769,230
outstanding at December 31, 1997 and 1996, $310,000
redemption value)......................................... 303,089 302,037
Ordinary partners' capital:
Ordinary partnership interests (52,319,076 and 47,000,000
outstanding at December 31, 1997 and 1996,
respectively).......................................... 368,618 292,585
Warrants.................................................. 12,210 22,601
---------- ----------
Total ordinary partners' capital.................. 380,828 315,186
---------- ----------
Total liabilities and partners' capital........... $2,149,053 $ 942,913
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE> 50
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per ordinary partnership interest)
<TABLE>
<CAPTION>
CUMULATIVE
MARCH 23, 1994
YEARS ENDED DECEMBER 31, (COMMENCEMENT OF
----------------------------- OPERATIONS) TO
1995 1996 1997 DECEMBER 31, 1997
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
Operating expenses:
Development costs.......................... $62,854 $42,152 $62,478 $188,763
Marketing, general and administrative...... 17,372 18,873 25,593 68,586
------- ------- ------- --------
Total operating expenses..................... 80,226 61,025 88,071 257,349
Interest income.............................. 11,989 6,379 20,485 40,636
------- ------- ------- --------
Net loss..................................... 68,237 54,646 67,586 216,713
Preferred distributions and related increase
in redeemable preferred partnership
interests.................................. 17,323 21,202 38,525
------- ------- ------- --------
Net loss applicable to ordinary partnership
interests.................................. $68,237 $71,969 $88,788 $255,238
======= ======= ======= ========
Net loss per ordinary partnership
interest -- basic and diluted.............. $ 1.50 $ 1.53 $ 1.74
======= ======= =======
Weighted average ordinary partnership
interests outstanding -- basic and
diluted.................................... 45,575 47,000 50,981
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE> 51
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
CUMULATIVE
MARCH 23, 1994
YEARS ENDED DECEMBER 31, (COMMENCEMENT OF
--------------------------------- OPERATIONS) TO
1995 1996 1997 DECEMBER 31, 1997
--------- --------- --------- -----------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss.................................................. $ (68,237) $ (54,646) $ (67,586) $ (216,713)
Deferred revenues......................................... 21,913 1,739 23,652
Stock compensation transactions........................... 317 1,290 1,607
Depreciation and amortization............................. 398 724 1,016 2,253
Changes in operating assets and liabilities:
Other current assets.................................... (506) (100) (29,020) (29,626)
Other assets............................................ (107) (706) (813)
Accounts payable........................................ 857 1,723 (2,017) 1,201
Payable to affiliates................................... 4,865 (3,553) (1,488) (177)
Accrued expenses........................................ 2,342 2,147 1,383 8,312
--------- --------- --------- -----------
Net cash used in operating activities....................... (38,368) (51,756) (97,128) (210,304)
--------- --------- --------- -----------
Investing activities:
Globalstar System under construction...................... (328,261) (490,776) (636,655) (1,527,688)
Payable to affiliates for Globalstar System under
construction............................................ 8,863 19,921 42,908 96,734
Capitalized interest accrued.............................. 5,211 39,552 44,763
Accounts payable.......................................... 67 608 (1,112) (437)
Vendor financing liability................................ 42,219 88,475 67,029 197,723
--------- --------- --------- -----------
Cash used for Globalstar System......................... (277,112) (376,561) (488,228) (1,188,905)
Additional satellite spares............................... (99,225) (99,225)
Purchases of property and equipment....................... (888) (935) (1,870) (4,812)
Deferred FCC license costs................................ (2,535) (1,634) (1,652) (8,107)
Purchases of investments.................................. (126,923) (129,923)
Maturity of investments................................... 126,923 129,923
Other current assets...................................... 190
--------- --------- --------- -----------
Net cash used in investing activities....................... (280,345) (379,130) (591,025) (1,301,049)
--------- --------- --------- -----------
Financing activities:
Net proceeds from issuance of $500,000, 11 3/8% Senior
Notes................................................... 472,090 472,090
Proceeds from warrants issued in connection with $500,000,
11 3/8% Senior Notes.................................... 12,210 12,210
Net proceeds from issuance of $325,000 11 1/4% Senior
Notes................................................... 301,850 301,850
Net proceeds from issuance of $325,000 10 3/4% Senior
Notes................................................... 320,197 320,197
Deferred financing costs.................................. (1,875) (250) (2,125)
Proceeds from capital subscriptions receivable............ 133,780 282,441
Payment of accrued capital raising costs.................. (900) (2,400)
Sale of partnership interests to GTL...................... 185,750 140,930 328,680
Sale of redeemable preferred partnership interests to
GTL..................................................... 299,500 299,500
Distributions on redeemable preferred partnership
interests............................................... (14,833) (20,150) (34,983)
Prepaid interest on redeemable preferred partnership
interests............................................... 47 47
Borrowings under long-term revolving credit facility...... 106,000 65,000 171,000
Repayment of borrowings under long-term revolving credit
facility................................................ (10,000) (161,000) (171,000)
--------- --------- --------- -----------
Net cash provided by financing activities................... 316,755 380,464 1,131,127 1,975,507
--------- --------- --------- -----------
Net increase (decrease) in cash and cash equivalents........ (1,958) (50,422) 442,974 464,154
Cash and cash equivalents, beginning of period.............. 73,560 71,602 21,180
--------- --------- --------- -----------
Cash and cash equivalents, end of period.................... $ 71,602 $ 21,180 $ 464,154 $ 464,154
========= ========= ========= ===========
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 $ 22,601
========= ===========
Increase in redemption value of preferred partnership
interests............................................... $ 2,537 $ 1,052 $ 3,589
========= ========= ===========
Supplemental Information:
Interest paid........................................... $ 515 $ 48,527 $ 49,042
========= ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE> 52
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF ORDINARY PARTNERS' CAPITAL AND SUBSCRIPTIONS
RECEIVABLE
ORDINARY PARTNERS' CAPITAL
<TABLE>
<CAPTION>
ORDINARY
PARTNERSHIP
INTERESTS WARRANTS TOTAL
----------- -------- --------
<S> <C> <C> <C>
Capital subscription, March 23, 1994 General partner (18,000
interests)................................................ $ 50,000 $ 50,000
Limited partner (18,000 interests)........................ 225,000 225,000
Cost of raising capital..................................... (2,400) (2,400)
Net losses -- pre-capital subscription period:
Year ended December 31, 1993.............................. (11,510) (11,510)
January 1, 1994 to March 22, 1994......................... (6,872) (6,872)
Net loss applicable to ordinary partnership
interests -- March 23, 1994 (commencement of operations)
to December 31, 1994...................................... (26,244) (26,244)
Capital subscription, December 31, 1994 (1,000 limited
partnership interests).................................... 18,750 18,750
-------- --------
Capital balances, December 31, 1994......................... 246,724 246,724
Sale of 10,000 general partnership interests to GTL,
February 22, 1995......................................... 185,750 185,750
Warrant agreement in connection with debt guarantee......... $ 22,601 22,601
Net loss applicable to ordinary partnership interests--Year
ended December 31, 1995................................... (68,237) (68,237)
-------- -------- --------
Capital balances--December 31, 1995......................... 364,237 22,601 386,838
Stock compensation transactions by managing general partner
for the benefit of Globalstar............................. 317 317
Net loss applicable to ordinary partnership interests--Year
ended December 31, 1996................................... (71,969) (71,969)
-------- -------- --------
Capital balances--December 31, 1996......................... 292,585 22,601 315,186
Exercise of warrants in March 1997.......................... 163,488 (22,601) 140,887
Warrant agreement in connection with issuance of senior
notes..................................................... 12,210 12,210
Stock compensation transactions by managing general partner
for the benefit of Globalstar............................. 1,290 1,290
Sale of ordinary partnership interests in connection with
GTL stock option exercises................................ 43 43
Net loss applicable to ordinary partnership interests--Year
ended December 31, 1997................................... (88,788) (88,788)
-------- -------- --------
Capital balances--December 31, 1997......................... $368,618 $ 12,210 $380,828
======== ======== ========
SUBSCRIPTIONS RECEIVABLE
Capital subscriptions:
March 23, 1994............................................ $275,000 $275,000
December 31, 1994......................................... 18,750 18,750
-------- --------
Total subscriptions....................................... 293,750 293,750
-------- --------
Cash received............................................. (148,661) (148,661)
Credit for pre-capital subscription costs................. (11,309) (11,309)
-------- --------
(159,970) (159,970)
-------- --------
Subscriptions receivable, December 31, 1994................. 133,780 133,780
Cash received............................................. (133,780) (133,780)
-------- --------
Subscriptions receivable, December 31, 1995, 1996 and
1997...................................................... $ -- $ --
======== ========
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE> 53
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Globalstar, L.P. ("Globalstar"), a Delaware limited partnership with a
December 31 fiscal year end, was formed in November 1993. It had no activities
until March 23, 1994, when it received capital subscriptions for $275 million
and commenced operations. The accompanying financial statements reflect the
operations of the Partnership from that date.
On April 23, 1996, a merger between Loral Corporation ("Old Loral") and
Lockheed Martin Corporation ("Lockheed Martin") was completed. In conjunction
with the merger, Old Loral's direct and indirect interests in Globalstar,
Globalstar Telecommunications Limited ("GTL"), Space Systems/Loral, Inc.
("SS/L") and other affiliated businesses, as well as certain other assets and
liabilities, were transferred to Loral Space & Communications Ltd., a Bermuda
company (and with its subsidiaries "Loral").
The managing general partner of Globalstar is Loral/QUALCOMM Satellite
Services, L.P. ("LQSS"). The general partner of LQSS is Loral/QUALCOMM
Partnership, L.P. ("LQP"), a Delaware limited partnership comprised of
subsidiaries of Loral and Qualcomm. The managing general partner of LQP is Loral
General Partner, Inc. ("LGP"), a subsidiary of Loral.
Globalstar was founded to design, construct and operate a worldwide,
low-earth orbit ("LEO") satellite-based digital telecommunications system (the
"Globalstar System"). The Globalstar System's worldwide coverage is designed to
enable its service providers to extend modern telecommunications services to
millions of people who currently lack basic telephone service and to enhance
wireless communications in areas underserved or not served by existing or future
cellular systems, providing a telecommunications solution in parts of the world
where the build-out of terrestrial systems cannot be economically justified. On
January 31, 1995, the U.S. Federal Communications Commission ("FCC") granted the
necessary license to a wholly-owned subsidiary of LQP to construct, launch and
operate the Globalstar System. LQP has agreed to use such license for the
exclusive benefit of Globalstar.
On November 23, 1994, GTL was incorporated as an exempted company under the
Companies Act 1981 of Bermuda. GTL's sole business is acting as a general
partner of Globalstar. On February 14, 1995, GTL completed an initial public
offering of 20,000,000 shares of common stock resulting in net proceeds of
$185,750,000. Effective February 22, 1995, GTL purchased 10,000,000 partnership
interests from Globalstar with the net proceeds of the initial public offering.
The partners in Globalstar have the right to convert their partnership interests
into shares of GTL common stock on a one-for-two basis following the Full
Constellation Date, as defined, of the Globalstar System and after at least two
consecutive reported fiscal quarters of positive net income, subject to certain
annual limitations.
At December 31, 1997, Loral had a direct and indirect ownership of
20,962,211 (40.1%) ordinary partnership interests of Globalstar, including
5,439,678 shares of GTL's outstanding common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development Stage Company
Globalstar is devoting substantially all of its present efforts to the
design, licensing, construction, testing, and financing of the Globalstar
System, and establishing its business. Its planned principal operations have not
commenced. Accordingly, Globalstar is a development stage company as defined in
Statement of Financial Accounting Standards ("SFAS") No. 7 "Accounting and
Reporting by Development Stage Enterprises."
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
F-18
<PAGE> 54
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which Globalstar will operate, marketing problems and costs and expenses that
may exceed current estimates. There can be no assurance that substantial delays
in any of the foregoing matters would not delay Globalstar's achievement of
profitable operations.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the amounts of expenses reported for the period. Actual results
could differ from estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Globalstar
and its wholly-owned subsidiaries, including Globalstar Capital Corporation. All
intercompany accounts and transactions are eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less.
Concentration of Credit Risk
Financial instruments which potentially subject Globalstar to
concentrations of credit risk are cash and cash equivalents. Globalstar's cash
and cash equivalents are maintained with high-credit-quality financial
institutions. The creditworthiness of such institutions is generally substantial
and management believes that its credit evaluation, approval and monitoring
processes mitigate potential credit risks.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally three to eight years. Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful lives of the
improvements.
Globalstar System Under Construction
Globalstar System under construction expenditures include and will include
progress payments and costs for the design, manufacture, test, launch and launch
insurance for 56 low-earth orbit satellites, including eight in orbit spare
satellites (the "Space Segment"), and ground and satellite operations control
centers, gateways and user terminals (the "Ground Segment").
Globalstar intends to depreciate the Space Segment over 7 1/2 years and to
depreciate the Ground Segment over eight years as assets are placed in service.
Service is currently anticipated to commence in early 1999. Losses from
unsuccessful launches and in-orbit failures of Globalstar's satellites, net of
insurance proceeds, will be recorded in the period when the loss occurs.
Costs incurred related to the development of certain technologies, pursuant
to a cost sharing arrangement included in Globalstar's contract with Qualcomm,
and for the engineering and development of subscriber terminals, are being
charged to operations as incurred.
F-19
<PAGE> 55
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financing Costs and Interest
Deferred financing costs represent costs incurred in obtaining a long-term
credit facility and the estimated fair value of a warrant agreement in
connection with a guarantee of this facility (see Note 7-Credit Facility). Such
costs are being amortized over the term of the credit facility as interest.
Total amortization of deferred financing costs for the years ended December 31,
1997, 1996 and 1995 was approximately $4,946,000, $5,134,000 and $15,000,
respectively.
Interest costs incurred during the construction of the Globalstar System
are capitalized. Total interest costs capitalized for the years ended December
31, 1997, 1996 and 1995 was approximately $95,895,000, $9,900,000 and $300,000,
respectively.
FCC License Costs
Expenditures, including license fees, legal fees and direct engineering and
other technical support, for obtaining the required FCC licenses are capitalized
and will be amortized over 7 1/2 years, the expected life of the first
generation satellites.
Deferred Revenues
Advance payments from Globalstar strategic partners to secure exclusive
rights to Globalstar service territories are deferred. These advance payments
are recoverable by the service providers through credits against a portion of
the service fees payable to Globalstar after the commencement of services.
Vendor Financing
Globalstar's contracts with SS/L call for a portion of the contract price
to be deferred as vendor financing and to be repaid, over as long as a five-year
period, commencing upon the initial service and full coverage dates of the
Globalstar System or placing certain assets in service. Amounts deferred as
vendor financing are capitalized as costs of the assets to which they relate as
incurred.
Notes Payable
Interest accrues on the $500 million, $325 million and $325 million
principal amount Senior Notes at 11 3/8%, 11 1/4% and 10 3/4% per annum,
respectively. Globalstar is increasing the carrying value of the senior notes
payable to their ultimate redemption value.
Preferred Partnership Distributions
Distributions accrue on the Redeemable Preferred Partnership Interests
("RPPIs") at 6 1/2% per annum. Globalstar is increasing the carrying value of
the redeemable preferred partnership interests to their ultimate redemption
value. The distributions are recorded as reductions against the ordinary
partnership capital accounts.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") Globalstar accounts for
stock-based awards to employees using the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25").
F-20
<PAGE> 56
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net (Loss) Income Allocation
Net losses are allocated among the partners in proportion to their
percentage interests until the adjusted capital account of a partner is reduced
to zero, then in proportion to, and to the extent of, positive adjusted capital
account balances and then to the general partners.
Net income is allocated among the partners in proportion to, and to the
extent of, the distributions made to the partners from distributable cash flow
for the period, as defined, then in proportion to and to the extent of negative
adjusted capital account balances and then in accordance with percentage
interests.
Under the terms of the Partnership Agreement, adjusted partners' capital
accounts are calculated in accordance with the principles of U.S. Treasury
Regulations governing the allocation of taxable income and loss including
adjustments to reflect the fair market value (including intangibles) of
partnership assets upon certain capital transactions including a sale of
partnership interests. Such adjustments are not permitted under generally
accepted accounting principles and, accordingly, are not reflected in the
accompanying consolidated financial statements.
Income Taxes
Globalstar was organized as a Delaware limited partnership. As such, no
income tax provision (benefit) is included in the accompanying financial
statements since U.S. income taxes are the responsibility of its partners.
Generally, taxable income (loss), deductions and credits of Globalstar will be
passed proportionately through to its partners.
Earnings Per Ordinary Partnership Interest
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Dilutive
earnings per share is very similar to the previously reported fully diluted
earnings per share. The adoption of SFAS 128 had no effect on reported net loss
per ordinary partnership interest. Due to Globalstar's net losses for the years
ended December 31, 1997, 1996 and 1995, diluted average ordinary partnership
interests outstanding excludes the assumed conversion of the Redeemable
Preferred Partnership Interests and the assumed issuance of ordinary partnership
interests upon exercise of GTL's outstanding options and warrants as their
effect would have been anti-dilutive. Accordingly, basic and diluted weighted
average ordinary partnership interests outstanding is based on net loss
applicable to ordinary partnership interests and the weighted average ordinary
partnership interests outstanding during the years ended December 31, 1997, 1996
and 1995.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), and in February 1998, issued Statement No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. SFAS 131 establishes annual and interim reporting standards
for an enterprise's business segments and related
F-21
<PAGE> 57
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
disclosures about its products, services, geographic areas and major customers.
SFAS 132 expands and standardizes the disclosure requirements for pensions and
other postretirement benefits. Globalstar is required to adopt SFAS 130, 131 and
132 in 1998 and the financial statements of Globalstar will reflect the
appropriate disclosures.
Reclassifications
Certain reclassifications have been made to conform prior-year amounts to
the current-year presentation.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment consists of:
Leasehold improvements................................... $ 612 $ 473
Furniture and office equipment........................... 4,200 2,469
------- -------
4,812 2,942
Accumulated depreciation and amortization................ (2,238) (1,222)
------- -------
$ 2,574 $ 1,720
======= =======
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1997, 1996 and 1995, was $1,016,000, $724,000, and $383,000, respectively.
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION
Total System Cost
As of December 31, 1997, Globalstar's current budgeted expenditures for the
design, construction and deployment of the Globalstar System, including working
capital, cash interest on borrowings and operating expenses is approximately
$2.7 billion. Most of the ground segment costs are incurred under a cost-plus
contract with Qualcomm. Actual amounts may vary from this estimate and
additional funds would be required in the event of unforeseen delays, cost
overruns, launch failures, technological risks, adverse regulatory developments,
or to meet unanticipated expenses.
In addition, Globalstar has agreed to purchase from SS/L eight additional
spare satellites, for approximately $175 million, increasing Globalstar's
ability to have at least 40 satellites in service during 1999, even in the event
of a launch failure. If the launch program is successful, the additional
satellites will serve as ground spares, readily available to replenish the
constellation as needed to respond to satellite attrition during the first
generation, or to increase system capacity as required. If Globalstar were to
experience a launch failure, the costs associated with the construction and
launch of replacements would be substantially covered by insurance.
Further, in order to accelerate the deployment of gateways around the world
Globalstar has agreed to finance approximately $80 million of the cost of up to
32 of the initial 38 gateways. Globalstar expects to recover this financing upon
resale of such gateways to its partners and service providers. At December 31,
1997, other current assets included $24.1 million of advances made under this
agreement.
In December 1997, an order for 40,000 fixed access terminals totalling $84
million was placed with Ericsson. Globalstar expects to recover this cost
through resale of these terminals to vendors.
F-22
<PAGE> 58
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION (CONTINUED)
As of December 31, 1997, Globalstar had raised or received commitments for
approximately $2.6 billion, including the vendor financing arrangements.
Globalstar intends to raise the remaining funds required for the Globalstar
System from a combination of sources, including debt issuance (which may include
an equity component), financial support from the Globalstar partners, projected
service provider payments, projected net service revenues from initial
operations, and anticipated payments from the sale of gateways and Globalstar
phones. Although Globalstar believes it will be able to obtain these additional
funds, there can be no assurance that such funds will be available on favorable
terms or on a timely basis, if at all.
\ The Space Segment
Globalstar has entered into a contract with SS/L, an affiliate of Loral and
a limited partner of LQSS, to design, manufacture, test and launch its 56
satellite constellation, including eight in-orbit spares. The price of the
contract consists of three parts, the first for non-recurring work at a price
not to exceed $117.1 million, the second for recurring work at a fixed price of
$15.6 million per satellite (including certain performance incentives of up to
approximately $1.9 million per satellite) and the third for launch services and
insurance. SS/L has agreed to obtain launch vehicles and arrange for the launch
of Globalstar's satellites on Globalstar's behalf for all 56 satellites, and
obtain insurance to cover the replacement cost of satellites or launch vehicles
lost in the event of a launch failure. In certain circumstances these amounts
are subject to equitable adjustment in light of future conditions, which may, in
turn, be influenced by international political developments. Any change in such
assumptions may result in an increase in the costs paid by Globalstar, which may
be substantial. Termination by Globalstar of this contract would result in
termination fees, which may be substantial.
Globalstar has authorized SS/L to alter its original launch plans and
procure three launches of the Starsem Soyuz launch vehicle, which will launch
four Globalstar satellites each. As a result of this decision, total costs for
launch vehicles and insurance are expected to be approximately $459 million.
SS/L has entered into fixed-price subcontracts aggregating approximately
$710 million, with certain of Globalstar's direct or indirect limited partners.
Some of these contracts are subject to adjustment.
Globalstar's space segment contract with SS/L calls for a portion of the
contract price to be deferred as vendor financing (see Note 6).
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 300 pre-production
subscriber terminals. The contract provides for reimbursement to Qualcomm,
subject to a cap for certain joint development efforts, for contract costs
incurred, plus a 12% fee thereon. Termination by Globalstar of its contract with
Qualcomm would result in delays and termination fees, which may be substantial.
A portion of the ground operations control center software is being developed by
Globalstar.
Qualcomm has revised its estimated costs under its contract due to
additional integration testing procedures to support system readiness on
schedule, scope changes to add features, capabilities and functions, cost growth
and other factors. As a result of cost containment and arrangements with
Qualcomm for $100 million of contract payment deferrals (see Note 15),
Globalstar expects the total ground segment expenditure to be approximately $710
million, net of such deferrals, through the In-Service Date.
F-23
<PAGE> 59
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION (CONTINUED)
Globalstar will receive from Qualcomm or its licensee(s) a payment of
approximately $400,000 for each installed gateway sold to a Globalstar service
provider. In addition, Globalstar will receive a payment of up to $10 on each
Globalstar subscriber terminal sold, until Globalstar funding of that design has
been recovered.
Globalstar has entered into an agreement with Lockheed Martin for the
development and delivery of two satellite operations control centers and 33
telemetry and command units for the Globalstar System. The fixed contract price
is approximately $29.0 million and provides for reimbursement to Lockheed Martin
for contract costs incurred such as labor, materials, travel, license fees,
royalties and general and administrative expenses. Lockheed Martin will receive
a 12% fee under the contract, 6% of which is payable at the time the costs are
incurred with the remainder payable upon achievement of certain milestones.
Globalstar will own any intellectual property produced under this contract.
5. VENDOR FINANCING LIABILITY
Globalstar's space segment contract with SS/L calls for approximately $310
million of the contract price to be deferred as vendor financing. Of the $310
million, $90 million is interest bearing at the 30-day LIBOR rate plus 3% per
annum. The remaining $220 million of vendor financing is non-interest bearing.
Globalstar will repay the non-interest bearing portions as follows: $49 million
following the launch and acceptance of 24 or more satellites (the "Preliminary
Constellation"), $61 million upon the launch and acceptance of 48 or more
satellites (the "Full Constellation"), and the remainder in equal installments
over the five-year period following acceptance of the Preliminary and Full
Constellations. Payment of the $90 million interest bearing vendor financing
will be deferred until December 31, 1998 or the Full Constellation Date,
whichever is earlier. Thereafter, interest and principal will be repaid in
twenty equal quarterly installments over the next five years. At December 31,
1997 and 1996, approximately $90.0 million and $72.0 million, respectively, of
the vendor financing liability was interest bearing.
In addition, Globalstar's contract with SS/L for the eight additional
satellites calls for approximately $43 million of the contract price to be
deferred as vendor financing. Of the $43 million, $19 million is interest
bearing, the remaining $24 million is non-interest bearing. The $19 million in
vendor financing will be repaid pro-rata on a per satellite basis, as follows:
50% as each satellite is place into storage and 50% when the satellite is
delivered and accepted on-orbit. Interest accrues at 10% per annum on the second
50% from the time the satellite is place into storage until the date SS/L is
directed by Globalstar to release the satellite from storage and to ship it to
the launch base for launch. Globalstar will repay the non-interest bearing
portion of vendor financing monthly over a five year term with 50% of the
payments commencing on the date the Preliminary Constellation has been accepted.
Globalstar will commence repaying the remaining 50% when the Full Constellation
has been accepted.
6. CREDIT FACILITY
On December 15, 1995, Globalstar entered into a $250 million credit
agreement (the "Globalstar Credit Agreement") with a group of banks. Lockheed
Martin, Qualcomm, SS/L and another Globalstar partner have guaranteed $206.3
million, $21.9 million, $11.7 million and $10.1 million of the Globalstar Credit
Agreement, respectively. In addition, Loral agreed to indemnify Lockheed Martin
for any liability in excess of $150 million. The Globalstar Credit Agreement
provides that Globalstar may select loans at varying interest rates, including
the Eurodollar rate plus 5/8%. Globalstar pays a commitment fee on the unused
portion. The Globalstar Credit Agreement contains covenants requiring Globalstar
to meet certain financial ratios including minimum net worth of $200 million and
limits additional indebtedness and the payment of cash distributions. The
Globalstar Credit Agreement expires on December 15, 2000.
F-24
<PAGE> 60
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CREDIT FACILITY (CONTINUED)
In exchange for the guarantee and indemnity, GTL issued warrants to
purchase 8,370,636 shares of GTL common stock at $13.25 per share as follows:
Loral and SS/L 2,275,044 warrants, Lockheed Martin 5,022,380 warrants, Qualcomm
734,262 warrants and another Globalstar partner 338,950 warrants. As part of
this transaction, Globalstar issued GTL warrants to purchase an additional
1,131,168 ordinary partnership interests of Globalstar. In February 1997, GTL
accelerated the vesting and exercisability of these warrants and the holders
exercised such warrants. In addition, GTL distributed to the holders of its
common stock rights to subscribe for and purchase 2,262,336 GTL shares for a
price of $13.25 per share of which Loral received rights to purchase 318,344
shares and Loral agreed to purchase all shares not purchased upon exercise of
the rights. In March 1997, the warrants to purchase 8,370,636 shares of GTL
common stock were exercised for proceeds of approximately $110.9 million. In May
1997, GTL shareholders exercised the rights to purchase 2,262,336 shares of GTL
common stock (including 350,348 shares purchased by Loral) for $13.25 per share
for proceeds of $30.0 million. GTL used the total proceeds of $140.9 million to
purchase 5,316,486 Globalstar ordinary partnership interests for $26.50 per
interest.
In addition, Globalstar also agreed to pay to Loral and the other
guaranteeing partners a fee equal to 1.5% per annum of the average quarterly
amount outstanding under the Globalstar Credit Agreement (the "Guarantee Fee").
Payment of the Guarantee Fee, classified as deferred interest payable in
Globalstar's balance sheet, is being deferred and subordinated, with interest at
LIBOR plus 3%, until after the termination date of the Globalstar Credit
Agreement. Globalstar's managing general partner may also defer payment of such
fee if it determines that such deferral is necessary to comply with the terms of
any applicable credit agreement or indenture.
7. COMMITMENTS
Globalstar leases its primary facility from Lockheed Martin under a
non-cancellable operating lease expiring in 2000. The lease contains renewal
options for up to an additional ten years. The following table presents the
future minimum lease payments required under operating leases that have an
initial lease term in excess of one year (in thousands):
<TABLE>
<S> <C>
1998........................................................ $2,777
1999........................................................ 3,145
2000........................................................ 2,182
2001........................................................ 156
2002........................................................ 156
Thereafter.................................................. 611
------
Total minimum lease payments................................ $9,027
======
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995, was
approximately $1,756,000, $1,067,000, and $934,000, respectively. Included in
rent expense are payments to Lockheed Martin of $1,480,000, $869,000, and
$650,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
8. SENIOR NOTES AND WARRANTS
On February 13, 1997, GTL and Globalstar sold units consisting of $500
million aggregate principal amount of Globalstar's 11 3/8% Senior Notes due 2004
and warrants to purchase 2,064,500 shares of GTL common stock in a private
offering. GTL was allocated $12,210,000 of the offering proceeds for these
warrants which were used to purchase warrants for Globalstar's ordinary
partnership interests. The notes may not be
F-25
<PAGE> 61
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SENIOR NOTES AND WARRANTS (CONTINUED)
redeemed prior to February 2002 and are subject to a prepayment premium prior to
2004. Interest is paid semi-annually.
The warrants are exercisable on or after February 19, 1998 at a price of
$34.787 per share and expire on February 15, 2004. Any proceeds from the
exercise of the warrants will be used to purchase Globalstar ordinary
partnership interests.
On June 13, 1997, Globalstar sold $325 million principal amount of 11 1/4%
Senior Notes due 2004 in a private offering. The notes may not be redeemed prior
to June 2002 and are subject to a prepayment premium prior to 2004. Interest is
paid semi-annually.
On October 29, 1997, Globalstar sold $325 million principal amount of
10 3/4% Senior Notes due 2004 in a private offering. The notes may not be
redeemed prior to November 2002 and are subject to a prepayment premium prior to
2004. Interest is paid semi-annually.
The Senior Notes rank parri passu with each other and senior in right of
payment to the RPPIs (see Note 9). The indentures for the notes contain certain
covenants that among other things limit the ability of Globalstar to incur
additional debt, issue preferred stock, or pay dividends and certain
distributions. In certain limited circumstances involving a change of control of
Globalstar, as defined, each note is redeemable at the option of the holder for
101% of the principal amount plus accrued interest.
9. SALE OF REDEEMABLE PREFERRED PARTNERSHIP INTERESTS
During 1996, GTL purchased 4,769,230 RPPIs in Globalstar using the net
proceeds of $299.5 million from GTL's sale of its Convertible Preferred
Equivalent Obligations (the "CPEOs"). The RPPIs will convert to ordinary general
partnership interests on a one-for-one basis upon any conversion of the CPEOs,
will pay a quarterly preferred distribution to GTL of 6 1/2% per annum, will be
allocated losses of the partnership only after all adjusted capital accounts of
the ordinary partnership interests have been reduced to zero, and are redeemable
on terms comparable to the CPEOs. If still outstanding, the RPPIs must be
redeemed by Globalstar on March 1, 2006 for the aggregate amount of $310,000,000
plus all unpaid distributions. Globalstar may elect to make the quarterly
preferred distribution and redemption payments to GTL in cash or general
partnership interests. If such distribution is made in cash, GTL must make its
interest payment on the CPEOs in cash. Globalstar may elect to defer payment of
the preferred distribution; in such case, GTL may also elect to defer interest
payment on the CPEOs, however, holders of the CPEOs are entitled to certain
representation rights on the General Partners' Committee of Globalstar in the
event six consecutive interest payments are deferred. Through December 31, 1997,
all payments have been made in cash on a timely basis.
10. ORDINARY PARTNERS' CAPITAL
Initial Capital Subscriptions
Prior to the commencement of Globalstar's operations on March 23, 1994,
Loral and Qualcomm undertook independent efforts at their own risk to explore
the feasibility of a Globalstar-type system. Efforts to develop the Globalstar
System were formalized with the initial funding of Globalstar on March 23, 1994
through capital subscriptions of $50,000,000 for 18,000,000 general partner
interests and $225,000,000 for an aggregate of 18,000,000 limited partner
interests. In connection with the initial capital subscriptions, the partners of
Globalstar agreed to reimburse Loral and Qualcomm for certain expenditures
totaling $18,382,000 incurred related to such efforts from January 1, 1993
through March 22, 1994. These expenditures included development costs and
marketing, general and administrative expenses related to the Globalstar System.
F-26
<PAGE> 62
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. ORDINARY PARTNER'S CAPITAL (CONTINUED)
In addition, costs of $2,235,000 were incurred in connection with the FCC
license application. The aggregate expenditures by Loral and Qualcomm of
$20,617,000 were reimbursed through a credit of $11,309,000 issued to the
general partner as a reduction of its required capital subscription payment and
a payment to Qualcomm of $9,308,000. The reimbursed expenses of $18,382,000 have
been charged to partners' capital as of the date of the capital subscription
agreement and allocated to the partners' capital accounts in accordance with the
partnership agreement. The $2,235,000 of costs relating to the FCC license
application are included in the balance sheet.
GTL Stock Split
On May 28, 1997, GTL issued a two-for-one stock split. Prior to the
two-for-one stock split, GTL's equity securities and convertible securities were
represented by equivalent Globalstar partnership interests on an approximate
one-for-one basis. Globalstar's partnership interests were not affected by the
GTL stock split and, accordingly, GTL's equity securities and convertible
securities are now represented by equivalent Globalstar partnership interests on
an approximate two-for-one basis. All GTL share and per share amounts have been
restated to reflect the stock split.
Stock Option Arrangements
Officers and employees of Globalstar are eligible to participate in GTL's
1994 Stock Option Plan (the "Plan"), which provides for nonqualified and
incentive stock options. The plan is administered by a stock option committee
(the "Committee"), appointed by the GTL Board of Directors. The Committee
determines the option price, the option exercise date and the expiration date of
each option (provided no option shall be exercisable after the expiration of ten
years from the date of grant). Proceeds received by GTL for options exercised
will be used to purchase Globalstar ordinary partnership interests under a
two-for-one exchange arrangement.
In 1997, 1996 and 1995, options to purchase 263,900, 244,000 and 220,800
shares of GTL common stock, respectively, were granted under the Plan. The
options generally expire ten years from the date of grant and become exercisable
over the period stated in each option, generally ratably over a five-year
period. All options granted in 1995, 1996 and 1997 were non-qualified stock
options with a price equal to fair market value at the date of grant. As of
December 31, 1997, 553,100 shares of common stock were available for future
grant under the Plan.
On September 14, 1995, Loral, in its capacity as managing general partner,
granted certain of its officers options to purchase 280,000 shares of the GTL
common stock owned by Loral at an exercise price of $10.00 per share. The
exercise price was greater than the market price at grant date. These options
are immediately exercisable, and expire 12 years from date of grant; no options
were exercised or cancelled during the year.
On October 9, 1996, Loral, in its capacity as managing general partner,
granted certain of its officers options to purchase 304,000 shares of the GTL
common stock owned by Loral at a price $12.6875 below market price on the grant
date. Such options vest over a three year period and expire 10 years from date
of grant; no options were exercised or cancelled during the year.
In April and December 1996, Loral granted certain officers and employees of
Globalstar options to purchase 94,000 shares of Loral common stock at $10.50 per
share and 5,000 shares of Loral common stock at $18.9375 per share,
respectively. In April 1997, 5,000 shares were cancelled and 5,000 shares were
granted at 13.75 per share. Such exercise prices were equal to the market price
at grant date. These options expire ten years from the date of grant and become
exercisable ratably over a five year period.
F-27
<PAGE> 63
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. ORDINARY PARTNER'S CAPITAL (CONTINUED)
As described in Note 2-Summary of Significant Accounting Policies,
Globalstar accounts for its stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Except for $1,290,000 and $317,000 of compensation expense in 1997 and 1996,
respectively, related to below market option grants, no compensation expense has
been recognized in Globalstar's financial statements for stock-based
compensation.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") requires the disclosure of pro forma net
income and earnings per share had Globalstar adopted the fair value method as of
the beginning of 1995. Under SFAS 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from Globalstar's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. Globalstar's calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, six months following vesting; stock
volatility, 30%; risk free interest rates, 5.76% to 6.58% based on date of grant
in 1997, 6.25% in 1996 and 6% in 1995; and no dividends during the expected
term. Globalstar's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the 1996 and 1995 awards (including the stock-based awards made by
Loral to its officers and directors on Globalstar's behalf) had been amortized
to expense over the vesting period of the awards, the pro forma net loss
applicable to ordinary partnership interests would have increased by $2,536,000
to $91,324,000 ($1.79 per ordinary partnership interest) in 1997, $1,054,000 to
$73,023,000 ($1.55 per ordinary partnership interest) in 1996 and $156,000 to
$68,393,000 ($1.50 per ordinary partnership interest) in 1995.
A summary of the status of the GTL stock option plan for the years ended
December 31, 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------- ---------
<S> <C> <C>
Granted in 1995 (weighted average fair value $2.665 per
share).................................................... 220,800 $ 8.3125
------- --------
Outstanding at December 31, 1995............................ 220,800 8.3125
Granted (weighted average fair value $9.02 per share)....... 244,000 27.4500
Forfeited................................................... (2,400) 8.3125
------- --------
Outstanding at December 31, 1996............................ 462,400 18.4120
Granted (weighted average fair value $14.20 per share)...... 263,900 43.9300
Forfeited................................................... (29,400) 22.3220
Exercised................................................... (5,180) 8.3125
------- --------
Outstanding at December 31, 1997............................ 691,720 $28.0570
======= ========
Options exercisable at December 31, 1997.................... 47,620 $ 8.3125
======= ========
</TABLE>
At December 31, 1996 and 1995, there were no options exercisable.
F-28
<PAGE> 64
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. ORDINARY PARTNER'S CAPITAL (CONTINUED)
The following table summarizes information about the stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------------------- EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE-YEARS PRICE NUMBER PRICE
- -------------------- ------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$8.3125 201,820 7.70 $ 8.3125 47,620 $8.3125
$25.1875 to $32.75 289,400 8.69 27.144
$49.25 200,500 9.75 49.25
------- -------- ------ -------
691,720 $28.057 47,620 $8.3125
======= ======== ====== =======
</TABLE>
11. PENSIONS AND OTHER EMPLOYEE BENEFITS
Prior to April 23, 1996, Globalstar employees were eligible to participate
in the employee benefit plans of Old Loral. Globalstar was charged for the
actual costs of these benefits which for the period March 23 through December
31, 1994, amounted to $321,000, including $55,000 relating to pensions and
retiree health care and life insurance benefits. The costs incurred for the year
ended December 31, 1995 amounted to $710,000, including $121,000 relating to
pensions and retiree health care and life insurance benefits. In April 1996,
separate pension, post-retirement health care and life insurance and employee
savings plans were established by Globalstar.
Pensions: Globalstar maintains a noncontributory pension plan and a
supplemental pension plan covering certain employees. Eligibility for
participation in these plans vary and benefits are generally based on members'
compensation and years of service. Plan assets are generally invested in U.S.
government and agency obligations and listed stocks and bonds.
Pension cost includes the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Service cost-benefits earned during the period.............. $ 334 $ 213
Interest cost on projected benefit obligation............... 347 195
Actual return on plan assets................................ (664) (134)
Net amortization and deferral............................... 231 (151)
------- -------
Total pension cost........................................ $ 248 $ 123
======= =======
</TABLE>
F-29
<PAGE> 65
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. PENSIONS AND OTHER EMPLOYEE BENEFITS (CONTINUED)
The following presents the plan's funded status and amounts recognized in
the balance sheet (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits........................................... $ 3,960 $ 2,944
------- -------
Accumulated benefits...................................... $ 4,018 $ 3,129
Effect of projected future salary increases............... 1,154 764
------- -------
Projected benefits........................................ 5,172 3,893
Plan assets at fair value................................... 4,808 4,156
------- -------
Plan assets in excess of (less than) projected benefit
obligation................................................ (364) 263
Unrecognized net gain....................................... 7 386
------- -------
Pension liability........................................... $ 371 $ 123
======= =======
</TABLE>
The principal actuarial assumptions were:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Discount rate............................................. 7.25% 7.75%
Rate of increase in compensation levels................... 4.50% 4.50%
Expected long-term rate of return on plan assets.......... 9.50% 9.50%
</TABLE>
Postretirement Health Care and Life Insurance Benefits: In addition to
providing pension benefits, Globalstar provides certain health care and life
insurance benefits for retired employees and dependents. Participants are
eligible for these benefits when they retire from active service and meet the
eligibility requirements for Globalstar's pension plan. These benefits are
funded primarily on a pay-as-you-go basis with the retiree generally paying a
portion of the cost through contributions, deductibles and coinsurance
provisions.
Post-retirement health care and life insurance costs include the following
components (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Service cost--benefits earned during the period............. $ 39 $ 29
Interest cost on accumulated post-retirement benefit
obligation................................................ 49 32
Net amortization and deferral............................... 34 26
Return on assets............................................ (2) (2)
------- -------
Total post-retirement health care and life insurance
costs..................................................... $ 120 $ 85
======= =======
</TABLE>
At December 31, 1997 and 1996, the total accumulated post-retirement benefit
obligation was $838,000 and $641,000, respectively. Actuarial assumptions used
in determining the accumulated post-retirement benefit obligation include a
discount rate of 7.25% and 7.75% at December 31, 1997 and 1996, respectively,
and an assumed health care cost trend rate of 9.96% decreasing gradually to an
ultimate rate of 5.50% by the year 2004. Changing the assumed health care cost
trend by 1% in each year would change the accumulated post-retirement benefit
obligation at December 31, 1997 by $254,000 and the aggregate service and
interest cost components by $30,000 for the year ended December 31, 1997.
F-30
<PAGE> 66
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value.
The carrying amounts of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The fair value of the Senior
Notes is based on market quotations.
The estimated fair values of Globastar's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
Cash and cash equivalents............................. $464,154 $464,154
10 3/4% Senior notes.................................. 320,311 316,100
11 1/4% Senior notes.................................. 303,641 325,000
11 3/8% Senior notes.................................. 475,579 502,500
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
Cash and cash equivalents............................. $ 21,180 $ 21,180
</TABLE>
13. RELATED PARTY TRANSACTIONS
In addition to the transactions described in Notes 4, 5, 6, 7, 8, 9, 10, 11
and 15, Globalstar has a number of other transactions with its affiliates.
Globalstar believes that the arrangements are as favorable to Globalstar as
could be obtained from unaffiliated parties. The following describes these
related-party transactions.
Globalstar has granted to SS/L an irrevocable, royalty-free, non-exclusive
license to use certain intellectual property expressly developed in connection
with the SS/L agreement provided that SS/L will not use, or permit others to
use, such license for the purpose of engaging in any business activity that
would be in material competition with Globalstar. Globalstar has similarly
agreed that it will not license such intellectual property if it will be used
for the purpose of designing or building satellites that would be in competition
with SS/L.
Globalstar has granted to Qualcomm an irrevocable, non-exclusive, worldwide
perpetual license to intellectual property owned by Globalstar in the Ground
Segment and developed pursuant to the Qualcomm agreement. Qualcomm may, pursuant
to such grant, use the intellectual property for applications other than the
Globalstar System provided that Qualcomm may not for a period of three years
after its withdrawal as a strategic partner or prior to the third anniversary of
the Full Constellation Date, whichever is earlier, engage in any business
activity that would be in competition with the Globalstar System. The grant of
intellectual property to Qualcomm described above is generally royalty free.
Under certain specified circumstances, however, Qualcomm will be required to pay
a 3% royalty fee on such intellectual property.
A support agreement was entered into among Qualcomm, Loral and Globalstar
pursuant to which Qualcomm agreed to assist Globalstar and SS/L with
Globalstar's system design, support Globalstar and Loral with respect to various
regulatory matters, and assist Globalstar and Loral in their marketing efforts
with respect to Globalstar. For the years ended December 31, 1997, 1996 and
1995, Qualcomm has received approximately $894,000, $1,823,000, and $2,712,000,
respectively, for costs incurred in rendering such support and assistance.
Subsidiaries of Loral have formed joint ventures with partners which have
executed service provider agreements granting the joint ventures exclusive
rights to provide Globalstar service to users in Brazil, Canada
F-31
<PAGE> 67
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
and Mexico as long as specified minimum levels of subscribers are met. Similar
exclusive service provider agreements have been entered into with certain of
Globalstar's limited partners for specific countries. These service providers
will receive certain discounts from Globalstar's expected pricing schedule
generally over a five-year period. Globalstar has also agreed to provide
Qualcomm, under certain circumstances, with capacity on the Globalstar System
for its OmniTRACS services at its most favorable rates and to grant to Qualcomm
the exclusive right to utilize the Globalstar System to provide OmniTRACS-like
services.
Globalstar has entered into consulting agreements with certain limited
partners. Costs incurred under these arrangements for the years ended December
31, 1997, 1996 and 1995, were approximately $143,000, $496,000, and $1,411,000,
respectively. Globalstar anticipates that similar agreements may be entered into
with other strategic partners in the future.
Globalstar has granted to Hyundai Electronics Industries Co., Ltd.
("Hyundai") certain rights, including certain sub-contract rights with respect
to its satellite constellation and the right, at Hyundai's election, to act as
Globalstar's exclusive licensee authorized to manufacture and sell Globalstar
phones in South and North Korea.
Current payable to affiliates consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
SS/L........................................................ $ 14,120 $ 22,572
Qualcomm.................................................... 90,817 40,903
Loral....................................................... 420 462
-------- --------
Total....................................................... $105,357 $ 63,937
======== ========
</TABLE>
Commencing after the initiation of Globalstar services, LQP, the general
partner of LQSS, will receive a managing partner's allocation equal to 2.5% of
Globalstar's revenues up to $500 million plus 3.5% of revenues in excess of $500
million. Should Globalstar incur a net loss in any year following commencement
of services, the allocation for that year will be reduced by 50% and LQP will
reimburse Globalstar for allocation payments, if any, received in any prior
quarter of such year, sufficient to reduce its management allocation for the
year to 50%. No allocations have been made to date.
14. REGULATORY MATTERS
Globalstar and its operations are, and will be, subject to substantial U.S.
and international regulation, including required regulatory approvals in each
country in which Globalstar intends to provide service. Globalstar's business
may be significantly affected by regulatory activities.
15. SUBSEQUENT EVENT
On March 4, 1998, Qualcomm entered into a financing agreement with
Globalstar providing $100 million principal amount of vendor financing. The
principal amount will accrue interest at a rate of 5.75% per annum, and will be
capitalized to principal quarterly. Globalstar will make eight equal principal
payments on a quarterly basis commencing on January 1, 2000 with final payment
due October 1, 2001 accompanied by all then unpaid accrued interest.
F-32
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
3.1 Memorandum of Association of Globalstar Telecommunications
Limited*
3.2 Bye-Laws of Globalstar Telecommunications Limited*
4.1 Indenture dated as of March 6, 1996 relating to Globalstar
Telecommunications Limited's 6 1/2% Convertible Preferred
Equivalent Obligations due 2006**
4.2 Indenture dated as of February 15, 1997 relating to
Globalstar's and Globalstar Capital Corporation's 11 3/8%
Senior Notes due 2004***
4.3 Indenture dated as of June 1, 1997 relating to Globalstar's
and Globalstar Capital Corporation's 11 1/4% Senior Notes
due 2004.****
4.4 Indenture dated as of October 15, 1997 relating to
Globalstar's and Globalstar Capital Corporation's 10 3/4%
Senior Notes due 2004.*****
10.1 Amended and Restated Agreement of Limited Partnership of
Globalstar L.P., dated as of March 6, 1996, among
Loral/Qualcomm Satellite Services, L.P., Globalstar
Telecommunications Limited, AirTouch Satellite Services, San
Giorgio S.p.A., Hyundai/Dacom, Loral/DASA Globalstar, L.P.,
Loral Globalstar, L.P., TE.S.A.M. and Vodastar Limited***
10.2 Subscription Agreements by and between Globalstar, L.P., and
each of AirTouch Communications, Alcatel Spacecom, Loral
General Partner, Inc., Hyundai/Dacom and Vodastar Limited*
10.3 Subscription Agreement by and between Globalstar, L.P. and
Loral/Qualcomm Satellite Services, L.P.*
10.4 Contract between Globalstar, L.P. and Space Systems/Loral,
Inc.*
10.5 Contract for the Development of Certain Portions of the
Ground Operations Control Center between Globalstar and
Loral Western Development Laboratories.*
10.6 Contract for the Development of Satellite Orbital Operations
Centers between Globalstar and Loral Aerosys, a division of
Loral Aerospace Corporation.*
10.7 1994 Stock Option Plan.**++
10.8 Amendment to 1994 Stock Option Plan+++
10.9 Revolving Credit Agreement dated as of December 15, 1995, as
amended on March 25, 1996, among Globalstar, certain banks
parties thereto and Chemical Bank, as Administrative
Agent***
10.10 Second Amendment to Revolving Credit Agreement dated July
31, 1997 among Globalstar, certain banks parties thereto and
The Chase Manhattan Bank, as Administrative Agent.*****
10.11 Third Amendment to Revolving Credit Agreement dated as of
October 15, 1997 among Globalstar, certain banks parties
thereto and The Chase Manhattan Bank, as Administrative
Agent.*****
10.12 Warrant Agreement dated as of February 19, 1997 relating to
Warrants to purchase shares of Common Stock of Globalstar
Telecommunications Limited.***
10.13 Registration Rights Agreement dated March 6, 1996 relating
to the Globalstar Telecommunications Limited's 6 1/2%
Convertible Preferred Equivalent Obligations due 2006**
10.14 Registration Rights Agreement dated February 19, 1997
relating to Globalstar's 11 3/8% Senior Notes due 2004 and
the Company's Warrants to purchase 1,032,250 shares of
Common Stock issued in connection therewith.***
10.15 Registration Rights Agreement dated June 13, 1997 relating
to Globalstar's and Globalstar Capital Corporation's 11 1/4%
Senior Notes due 2004.****
10.16 Registration Rights Agreement dated October 29, 1997
relating to Globalstar's and Globalstar Capital
Corporation's 10 3/4% Senior Notes due 2004.*****
12 Statement Regarding Computation of Ratios+
</TABLE>
<PAGE> 69
<TABLE>
<S> <C>
23 Consent of Deloitte & Touche LLP+
27 Financial Data Schedule (EDGAR only)+
</TABLE>
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-86808).
** Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-6477).
*** Incorporated by reference to the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1996.
**** Incorporated by reference to Globalstar's Registration Statement on Form
S-4 (No. 333-25461).
***** Incorporated by reference to Globalstar's Registration Statement on Form
S-4 (No. 333-41229).
+ Filed herewith.
++ Management compensation plan.
<PAGE> 1
EXHIBIT 12
STATEMENT REGARDING COMPUTATION OF RATIOS
(IN THOUSANDS, EXCEPT RATIOS)
GLOBALSTAR TELECOMMUNICATIONS LIMITED
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Earnings:
Net loss.................................................. $(24,152) $(15,080)
Add:
Equity in loss applicable to ordinary partnership
interests of Globalstar, L.P........................ 24,152 15,080
Interest expense..................................... 21,202 17,370
-------- --------
Earnings available to cover fixed charges(1)................ $ 21,202 $ 17,370
======== ========
Fixed charges -- interest expense........................... $ 21,202 $ 17,370
======== ========
Ratio of earnings to fixed charges.......................... 1x 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>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Net loss.................................................... $ (67,586) $(54,646)
Dividends on redeemable preferred partnership interests..... (21,202) (17,323)
Capitalized interest........................................ (95,895) (9,900)
--------- --------
Deficiency of earnings to cover fixed charges............... $(184,683) $(81,869)
========= ========
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF DELOITTE & TOUCHE LLP
Globalstar Telecommunications Limited:
We consent to the incorporation by reference in Registration Statement Nos.
333-6477, 333-22063, and 333-25457 on Form S-3 and 333-29447 on Form S-8 of
Globalstar Telecommunications Limited of our reports dated March 6, 1998, on the
financial statements of Globalstar Telecommunications Limited and the
consolidated financial statements of Globalstar, L.P. appearing in this Annual
Report on Form 10-K of Globalstar Telecommunications Limited and Globalstar,
L.P. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
San Jose, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary consolidated financial information extracted
from the financial statements of Globalstar Telecommunications Limited for the
year ended December 31, 1997 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000933401
<NAME> GLOBALSTAR TELECOMMUNICATIONS LIMITED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 612,716
<CURRENT-LIABILITIES> 1,679
<BONDS> 0
0
301,410
<COMMON> 30,638
<OTHER-SE> 278,989
<TOTAL-LIABILITY-AND-EQUITY> 612,716
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,202
<INCOME-PRETAX> (24,152)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,152)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,152)
<EPS-PRIMARY> (0.86)<F1>
<EPS-DILUTED> (0.86)
<FN>
<F1>Note: The adoption of SFAS 128 did not have any effect on the reported
net loss per share for the years ended December 31, 1997, 1996, and 1995.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary consolidated financial information extracted
from the financial statements of Globalstar, L.P. for the year ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001037927
<NAME> GLOBALSTAR, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 464,154
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 493,780
<PP&E> 1,532,500
<DEPRECIATION> 2,238
<TOTAL-ASSETS> 2,149,053
<CURRENT-LIABILITIES> 143,810
<BONDS> 1,099,531
0
303,089
<COMMON> 380,828
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,149,053
<SALES> 0
<TOTAL-REVENUES> 20,485
<CGS> 88,071
<TOTAL-COSTS> 88,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (67,586)
<INCOME-TAX> 0
<INCOME-CONTINUING> (67,586)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (88,788)
<EPS-PRIMARY> (1.74)<F1>
<EPS-DILUTED> (1.74)
<FN>
<F1>Note: The adoption of SFAS 128 did not have any effect on the reported
net loss per share for the years ended December 31, 1997, 1996, and 1995.
</FN>
</TABLE>
