<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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
GLOBALSTAR, L.P.
3200 ZANKER ROAD
SAN JOSE, CA 95134
TELEPHONE: (408) 933-4000
COMMISSION FILE NUMBER: 333-25461
JURISDICTION OF INCORPORATION: DELAWARE
IRS IDENTIFICATION NUMBER: 13]-3759024
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.
As of October 15, 2000, there were 106,284,999 shares of Globalstar
Telecommunications Limited common stock outstanding.
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<PAGE> 2
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Part I FINANCIAL INFORMATION
Globalstar Telecommunications Limited (A General Partner of
Globalstar, L.P.)......................................... 2
Globalstar, L.P............................................. 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Part II OTHER INFORMATION
Exhibits and Reports of Form 8-K............................ 22
</TABLE>
1
<PAGE> 3
PART I
FINANCIAL INFORMATION
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Investment in Globalstar, L.P.:
Redeemable preferred partnership interests................ $ 357,027 $ 358,968
Dividends receivable...................................... 3,323 3,323
Ordinary partnership interests............................ 696,968 661,072
Ordinary partnership warrants............................. 11,268 11,539
---------- ----------
Total assets...................................... $1,068,586 $1,034,902
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Dividends payable......................................... $ 3,323 $ 3,323
Commitments and contingencies
Shareholders' equity:
Preference shares, $.01 par value, 20,000,000 shares
authorized:
8% Series A convertible redeemable preferred stock,
(4,396,295 shares outstanding, $220 million redemption
value)................................................ 213,393 213,393
9% Series B convertible redeemable preferred stock,
(2,959,990 and 3,000,000 shares outstanding at
September 30, 2000 and December 31, 1999,
respectively, $150 million redemption value).......... 143,634 145,575
Common stock, $1.00 par value, 600,000,000 shares
authorized (103,764,999 and 88,742,794 shares
outstanding at September 30, 2000 and December 31,
1999, respectively).................................... 103,765 88,743
Paid-in capital........................................... 1,061,363 756,615
Warrants.................................................. 11,268 11,539
Accumulated deficit....................................... (468,160) (184,286)
---------- ----------
Total shareholders' equity........................ 1,065,263 1,031,579
---------- ----------
Total liabilities and shareholders' equity........ $1,068,586 $1,034,902
========== ==========
</TABLE>
---------------
NOTE: The December 31, 1999 balance sheet has been derived from audited
financial statements at that date.
See notes to condensed financial statements.
2
<PAGE> 4
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Equity in net loss applicable to ordinary
partnership interests of Globalstar, L.P......... $86,021 $16,769 $252,034 $48,244
Amortization of excess carrying value in
Globalstar, L.P.................................. 11,455 31,840
Dividend income on Globalstar, L.P. redeemable
preferred partnership interests.................. 7,771 7,129 23,051 21,819
Interest expense on convertible preferred
equivalent obligations........................... 2,510
------- ------- -------- -------
Net loss........................................... 89,705 9,640 260,823 28,935
Preferred dividends on convertible redeemable
preferred stock.................................. 7,771 7,129 23,051 19,309
------- ------- -------- -------
Net loss applicable to common shareholders......... $97,476 $16,769 $283,874 $48,244
======= ======= ======== =======
Net loss per share -- basic and diluted............ $ 1.00 $ 0.20 $ 2.95 $ 0.59
======= ======= ======== =======
Weighted average shares outstanding -- basic and
diluted.......................................... 97,154 82,062 96,095 82,035
======= ======= ======== =======
</TABLE>
See notes to condensed financial statements.
3
<PAGE> 5
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(260,823) $ (28,935)
Equity in net loss applicable to ordinary partnership
interests of Globalstar, L.P........................... 252,034 48,244
Amortization of excess carrying value in Globalstar,
L.P.................................................... 31,840
Accretion to redemption value of redeemable preferred
partnership interests.................................. (339)
Dividends accrued on redeemable preferred partnership
interests.............................................. (3,500)
--------- ---------
Net cash provided by operating activities.............. 23,051 15,470
--------- ---------
Investing activities:
Purchase of ordinary partnership interests in
Globalstar, L.P....................................... (335,510) (2,846)
Purchase of 8% redeemable preferred partnership
interests in Globalstar, L.P.......................... (339,775)
--------- ---------
Net cash used in investing activities.................. (335,510) (342,621)
--------- ---------
Financing activities:
Net proceeds from issuance of common stock upon
exercise of options and warrants...................... 1,896 2,846
Net proceeds from sale of common stock................. 333,614
Proceeds from issuance of 8% Series A convertible
redeemable preferred stock............................ 339,775
Payment of preferred stock dividends................... (23,051) (15,470)
--------- ---------
Net cash provided by financing activities.............. 312,459 327,151
--------- ---------
Net increase (decrease) in cash and cash equivalents......
Cash and cash equivalents, beginning of period............
--------- ---------
Cash and cash equivalents, end of period.................. $ -- $ --
========= =========
Noncash transactions:
Change in fair value of stock compensation for the
benefit of Globalstar................................. $ (17,953) $
========= =========
Conversion of 9% Series B redeemable preferred
partnership interests into common stock............... $ 1,941 $
========= =========
</TABLE>
See notes to condensed financial statements.
4
<PAGE> 6
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared by Globalstar Telecommunications Limited ("GTL" or the "Company")
pursuant to the rules of the Securities and Exchange Commission ("SEC") and, in
the opinion of GTL, include all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of financial position, results of
operations and cash flows as of and for the periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to SEC rules. GTL believes
that the disclosures made are adequate to keep the information presented from
being misleading. The results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results to be expected
for the full year. These financial statements should be read in conjunction with
GTL's audited financial statements and notes thereto included in the latest
Annual Report on Form 10-K for GTL and Globalstar, L.P. ("Globalstar").
2. ORGANIZATION AND BUSINESS
GTL's sole business is acting as a general partner of Globalstar. In the
first quarter of 2000, Globalstar commenced commercial operations and began the
transition from a development stage entity to an operating entity. In 2000,
Globalstar operations are focused on operating the Globalstar System and the
provisioning of global wireless telecommunications services.
Globalstar's subscriber revenues to date have been lower than originally
anticipated. If Globalstar fails to rapidly and significantly improve its market
penetration rates and revenues, it will be unable to service its debt or fund
its operating costs, unless additional financing can be obtained, as to which
there can be no assurance. If Globalstar is unable to obtain sufficient funds to
pay for its debt service, Globalstar will be in default under its debt
facilities.
As of September 30, 2000, GTL held 40.3% of the outstanding ordinary
partnership interests, 100% of the outstanding 8% convertible redeemable
preferred partnership interests (the "8% RPPIs") and 100% of the outstanding 9%
convertible redeemable preferred partnership interests (the "9% RPPIs") of
Globalstar. GTL accounts for its investment in Globalstar on the equity method,
recognizing its allocated share of net losses in the period incurred based on
the ordinary partnership interests it owns.
GTL's equity securities and convertible securities are represented by
equivalent Globalstar partnership interests on an approximate four-for-one
basis.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Earnings Per Share
Due to GTL's net losses for the three and nine months ended September 30,
2000 and 1999, diluted weighted average common shares outstanding excludes the
weighted average effect of: (i) the assumed conversion of GTL's 8% Series A
convertible redeemable preferred stock (the "8% Preferred Stock") into 9.5
million and 15.0 million common shares for the three months ended September 30,
2000 and 1999, respectively, and into 9.5 million and 13.9 million common shares
for the nine months ended September 30, 2000 and 1999, respectively; (ii) the
assumed conversion of GTL's 9% Series B convertible redeemable preferred stock
(the "9% Preferred Stock") into 5.7 million common shares for both the three and
nine months ended September 30, 2000; and (iii) the assumed exercise of
outstanding options and warrants, into 12.3 million and 7.9 million common
shares for the three months ended September 30, 2000 and 1999, respectively, and
into 10.0 million and 6.9 million common shares for the nine months ended
September 30, 2000 and 1999, respectively, as their effect would have been
anti-dilutive. Accordingly, basic and diluted net
5
<PAGE> 7
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
loss per share is based on the net loss applicable to common shareholders' and
the weighted average common shares outstanding for the three and nine months
ended September 30, 2000 and 1999, respectively.
Investment in Globalstar, L.P.
GTL's investment in Globalstar includes the excess carrying value over
GTL's interest in Globalstar's total partners' capital. Such excess totaled $913
million at September 30, 2000, including an increase of $243 million during the
first quarter of 2000 and an increase of $58 million during the third quarter of
2000, resulting primarily from the additional investments in Globalstar's
ordinary partnership interests discussed in Note 4. In connection with
Globalstar's commencement of commercial operations, GTL began amortizing this
excess in January 2000 over a period of 20 years. Accumulated amortization as of
September 30, 2000 was $31.8 million.
Comprehensive Loss
During the periods presented, GTL had no changes in equity from
transactions or other events and circumstances from non-owner sources.
Accordingly, a statement of comprehensive loss has not been provided.
4. SHAREHOLDERS' EQUITY
On February 1, 2000, GTL sold 8,050,000 shares of common stock in a public
offering under its shelf registration statement. The sale yielded net proceeds
of approximately $268.5 million to the Company. GTL used the proceeds to
purchase 1,987,654 ordinary partnership interests in Globalstar.
On September 19, 2000, GTL entered into a purchase agreement with Bear
Stearns International Limited ("Bear Stearns"), under which Bear Stearns has
agreed to purchase over several tranches, up to $105 million of shares of GTL
common stock. Sales under this agreement are subject to certain conditions,
including the requirement that GTL's share price is trading higher than $4.50.
As of September 30, 2000, Bear Stearns had purchased 1,530,000 shares of GTL
common stock, resulting in net proceeds to GTL of $9 million. GTL used the
proceeds from the sales to purchase 377,778 ordinary partnership interests in
Globalstar.
On September 29, 2000, Globalstar's founding partners, Loral Space &
Communications Ltd. ("Loral"), Vodafone, Qualcomm, Elsacom and TESAM, purchased
an aggregate of 5.2 million shares of common stock of GTL for $56 million. GTL
used the proceeds from the sales to purchase 1,295,360 ordinary partnership
interests in Globalstar.
Globalstar is using the proceeds from the above transactions for general
corporate purposes including capital expenditures, operations (including
marketing and distribution of phones and services) and interest expense.
5. GLOBALSTAR ADDITIONAL SYSTEM COSTS AND FUNDING
Before any additional financing, Globalstar expects to end 2000 with
approximately $175 million in cash and expects that this estimated cash balance
will last into the second quarter of 2001.
Over the next 12 months, commencing on October 1, 2000, Globalstar will
require significant additional funds to cover its cash outflows which it expects
will include operating costs of approximately $235 million, cash-pay interest of
approximately $245 million and other cash requirements of approximately $43
million for the eight spare satellites being constructed by Space Systems/Loral,
Inc. ("SS/L"), $144 million for repayment of vendor financing and debt and
approximately $60 million for the financing provided to
6
<PAGE> 8
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Globalstar's service providers to assist in the purchase of gateways, fixed
access terminals and handsets. These expenditures are partially offset by
expected receipts of approximately $135 million from the service providers as
repayment of such financing. The amount of such additional funds will depend,
among other things, upon the amount and timing of revenues generated. If
Globalstar is not able to raise sufficient funds, the lack of funds would have a
material adverse effect on GTL's investment in Globalstar.
Globalstar also has secured from SS/L twelve and eighteen month call up
orders for two additional Delta launch vehicles. The total future commitment for
these launch vehicles is approximately $86.5 million plus escalation of 3% per
year. If these launch vehicles are not used by the end of 2003, Globalstar will
incur a termination charge of approximately $18.6 million.
6. GLOBALSTAR CREDIT FACILITIES
$250 Million Credit Agreement
On June 30, 2000, Globalstar's $250 million credit facility with The Chase
Manhattan Bank, which was fully drawn, matured and was thereupon repaid in full
by its guarantors, Lockheed Martin, Qualcomm, DASA and SS/L, who had previously
received warrants for GTL common stock in consideration of their guarantees.
Pursuant to the relevant agreements entered into in 1996, Globalstar issued
three-year notes in the amounts of $206.3 million, $21.9 million, $11.7 million
and $10.1 million to Lockheed Martin, Qualcomm, SS/L and DASA, respectively, in
satisfaction of their subrogation rights. The notes are due on June 30, 2003 and
bear interest, on a deferred basis, at a rate of London Interbank Offer Rate
("LIBOR") plus 3%.
On June 30, 2000, Loral paid $56.3 million on a net basis to Lockheed
Martin in satisfaction of its obligation to indemnify Lockheed Martin for
liability in excess of $150 million under Lockheed Martin's guarantee of
Globalstar's $250 million credit facility. Accordingly, Loral is entitled to
receive notes in respect thereof.
Lockheed Martin, however, has rejected the notes it received and has asked
Globalstar for alternative forms of payment, while continuing to claim that it
is entitled to receive an immediate cash reimbursement by Globalstar of its $150
million payment to the bank lenders. Globalstar disputes Lockheed Martin's
interpretation of the relevant agreements, but is, nonetheless, in discussions
with Lockheed Martin to resolve the dispute.
If the dispute is not resolved, Globalstar cannot be sure that if the
matter were litigated a court would agree with Globalstar's interpretation of
the agreements. Moreover, if as a result of this dispute, a holder of Globalstar
public bonds claimed a cross default under the applicable indentures, and a
court ruled against Globalstar, the maturity date of the bonds would be
accelerated. Management believes, however, that a court would agree with
Globalstar's interpretation of the relevant agreements.
$500 Million Credit Agreement
On August 5, 1999, Globalstar entered into a $500 million credit agreement
with a group of banks. The credit agreement provides for a $100 million
three-year revolving credit facility ("Revolver"), a $100 million three-year
term loan ("Term Loan A") and a $300 million four-year term loan ("Term Loan
B"). As of September 30, 2000, all amounts under the $500 million credit
agreement were drawn.
Borrowings under the facilities bear interest, at Globalstar's option, at
various rates based on margins over the lead bank's base rate or LIBOR for
periods of one to six months. Globalstar pays a commitment fee on the unused
portion of the facilities. The credit agreement contains customary financial
covenants that commence March 31, 2001, including minimum revenue thresholds,
maintenance of consolidated net worth, interest coverage ratios and maximum
leverage ratios. In addition, the credit agreement contains customary
limitations
7
<PAGE> 9
GLOBALSTAR TELECOMMUNICATIONS LIMITED
(A GENERAL PARTNER OF GLOBALSTAR, L.P.)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
on indebtedness, liens, contingent obligations, fundamental changes, asset
sales, dividends, investments, optional payments and modification of
subordinated and other debt instruments and transactions with affiliates.
One of these covenants would require, among other things, that Globalstar
have revenues of $100 million for the 12 month period ended March 31, 2001.
Globalstar's revenues for the six months ended September 30, 2000, the first six
months of this period, were $1.9 million. Given the level of revenues in the
first six months of this period, Globalstar anticipates that the growth in
revenues during the subsequent six month period will not be sufficient to meet
its $100 million revenue covenant. If Globalstar cannot satisfy this covenant,
obtain waivers or amendments from a majority of the bank lenders, or fulfill the
$500 million obligation in a form satisfactory to all bank lenders, Globalstar
will be in default under its debt facilities (including vendor financing) and
Globalstar's lenders and bondholders would have the right to accelerate payment
of their loans to Globalstar. Loral SatCom Ltd. and Loral Satellite Inc.,
directly and indirectly wholly owned subsidiaries of Loral, have jointly and
severally guaranteed Globalstar's obligation under this credit agreement. Loral
has advised Globalstar that it is currently in negotiations with the banks to
restructure the guarantee arrangements.
7. SUBSEQUENT EVENTS
During October 2000, Bear Stearns purchased 2,520,000 additional shares of
GTL common stock (see Note 4), resulting in additional proceeds to GTL of $19
million. GTL used the proceeds from the sales to purchase 622,223 additional
ordinary partnership interests in Globalstar.
In October 2000, GTL announced that future dividends on its two series of
preferred stock would be paid in shares of its common stock rather than cash, as
permitted under the terms of both series of preferred stock. These terms provide
that shares of common stock be valued at 95% of their average market value,
which is defined as the arithmetic average of the average of the high and low
trading prices of GTL common stock as reported on NASDAQ for the ten trading
days ending on the fifth business day prior to the record date for such
dividend. In connection with these dividends, Globalstar will issue partnership
interests to GTL corresponding to the proportionate number of common shares
issued by GTL to the preferred holders.
8
<PAGE> 10
GLOBALSTAR, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PARTNERSHIP INTERESTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 285,919 $ 127,675
Restricted cash........................................... 46,246
Accounts receivable, net of allowance of $6 at September
30, 2000................................................ 801
Production gateways and user terminals.................... 183,078 114,980
Other current assets...................................... 15,743 4,001
---------- ----------
Total current assets................................ 485,541 292,902
Property and equipment:
Globalstar System, net.................................... 2,938,700
Other property and equipment, net......................... 4,669 5,128
---------- ----------
2,943,369 5,128
Globalstar System under construction:
Space segment............................................. 2,109,275
Ground segment............................................ 15,549 1,071,914
---------- ----------
15,549 3,181,189
Additional spare satellites................................. 141,489 53,467
Deferred financing costs.................................... 153,351 151,873
Other assets................................................ 96,960 96,900
---------- ----------
Total assets........................................ $3,836,259 $3,781,459
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of debt................................... $ 46,000 $
Accounts payable.......................................... 11,507 10,908
Payable to affiliates..................................... 43,081 468,536
Vendor financing liability................................ 98,298 137,484
Accrued expenses.......................................... 16,767 20,841
Accrued interest.......................................... 47,174 33,533
---------- ----------
Total current liabilities........................... 262,827 671,302
Deferred revenues........................................... 36,201 25,811
Vendor financing liability, net of current portion.......... 666,848 256,311
Deferred interest payable................................... 595
Accrued interest on notes payable........................... 6,145
Revolving credit facility................................... 100,000
Term loans payable.......................................... 354,000 400,000
Notes payable............................................... 150,000
Notes payable to affiliates................................. 100,000
Senior notes payable ($1,450,000 aggregate principal
amount)................................................... 1,405,629 1,399,111
Commitments and contingencies (Notes 4 and 6) Partners'
capital:
8% Series A convertible redeemable preferred partnership
interests (4,396,295 interests outstanding, $220 million
redemption value)....................................... 213,393 213,393
9% Series B convertible redeemable preferred partnership
interests (2,959,990 and 3,000,000 interests outstanding
at September 30, 2000 and December 31, 1999,
respectively, $150 million redemption value)............ 143,634 145,575
Ordinary partnership interests (63,553,877 and 59,844,323
interests outstanding at September 30, 2000 and December
31, 1999, respectively)................................. 184,559 516,530
Unearned compensation..................................... (1,540) (16,754)
Warrants.................................................. 214,563 169,585
---------- ----------
Total partners' capital............................. 754,609 1,028,329
---------- ----------
Total liabilities and partners' capital............. $3,836,259 $3,781,459
========== ==========
</TABLE>
---------------
NOTE:The December 31, 1999 balance sheet has been derived from audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
9
<PAGE> 11
GLOBALSTAR, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER ORDINARY PARTNERSHIP INTEREST AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Gross revenue:
Service........................................ $ 1,000 $ $ 1,660 $
Royalty income................................. 427 1,215
-------- ------- -------- --------
Total gross revenue.............................. 1,427 2,875
Less, discounts and promotions on service
revenue..................................... (237) (368)
-------- ------- -------- --------
Net revenue...................................... 1,190 2,507
-------- ------- -------- --------
Operating expenses:
Operations..................................... 29,498 21,803 105,563 78,856
Marketing, general and administrative.......... 16,426 19,485 47,684 41,156
Depreciation and amortization.................. 83,697 582 244,715 1,704
-------- ------- -------- --------
Total operating expenses............... 129,621 41,870 397,962 121,716
-------- ------- -------- --------
Operating loss................................... 128,431 41,870 395,455 121,716
Interest income.................................. 5,015 833 11,856 4,908
Interest expense................................. 87,771 245,162
-------- ------- -------- --------
Net loss......................................... 211,187 41,037 628,761 116,808
Preferred distributions on redeemable preferred
partnership interests.......................... 7,771 7,129 23,051 21,819
-------- ------- -------- --------
Net loss applicable to ordinary partnership
interests...................................... $218,958 $48,166 $651,812 $138,627
======== ======= ======== ========
Net loss per ordinary partnership
interest -- basic and diluted.................. $ 3.54 $ 0.83 $ 10.57 $ 2.38
======== ======= ======== ========
Weighted average ordinary partnership interests
outstanding -- basic and diluted............... 61,922 58,191 61,660 58,185
======== ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
10
<PAGE> 12
GLOBALSTAR, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(628,761) $(116,808)
Deferred revenues......................................... 10,390
Amortization of unearned compensation..................... (2,667) 1,280
Depreciation and amortization............................. 244,715 1,704
Non-cash interest......................................... 49,973
Changes in operating assets and liabilities:
Accounts receivable..................................... (801)
Other current assets.................................... (11,742) 1,217
Other assets............................................ (2,587) (35)
Accounts payable........................................ 4,269 (6,753)
Payable to affiliates................................... (17,944) 51,366
Accrued expenses........................................ (4,074) 2,574
Accrued interest and other.............................. 19,191
--------- ---------
Net cash used in operating activities................. (340,038) (65,455)
--------- ---------
Investing activities:
Globalstar System....................................... (13,039) (662,112)
Insurance proceeds from launch failure.................. 28,500
Payable to affiliates for Globalstar System............. (30,882) 115,115
Capitalized interest accrued............................ 21,557
Accounts payable........................................ (3,670) 897
Vendor financing liability.............................. 63,949 49,207
--------- ---------
Cash provided by (used for) Globalstar System........... 16,358 (446,836)
Advances for production gateways and user terminals..... (156,786) (22,048)
Cash receipts for production gateways and user
terminals.............................................. 88,689 40,824
Receipt and use of restricted cash...................... 46,246 (37,881)
Additional spare satellites, net of vendor financing.... (82,254)
Purchases of property and equipment..................... (1,435) (2,157)
Deferred FCC license costs.............................. (797)
--------- ---------
Net cash used in investing activities................. (89,182) (468,895)
--------- ---------
Financing activities:
Proceeds from issuance of $300,000 Term Loan B.......... 300,000
Deferred financing costs................................ (13,568)
Sale of ordinary partnership interests upon exercise of
options and warrants................................... 1,896 2,846
Sale of ordinary partnership interests to GTL........... 333,614
Sale of 8% Series A convertible redeemable preferred
partnership interests to GTL........................... 339,775
Repayment of vendor financing........................... (74,995)
Distributions on redeemable preferred partnership
interests.............................................. (23,051) (17,980)
Borrowings under credit facilities...................... 350,000 75,000
Repayment of borrowings under long term credit
facilities............................................. (75,000)
--------- ---------
Net cash provided by financing activities............. 587,464 611,073
--------- ---------
Net increase in cash and cash equivalents............... 158,244 76,723
Cash and cash equivalents, beginning of period.......... 127,675 56,223
--------- ---------
Cash and cash equivalents, end of period................ $ 285,919 $ 132,946
========= =========
Noncash transactions:
Issuance of notes to guarantors for repayment of
revolving credit line.................................. $ 250,000
=========
Conversion of affiliate payables to vendor financing.... $(387,777)
=========
Conversion of 9% Series B redeemable preferred
partnership interests into ordinary partnership
interests.............................................. $ 1,941
=========
Change in fair value of stock compensation for the
benefit of Globalstar.................................. $ (17,953)
=========
</TABLE>
See notes to condensed consolidated financial statements.
11
<PAGE> 13
GLOBALSTAR, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Globalstar, L.P. ("Globalstar") pursuant to the rules of the
Securities and Exchange Commission ("SEC") and, in the opinion of Globalstar,
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of financial position, results of operations and cash flows
as of and for the periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such SEC rules. Globalstar believes that the
disclosures made are adequate to keep the information presented from being
misleading. The results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results to be expected
for the full year. These condensed consolidated financial statements should be
read in conjunction with Globalstar's audited consolidated financial statements
and notes thereto included in the latest Annual Report on Form 10-K for
Globalstar Telecommunications Limited ("GTL") and Globalstar.
2. ORGANIZATION AND BUSINESS
Globalstar was founded by Loral Space & Communications Ltd. ("Loral") and
QUALCOMM Incorporated ("Qualcomm") to design, construct and operate a worldwide,
low-earth orbit ("LEO") satellite-based wireless digital telecommunications
system (the "Globalstar System"). As of December 31, 1999, Globalstar's planned
principal operations had not commenced and accordingly, Globalstar was a
development stage company as defined in Statement of Financial Accounting
Standards No. 7, Accounting and Reporting by Development Stage Enterprises. In
the first quarter of 2000, Globalstar commenced commercial operations and began
the transition from a development stage entity to an operating entity. In 2000,
Globalstar operations are focused on operating the Globalstar System and the
provisioning of global wireless telecommunications services.
Globalstar's subscriber revenues to date have been lower than originally
anticipated. If Globalstar fails to rapidly and significantly improve its market
penetration rates and revenues, it will be unable to service its debt or fund
its operating costs, unless additional financing can be obtained, as to which
there can be no assurance. If Globalstar is unable to obtain sufficient funds to
pay for its debt service, Globalstar will be in default under its debt
facilities.
Globalstar operates in one industry segment, global mobile telephone
service.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Earnings Per Ordinary Partnership Interest
Due to Globalstar's net losses for the three and nine months ended
September 30, 2000 and 1999, diluted weighted average ordinary partnership
interests outstanding excludes the weighted average effect of: (i) the assumed
conversion of the 8% Series A convertible redeemable preferred partnership
interests (the "8% RPPI's") into 2.3 million and 3.8 million ordinary
partnership interests for the three months ended September 30, 2000 and 1999,
respectively, and into 2.3 million and 3.5 million ordinary partnership
interests for the nine months ended September 30, 2000 and 1999, respectively;
(ii) the assumed conversion of the 9% Series B convertible redeemable preferred
partnership interests (the "9% RPPI's") into 1.4 million ordinary partnership
interests for both the three and nine months ended September 30, 2000; and (iii)
the assumed issuance of ordinary partnership interests upon exercise of
Globalstar warrants and GTL's outstanding options and warrants, into 10.9
million and 5.2 million ordinary partnership interests for the three months
ended September 30, 2000 and 1999, respectively, and into 8.8 million and 3.4
million ordinary partnership interests for the nine months ended September 30,
2000 and 1999, respectively, as their effect would have been anti-dilutive.
Accordingly, basic and diluted net loss per ordinary partnership interest are
based on the net loss
12
<PAGE> 14
GLOBALSTAR, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
applicable to ordinary partnership interests and the weighted average ordinary
partnership interests outstanding for the three and nine months ended September
30, 2000 and 1999, respectively.
Property and Equipment
Property and equipment are stated at historical cost, less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, as follows:
<TABLE>
<S> <C>
Globalstar System......................... Up to periods of 10 years from
commencement of service in the first
quarter of 2000
Furniture, fixtures & equipment........... 3 to 8 years
Leasehold improvements.................... Shorter of lease term or the estimated
useful lives of the improvements
</TABLE>
Service Revenue
Globalstar provides satellite services under agreements with its service
providers and recognizes revenue as satellite services are provided. Gross
service revenue represents the billable usage at the contracted rate for the
respective services provided. Net service revenue reflects Globalstar's service
revenue after promotions and discounts provided to service providers. These
promotional programs include a 25% discount on mobile usage fees and free
minutes, accumulated based on usage, to service providers for the advance
purchase of airtime. A number of Globalstar service providers have committed to
pre-purchase discounted minutes of use, amounting to approximately $23 million
in pre-committed gross revenue, of which approximately $7.8 million has been
received as of September 30, 2000.
Royalties
Royalty income is comprised of royalty payments for Globalstar user
terminals sold by user terminal manufacturers. Revenue is generally recognized
as units are shipped by the user terminal manufacturers.
Payments received in excess of cost for Globalstar gateways sold to service
providers are recorded as a reduction to the Globalstar System.
Research and Development Expense
Globalstar's research and development costs, which are expensed as
incurred, were $1.1 million and $21.8 million for the three months ended
September 30, 2000 and 1999, respectively, and $4.3 million and $78.9 million
for the nine months ended September 30, 2000 and 1999, respectively, and are
included in operations expense.
Comprehensive Loss
During the periods presented, Globalstar had no changes in ordinary
partner's capital from transactions or other events and circumstances from
non-owners sources. Accordingly, a statement of comprehensive loss has not been
provided.
Reclassifications
Certain reclassifications have been made to conform prior period amounts to
the current period presentation.
13
<PAGE> 15
GLOBALSTAR, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ADDITIONAL SYSTEM COSTS AND FUNDING
Before any additional financing, Globalstar expects to end 2000 with
approximately $175 million in cash and expects that this estimated cash balance
will last into the second quarter of 2001.
Over the next 12 months, commencing on October 1, 2000, Globalstar will
require significant additional funds to cover its cash outflows which it expects
will include operating costs of approximately $235 million, cash-pay interest of
approximately $245 million and other cash requirements of approximately $43
million for the eight spare satellites being constructed by Space Systems/Loral
Inc. ("SS/L"), $144 million for repayment of vendor financing and debt and
approximately $60 million for the financing provided to Globalstar's service
providers to assist in the purchase of gateways, fixed access terminals and
handsets. These expenditures are partially offset by expected receipts of
approximately $135 million from the service providers as repayment of such
financing. The amount of such additional funds will depend, among other things,
upon the amount and timing of revenues generated. If Globalstar is not able to
raise sufficient funds, the lack of funds would have a material adverse effect
on Globalstar's partners' capital.
Globalstar also has secured from SS/L twelve and eighteen month call up
orders for two additional Delta launch vehicles. The total future commitment for
these launch vehicles is approximately $86.5 million plus escalation of 3% per
year. If these launch vehicles are not used by the end of 2003, Globalstar will
incur a termination charge of approximately $18.6 million.
5. PAYABLES TO AFFILIATES AND VENDOR FINANCING
Payables and vendor financing due to affiliates is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
SS/L............................................... $247,716 $346,537
Qualcomm........................................... 544,613 501,647
Other affiliates................................... 15,898 14,147
-------- --------
808,227 862,331
Less, current portion.............................. 141,379 606,020
-------- --------
Long-term portion.................................. $666,848 $256,311
======== ========
</TABLE>
In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of capitalized interest as of May 2000)
with Qualcomm that replaced the previous $100 million vendor financing
agreement. The vendor financing bears interest at 6%, matures on August 15, 2003
and requires repayment pro rata with the term loans under Globalstar's $500
million credit facility (see Note 6). As of September 30, 2000, $528 million was
outstanding under this facility. In connection with this agreement, Qualcomm
received warrants to purchase 3,450,000 Globalstar ordinary partnership
interests at an exercise price of $42.25 per interest. The exercise price was
determined by reference to the fair market value of GTL's common stock on the
closing date of the vendor financing, based on an approximate one partnership
interest for four shares of GTL common stock. Fifty percent of the warrants
vested on the closing date, twenty five percent vested on September 1, 2000, and
the remaining twenty five percent will vest on September 1, 2001. The warrants
will expire in 2007. The fair value of such warrants totaled approximately $45.2
million at September 30, 2000 and is being amortized over the term of the vendor
financing arrangements. The fair value attributable to the unvested portion of
such warrants is subject to adjustment based upon the future value of GTL's
common stock.
Loral has agreed that if the principal amount (excluding capitalized
interest of $35.3 million at September 30, 2000) outstanding under the Qualcomm
vendor financing facility exceeds the principal amount
14
<PAGE> 16
GLOBALSTAR, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding under Globalstar's $500 million credit facility, as determined on
certain measurement dates, then Loral will guarantee 50% of such excess amount.
As a result, Loral's aggregate guarantee liability for debt outstanding under
the Qualcomm vendor financing facility and Globalstar's $500 million credit
facility will not exceed $500 million.
6. CREDIT FACILITIES
$250 Million Credit Agreement
On June 30, 2000, Globalstar's $250 million credit facility with The Chase
Manhattan Bank which was fully drawn, matured and was thereupon repaid in full
by its guarantors, Lockheed Martin, Qualcomm, DASA and SS/L, who had previously
received warrants for GTL common stock in consideration of their guarantees.
Pursuant to the relevant agreements entered into in 1996, Globalstar issued
three-year notes in the amounts of $206.3 million, $21.9 million, $11.7 million
and $10.1 million to Lockheed Martin, Qualcomm, SS/L and DASA, respectively, in
satisfaction of their subrogation rights. The notes are due on June 30, 2003 and
bear interest, on a deferred basis, at a rate of London Interbank Offer Rate
("LIBOR") plus 3%, and are presented as notes payable and notes payable to
affiliates on the condensed consolidated balance sheet of Globalstar.
On June 30, 2000, Loral paid $56.3 million on a net basis to Lockheed
Martin in satisfaction of its obligation to indemnify Lockheed Martin for
liability in excess of $150 million under Lockheed Martin's guarantee of
Globalstar's $250 million credit facility. Accordingly, Loral is entitled to
receive notes in respect thereof.
Lockheed Martin, however, has rejected the notes it received and has asked
Globalstar for alternative forms of payment, while continuing to claim that it
is entitled to receive an immediate cash reimbursement by Globalstar of its $150
million payment to the bank lenders. Globalstar disputes Lockheed Martin's
interpretation of the relevant agreements, but is, nonetheless, in discussions
with Lockheed Martin to resolve the dispute.
If the dispute is not resolved, Globalstar cannot be sure that if the
matter were litigated a court would agree with Globalstar's interpretation of
the agreements. Moreover, if as a result of this dispute, a holder of Globalstar
public bonds claimed a cross default under the applicable indentures, and a
court ruled against Globalstar, the maturity date of the bonds would be
accelerated. Management believes, however, that a court would agree with
Globalstar's interpretation of the relevant agreements.
$500 Million Credit Agreement
On August 5, 1999, Globalstar entered into a $500 million credit agreement
with a group of banks. The credit agreement provides for a $100 million
three-year revolving credit facility ("Revolver"), a $100 million three-year
term loan ("Term Loan A") and a $300 million four-year term loan ("Term Loan
B"). As of September 30, 2000, all amounts under the $500 million credit
agreement were drawn.
Borrowings under the facilities bear interest, at Globalstar's option, at
various rates based on margins over the lead bank's base rate or LIBOR for
periods of one to six months. Globalstar pays a commitment fee on the unused
portion of the facilities. The credit agreement contains customary financial
covenants that commence March 31, 2001, including minimum revenue thresholds,
maintenance of consolidated net worth, interest coverage ratios and maximum
leverage ratios. In addition, the credit agreement contains customary
limitations on indebtedness, liens, contingent obligations, fundamental changes,
asset sales, dividends, investments, optional payments and modification of
subordinated and other debt instruments and transactions with affiliates.
One of these covenants would require, among other things, that Globalstar
have revenues of $100 million for the 12 month period ended March 31, 2001.
Globalstar's revenues for the six months ended September 30,
15
<PAGE> 17
GLOBALSTAR, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000, the first six months of this period, were $1.9 million. Given the level of
revenues in the first six months of this period, Globalstar anticipates that the
growth in revenues during the subsequent six month period will not be sufficient
to meet its $100 million revenue covenant. If Globalstar cannot satisfy this
covenant, obtain waivers or amendments from a majority of the bank lenders, or
fulfill the $500 million obligation in a form satisfactory to all bank lenders,
Globalstar will be in default under its debt facilities (including vendor
financing) and Globalstar's lenders and bondholders would have the right to
accelerate payment of their loans to Globalstar. Loral SatCom Ltd. and Loral
Satellite Inc., directly and indirectly wholly owned subsidiaries of Loral, have
jointly and severally guaranteed Globalstar's obligation under this credit
agreement. Loral has advised Globalstar that it is currently in negotiations
with the banks to restructure the guarantee arrangements.
7. ORDINARY PARTNERS' CAPITAL
On February 1, 2000, GTL sold 8,050,000 shares of common stock in a public
offering under its shelf registration statement. The sale yielded net proceeds
of approximately $268.5 million to GTL. GTL used the proceeds to purchase
1,987,654 ordinary partnership interests in Globalstar.
On September 19, 2000, GTL entered into a purchase agreement with Bear
Stearns International Limited ("Bear Stearns"), under which Bear Stearns has
agreed to purchase over several tranches, up to $105 million of shares of GTL
common stock. Sales under this agreement are subject to certain conditions,
including the requirement that GTL's share price is trading higher than $4.50.
As of September 30, 2000, Bear Stearns had purchased 1,530,000 shares of GTL
common stock, resulting in net proceeds to GTL of $9 million. GTL used the
proceeds from the sales to purchase 377,778 ordinary partnership interests in
Globalstar.
On September 29, 2000, Globalstar's founding partners, Loral, Vodafone,
Qualcomm, Elsacom and TESAM, purchased an aggregate of 5.2 million shares of
common stock of GTL for $56 million. GTL used the proceeds from the sales to
purchase 1,295,360 ordinary partnership interests in Globalstar.
Globalstar is using the proceeds from the above transactions for general
corporate purposes including capital expenditures, operations (including
marketing and distribution of phones and services) and interest expense.
8. SUBSEQUENT EVENTS
During October 2000, Bear Stearns purchased 2,520,000 additional shares of
GTL common stock (see Note 7), resulting in additional proceeds to GTL of $19
million. GTL used the proceeds from the sales to purchase 622,223 additional
ordinary partnership interests in Globalstar.
In October 2000, GTL announced that future dividends on its two series of
preferred stock would be paid in shares of its common stock rather than cash, as
permitted under the terms of both series of preferred stock. These terms provide
that shares of common stock be valued at 95% of their average market value,
which is defined as the arithmetic average of the average of the high and low
trading prices of GTL common stock as reported on NASDAQ for the ten trading
days ending on the fifth business day prior to the record date for such
dividend. In connection with these dividends, Globalstar will issue partnership
interests to GTL corresponding to the proportionate number of common shares
issued by GTL to the preferred holders.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Globalstar Telecommunications Limited ("GTL" or the "Company") is a holding
company that acts as a general partner of Globalstar, L.P. ("Globalstar") and
has no other business. A subsidiary of Loral Space & Communications Ltd.
("Loral") serves as the managing general partner of Globalstar. 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. Therefore, matters discussed in this section address the
financial condition and results of operations of Globalstar.
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Financial
Condition and Results of Operations are not historical facts, but are
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995. In addition, Globalstar and GTL or its
representatives have made and may continue to make forward-looking statements,
orally or in writing, in other contexts, such as in reports filed with the SEC,
press releases or statements made with the approval of an authorized executive
officer of either Globalstar or GTL. These forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "plans," "may," "will," "would," "could," "should," "anticipates,"
"estimates," "project," "intend," or "outlook" or the negative of these words or
other variations of these words or other comparable words, or by discussion of
strategy that involve risks and uncertainties. These forward-looking statements
are only predictions, and actual events or results may differ materially as a
result of a wide variety of factors and conditions, many of which are beyond
Globalstar's or GTL's control. Some of these factors and conditions include: (i)
Globalstar has recently commenced commercial service and subscriber demand to
date has been lower than expected; (ii) Globalstar anticipates that it will not
be able to meet a financial covenant that will become effective in March 2001
and if Globalstar cannot obtain waivers or amendments from a majority of its
bank lenders, or fulfill the $500 million obligation in a form satisfactory to
all bank lenders, Globalstar will be in default under its debt facilities
(including vendor financing) and Globalstar's lenders and bondholders would have
the right to accelerate payment of their loans to Globalstar; (iii) dependence
on service providers to market Globalstar service and implement important parts
of its system and on third parties to complete its system; (iv) Globalstar has
substantial debt; (v) Globalstar will require additional financing; (vi)
satellites may fail prematurely; (vii) severe competition in the
telecommunications industry; (viii) Globalstar is subject to regulation; (ix)
the outcome of Globalstar's discussion with Lockheed Martin and (x) GTL's
recovery of its investment in Globalstar is dependent upon Globalstar's ability
to generate or raise additional cash. For a detailed discussion of some of these
factors and conditions, please refer to the most recent Report on Form 10-K that
Globalstar and GTL filed with the SEC. In addition, Globalstar operates in an
industry sector where securities values may be volatile and may be influenced by
economic and other factors beyond Globalstar's control.
RESULTS OF OPERATIONS
Effective January 1, 2000, Globalstar commenced commercial operations and
as of September 30, 2000, 43 countries were in full service, served by 20
gateways. For the three months ended September 30, 2000, Globalstar recorded
2,269,000 minutes of billable service, double the usage in the second quarter.
For the nine months ended September 30, 2000, Globalstar recorded 3,957,000
minutes of billable service.
Globalstar's growth to date has been lower than anticipated. In order to
stimulate multi-phone sales, Globalstar plans on implementing new marketing
activities, expanding coverage, diversifying and bolstering promotional pricing
offers and distributing phones at more attractive prices. Globalstar is also
introducing new data applications that will enhance conventional marketing
efforts and serve multiple new business opportunities.
Early marketing efforts by the service providers focused on broad
distribution channels into the consumer markets. While continuing that method,
Globalstar is accelerating plans for direct marketing to large industrial and
government accounts. Accordingly, Globalstar has begun implementation of a
centralized global marketing effort that goes beyond local service provider
efforts to fully exploit these vertical markets.
17
<PAGE> 19
In parallel with Globalstar's direct sales efforts, service providers have
introduced new promotional plans to support sales and marketing in the consumer
retail markets. The various plans price phones from as low as $199 with a
contract for high volume usage, offer phone leasing arrangements and often
include free minutes of use for limited time periods. These programs are
expected to stimulate sales and help establish the appropriate price points for
phones, access fees and minutes of use in various markets.
At the same time, Globalstar is introducing new products and services,
particularly in data applications. In the near term, customers in North America
will be able to use their Globalstar phones for various data services including
Internet access and access to e-mail services and other data systems using a
portable PC or hand-held device connected to a Globalstar handset. All Qualcomm
Globalstar phones currently fielded in North America are data capable.
Globalstar expects equivalent service to be available in GSM territories in
2001.
A new branding campaign, advertising Globalstar service as "above and
beyond cellular" was introduced in late-October to reinforce product name
recognition and the positioning of Globalstar as the phone that works beyond
cellular coverage areas. The campaign will run through the end of the year on
television and in print and will appear on outdoor billboards and in regional
airports, particularly in those geographic areas where the service is most
needed. This campaign reinforces service provider advertising which focuses on
promotional offers to targeted markets.
The company also has stepped-up participation around the world at trade
shows, again focused on vertical markets like shipping, ranching, aviation,
wilderness outfitters and utilities, among other markets. This effort,
centralized under Globalstar, will supplement and coordinate local service
providers' marketing programs.
For the three months ended September 30, 2000, Globalstar recognized gross
service revenue of $1 million, royalty income of $427,000 relating to Globalstar
user terminals sold by user terminal manufacturers, offset by promotions and
discounts of $237,000 on service revenue, resulting in net revenue of $1.2
million. For the nine months ended September 30, 2000, Globalstar recognized
gross service revenue of $1.7 million, royalty income of $1.2 million, offset by
promotions and discounts of $368,000 on service revenue, resulting in net
revenue of $2.5 million. Globalstar has offered promotional programs to its
service providers, including a 25% discount on mobile usage fees and free
minutes for the advance purchase of airtime. A number of Globalstar service
providers have committed to pre-purchase discount minutes of use, amounting to
approximately $23 million in pre-committed gross revenue, of which approximately
$7.8 million has been received as of September 30, 2000.
Operating Expenses. Operations costs increased to $29 million for the
three months ended September 30, 2000 from $22 million for the three months
ended September 30, 1999 and increased to $106 million for the nine months ended
September 30, 2000 from $79 million for the nine months ended September 30,
1999. The increase is primarily the result of increased costs associated with
Globalstar system integration and testing and gateway maintenance.
Marketing, general and administrative ("MG&A") costs decreased to $16
million for the three months ended September 30, 2000 from $19 million for the
three months ended September 30, 1999. The decrease is primarily the result of
costs relating to higher trade show costs in the third quarter of 1999. MG&A
costs increased to $48 million for the nine months ended September 30, 2000 from
$41 million for the nine months ended September 30, 1999. The increase is
primarily the result of increased advertising and marketing costs associated
with Globalstar commencing service. Management expects that marketing costs will
increase in the fourth quarter of 2000 to stimulate sales growth.
Depreciation and amortization increased to $84 million for the three months
ended September 30, 2000 from $582,000 for the three months ended September 30,
1999 and increased to $245 million for the nine months ended September 30, 2000
from $2 million for the nine months ended September 30, 1999. The increase is
the result of Globalstar commencing service and starting to depreciate the
Globalstar System in 2000.
Interest income increased to $5 million for the three months ended
September 30, 2000 from $833,000 for the three months ended September 30, 1999
and increased to $12 million for the nine months ended September 30, 2000 from
$5 million for the nine months ended September 30, 1999. The increase is the
result
18
<PAGE> 20
of higher average cash balances available for investment during 2000, and to a
lesser extent, higher interest rates.
Interest expense increased to $88 million and $245 million for the three
and nine months ended September 30, 2000, as compared to no interest expense in
1999. These increases are the result of Globalstar commencing service and
starting to expense interest which was previously capitalized to the Globalstar
system under construction.
As a result of the above, the net loss applicable to ordinary partnership
interests before preferred distributions increased to $211 million for the three
months ended September 30, 2000 from $41 million for the three months ended
September 30, 1999 and increased to $629 million for the nine months ended
September 30, 2000 from $117 million for the nine months ended September 30,
1999.
Income Taxes. Globalstar is organized as a limited partnership. As such,
no income tax provision or benefit is included in the accompanying financial
statements since U.S. income taxes are the responsibility of its partners.
Generally, taxable income or loss, deductions and credits of Globalstar are
passed through to its partners.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, including restricted cash, increased from $174
million at December 31, 1999 to $286 million at September 30, 2000. The net
increase is primarily the result of the net proceeds from the sale of
Globalstar's ordinary partnership interests of $335 million and the net proceeds
from borrowings under credit facilities of $350, partially offset by the net
repayment of vendor financing of $11 million, net cash used for the Globalstar
system of $48 million, net cash used in operating activities of $340 million,
net expenditures for production gateways and user terminals of $68 million, net
distributions on redeemable preferred partnership interests of $23 million, and
net expenditures for additional spare satellites of $82 million.
On June 30, 2000, Globalstar's $250 million credit facility with The Chase
Manhattan Bank, which was fully drawn, matured and was thereupon repaid in full
by its guarantors, Lockheed Martin, Qualcomm, DASA and Space Systems/Loral Inc.
("SS/L"), who had previously received warrants for GTL common stock in
consideration of their guarantees. Pursuant to the relevant agreements entered
into in 1996, Globalstar issued three-year notes in the amounts of $206.3
million, $21.9 million, $11.7 million and $10.1 million to Lockheed Martin,
Qualcomm, SS/L and DASA, respectively, in satisfaction of their subrogation
rights. The notes are due on June 30, 2003 and bear interest, on a deferred
basis, at a rate of LIBOR plus 3%.
On June 30, 2000, Loral paid $56.3 million on a net basis to Lockheed
Martin in satisfaction of its obligation to indemnify Lockheed Martin for
liability in excess of $150 million under Lockheed Martin's guarantee of
Globalstar's $250 million credit facility. Accordingly, Loral is entitled to
receive notes in respect thereof.
Lockheed Martin, however, has rejected the notes it received and has asked
Globalstar for alternate forms of payment, while continuing to claim that it is
entitled to receive an immediate cash reimbursement by Globalstar of its $150
million payment to the bank lenders. Globalstar disputes Lockheed Martin's
interpretation of the relevant agreements, but is, nonetheless, in discussions
with Lockheed Martin to resolve the dispute.
If the dispute is not resolved, Globalstar cannot be sure that if the
matter were litigated a court would agree with Globalstar's interpretation of
the agreements. Moreover, if as a result of this dispute, a holder of Globalstar
public bonds claimed a cross default under the applicable indentures, and a
court ruled against Globalstar, the maturity date of the bonds would be
accelerated. Management believes, however, that a court would agree with
Globalstar's interpretation of the relevant agreements.
As of September 30, 2000, all 52 Globalstar satellites, including four
in-orbit spares, have been launched and are being used to test system
functionality, to support service provider friendly user trials, and to provide
commercial service. Globalstar has secured from SS/L twelve and eighteen month
call up orders for two additional Delta launch vehicles in the event additional
spare satellites are required. The total future
19
<PAGE> 21
commitment for these launch vehicles is approximately $86.5 million plus
escalation of 3% per year. If these launch vehicles are not used by year end
2003, Globalstar will incur a termination charge of approximately $18.6 million.
Before any additional financing, Globalstar expects to end 2000 with
approximately $175 million in cash and expects that this estimated cash balance
will last into the second quarter of 2001.
Over the next 12 months, commencing on October 1, 2000, Globalstar will
require significant additional funds to cover its cash outflows which it expects
will include operating costs of approximately $235 million, cash-pay interest of
approximately $245 million and other cash requirements of approximately $43
million for the eight spare satellites being constructed by SS/L, $144 million
for repayment of vendor financing and debt and approximately $60 million for the
financing provided to Globalstar's service providers to assist in the purchase
of gateways, fixed access terminals and handsets. These expenditures are
partially offset by expected receipts of approximately $135 million from the
service providers as repayment of such financing. The amount of such additional
funds will depend, among other things, upon the amount and timing of revenues
generated. If Globalstar is not able to raise sufficient funds, the lack of
funds would have a material adverse effect on GTL's investment in Globalstar and
on Globalstar's partners' capital.
In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of capitalized interest as of May 2000)
with Qualcomm that replaced the previous $100 million vendor financing
agreement. The vendor financing bears interest at 6%, matures on August 15, 2003
and requires repayment pro rata with the term loans under Globalstar's $500
million credit facility (see Note 6). As of September 30, 2000, $528 million was
outstanding under this facility. In connection with this agreement, Qualcomm
received warrants to purchase 3,450,000 Globalstar partnership interests at an
exercise price of $42.25 per interest. The exercise price was determined by
reference to the fair market value of GTL's common stock on the closing date of
the vendor financing, based on an approximate one partnership interest for four
shares of GTL common stock. Fifty percent of the warrants vested on the closing
date, twenty five percent vested on September 1, 2000, and the remaining twenty
five percent will vest on September 1, 2001. The warrants will expire in 2007.
The fair value of such warrants totaled approximately $45.2 million at September
30, 2000 and is being amortized over the term of the vendor financing
arrangements. The fair value attributable to the unvested portion of such
warrants is subject to adjustment based upon the future value of GTL's common
stock.
Loral has agreed that if the principal amount (excluding capitalized
interest of $35.3 million at September 30, 2000) outstanding under the Qualcomm
vendor financing facility exceeds the principal amount outstanding under
Globalstar's $500 million credit facility, as determined on certain measurement
dates, then Loral will guarantee 50% of such excess amount. As a result, Loral's
aggregate guarantee liability for debt outstanding under the Qualcomm vendor
financing and Globalstar's credit facility will not exceed $500 million.
Globalstar's $500 million credit facility contains various financial
condition covenants, one which would require, among other things, that
Globalstar have revenues of $100 million for the 12 month period ended March 31,
2001. Globalstar's revenues for the six months ended September 30, 2000, the
first six months of this period, were $1.9 million. Given the level of revenues
in the first six months of this period, Globalstar anticipates that the growth
in revenues during the subsequent six month period will not be sufficient to
meet its $100 million revenue covenant. If Globalstar cannot satisfy this
covenant, obtain waivers or amendments from a majority of the bank lenders, or
fulfill the $500 million obligation in a form satisfactory to all bank lenders,
Globalstar will be in default under its debt facilities (including vendor
financing) and Globalstar's lenders and bondholders would have the right to
accelerate payment of their loans to Globalstar. Loral SatCom Ltd. and Loral
Satellite Inc., directly and indirectly wholly owned subsidiaries of Loral, have
jointly and severally guaranteed Globalstar's obligation under this credit
agreement. Loral has advised Globalstar that it is currently in negotiations
with the banks to restructure the guarantee arrangements.
In February 2000, GTL sold 8,050,000 shares of its common stock to the
public under a shelf registration statement. GTL used the net proceeds from the
offering of approximately $268.5 million to purchase 1,987,654 ordinary
partnership interests in Globalstar.
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On September 19, 2000, GTL entered into a purchase agreement with Bear
Stearns International Limited ("Bear Stearns"), under which Bear Stearns has
agreed to purchase over several tranches, up to $105 million of shares of GTL
common stock. Sales under this agreement are subject to certain conditions,
including the requirement that GTL's share price is trading higher than $4.50.
As of September 30, 2000, Bear Stearns had purchased 1,530,000 shares of GTL
common stock, resulting in net proceeds to GTL of $9 million. GTL used the
proceeds from the sales to purchase 377,778 ordinary partnership interests in
Globalstar.
On September 29, 2000, Globalstar's founding partners, Loral, Vodafone,
Qualcomm, Elsacom and TESAM, purchased an aggregate of 5.2 million shares of
common stock of GTL for $56 million. GTL used the proceeds from the sales to
purchase 1,295,360 ordinary partnership interests in Globalstar.
Globalstar is using the proceeds from the above transactions for general
corporate purposes including capital expenditures, operations (including
marketing and distribution of phones and services) and interest expense.
During October 2000, Bear Stearns purchased 2,520,000 additional shares of
GTL common stock, resulting in additional proceeds to GTL of $19 million. GTL
used the proceeds from the sales to purchase 622,223 additional ordinary
partnership interests in Globalstar.
In October 2000, GTL announced that future dividends on its two series of
preferred stock would be paid in shares of its common stock rather than cash, as
permitted under the terms of both series of preferred stock. These terms provide
that shares of common stock be valued at 95% of their average market value,
which is defined as the arithmetic average of the average of the high and low
trading prices of GTL common stock as reported on NASDAQ for the ten trading
days ending on the fifth business day prior to the record date for such
dividend. In connection with these dividends, Globalstar will issue partnership
interests to GTL corresponding to the number of common shares issued by GTL to
the preferred holders.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Globalstar has not yet completed its review of the impact
that the adoption of SFAS 133 will have. Based on its evaluation to date,
however, Globalstar does not believe that it will have a significant effect on
its earnings or financial position. Globalstar is required to adopt SFAS 133 on
January 1, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2000, the fair value of Globalstar's debt and interest
bearing vendor financing (collectively, "debt obligations") was estimated to be
$1.8 billion, using quoted market prices or, in the case of vendor financing and
term-loans and the revolving credit line with variable interest rates, recorded
value. The debt obligations carrying value exceeded their fair value by $1.15
billion as of September 30, 2000.
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<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report
<TABLE>
<S> <C>
Exhibit 12 Statement Regarding Computation of Ratios
Exhibit 27.1 Financial Data Schedules
Exhibit 27.2 Financial Data Schedules
Exhibit 99.1 Financial Statements for Loral Qualcomm Satellite Services,
L.P.
Exhibit 99.2 Financial Statements for Globalstar Capital Corporation
</TABLE>
(b) Reports on Form 8-K
<TABLE>
<CAPTION>
DATE OF REPORT DESCRIPTION
-------------- -----------
<S> <C> <C>
July 7, 2000 Item 5 -- Other Events Globalstar $250 Million
Credit Facility
September 21, 2000 Item 5 -- Other Events GTL Common Stock Sale
Agreement
September 25, 2000 Item 5 -- Other Events GTL Common Stock Subscription
Agreements with Globalstar
partners
</TABLE>
22
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
GLOBALSTAR TELECOMMUNICATIONS LIMITED
Registrant
/s/ RICHARD J. TOWNSEND
------------------------------------------
Richard J. Townsend
Vice President and Chief Financial Officer
(Principal Financial Officer)
and Registrant's Authorized Officer
GLOBALSTAR, L.P.
/s/ DANIEL P. MCENTEE
------------------------------------------
Daniel P. McEntee
Vice President and Chief Financial Officer
(Principal Financial Officer)
and Registrant's Authorized Officer
Date: November 13, 2000
23
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
Exhibit 12 Statement Regarding Computation of Ratios
Exhibit 27.1 Financial Data Schedules
Exhibit 27.2 Financial Data Schedules
Exhibit 99.1 Financial Statements for Loral Qualcomm Satellite Services,
L.P.
Exhibit 99.2 Financial Statements for Globalstar Capital Corporation
</TABLE>
