10-K 1 v369443_10k.htm FORM 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

(Mark One)  
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from to 

Commission File Number 001-33117

 

GLOBALSTAR, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   41-2116508

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

300 Holiday Square Blvd.

Covington, Louisiana 70433

(Address of Principal Executive Offices)

 

Registrant's Telephone Number, Including Area Code: (985) 335-1500

 

Securities registered pursuant to Section 12(g) of the Act:

Voting Common Stock, $.0001 par value

5.75% Convertible Senior Notes due 2028

 

Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ¨ No x  

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x  

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨  

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨  

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨   Accelerated filer x  

Non-accelerated filer ¨

(Do not check if a smaller reporting

company)

  Smaller reporting company ¨

 

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes o No x  

 

The aggregate market value of the Registrant's common stock held by non-affiliates at June 30, 2013, the last business day of the Registrant's most recently completed second fiscal quarter, was approximately $99.9 million. 

 

As of February 28, 2014, 643,718,177 shares of voting common stock and 209,008,656 shares of nonvoting common stock were outstanding. Unless the context otherwise requires, references to common stock in this Report mean Registrant's voting common stock.  

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant's Proxy Statement for the 2014 Annual Meeting of Stockholders are incorporated by reference in Part III of this Report.

 

 
 

 

FORM 10-K

 

For the Fiscal Year Ended December 31, 2013

 

TABLE OF CONTENTS

 

    Page
  PART I
Item 1. Business 3
Item 1A. Risk Factors 14
Item 1B. Unresolved Staff Comments 25
Item 2. Properties 25
Item 3. Legal Proceedings 26
Item 4. Mine Safety Disclosures 26
  PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 27
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 47
Item 8. Financial Statements and Supplementary Data 48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 106
Item 9A. Controls and Procedures 106
Item 9B. Other Information 107
  PART III
Item 10. Directors and Executive Officers of the Registrant 107
Item 11. Executive Compensation 107
Item 12. Security Ownership of Certain Beneficial Owners and Management 107
Item 13. Certain Relationships and Related Transactions 107
Item 14. Principal Accountant Fees and Services 107
  PART IV
Item 15. Exhibits, Financial Statements Schedules 108
Signatures   109

 

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PART I

 

Forward-Looking Statements 

 

Certain statements contained in or incorporated by reference into this Report, other than purely historical information, including, but not limited to, estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions, although not all forward-looking statements contain these identifying words. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements, such as the statements regarding our ability to develop and expand our business, our anticipated capital spending, our ability to manage costs, our ability to exploit and respond to technological innovation, the effects of laws and regulations (including tax laws and regulations) and legal and regulatory changes, the opportunities for strategic business combinations and the effects of consolidation in our industry on us and our competitors, our anticipated future revenues, our anticipated financial resources, our expectations about the future operational performance of our satellites (including their projected operational lives), the expected strength of and growth prospects for our existing customers and the markets that we serve, commercial acceptance of new products, problems relating to the ground-based facilities operated by us or by independent gateway operators, worldwide economic, geopolitical and business conditions and risks associated with doing business on a global basis and other statements contained in this Report regarding matters that are not historical facts, involve predictions. Risks and uncertainties that could cause or contribute to such differences include, without limitation, those in "Item 1A. Risk Factors" of this Report. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Report to reflect actual results or future events or circumstances.

 

Item 1. Business

 

Overview

 

Globalstar, Inc. (“we,” “us” or “the Company”) provides Mobile Satellite Services (“MSS”) including voice and data communications services globally via satellite. By providing wireless communications services in areas not served or underserved by terrestrial wireless and wireline networks and in circumstances where terrestrial networks are not operational due to natural or man-made disasters, we seek to meet our customers' increasing desire for connectivity. We offer voice and data communication services over our network of in-orbit satellites and our active ground stations (or “gateways”), which we refer to collectively as the Globalstar System.

  

In 2006 we began a process of designing, manufacturing and deploying a second-generation constellation of Low Earth Orbit (“LEO”) satellites to replace our first-generation constellation. Our second-generation satellites are designed to last twice as long in space, have 40% greater capacity and be built at a significantly lower cost compared to our first-generation satellites. This effort has culminated in the successful launch of our second-generation satellites, with the fourth launch occurring on February 6, 2013. Three prior launches of second-generation satellites were successfully completed in October 2010, July 2011 and December 2011.We have integrated all of the new second-generation satellites with certain of our first-generation satellites to form our second-generation constellation. The restoration of our constellation’s Duplex capabilities was complete after the final satellite from our February 2013 launch was placed into service in August 2013. The restoration of Duplex capabilities has resulted in a substantial increase in service levels, making our products and services more desirable to existing and potential customers. Existing subscribers have started to utilize our services more, measured by minutes of use on the Globalstar System year over year, a trend that we expect to continue. We are gaining new customers and winning back former customers, which continues to contribute to increases in Duplex revenue. We offer a range of price-competitive products to the industrial, governmental and consumer markets. Due to the unique design of the Globalstar System (and based on customer input), we believe that we offer the best voice quality among our peer group.

 

We define a successful level of service for our customers as measured by their ability to make uninterrupted calls of average duration for a system-wide average number of minutes per month. Our goal is to provide service levels and call success rates equal to or better than our MSS competitors so our products and services are attractive to potential customers. We define voice quality as the ability to easily hear, recognize and understand callers with imperceptible delay in the transmission. Due to the unique design of the Globalstar System, by this measure our system outperforms geostationary (“GEO”) satellites used by some of our competitors. Due to the difference in signal travel distance, GEO satellite signals must travel approximately 42,000 additional nautical miles, which introduces considerable delay and signal degradation to GEO calls. For our competitors using cross-linked satellite architectures, which require multiple inter-satellite connections to complete a call, signal degradation and delay can result in compromised call quality as compared to that experienced over the Globalstar System.

 

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We also compete aggressively on price. In 2004 we were the first MSS company to offer bundled pricing plans that we adapted from the terrestrial wireless industry. We expect to continue to innovate and retain our position as the low cost, high quality leader in the MSS industry. 

 

Our satellite communications business, by providing critical mobile communications to our subscribers, serves principally the following markets: recreation and personal; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources, mining and forestry; construction; utilities; and transportation.

 

At December 31, 2013, we served approximately 583,000 subscribers. We increased our net subscribers by 4% from December 31, 2012 to December 31, 2013. Beginning in 2013, we initiated a process to deactivate certain suspended subscribers in our SPOT subscriber base. We deactivated approximately 36,000 subscribers during the first quarter of 2013. Excluding these deactivated subscribers from our December 31, 2012 subscriber count, total subscribers increased 11% from December 31, 2012 to December 31, 2013. We count "subscribers" based on the number of devices that are subject to agreements which entitle them to use our voice or data communications services rather than the number of persons or entities who own or lease those devices.

 

We currently provide the following communications services via satellite which are available only with equipment designed to work on our network:

 

two-way voice communication and data transmissions, which we call “Duplex,” using mobile or fixed devices; and
one-way data transmissions using a mobile or fixed device that transmits its location and other information to a central monitoring station, which includes certain SPOT and Simplex products.

 

We designed our second-generation constellation to support our current lineup of Duplex, SPOT and Simplex products. With the improvement in both coverage and service quality for our Duplex product offerings resulting from the deployment of our second-generation constellation, we anticipate further expansion of our subscriber base and increases in our average revenue per user, or “ARPU.”

 

Our products and services are sold through a variety of independent agents, dealers and resellers, and independent gateway operators (“IGOs”). Our success in marketing these products and services is enhanced through diversification of our distribution channels, consumer and commercial markets, and product offerings.

 

Duplex Two-Way Voice and Data Products

 

Mobile Voice and Data Satellite Communications Services and Equipment

 

We provide mobile voice and data services to a wide variety of commercial, government and recreational customers for remote business continuity, recreational, emergency response and other applications. Subscribers under these plans typically pay an initial activation fee to an agent or dealer or to us, a monthly usage fee to us that entitles the customer to a fixed or unlimited number of minutes, and fees for additional services such as voicemail, call forwarding, short messaging, email, data compression and internet access. Extra fees may also apply for non-voice services, roaming and long-distance. We regularly monitor our service offerings in accordance with customer demands and market changes and offer pricing plans such as bundled minutes, annual plans and unlimited plans.

 

We offer our services for use only with equipment designed to work on our network, which users generally purchase in conjunction with an initial service plan. We offer the GSP-1700 phone, which includes a user-friendly color LCD screen and a variety of accessories. The phone design represents a significant improvement over earlier-generation equipment that we believe will facilitate increased adoption from prospective users. We also believe that the GSP-1700 is among the smallest, lightest and least-expensive satellite phones available. We are the only MSS provider using the patented Qualcomm CDMA technology that we believe provides superior voice quality when compared to competitive handsets.

 

Fixed Voice and Data Satellite Communications Services and Equipment

 

We provide fixed voice and data services in rural villages, at remote industrial, commercial and residential sites and on ships at sea, among other places, primarily with our GSP-2900 fixed phone. Fixed voice and data satellite communications services are in many cases an attractive alternative to mobile satellite communications services in environments where multiple users will access the service within a defined geographic area and cellular or ground phone service is not available. Our fixed units also may be mounted on vehicles, barges and construction equipment and benefit from the ability to have higher gain antennas. Our fixed voice and data service plans are similar to our mobile voice and data plans and offer similar flexibility. In addition to offering monthly service plans, our fixed phones can be configured as pay phones installed at a central location, for example, in a rural village.

 

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Satellite Data Modem Services

 

In addition to data utilization through fixed and mobile services described above, we offer data-only services. Duplex devices have two-way transmission capabilities. Asset-tracking applications enable customers to control directly their remote assets and perform complex monitoring activities. We offer asynchronous and packet data service in all of our Duplex territories. Customers can use our products to access the internet, corporate virtual private networks and other customer specific data centers. Our satellite data modems can be activated under any of our current pricing plans. Customers can access satellite data modems in every Duplex region we serve. We provide store-and-forward capabilities to customers who do not require real-time transmission and reception of data. Additionally, we offer a data acceleration and compression service to the satellite data modem market. This service increases web-browsing, email and other data transmission speeds without any special equipment or hardware.

 

Qualcomm GSP-1720 Satellite Voice and Data Modem

 

The GSP-1720 is a satellite voice and data modem board with multiple antenna configurations and an enlarged set of commands for modem control. This board is attractive to integrators because it has more user interfaces that are easily programmable. This makes it easier for value added resellers to integrate the satellite modem processing with the specific application, such as monitoring and controlling oil and gas pumps, electric power plants and other remote facilities.

 

Sat-Fi

 

In January 2014, we announced Sat-Fi, a revolutionary new Duplex technology that we expect to bring to market during the second quarter of 2014.  Sat-Fi will permit customers to use their existing smartphones and other Wi-Fi enabled devices to communicate over our satellite system. We believe Sat-Fi represents a major step forward in our desire to integrate seamlessly our mobile satellite capabilities into the communications services that people use on a daily basis. With Sat-Fi, our subscribers can initiate and receive voice calls using their existing mobile telephone numbers and existing smartphones any time they are in range of a Sat-Fi device. With future enhancements, customers will not necessarily know, nor will they care, when they are communicating via the Globalstar System, given our superior voice quality and low-priced service plans.

 

New Products, Services and the Next-Generation IMS Ground Network

 

We have a contract with Hughes Network Systems, LLC (“Hughes”) under which Hughes will design, supply and implement (a) the Radio Access Network ("RAN") ground network equipment and software upgrades for installation at a number of our satellite gateway ground stations and (b) satellite interface chips to be used in our various next-generation Globalstar devices. These upgrades will be part of our next-generation ground network.

 

We also have a contract with Ericsson, Inc. (“Ericsson”) to work with us to develop, implement and maintain a ground interface, or core network, system that will be installed at our satellite gateway ground stations. The core network system is wireless 3G/4G compatible and will link our radio access network to the public-switched telephone network (“PSTN”) and/or Internet.  This new core network system will be part of our next-generation ground network.

 

Our second-generation constellation, when combined with our next-generation ground network, is designed to provide our customers with enhanced future services featuring increased data speeds of up to 256 kbps in a flexible Internet protocol multimedia subsystem (“IMS”) configuration. We will be able to support multiple products and services, including multicasting; advanced messaging capabilities such as Multimedia Messaging Service (“MMS”); geo-location services; multi-band and multi-mode handsets; and data devices with GPS integration.

 

Direct Sales, Dealers and Resellers

 

Our sales group is responsible for conducting direct sales with key accounts and for managing indirect agent, dealer and reseller relationships in assigned territories in the countries in which we operate.

 

The reseller channel for Duplex equipment and service is comprised primarily of communications equipment, retailer companies, and commercial communications equipment rental companies that retain and bill clients directly, outside of our billing system. Many of our resellers specialize in niche vertical markets where high-use customers are concentrated. We have sales arrangements with major resellers to market our services, including some value added resellers that integrate our products into their proprietary end products or applications.

 

Our typical dealer is a communications services business-to-business equipment retailer. We offer competitive service and equipment commissions to our network of dealers to encourage sales.

 

In addition to sales through our distribution managers, agents, dealers and resellers, customers can place orders through our existing sales force and through our direct e-commerce website.

 

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SPOT Consumer Retail Products

 

We have differentiated ourselves from other MSS providers by offering affordable, high utility mobile satellite products that appeal to the mainstream consumer market. With the 2009 acquisition of satellite asset tracking and consumer messaging products manufacturer Axonn LLC (“Axonn”), we believe we are the only vertically integrated mobile satellite company, which results in decreased pre-production costs and shorter time to market for our retail consumer products.  Since their introduction, our SPOT products have been responsible for initiating over 2,900 rescues in over 70 countries and at sea. We are not aware of any other competitive offering that can match the life-saving record of our SPOT line of products. 

 

SPOT Satellite GPS Messenger

 

We began commercial sales of the first SPOT products and services when we introduced the SPOT Personal Tracker in 2007. In 2009, we introduced an updated version of this product, the SPOT Satellite GPS Messenger (“SPOT 2”). In September 2013, we introduced SPOT Gen3, the next generation of the SPOT Satellite GPS Messenger. SPOT Gen3 offers enhanced functionality with more tracking features, improved battery performance and more power options, including rechargeable and USB direct line power. We believe the sales volumes of SPOT products and services to date show a viable market for affordable emergency and tracking functionality worldwide.

 

We have targeted our SPOT Satellite GPS Messenger to recreational and commercial markets that require personal tracking, emergency location and messaging solutions that operate beyond the reach of terrestrial, wireless and wireline coverage. Using our network and web-based mapping software, this device provides consumers with the ability to trace geographically or map the location of individuals or equipment. The product also enables users to transmit messages to a specific preprogrammed email address, phone or data device, including a request for assistance and an “SOS” message in the event of an emergency.

 

SPOT Satellite GPS Messenger products and services are available in the U.S. and Canada, as well as in our overseas markets, including South and Central America, Western Europe, and through independent gateway operators in their respective territories. 

 

SPOT Global Phone

 

In May 2013, we introduced SPOT Global Phone to the consumer mass market. This product leverages our retailer distribution channels and SPOT brand name. The related service and subscriber equipment revenue generated from this product is included in our Duplex business.

 

SPOT Trace

 

 In November 2013, we introduced SPOT Trace, an anti-theft asset tracking device. SPOT Trace helps ensure that cars, motorcycles, boats, ATVs, snowmobiles and other valuable assets are where they should be by notifying owners via email or text messages when movement is detected.

 

Product Distribution

 

We distribute and sell our SPOT products through a variety of distribution channels. We have also expanded our distribution channels through product alliances. We have distribution relationships with a number of "Big Box" retailers and other similar distribution channels including Amazon.com, Bass Pro Shops, Best Buy, Big 5 Sporting Goods, Big Rock Sports, Cabela's, Wholesale Sports, London Drugs, Outdoor and More, Gander Mountain, REI, Sportsman's Warehouse, West Marine, and CWR Electronics. We also sell SPOT products and services directly using our existing sales force and through our direct e-commerce website, www.findmespot.com.

 

Commercial Simplex One-Way Transmission Products

 

Simplex service is a one-way burst data transmission from a commercial Simplex device over the Globalstar System that can be used to track and monitor assets. Our subscribers presently use our Simplex devices to track cargo containers and rail cars; to monitor utility meters; as well as a host of other applications. At the heart of the Simplex service is a demodulator and RF interface, called an appliqué, which is located at a gateway and an application server located in our facilities. The appliqué-equipped gateways provide coverage over vast areas of the globe. The server receives and collates messages from all Simplex telemetry devices transmitting over our satellite network. Simplex devices consist of a telemetry unit, an application specific sensor, a battery and optional global positioning functionality. The small size of the devices makes them attractive for use in tracking asset shipments, monitoring unattended remote assets, trailer tracking and mobile security. Current users include various governmental agencies, including the Federal Emergency Management Agency (“FEMA”), the U.S. Army, the U.S. Air Force, the National Oceanic and Atmospheric Administration (“NOAA”), the U.S. Forest Service and British Ministry of Defense, as well as other organizations, including BP, Shell and The Salvation Army.

 

We designed our Simplex service to address the market for a small and cost-effective solution for sending data, such as geographic coordinates, from assets or individuals in remote locations to a central monitoring station. Customers are able to realize an efficiency advantage from tracking assets on a single global system as compared to several regional systems.

 

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We offer a small Satellite Transmitter, such as the STX-2 and STX-3, which enables an integrator’s product designs to access our Simplex network. We also offer complete products that utilize these transmitters. Our Simplex units, including the enterprise products MMT and SMARTONE, are used worldwide by industrial, commercial and government customers. These products provide cost-effective, low power, ultra-reliable, secure monitoring that help solve a variety of security applications and asset tracking challenges.

 

The reseller channel for Simplex equipment and service is comprised primarily of communications equipment retailer companies and commercial communications equipment rental companies that retain and bill clients directly, outside of our billing system. Many of our resellers specialize in niche vertical markets where high-use customers are concentrated. We have sales arrangements with major resellers to market our services, including some value added resellers that integrate our STX-2, or our products based on it, into their proprietary solutions designed to meet certain specialized niche market applications.

 

Independent Gateway Operators

 

Our wholesale operations encompass primarily bulk sales of wholesale minutes to IGOs around the globe. IGOs maintain their own subscriber bases that are mostly exclusive to us and promote their own service plans. The IGO system allows us to expand in regions that hold significant growth potential but are harder to serve without sufficient operational scale or where local regulatory requirements do not permit us to operate directly.

 

Currently, 12 of the 24 active gateways in our network are owned and operated by unaffiliated companies, some of whom operate more than one gateway. Except for the gateway in Nigeria, in which we hold a 30% equity interest, and Globalstar Asia Pacific, our joint venture in South Korea in which we hold a 49% equity interest, we have no financial interest in these IGOs and conduct business with them through arms’ length contracts for wholesale minutes of service. Some of these IGOs have been unable to grow their businesses adequately due in part to limited resources and the prior inability of our constellation to provide reliable Duplex service. With the completion of our second-generation constellation, we expect the IGOs to grow their businesses significantly in the future.

 

Set forth below is a list of IGOs as of December 31, 2013:

 

Location   Gateway   Independent Gateway Operators
Argentina   Bosque Alegre   TE.SA.M Argentina
Australia   Dubbo   Pivotel Group PTY Limited
Australia   Mount Isa   Pivotel Group PTY Limited
Australia   Meekatharra   Pivotel Group PTY Limited
South Korea   Yeo Ju   Globalstar Asia Pacific
Mexico   San Martin   Globalstar de Mexico
Nigeria   Kaduna   Globaltouch (West Africa) Limited
Peru   Lurin   TE.SA.M Peru
Russia   Khabarovsk   GlobalTel
Russia   Moscow   GlobalTel
Russia   Novosibirsk   GlobalTel
Turkey   Ogulbey   Globalstar Avrasya

 

We currently hold two gateways in storage that we are actively marketing for future deployment in new territories.

 

Other Services

 

We also provide certain engineering services to assist customers in developing new applications related to our system. These services include hardware and software designs to develop specific applications operating over our network, as well as, the installation of gateways and antennas.

 

Our Spectrum and Regulatory Structure

 

Globalstar has access to a world-wide allocation of radio frequency spectrum through the international radio frequency tables administered by the International Telecommunications Union (“ITU”). We believe access to this global spectrum enables us to design satellites, networks and terrestrial infrastructure enhancements more cost effectively because the products and services can be deployed and sold worldwide. In addition, this broad spectrum assignment enhances our ability to capitalize on existing and emerging wireless and broadband applications.

 

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First Generation Constellation

 

In the United States, the U.S. Federal Communications Commission (“FCC”) has authorized us to operate our first-generation satellites in 25.225 MHz of radio spectrum comprising two blocks of non-contiguous radio frequencies in the 1.6/2.4 GHz band commonly referred to as the Big LEO Spectrum Band. Specifically, the FCC has authorized us to operate between 1610-1618.725 MHz for “Uplink” communications from mobile earth terminals to our satellites and between 2483.5-2500 MHz for “Downlink” communications from our satellites to our mobile earth terminals. The FCC has also authorized us to operate our four domestic gateways with our first-generation satellites in the 5091-5250 and 6875-7055 MHz bands.

 

Three of our subsidiaries hold our FCC licenses. Globalstar Licensee LLC holds our mobile satellite services license. GUSA Licensee LLC (“GUSA”) is authorized by the FCC to distribute mobile and fixed subscriber terminals and to operate gateways in the United States. GUSA holds the licenses for our gateways in Texas, Florida and Alaska. Another subsidiary, GCL Licensee LLC (“GCL”), holds an FCC license to operate a gateway in Puerto Rico. GCL is also subject to regulation by the Puerto Rican regulatory agency.

 

Second-Generation Constellation

 

We licensed and registered our second-generation satellites in France. In October 2010, the French Ministry for the Economy, Industry and Employment authorized Globalstar Europe SARL, now Globalstar Europe SAS (“Globalstar Europe”), our wholly owned subsidiary, to operate our second-generation satellites.  In November 2010, ARCEP, the French independent administrative authority of post and electronic communications regulations, granted a license to Globalstar Europe to provide mobile satellite service. In August 2011, the French Ministry in charge of space operations issued us final authorization and has undertaken the registration of our second-generation satellites with the United Nations as provided under the Convention on Registration of Objects Launched into Outer Space. In accordance with this authorization to operate the second-generation satellites, in early 2014, we completed the enhancements to the existing gateway operations in Aussaguel, France to include satellite operations and control functions. We now have redundant satellite operation control facilities in Milpitas, California and Aussaguel, France.

 

The French National Frequencies Agency (“ANFR”) is representing us before the ITU for purposes of receiving assignments of orbital positions and conducting international coordination efforts to address any interference concerns. ANFR submitted the technical papers to the ITU on our behalf in July 2009. As with the first-generation constellation, the ITU will require us to coordinate our spectrum assignments with other companies that use any portion of our spectrum bands. We cannot predict how long the coordination process will take; however, we are able to use the frequencies during the coordination process in accordance with our national licenses.

 

In addition to having completed the French licensing and registration of our second-generation satellites, in March 2011 we obtained all authorizations necessary from the FCC to operate our domestic gateways with our second-generation satellites.

 

Our former Non-Geostationary Satellite Orbit (“NGSO”) satellite constellation license issued by the FCC was valid until April 2013. We have filed an application to modify and extend this license. Under the FCC’s rules, we may continue to operate our constellation pending the FCC’s approval of our application. This license application applies only to our continued use of our first-generation satellites.

 

Potential Terrestrial Use of Globalstar Spectrum

 

In February 2003, the FCC adopted rules that permit satellite service providers such as Globalstar to establish terrestrial networks utilizing the ancillary terrestrial component (“ATC”) of their licensed spectrum.  ATC authorization enables the integration of a satellite-based service with terrestrial wireless services, resulting in a hybrid mobile satellite services/ATC network designed to provide advanced services and broad coverage throughout the United States. An ATC deployment could extend our services to urban areas and inside buildings where satellite services are currently not available, as well as to rural and remote areas that lack terrestrial wireless services.

 

In order to establish an ATC network, a satellite service provider must first meet certain specified requirements commonly known as the “gating criteria.” Currently, these criteria would require us to provide continuous coverage over the United States and have an in-orbit spare satellite. Additionally, ATC services must be complementary or ancillary to mobile satellite services in an "integrated service offering," which can be achieved by using "dual-mode" devices capable of transmitting and receiving mobile satellite and ATC signals, or providing “other evidence” that the satellite service provider meets the requirement. Further, user subscriptions that include ATC services must also include mobile satellite services. Because of these requirements, the number of potential early stage competitors in providing ATC services is limited, as only mobile satellite services operators who offer commercial satellite services can provide ATC services.

 

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In January 2006, the FCC granted our application to add an ATC service to our existing mobile satellite services. In April 2008, the FCC issued a decision extending our ATC authorization from 11MHz to a total of 19.275 MHz of our spectrum. Outside the United States, other countries are considering implementing regulations to facilitate ATC services. We expect to pursue ATC and/or terrestrial licenses in jurisdictions such as Canada and the European Community as market conditions dictate.

 

In July 2010, the FCC instituted a rulemaking proceeding and notice of inquiry to consider whether certain gating criteria should be revised or eliminated so as to permit satellite operators to exercise greater flexibility in utilizing ATC. Interested parties, including Globalstar, filed comments in these proceedings in September 2010. In these proceedings, we have proposed the elimination of, or substantial modifications to, the existing gating criteria.

 

On November 13, 2012, we filed a petition for rulemaking with the FCC, requesting the substantial revision and/or elimination of the gating criteria for ATC services as well as regulatory flexibility to offer terrestrial wireless services, including mobile broadband services, over 19.275 MHz of our licensed Big LEO spectrum allocation. In our petition, we proposed a “near-term” plan for terrestrial relief in the 11.5 MHz of our “downlink” spectrum at 2483.5-2495 MHz to offer innovative services such as a proposed Terrestrial Low Power Service (“TLPS”). Under this proposal, we would utilize both our exclusively licensed 11.5 MHz of MSS spectrum at 2483.5 to 2495 MHz, as well as the contiguous 10.5 MHz of unlicensed Industrial, Scientific and Medical (“ISM”) spectrum located at 2473 to 2483.5 MHz to provide a carrier-grade fourth non overlapping 22 MHz channel under the IEEE 802.11 standard where most WiFi use currently exists. Significantly, we proposed to use the 10.5 MHz of unlicensed ISM spectrum on a non-exclusive basis with no special protections against interference from adjacent bands.

 

Additionally, in our petition for rulemaking, we have also proposed a “long-term” plan to obtain authority over our exclusively licensed spectrum at 1610-1617.775 MHz in order to provide additional mobile broadband services based on the Long Term Evolution (“LTE”) standard.

 

 On November 1, 2013, the FCC issued a Notice of Proposed Rulemaking (“NPRM”) commencing a formal proceeding to permit us to deploy a terrestrial broadband network over 22 MHz of spectrum in the 2.4 GHz band. The proposed rules essentially eliminate the former gating criteria and would allow us to provide low power terrestrial broadband services over our licensed 11.5 MHz S-band spectrum at 2483.5 – 2495 MHz, as well as the non-exclusive use of the adjacent 10.5 MHz unlicensed spectrum at 2473 – 2483.5 MHz.

 

During 2014, we will actively participate in this formal rulemaking proceeding, as well as actively prosecute our petition for rulemaking regarding our long-term plan.

 

National Regulation of Service Providers

 

In order to operate gateways, applicable laws and regulations require the IGOs and our affiliates in each country to obtain a license or licenses from that country's telecommunications regulatory authority. In addition, the gateway operator must enter into appropriate interconnection and financial settlement agreements with local and interexchange telecommunications providers. All 24 active gateways, which we and the IGOs operate, are licensed.

 

Our subscriber equipment generally must be type certified in countries in which it is sold or leased. The manufacturers of the equipment and our affiliates or IGOs are jointly responsible for securing type certification. We have received type certification in multiple countries for each of our products.

 

Satellites

 

Beginning in the late 1990’s, we launched our first-generation satellite constellation. In 2007 we launched spare first-generation satellites to provide support for our Duplex, Simplex and SPOT services.

 

We launched second-generation satellites in four batches during the period October 2010 through February 2013. As of August 2013, we had placed into service all of these second-generation satellites. We designed our second-generation satellites to support our current lineup of Duplex, SPOT, and Simplex products and services, and these satellites are backwards compatible with our first-generation ground network and satellites, as well as forward compatible with our second-generation ground network.

 

  We designed the second-generation satellites to have a 15-year life from the date the satellites are first positioned into their operational orbits, twice the useful life of the first-generation satellites. This longer life is achieved by increasing the solar array and battery capacity, using a larger fuel tank, more redundancy for key satellite equipment, and improved radiation specifications and additional lot level testing for all susceptible electronic components, in order to account for the accumulated dosage of radiation encountered during a 15-year mission at the operational altitude of the satellites. The second-generation satellites use passive S-band antennas on the body of the spacecraft providing additional shielding for the active amplifiers which are located inside the spacecraft, unlike the first-generation amplifiers that were located on the outside as part of the active antenna array.

 

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Each satellite has a high degree of on-board subsystem redundancy, an on-board fault detection system and isolation and recovery for safe and quick risk mitigation. Our ability to reconfigure the orbital location of each satellite provides us with operating flexibility and continuity of service. The design of our space segment and primary and secondary ground control system facilitates the real-time intervention and management of the satellite constellation and service upgrades via hardware and software enhancements.

 

Today we have adequate satellites to provide Duplex, SPOT and Simplex services.

 

Ground Network

 

Our satellites communicate with a network of 24 active gateways, each of which serves an area of approximately 700,000 to 1,000,000 square miles. The design of our orbital planes ensures that generally at least one satellite is visible from any point on the earth's surface between 70° north latitude and 70° south latitude. A gateway must be within line-of-sight of a satellite and the satellite must be within line-of-sight of the subscriber to provide services. We have positioned our gateways to cover most of the world's land and population. We own 12 of these gateways and the rest are owned by IGOs. In addition, we have spare parts in storage, including antennas and gateway electronic equipment, including two un-deployed stored gateways.

 

Each of our gateways has multiple antennas that communicate with our satellites and pass calls seamlessly between antenna beams and satellites as the satellites traverse the gateways, thereby reflecting the signals from our users' terminals to our gateways. Once a satellite acquires a signal from an end-user, the Globalstar System authenticates the user and establishes the voice or data channel to complete the call to the public switched telephone network, to a cellular or another wireless network or to the internet (for a data call including Simplex).

 

We believe that our terrestrial gateways provide a number of advantages over the in-orbit switching used by our main competitor, including better call quality, reduced call latency and convenient regionalized local phone numbers for inbound and outbound calling. We also believe that our network's design, which relies on terrestrial gateways rather than in-orbit switching, enables faster and more cost-effective system maintenance and upgrades because the system's software and much of its hardware is based on the ground. Our multiple gateways allow us to reconfigure our system quickly to extend another gateway's coverage to make up some or all of the coverage of a disabled gateway or to handle increased call capacity resulting from surges in demand.

 

Our network uses Qualcomm's patented CDMA technology to permit diversity combining of the strongest available signals. Patented receivers in our handsets track the pilot channel or signaling channel as well as three additional communications channels simultaneously. Compared to other satellite and network architectures, we offer superior call clarity with virtually no discernible delay. Our system architecture provides full frequency re-use. This maximizes diversity (which maximizes quality) and capacity as we can reuse the assigned spectrum in every satellite beam in every satellite. Our network also works with internet protocol (“IP”) data for reliable transmission of IP messages.

 

 We designed our second-generation satellites to support our current lineup of Duplex, SPOT, and Simplex products and services, and to be backwards compatible with our first-generation ground network and satellites, as well as forward compatible with our second-generation ground network.

 

Although our network is currently CDMA-based, it is configured so that it can also support one or more other air interfaces that we may select in the future. For example, we have developed a non-Qualcomm proprietary CDMA technology for our SPOT and Simplex services. Because our satellites are essentially "mirrors in the sky," and all of our network's switches and hardware are located on the ground, we can easily and relatively inexpensively modify our ground hardware and software to use other wave forms to meet customer demands for new and innovative services and products.

 

We own and operate gateways in the United States, Canada, Venezuela, Puerto Rico, France, Brazil and Singapore.

 

Industry

 

We compete in the mobile satellite services sector of the global communications industry. Mobile satellite service operators provide voice and data services using a network of one or more satellites and associated ground facilities. Mobile satellite services are usually complementary to, and interconnected with, other forms of terrestrial communications services and infrastructure and are intended to respond to users' desires for connectivity at all times and locations. Customers typically use satellite voice and data communications in situations where existing terrestrial wireline and wireless communications networks are impaired or do not exist.

 

Worldwide, government organizations, military, natural disaster aid associations, event-driven response agencies and corporate security teams depend on mobile and fixed voice and data communications services on a regular basis. Businesses with global operating scope require communications services when operating in remote locations around the world. Mobile satellite services users span the forestry, maritime, government, oil and gas, mining, leisure, emergency services, construction and transportation sectors, among others. We believe many such customers increasingly view satellite communications services as critical to their daily operations.

 

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Over the past two decades, the global mobile satellite services market has experienced significant growth. Increasingly, better-tailored, improved-technology products and services are creating new channels of demand for mobile satellite services. Growth in demand for mobile satellite voice services is driven by the declining cost of these services, the diminishing size and lower costs of the handsets, as well as, heightened demand by governments, businesses and individuals for ubiquitous global voice coverage. Growth in mobile satellite data services is driven by the rollout of new applications requiring higher bandwidth, as well as low cost data collection and asset tracking devices and technological improvements permitting integration of mobile satellite services over smartphones and other Wi-Fi enabled devices.

 

Communications industry sectors that are relevant to our business include:

 

mobile satellite services, which provide customers with connectivity to mobile and fixed devices using a network of satellites and ground facilities;
fixed satellite services, which use geostationary satellites to provide customers with voice and broadband communications links between fixed points on the earth's surface; and
terrestrial services, which use a terrestrial network to provide wireless or wireline connectivity and are complementary to satellite services.

 

Within the major satellite sectors, fixed satellite services and mobile satellite services operators differ significantly from each other. Fixed satellite services providers, such as Intelsat Ltd., Eutelsat Communications and SES S.A., and aperture terminal companies, such as Hughes and Gilat Satellite Networks, are characterized by large, often stationary or "fixed," ground terminals that send and receive high-bandwidth signals to and from the satellite network for video and high speed data customers and international telephone markets. On the other hand, mobile satellite services providers, such as Globalstar, Inmarsat P.L.C. (“Inmarsat”) and Iridium Communications, Inc. (“Iridium”), focus more on voice and data services (including data services which track the location of remote assets such as shipping containers), where mobility or small sized terminals are essential. As mobile satellite terminals begin to offer higher bandwidth to support a wider range of applications, we expect mobile satellite services operators will increasingly compete with fixed satellite services operators.

 

LEO systems reduce transmission delay compared to a geosynchronous system due to the shorter distance signals have to travel. In addition, LEO systems are less prone to signal blockage and, consequently, we believe provide a better overall quality of service.

 

Competition

 

The global communications industry is highly competitive. We currently face substantial competition from other service providers that offer a range of mobile and fixed communications options. Our most direct competition comes from other global mobile satellite services providers. Our two largest global competitors are Inmarsat and Iridium. We compete primarily on the basis of coverage, quality, portability and pricing of services and products.

 

Inmarsat owns and operates a fleet of geostationary satellites. Due to its multiple-satellite geostationary system, Inmarsat's coverage area extends to and covers most bodies of water more completely than we do. Accordingly, Inmarsat is the leading provider of satellite communications services to the maritime sector. Inmarsat also offers global land-based and aeronautical communications services. Inmarsat generally does not sell directly to customers. Rather, it markets its products and services principally through a variety of distributors, who, in most cases, sell to additional downstream entities who sell to the ultimate customer. We compete with Inmarsat in several key areas, particularly in our maritime markets. During 2011, Inmarsat launched a mobile handset designed to compete with both Iridium’s mobile handset service and our GSP-1700 handset service.

 

Iridium owns and operates a fleet of low earth orbit satellites that is similar to our network of satellites. Iridium provides voice and data communications to businesses, United States and foreign governments, non-governmental organizations and consumers. Iridium sells its products and services to commercial end users through a wholesale distribution network. We have faced increased competition from Iridium in some of our target markets. During 2011, Iridium introduced a product that delivers remote communication features including send and receive text messaging, interactive SOS, and message delivery information.

 

We compete with regional mobile satellite communications services in several markets. In these cases, our competitors serve customers who require regional, not global, mobile voice and data services, so our competitors present a viable alternative to our services. All of these competitors operate geostationary satellites. Our regional mobile satellite services competitors currently include Thuraya, principally in the Middle East and Africa and ACeS (now operated by Inmarsat) in Asia.

 

In some of our markets, such as rural telephony, we compete directly or indirectly with very small aperture terminal (“VSAT”) operators that offer communications services through private networks using very small aperture terminals or hybrid systems to target business users. VSAT operators have become increasingly competitive due to technological advances that have resulted in smaller, more flexible and cheaper terminals.

 

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We compete indirectly with terrestrial wireline (“landline”) and wireless communications networks. We provide service in areas that are inadequately covered by these ground systems. To the extent that terrestrial communications companies invest in underdeveloped areas, we will face increased competition in those areas.

 

Our SPOT products compete indirectly with Personal Locator Beacons (“PLB”s). A variety of manufacturers offer PLBs to an industry specification.

 

Our industry has significant barriers to entry, including the cost and difficulty associated with obtaining spectrum licenses and successfully building and launching a satellite network. In addition to cost, there is a significant amount of lead-time associated with obtaining the required licenses, designing and building the satellite constellation and synchronizing the network technology. We will continue to face competition from Inmarsat and Iridium and other businesses that have developed global mobile satellite communications services in particular regions.

 

United States International Traffic in Arms Regulations

 

The United States International Traffic in Arms regulations under the United States Arms Export Control Act authorize the President of the United States to control the export and import of articles and services that can be used in the production of arms. The President has delegated this authority to the U.S. Department of State, Directorate of Defense Trade Controls. Among other things, these regulations limit the ability to export certain articles and related technical data to certain nations. Some information involved in the performance of our operations falls within the scope of these regulations. As a result, we may have to obtain an export authorization or restrict access to that information by international companies that are our vendors or service providers. We have received and expect to continue to receive export licenses for our telemetry and control equipment located outside the United States.

 

Environmental Matters

 

We are subject to various laws and regulations relating to the protection of the environment and human health and safety (including those governing the management, storage and disposal of hazardous materials). Some of our operations require continuous power supply. As a result, current and historical operations at our ground facilities, including our gateways, include storing fuel and batteries, which may contain hazardous materials, to power back-up generators. As an owner or operator of property and in connection with our current and historical operations, we could incur significant costs, including cleanup costs, fines, sanctions and third-party claims, as a result of violations of or in connection with liabilities under environmental laws and regulations.

 

Customers

 

The specialized needs of our global customers span many markets. Our system is able to offer our customers cost-effective communications solutions in areas unserved or underserved by existing telecommunications infrastructures. Although traditional users of wireless telephony and broadband data services have access to these services in developed locations, our targeted customers often operate, travel to or live in remote regions or regions with under-developed telecommunications infrastructure where these services are not readily available or are not provided on a reliable basis.

 

Our top revenue generating markets in the United States and Canada are (i) government (including federal, state and local agencies), public safety and disaster relief, (ii) recreation and personal and (iii) telecommunications. We also serve customers in the maritime and fishing, oil and gas, natural resources (mining and forestry), and construction, utilities markets, and transportation.

 

No one customer was responsible for more than 10% of our revenue in 2013, 2012, or 2011.

 

Domestic/Foreign

 

We supply services and products to a number of foreign customers. Although most of our sales are denominated in U.S. dollars, we are exposed to currency risk for sales in Canada, Europe, Brazil and other countries. In 2013, approximately 32% of our sales were denominated in foreign currencies. See Note 13 to the Consolidated Financial Statements for additional information regarding revenue by country.

 

Intellectual Property

 

We hold various U.S. and foreign patents and patents pending that expire between 2014 and 2031. These patents cover many aspects of our satellite system, our global network and our user terminals. In recent years, we have reduced our foreign filings and allowed some previously-granted foreign patents to lapse based on (a) the significance of the patent, (b) our assessment of the likelihood that someone would infringe in the foreign country, and (c) the probability that we could or would enforce the patent in light of the expense of filing and maintaining the foreign patent which, in some countries, is quite substantial. We continue to maintain all of the patents in the United States, Canada and Europe which we believe are important to our business. Our intellectual property is pledged as security for our obligations under our senior secured credit facility agreement (“Facility Agreement”).

 

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Employees

 

As of December 31, 2013, we had 267 employees, 13 of whom were located in Brazil and subject to collective bargaining agreements. We consider our relationship with our employees to be good.

 

Seasonality

 

Usage on the network, and to some extent sales, is subject to seasonal and situational changes. April through October are typically our peak months for service revenues and equipment sales. Most notably, emergencies, natural disasters, and sizable projects where satellite based communications devices are the only solution. In the consumer area, SPOT devices are subject to outdoor and leisure activity opportunities, as well as our promotional efforts.

 

Services and Equipment

 

Sales of services accounted for approximately 78% 75% and 76% of our total revenues for 2013, 2012, and 2011, respectively. We also sell the related voice and data equipment to our customers, which accounted for approximately 22%, 25% and 24% of our total revenues for 2013, 2012, and 2011, respectively.

 

Company History

 

Our first-generation network, originally owned by Globalstar, L.P. (“Old Globalstar”), was designed, built and launched in the late 1990s by a technology partnership led by Loral Space and Communications (“Loral”) and Qualcomm Incorporated (“Qualcomm”). In 2002, Old Globalstar filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. In 2004, we completed the acquisition of the business and assets of Old Globalstar. Thermo Capital Partners LLC, which owns and operates companies in diverse business sectors and is referred to in this report, together with its affiliates, as "Thermo," became our principal owner in this transaction. We were formed as a Delaware limited liability company in November 2003 and were converted into a Delaware corporation in March 2006.

 

In July 2010, we announced the relocation of our corporate headquarters to Covington, Louisiana. Our product development center, our international customer care operations, call center, software development and other global business functions including finance, accounting, legal and regulatory, sales, marketing and corporate communications have also relocated to Louisiana.

 

Additional Information

 

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You may read and copy any document we file with the SEC at the SEC's public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including Globalstar) file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC's internet site, www.sec.gov .

 

We make available free of charge financial information, news releases, SEC filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC, on our website at www.globalstar.com . The documents available on, and the contents of, our website are not incorporated by reference into this Report.

 

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Item 1A. Risk Factors

 

You should carefully consider the risks described below, as well as all of the information in this Report and our other past and future filings with the SEC, in evaluating and understanding us and our business. Additional risks not presently known or that we currently deem immaterial may also impact our business operations and the risks identified below may adversely affect our business in ways we do not currently anticipate. Our business, financial condition or results of operations could be materially adversely affected by any of these risks.

 

Risks Related to Our Business

 

If either Thermo or Terrapin Opportunity, L.P. fail to fulfill its capital commitment, our ability to execute our business plan will be adversely affected.

 

Our current sources of liquidity include cash on hand ($17.4 million at December 31, 2013), future cash flows from operations, and funds available from our equity line agreement with Terrapin Opportunity, L.P. (“Terrapin”) ($24.0 million at December 31, 2013). We also have available funds from Thermo under the Equity Commitment, Restructuring Support and Consent Agreement dated as of May 20, 2013 among Globalstar, Thermo, BNP Paribas, as agent, and the lenders under the Facility Agreement (the “Consent Agreement”) and the Global Deed of Amendment and Restatement (the “GARA”) with Thermo. Thermo’s remaining commitment under the Consent Agreement is $5.0 million at December 31, 2013. These current sources of liquidity are sufficient to meet our existing contractual obligations over the next 12 months.

 

We also have available funds of $11.5 million under the Common Stock Purchase and Option Agreement. To the extent that we exercise our option to require Thermo to purchase up to $11.5 million under the Common Stock Purchase and Option Agreement, it will reduce Thermo’s remaining commitment under the Consent Agreement on a dollar for dollar basis.

 

Our business plan assumes the funding of the financial arrangements with Thermo and Terrapin referred to above. If either is unable or fails to fulfill its commitment under these financial arrangements, it could materially and negatively impact our cash and liquidity and our ability to continue to execute our business plan will be adversely affected

 

We incurred operating losses in the past three years, and these losses are likely to continue.

 

We incurred operating losses of $87.4 million, $95.0 million and $73.2 million in 2013, 2012, and 2011, respectively. These losses are largely a result of non-cash depreciation expense as all of our second-generation satellites have been placed into service since 2010. Our second-generation satellites were designed to have a 15-year life from the date the satellites are placed into their operational orbit and we will continue to recognize high levels of depreciation expense commensurate with their estimated 15-year life.

 

We have substantial contractual obligations and capital expenditure plans, which may require additional capital, the terms of which have not been arranged. The terms of the Facility Agreement could complicate raising this additional capital.

 

We have various contractual agreements related to remaining amounts outstanding for the procurement and deployment of our second-generation constellation and upgrades to our ground infrastructure, including internal labor costs and interest on outstanding debt, which we expect will be reflected in capital expenditures primarily through 2015. The nature of these purchases requires us to enter into long-term fixed price contracts. We cannot be assured that operating cash flows and other previously committed funding will be sufficient to meet obligations over the term of these agreements. Restrictions in the Facility Agreement limit the types of financings we may undertake. Should we need to obtain additional financing, we cannot assure you that we will be able to obtain this financing on reasonable terms or at all. If we cannot obtain it in a timely manner, we may be unable to execute our business plan and fulfill our financial commitments.

 

The implementation of our business plan and our ability to generate income from operations assume we are able to maintain a healthy constellation and ground network capable of providing commercially acceptable levels of coverage and service quality, which are contingent on a number of factors.

 

 In prior periods our ability to generate revenue and cash flow was impacted adversely by our inability to offer commercially acceptable levels of Duplex service due to the degradation of our first-generation constellation. As a result, we improved the design of our second-generation constellation to last twice as long in space, have 40% greater capacity and be built at a significantly lower cost as compared to our first-generation constellation. The health of our constellation depends on the maintenance of these satellites, which are technically complex. Anomalies with our satellites may develop, and we cannot guarantee that we could successfully develop and implement a solution to them.

 

Our ground stations were initially designed to operate with our first-generation satellites. Certain of these ground stations will require upgrades to enable us to integrate the technology and service offerings with our second-generation satellites. We have entered into various contracts to upgrade our ground network but the completion of these upgrades may not be successful.

 

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Our ability to generate revenue and positive cash flow will depend upon our ability to maintain and operate all of our existing Duplex-capable satellites, upgrade and maintain our ground stations, maintain a sufficient number of subscribers, introduce new product and service offerings successfully, and compete successfully against other mobile satellite service providers to gain new subscribers.

 

Our satellites have a limited life and will degrade over time, which may cause our network to be compromised and which may materially and adversely affect our business, prospects and profitability. We may not be able to procure additional second-generation satellites on reasonable terms.

 

Since our first satellites were launched in the 1990’s, some first-generation satellites have failed in orbit and have been retired, and we expect others to fail in the future. We consider a satellite "failed" only when it can no longer provide any communications service, and we do not intend to undertake any further efforts to return it to service or when the other satellite subsystems can no longer support operations. In-orbit failure may result from various causes, including component failure, loss of power or fuel, inability to control positioning of the satellite, solar or other astronomical events, including solar radiation and flares, the quality of construction, gradual degradation of solar panels, the durability of components, and collision with other satellites or space debris. Any of these causes, including radiation induced failure of satellite components, may result in damage to or loss of a satellite before the end of its currently expected life.

 

As a result of the issues described above, some of our in-orbit satellites may experience temporary outages or may not otherwise be fully functioning at any given time. There are some remote tools we use to remedy certain types of problems affecting the performance of our satellites, but the physical repair of satellites in space is not feasible. As it is not economically feasible, we do not insure our satellites against in-orbit failures after an initial period of six months, whether the failures are caused by internal or external factors. Although our second-generation satellites were designed to provide commercial service over a 15-year life, we can provide no assurance as to whether any or all of them will continue in operation for their full 15-year design life.

  

All satellites have a limited life and degrade over time. In order to maintain commercially acceptable service coverage long-term, we must obtain and launch additional satellites. As discussed in Note 8 to our Consolidated Financial Statements, we and Thales may negotiate the terms of a follow-on contract for additional satellites, but we can provide no assurance as to whether we will ultimately agree on commercial terms for such a purchase. If we are unable to agree with Thales on commercial terms for the purchase of additional satellites, we may enter into negotiations with one or more other satellite manufacturers, but we cannot provide any assurance that these negotiations will be successful either.

 

Rapid and significant technological changes in the satellite communications industry may impair our competitive position and require us to make significant additional capital expenditures.

 

The hardware and software we currently utilize in operating our gateways were designed and manufactured over 15 years ago and portions have deteriorated. We have contracted to replace the digital hardware and software in the future; however the original equipment may become less reliable as it ages and will be more difficult and expensive to service. It may be difficult or impossible to obtain all necessary replacement parts for the hardware before the new equipment and software is fully deployed. We expect to face competition in the future from companies using new technologies and new satellite systems. The space and communications industries are subject to rapid advances and innovations in technology. New technology could render our system obsolete or less competitive by satisfying consumer demand in more attractive ways or through the introduction of incompatible standards. Particular technological developments that could adversely affect us include the deployment by our competitors of new satellites with greater power, greater flexibility, greater efficiency or greater capabilities, as well as continuing improvements in terrestrial wireless technologies. We have had to commit, and must continue to commit, to make significant capital expenditures to keep up with technological changes and remain competitive. Customer acceptance of the services and products that we offer will continually be affected by technology-based differences in our product and service offerings. New technologies may be protected by patents and therefore may not be available to us.

 

We may be unable to establish a worldwide service network due to the absence of gateways in certain important regions of the world, which may limit our growth and our ability to compete.

 

Our objective is to establish a worldwide service network, either directly or through IGOs, but to date we have been unable to do so in certain areas of the world and we may not succeed in doing so in the future. We have been unable to finance our own gateways or to find capable IGOs for several important regions and countries, including Eastern and Southern Africa, India, China, and certain parts of Southeast Asia. In addition to the lack of global service availability, cost-effective roaming is not yet available in certain countries because the IGOs have been unable to reach business arrangements with one another. This could reduce overall demand for our products and services and undermine our value for potential users who require service in these areas. 

 

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Restrictive covenants in our Facility Agreement may limit our operating and financial flexibility.

 

Our Facility Agreement contains a number of significant restrictions and covenants that limit our ability to:

 

incur or guarantee additional indebtedness;
pay dividends or make distributions to our stockholders;
make investments, acquisitions or capital expenditures;
repurchase or redeem capital stock or subordinated indebtedness;
grant liens on our assets;
incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us;
enter into transactions with our affiliates;
merge or consolidate with other entities or transfer all or substantially all of our assets; and
transfer or sell assets.

 

Complying with these restrictive covenants, as well as the financial and other nonfinancial covenants in the Facility Agreement and certain of our other debt obligations, as well as those that may be contained in any agreements governing future indebtedness, may impair our ability to finance our operations or capital needs or to take advantage of other favorable business opportunities. Our ability to comply with these covenants will depend on our future performance, which may be affected by events beyond our control.

 

An inability to comply with the financial and nonfinancial covenants contained in the Facility Agreement could have significant implications.

 

Our Facility Agreement contains a number of financial and nonfinancial covenants. Our ability to comply with these covenants will depend on our future performance, which may be affected by events beyond our control. Our failure to comply with these covenants would represent an event of default. An event of default under the Facility Agreement would permit the lenders to accelerate the indebtedness under the Facility Agreement. That acceleration would permit holders of our obligations under other agreements that contain cross-acceleration provisions to accelerate that indebtedness. See Part II – Item 5 – Liquidity and Capital Resources - to this report for further discussion on our debt covenants.

 

Our business plan to use a portion of our licensed MSS spectrum to provide terrestrial wireless services depends upon action by the FCC, which we cannot control.

 

Our business plan includes utilizing approximately 20 MHz of our licensed MSS spectrum to provide terrestrial wireless services, including mobile broadband applications, within the United States. In pursuit of these plans, the FCC has released an NPRM to substantially eliminate the gating criteria under the existing ATC regime and permit us to offer low power terrestrial mobile broadband services over a portion of our licensed MSS spectrum. As part of this formal proceeding, if the FCC does not ultimately adopt satisfactory rules, our anticipated future revenues and profitability could be reduced. We can provide no assurance that the FCC will finalize satisfactorily this NRPM or how long the regulatory process to obtain this relief will take. If we are unable to achieve the rule changes in the NPRM, then our only ability to utilize our MSS spectrum for terrestrial applications will be pursuant to the existing ATC regulatory regime that requires many restrictive conditions called gating criteria.

 

Future regulatory decisions could reduce our existing spectrum allocation or impose additional spectrum sharing agreements on us, which could adversely affect our services and operations.

 

Under the FCC's plan for mobile satellite services in our frequency bands, we must share frequencies in the United States with other licensed mobile satellite services operators. To date, there are no other authorized CDMA-based mobile satellite services operators and no pending applications for authorization. However the FCC or other regulatory authorities may require us to share spectrum with other systems that are not currently licensed by the United States or any other jurisdiction. On February 11, 2013, Iridium filed its own petition for rulemaking seeking to have the FCC reallocate 2.725 MHz of Big LEO spectrum from 1616-1618.725 MHz to Iridium’s exclusive use. Iridium also filed a motion to consolidate its petition with our petition for rulemaking. Although the FCC has received comments on Iridium’s petition, it has not taken any substantive action with respect to it. An adverse result in this proceeding could materially affect our ability to provide both Duplex and Simplex mobile satellite services.

 

We registered our second-generation constellation with the ITU through France rather than the United States. The French radiofrequency spectrum regulatory agency, ANFR, submitted the technical papers filing to the ITU on our behalf in July 2009. As with the first-generation constellation, the ITU requires us to coordinate our spectrum assignments with other administrators and operators that use any portion of our spectrum frequency bands. We are actively engaged in but cannot predict how long the coordination process will take; however, we are able to use the frequencies during the coordination process in accordance with our national licenses.

 

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In 2013, the FCC issued a notice of proposed rulemaking and commenced a proceeding to consider, among other things, expanding the use of terrestrial mobile broadband devices within the 5 GHz band. Our C-band Forward Link (Earth Station to Satellite) operates within the 5 GHz band at 5091-5250 MHz. As part of this proceeding, the FCC has requested comments regarding increasing power limits and eliminating the restriction against outdoor uses of U-NII-1 devices, essentially outdoor WiFi access points, operating within the same frequencies as our C-band Forward Link. We filed comments in opposition to these changes to the technical rules due to the substantial risk of harmful interference that these deployments could have on our system. If the FCC permits unlimited outdoor deployment of U-NII-1 devices, our ability to provide mobile satellite services could be negatively affected. We can provide no assurance as to the outcome of this proceeding or any other FCC action.

 

Spectrum values historically have been volatile, which could cause the value of our business to fluctuate.

 

Our business plan includes forming strategic partnerships to maximize the use and value of our spectrum, network assets and combined service offerings in the United States and internationally. Value that we may be able to realize from such partnerships will depend in part on the value ascribed to our spectrum. Historically, valuations of spectrum in other frequency bands have been volatile, and we cannot predict the future value that we may be able to realize for our spectrum and other assets. In addition, to the extent that the FCC takes action that makes additional spectrum available or promotes the more flexible use or greater availability (e.g., via spectrum leasing or new spectrum sales) of existing satellite or terrestrial spectrum allocations, the availability of such additional spectrum could reduce the value that we may be able to realize for our spectrum.

 

Our business is subject to extensive government regulation, which mandates how we may operate our business and may increase our cost of providing services, slow our expansion into new markets and subject our services to additional competitive pressures.

 

Our ownership and operation of an MSS system is subject to significant regulation in the United States by the FCC and in foreign jurisdictions by similar authorities. Additionally, our use of our licensed spectrum globally is subject to coordination by the ITU. Our second-generation constellation has been licensed and registered in France. The rules and regulations of the FCC or these foreign authorities may change and may not continue to permit our operations as presently conducted or as we plan to conduct them.

 

Failure to provide services in accordance with the terms of our licenses or failure to operate our satellites, ground stations, or other terrestrial facilities (including those necessary to provide ATC services) as required by our licenses and applicable government regulations could result in the imposition of government sanctions against us, up to and including cancellation of our licenses.

 

Our system requires regulatory authorization in each of the markets in which we or the IGOs provide service. We and the IGOs may not be able to obtain or retain all regulatory approvals needed for operations. For example, the company with which the original owners of our first-generation network contracted to establish an independent gateway operation in South Africa was unable to obtain an operating license from the Republic of South Africa and abandoned the business in 2001. Regulatory changes, such as those resulting from judicial decisions or adoption of treaties, legislation or regulation in countries where we operate or intend to operate, may also significantly affect our business. Because regulations in each country are different, we may not be aware if some of the IGOs and/or persons with which we or they do business do not hold the requisite licenses and approvals.

 

Our current regulatory approvals could now be, or could become, insufficient in the view of foreign regulatory authorities. Furthermore, any additional necessary approvals may not be granted on a timely basis, or at all, in all jurisdictions in which we wish to offer services, and applicable restrictions in those jurisdictions could become unduly burdensome.

 

Our operations are subject to certain regulations of the United States State Department's Directorate of Defense Trade Controls (i.e., the export of satellites and related technical data), United States Treasury Department's Office of Foreign Assets Control (i.e., financial transactions) and the United States Commerce Department's Bureau of Industry and Security (i.e., our gateways and phones). These regulations may limit or delay our ability to operate in a particular country. As new laws and regulations are issued, we may be required to modify our business plans or operations. If we fail to comply with these regulations in any country, we could be subject to sanctions that could affect, materially and adversely, our ability to operate in that country. Failure to obtain the authorizations necessary to use our assigned radio frequency spectrum and to distribute our products in certain countries could have a material adverse effect on our ability to generate revenue and on our overall competitive position.

 

The implementation of our business plan depends on increased demand for wireless communications services via satellite, both for our existing services and products and for new services and products. If this increased demand does not occur, our revenues and profitability may not increase as we expect.

 

Demand for wireless communication services via satellite may not grow, or may even shrink, either generally or in particular geographic markets, for particular types of services or during particular time periods. A lack of demand could impair our ability to sell our services and develop and successfully market new services, or could exert downward pressure on prices, or both. This, in turn, could decrease our revenues and profitability and adversely affect our ability to increase our revenues and profitability over time.

 

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We plan to introduce additional Duplex, SPOT, and Simplex products and services. However, we cannot predict with certainty the potential longer term demand for these products and services or the extent to which we will be able to meet demand. Our business plan assumes growing our Duplex subscriber base beyond levels achieved in the past, rapidly growing our SPOT and Simplex subscriber base and returning the business to profitability.

 

The success of our business plan will depend on a number of factors, including:

 

our ability to maintain the health, capacity and control of our satellites;
our ability to maintain the health of our ground network;
our ability to influence the level of market acceptance and demand for all of our services;
our ability to introduce new products and services that meet this market demand;
our ability to retain current customers and obtain new customers;
our ability to obtain additional business using our existing spectrum resources both in the United States and internationally;
our ability to control the costs of developing an integrated network providing related products and services;
our ability to market successfully our Duplex, SPOT and Simplex products and services;
our ability to develop and deploy innovative network management techniques to permit mobile devices to transition between satellite and terrestrial modes;
our ability to sell the equipment inventory on hand;
the cost and availability of user equipment that operates on our network;
the effectiveness of our competitors in developing and offering similar products and services and in persuading our customers to switch service providers; and
our ability to provide attractive service offerings at competitive prices to our target markets.

 

We depend on IGOs to market our services in important regions around the world. If the IGOs are unable to do this successfully, we will not be able to grow our business in those areas as rapidly as we expect.

 

Although we derive most of our revenue from retail sales to end users in the United States, Canada, a portion of Western Europe, Central America and portions of South America, either directly or through agents, dealers and resellers, we depend on IGOs to purchase, install, operate and maintain gateway equipment, to sell phones and data user terminals, and to market our services in other regions where these IGOs hold exclusive or non-exclusive rights. Not all of the IGOs have been successful and, in some regions, they have not initiated service or sold as much usage as originally anticipated. Some of the IGOs are not earning revenues sufficient to fund their operating costs due to the operational issues we experienced with our first-generation satellites. Although we expect these IGOs to return to profitability with the return of Duplex service, if they are unable to continue in business, we will lose the revenue we receive for selling equipment to them and providing services to their customers. Although we have implemented a strategy for the acquisition of certain IGOs when circumstances permit, we may not be able to continue to implement this strategy on favorable terms and may not be able to realize the additional efficiencies that we anticipate from this strategy. In some regions it is impracticable to acquire the IGOs either because local regulatory requirements or business or cultural norms do not permit an acquisition, because the expected revenue increase from an acquisition would be insufficient to justify the transaction, or because the IGO will not sell at a price acceptable to us. In those regions, our revenue and profits may be adversely affected if those IGOs do not fulfill their own business plans to increase substantially their sales of services and products.

 

We rely on a limited number of key vendors for timely supply of equipment and services. If our key vendors fail to provide equipment and services to us, we may face difficulties in finding alternative sources and may not be able to operate our business successfully.

 

We also have a limited quantity of our Duplex handsets remaining in inventory and have not contracted with a manufacturer to produce additional inventory. We have depended on Qualcomm as the exclusive manufacturer of phones using the IS 41 CDMA North American standard, which incorporates Qualcomm proprietary technology. This contract was cancelled in March 2013 and we are working with Qualcomm to resolve issues related to the termination. See Note 7 to our Consolidated Financial Statements for further discussion. Although we have contracted with Hughes and Ericsson to provide new hardware and software for our ground component, there could be a substantial period of time in which their products or services are not available and Qualcomm no longer supports our products and services.

 

Additionally, we depend on our product manufacturers to provide us with our inventory. If these manufacturers do not take on future orders or fail to perform under our current contracts, we may be unable to continue to produce and sell our inventory to customers at a reasonable cost to us or there may be delays in production and sales.

 

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We depend in large part on the efforts of third parties for the retail sale of our services and products. The inability of these third parties to sell our services and products successfully may decrease our future revenue and profitability.

 

We derive a large portion of our revenue from products and services sold through independent agents, dealers and resellers, including, outside the United States, IGOs. If these third parties are unable to market our products and services successfully, our future revenue and profitability may decrease.

 

Lack of availability of electronic components from the electronics industry, as needed in our retail products, our gateways, and our satellites, could delay or adversely impact our operations.

 

We rely upon the availability of components, materials and component parts from the electronics industry. The electronics industry is subject to occasional shortages in parts availability depending on fluctuations in supply and demand. Industry shortages may result in delayed shipments of materials, or increased prices, or both. As a consequence, elements of our operation which use electronic parts, such as our retail products, our gateways and our satellites, could be subject to delays or cost increases, or both.

 

Product liability, product replacement, or recall costs could adversely affect our business and financial performance.

 

We are subject to product liability and product recall claims if any of our products and services are alleged to have resulted in injury to persons or damage to property. If any of our products proves to be defective, we may need to recall and/or redesign them. In addition, any claim or product recall that results in significant adverse publicity may negatively affect our business, financial condition, or results of operations. We maintain product liability insurance, but this insurance may not adequately cover losses related to product liability claims brought against us. We may also be a defendant in class action litigation, for which no insurance is available. Product liability insurance could become more expensive and difficult to maintain and may not be available on commercially reasonable terms, if at all. In addition, we do not maintain any product recall insurance, so any product recall we are required to initiate could have a significant impact on our financial position, results of operations or cash flows. We regularly investigate potential quality issues as part of our ongoing effort to deliver quality products to our customers.

 

Because consumers use SPOT products and services in isolated and, in some cases, dangerous locations, we cannot predict whether users of the device who suffer injury or death may seek to assert claims against us alleging failure of the device to facilitate timely emergency response. Although we will seek to limit our exposure to any such claims through appropriate disclaimers and liability insurance coverage, we cannot assure investors that the disclaimers will be effective, claims will not arise or insurance coverage will be sufficient.

 

We face intense competition in all of our markets, which could result in a loss of customers and lower revenues and make it more difficult for us to enter new markets.

 

Satellite-based Competitors

 

There are currently three other MSS operators providing services similar to ours on a global or regional basis: Iridium, Thuraya, and Inmarsat. The provision of satellite-based products and services is subject to downward price pressure when the capacity exceeds demand or as new competitors enter the marketplace with particular competitive pricing strategies.

 

Other providers of satellite-based products could introduce their own products similar to our SPOT, Simplex or Duplex products, which may materially adversely affect our business plan. In addition, we may face competition from new competitors or new technologies. With so many companies targeting many of the same customers, we may not be able to retain successfully our existing customers and attract new customers and as a result may not grow our customer base and revenue.

 

Terrestrial Competitors

 

In addition to our satellite-based competitors, terrestrial wireless voice and data service providers are continuing to expand into rural and remote areas, particularly in less developed countries, and providing the same general types of services and products that we provide through our satellite-based system. Many of these companies have greater resources, greater name recognition and newer technologies than we do. Industry consolidation could adversely affect us by increasing the scale or scope of our competitors and thereby making it more difficult for us to compete. We could lose market share and revenue as a result of increasing competition from the extension of land-based communication services.

 

Although satellite communications services and ground-based communications services are not perfect substitutes, the two compete in certain markets and for certain services. Consumers generally perceive wireless voice communication products and services as cheaper and more convenient than satellite-based products and services.

 

ATC Competitors

 

We also expect to compete with a number of other satellite companies that plan to develop terrestrial networks that utilize their MSS spectrum. DISH Networks received FCC approval to offer terrestrial wireless services over the MSS spectrum that previously belonged to TerreStar and ICO Global. Further, LightSquared continues its regulatory initiative to receive final FCC approval to build out a wireless network utilizing its MSS spectrum. Any of these competitors could offer an integrated satellite and terrestrial network before we do, could combine with terrestrial networks that provide them with greater financial or operational flexibility than we have, or could offer wireless services, including mobile broadband services, that customers prefer over ours.

 

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Potential Loss of Customers

 

We may lose customers due to competition, consolidation, regulatory developments, disruptive technologies, business developments affecting our customers or their customers, the degradation of our constellation or for other reasons. Our top 10 customers for the year ended December 31, 2013 accounted for, in the aggregate, approximately 12% of our total revenues. For the year ended December 31, 2013, revenues from our largest customer were $2.2 million or 3% of our total revenues. If we fail to maintain our relationships with our major customers, if we lose them and fail to replace them with other similar customers, or if we experience reduced demand from our major customers, our revenue could be significantly reduced. In addition, we may incur additional costs to the extent that amounts due from these customers become uncollectible. More generally, our customers may fail to renew or may cancel their service contracts with us, which could negatively affect future revenues and profitability.

 

 We face special risks by doing business in developing markets, including currency and expropriation risks, which could increase our costs or reduce our revenues in these areas.

 

Although our most economically important geographic markets currently are the United States and Canada, we have substantial markets for our mobile satellite services in, and our business plan includes, developing countries or regions that are underserved by existing telecommunications systems, such as rural Venezuela, Brazil and Central America. Developing countries are more likely than industrialized countries to experience market, currency and interest rate fluctuations and may have higher inflation. In addition, these countries present risks relating to government policy, price, wage and exchange controls, social instability, expropriation and other adverse economic, political and diplomatic conditions.

 

We receive a majority of our revenues in U.S. dollars. Limited availability of U.S. currency in some local markets or governmental controls on the export of currency may prevent an IGO from making payments in U.S. dollars or delay the availability of payment due to foreign bank currency processing and approval. In addition, exchange rate fluctuations may affect our ability to control the prices charged for the independent gateway operators' services.

 

Our operations involve transactions in a variety of currencies. Sales denominated in foreign currencies involve primarily the Canadian dollar, the euro, and the Brazilian real. Certain of our obligations are denominated in euros. Accordingly, our operating results may be significantly affected by fluctuations in the exchange rates for these currencies. Approximately 32% and 29% of our total sales were to retail customers located primarily in Canada, Europe, Central America, and South America during 2013 and 2012, respectively. Our results of operations for 2013 and 2012 included losses of $1.0 million and $2.0 million, respectively, on foreign currency transactions. We may be unable to offset unfavorable currency movements as they adversely affect our revenue and expenses. Our inability to do so could have a substantial negative impact on our operating results and cash flows.

 

Pursuing strategic transactions may cause us to incur additional risks.

 

We may pursue acquisitions, joint ventures or other strategic transactions on an opportunistic basis. We may face costs and risks arising from any such transactions, including integrating a new business into our business or managing a joint venture. These may include legal, organizational, financial and other costs and risks.

 

In addition, if we were to choose to engage in any major business combination or similar strategic transaction, we may require significant external financing in connection with the transaction. Depending on market conditions, investor perceptions of us, and other factors, we may not be able to obtain capital on acceptable terms, in acceptable amounts or at appropriate times to implement any such transaction. Our Facility Agreement and other debt obligations contain covenants which limit our ability to engage in specified forms of capital transactions without lender consent, which may be impossible to obtain. Any such financing, if obtained, may further dilute our existing stockholders.

 

Our revenues are subject to changes in global economic conditions and consumer sentiment and discretionary spending.

 

Financial markets continue to be uncertain and could significantly adversely impact global economic conditions. These conditions could lead to further reduced consumer spending in the foreseeable future, especially for discretionary travel and related products. A substantial portion of the potential addressable market for our consumer retail products and services relates to recreational users, such as mountain climbers, campers, kayakers, sport fishermen and wilderness hikers. These potential customers may reduce their activities or their spending due to economic conditions, which could adversely affect our business, financial condition, results of operations and liquidity.

 

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Changes in international trade regulations and other risks associated with foreign trade could adversely affect our sourcing.

 

We source our products primarily from foreign contract manufacturers, with the largest concentration being in China. The adoption of regulations related to the importation of product, including quotas, duties, taxes and other charges or restrictions on imported goods, and changes in U.S. customs procedures could result in an increase in the cost of our products. Delays in customs clearance of goods or the disruption of international transportation lines used by us could result in our inability to deliver goods to customers in a timely manner or the potential loss of sales altogether. Current or future social and environmental regulations or critical issues, such as those relating to the sourcing of conflict minerals from the Democratic Republic of the Congo or the need to eliminate environmentally sensitive materials from our products, could restrict the supply of components and materials used in production or increase our costs. Any delay or interruption to our manufacturing process or in shipping our products could result in lost revenue, which would adversely affect our business, financial condition, or results of operations.

 

Changes in tax rates or adverse results of tax examinations could materially increase our costs.

 

We operate in various U.S. and foreign tax jurisdictions. The process of determining our anticipated tax liabilities involves many calculations and estimates which are inherently complex. We believe that we have complied in all material respects with our obligations to pay taxes in these jurisdictions. However, our position is subject to review and possible challenge by the taxing authorities of these jurisdictions. If the applicable taxing authorities were to challenge successfully our current tax positions, or if there were changes in the manner in which we conduct our activities, we could become subject to material unanticipated tax liabilities. We may also become subject to additional tax liabilities as a result of changes in tax laws, which could in certain circumstances have a retroactive effect.

 

 In January 2012 our Canadian subsidiary was notified that its income tax returns for the years ending October 31, 2008 and 2009 have been selected for audit. The Canada Revenue Agency is in the process of reviewing the information provided by the Canadian subsidiary.

 

In December 2013, the Company’s Singapore subsidiary was notified that its income tax returns for the years ended 2009 to 2012 had been selected for audit. The Company’s Singapore subsidiary has submitted the information required by the Inland Revenue Authority of Singapore.

 

 As a result of our acquisition of an independent gateway operator in Brazil during 2008, we are exposed to potential pre-acquisition tax liabilities. During 2013, the seller paid approximately $0.3 million of these liabilities, but the gateway operator remains subject to an additional $2.2 million in liabilities. We may be exposed to potential pre-acquisition liabilities for which we may not be fully indemnified by the seller, or the seller may fail to perform its indemnification obligations.

 

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

 

Borrowings under our Facility Agreement are at a variable rate. In order to mitigate our variable rate interest risk, we entered into a ten year interest rate cap agreement. The interest rate cap agreements reflect a variable notional amount ranging from $586.3 million to $14.8 million at interest rates that provide coverage to us for exposure resulting from escalating interest rates over the term of the Facility Agreement. The interest rate cap provides limits on the six-month Libor rate (“Base Rate”) used to calculate the coupon interest on outstanding amounts on the Facility Agreement. Our interest rate is capped at 5.50% if the Base Rate does not exceed 6.5%. Should the Base Rate exceed 6.5%, our Base Rate will be 1% less than the then six-month Libor rate. Regardless of our attempts to mitigate our exposure to interest rate fluctuations through the interest rate cap, we still have exposure for the uncapped amounts of the facility, which remain subject to a variable interest rate. As a result, an increase in interest rates could result in a substantial increase in interest expense, especially as the capped amount of the term loan decreases over time.

 

The loss of skilled management and personnel could impair our operations.

 

Our performance is substantially dependent on the performance and institutional knowledge of our senior management and key scientific and technical personnel.  The loss of the services of any member of our senior management, scientific or technical staff may significantly delay or prevent the achievement of business objectives by diverting management’s attention to retention matters, and could have a material adverse effect on our business, operating results and financial condition.

 

A natural disaster could diminish our ability to provide communications service.

 

Natural disasters could damage or destroy our ground stations resulting in a disruption of service to our customers. In addition, the collateral effects of such disasters such as flooding may impair the functioning of our ground equipment. If a natural disaster were to impair or destroy any of our ground facilities, we might be unable to provide service to our customers in the affected area for a period of time. Even if our gateways are not affected by natural disasters, our service could be disrupted if a natural disaster damages the public switch telephone network or terrestrial wireless networks or our ability to connect to the public switch telephone network or terrestrial wireless networks. Additionally, there are inherent dangers and risk associated with our satellite operations, including the risk of increased radiation and possibility of in-orbit collisions with other objects. Any such failures, collisions or service disruptions could harm our business and results of operations.

 

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If we do not develop, acquire and maintain proprietary information and intellectual property rights, it could limit the growth of our business and reduce our market share.

 

Our business depends on technical knowledge, and we believe that our future success is based, in part, on our ability to keep up with new technological developments and incorporate them in our products and services. We own or have the right to use our patents, work products, inventions, designs, software, systems and similar know-how. Although we have taken diligent steps to protect that information, the information may be disclosed to others or others may independently develop similar information, systems and know-how. Protection of our information, systems and know-how may result in litigation, the cost of which could be substantial. Third parties may assert claims that our products or services infringe on their proprietary rights. Any such claims, if made, may prevent or limit our sales of products or services or increase our costs of sales.

 

We license much of the software we require to support critical gateway operations from third parties, including Qualcomm and Space Systems/Loral Inc. This software was developed or customized specifically for our use. We also license software to support customer service functions, such as billing, from third parties which developed or customized it specifically for our use. If the third party licensors were to cease to support and service the software, or the licenses were to no longer be available on commercially reasonable terms, it may be difficult, expensive or impossible to obtain such services from alternative vendors. Replacing such software could be difficult, time consuming and expensive, and might require us to obtain substitute technology with lower quality or performance standards or at a greater cost.

 

If we are unable to remediate the material weakness in our internal controls, our ability to report our financial results on a timely and accurate basis and to comply with disclosure and other requirements may be adversely affected.

 

Our internal control processes, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that their objectives will be met. Therefore, we cannot assure you that in the future additional material weaknesses will not recur, exist or otherwise be identified. We will continue to monitor the effectiveness of these and other processes, procedures and controls and will make any further changes management determines appropriate. Effective internal controls are necessary for us to produce reliable financial reports. If we cannot produce reliable financial reports, our business and operating results may be adversely affected, investors may lose confidence in our reported financial information, there may be a negative effect on our stock price, and we may be subject to civil or criminal investigations and penalties.

 

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Risks Related to Our Common Stock

 

Our common stock has been delisted from the NASDAQ Stock Market, which may impair our ability to raise capital.

 

As of December 31, 2013, our voting common stock was listed on the over the counter stock market (“OTCQB”) under the symbol “GSAT”. In December 2012 we were removed from the NASDAQ Stock Market for not meeting the $1.00 per share minimum bid requirement. Broker-dealers may be less willing or able to sell and/or make a market in our common stock as a result of this delisting, which may make it more difficult for shareholders to dispose of, or to obtain accurate quotations for the price of, our common stock. Removal of our common stock from listing on the NASDAQ Stock Market may also make it more difficult for us to raise capital through the sale of our securities.

 

If our common stock is not listed on a U.S. national stock exchange or approved for quotation and trading on a national automated dealer quotation system or established automated over-the-counter trading market, holders of our 8.00% Notes Issued in 2013 and 8.00% Notes Issued in 2009 will have the option to require us to repurchase the Notes, which we may not have sufficient financial resources to do.

 

As our common stock is no longer listed on the NASDAQ Stock Market, we are no longer subject to any of the NASDAQ governance requirements, and our stockholders do not have the protection of these requirements.

 

Restrictive covenants in our Facility Agreement do not allow us to pay dividends on our common stock in the foreseeable future.

 

We do not expect to pay cash dividends on our common stock. Our Facility Agreement currently prohibits the payment of cash dividends. Any future dividend payments are within the discretion of our board of directors and will depend on, among other things, our results of operations, working capital requirements, capital expenditure requirements, financial condition, contractual restrictions, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our board of directors may deem relevant. We may not generate sufficient cash from operations in the future to pay dividends on our common stock.

 

The market price of our common stock is volatile and there is a limited market for our shares.

 

The trading price of our common stock is subject to wide fluctuations. Factors affecting the trading price of our common stock may include:

 

actual or anticipated variations in our operating results;
failure in the performance of our current or future satellites;
changes in financial estimates by research analysts, or any failure by us to meet or exceed any such estimates, or changes in the recommendations of any research analysts that elect to follow our common stock or the common stock of our competitors;
actual or anticipated changes in economic, political or market conditions, such as recessions or international currency fluctuations;
actual or anticipated changes in the regulatory environment affecting our industry, including final rulemaking  by the FCC related our proceeding;
actual or anticipated sales of common stock by our controlling stockholder or others;
changes in the market valuations of our industry peers; and
announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives.

 

The trading price of our common stock may also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. Our stockholders may be unable to resell their shares of our common stock at or above the initial purchase price. Additionally, because we are a controlled company there is a limited market for our common stock and we cannot assure our stockholders that a trading market will develop further or be maintained.

 

Trading volume for our common stock historically has been low; however, trading volume has recently increased significantly. Sales of significant amounts of shares of our common stock in the public market could lower the market price of our stock.

 

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The future issuance of additional shares of our common stock could cause dilution of ownership interests and adversely affect our stock price.

 

We may issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of our current stockholders. We are authorized to issue 1.7 billion shares of common stock (400.0 million are designated as nonvoting), of which approximately 535.9 million shares of voting common stock and 309.0 million shares of nonvoting common stock were issued and outstanding as of December 31, 2013 and 855.1 million shares were available for future issuance (of which approximately 620.0 million shares are reserved for issuances of shares upon exercise of warrants or options or conversion of notes). The potential issuance of such additional shares of common stock, whether directly or pursuant to any conversion right of any convertible securities, may create downward pressure on the trading price of our common stock. We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock for capital raising or other business purposes. Future sales of substantial amounts of common stock, or the perception that sales could occur, could have a material adverse effect on the price of our common stock.

 

We have issued and may issue shares of preferred stock or debt securities with greater rights than our common stock.

 

Our certificate of incorporation authorizes our board of directors to issue one or more series of preferred stock and set the terms of the preferred stock without seeking any further approval from holders of our common stock. Currently, there are 100 million shares of preferred stock authorized; one share of Series A Convertible Preferred Stock was issued and subsequently converted to shares of voting and nonvoting common stock during 2009. Any preferred stock that is issued may rank ahead of our common stock in terms of dividends, priority and liquidation premiums and may have greater voting rights than holders of our common stock.

 

If persons engage in short sales of our common stock, the price of our common stock may decline.

 

Selling short is a technique used by a stockholder to take advantage of an anticipated decline in the price of a security. A significant number of short sales or a large volume of other sales within a relatively short period of time can create downward pressure on the market price of a security. Further sales of common stock could cause even greater declines in the price of our common stock due to the number of additional shares available in the market, which could encourage short sales that could further undermine the value of our common stock. Holders of our securities could, therefore, experience a decline in the value of their investment as a result of short sales of our common stock.

 

Provisions in our charter documents and credit agreement and provisions of Delaware law may discourage takeovers, which could affect the rights of holders of our common stock.

 

Provisions of Delaware law and our amended and restated certificate of incorporation, amended and restated bylaws and our Facility Agreement and indenture could hamper a third party's acquisition of us or discourage a third party from attempting to acquire control of us. These provisions include:

 

the absence of cumulative voting in the election of our directors, which means that the holders of a majority of our common stock may elect all of the directors standing for election;
the ability of our board of directors to issue preferred stock with voting rights or with rights senior to those of the common stock without any further vote or action by the holders of our common stock;
the division of our board of directors into three separate classes serving staggered three-year terms;
the ability of our stockholders, at such time when Thermo does not own a majority of our outstanding capital stock entitled to vote in the election of directors, to remove our directors only for cause and only by the vote of at least 66 2/3% of the outstanding shares of capital stock entitled to vote in the election of directors;
prohibitions, at such time when Thermo does not own a majority of our outstanding capital stock entitled to vote in the election of directors, on our stockholders acting by written consent;
prohibitions on our stockholders calling special meetings of stockholders or filling vacancies on our board of directors;
the requirement, at such time when Thermo does not own a majority of our outstanding capital stock entitled to vote in the election of directors, that our stockholders must obtain a super-majority vote to amend or repeal our amended and restated certificate of incorporation or bylaws;
change of control provisions in our Facility Agreement, which provide that a change of control will constitute an event of default and, unless waived by the lenders, will result in the acceleration of the maturity of all indebtedness under the credit agreement;
change of control provisions relating to our 8.00% Notes Issued in 2009 and 8.00% Notes Issued in 2013, which provide that a change of control will permit holders of the Notes to demand immediate repayment; and
change of control provisions in our 2006 Equity Incentive Plan, which provide that a change of control may accelerate the vesting of all outstanding stock options, stock appreciation rights and restricted stock.

 

We also are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits us from engaging in any business combination with any interested stockholder, as defined in that section, for a period of three years following the date on which that stockholder became an interested stockholder. This provision does not apply to Thermo, which became our principal stockholder prior to our initial public offering.

 

These provisions also could make it more difficult for you and our other stockholders to elect directors and take other corporate actions, and could limit the price that investors might be willing to pay in the future for shares of our common stock.

 

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We are controlled by Thermo, whose interests may conflict with yours.

 

As of December 31, 2013, Thermo owned approximately 52% of our outstanding voting common stock and approximately 70% of all outstanding common stock. Additionally, Thermo owns warrants and 8.00% Notes Issued in 2009 that may be converted into or exercised for additional shares of common stock. Thermo is able to control the election of all of the members of our board of directors and the vote on substantially all other matters, including significant corporate transactions such as the approval of a merger or other transaction involving our sale.

 

We have depended substantially on Thermo to provide capital to finance our business. In 2006 and 2007, Thermo purchased an aggregate of $200 million of common stock at prices substantially above market. On December 17, 2007, Thermo assumed all of the obligations and was assigned all of the rights (other than indemnification rights) of the administrative agent and the lenders under our amended and restated credit agreement. To fulfill the conditions precedent to our Facility Agreement, in 2009, Thermo converted the loans outstanding under the credit agreement into equity and terminated the credit agreement. In addition, Thermo and its affiliates deposited $60.0 million in a contingent equity account to fulfill a condition precedent for borrowing under the Facility Agreement, purchased $20.0 million of our 5.0% Notes, which were subsequently converted into shares of common stock in 2013, purchased $11.4 million of our 8.00% Notes Issued in 2013, and loaned us $37.5 million to fund our debt service reserve account under the Facility Agreement. On May 20, 2013, we issued 8.00% Notes Issued in 2013 in exchange for 5.75% Notes. In connection with this exchange, we entered into the Consent Agreement, the Common Stock Purchase Agreement, and the Common Stock Purchase and Option Agreement. During 2013, Thermo and its affiliates funded a total of $65.0 million to us pursuant to the terms of these agreements.

 

Thermo is controlled by James Monroe III, our Chairman and CEO. Through Thermo, Mr. Monroe holds equity interests in, and serves as an executive officer or director of, a diverse group of privately-owned businesses not otherwise related to us. We reimburse Thermo and Mr. Monroe for certain third party, documented, out of pocket expenses they incur in connection with our business.

 

The interests of Thermo may conflict with the interests of our other stockholders. Thermo may take actions it believes will benefit its equity investment in us or loans to us even though such actions might not be in your best interests as a holder of our common stock.

 

Item 1B. Unresolved Staff Comments

 

Not Applicable

 

Item 2. Properties

 

Our principal headquarters are located in Covington, Louisiana, where we currently lease approximately 27,000 square feet of office space. We own or lease the facilities described in the following table (in approximate square feet):

 

Location   Country   Square Feet   Facility Use   Owned/Leased
Milpitas, California   USA   31,690   Satellite and Ground Control Center   Leased
Covington, Louisiana   USA   27,000   Corporate Office   Leased
Mississauga, Ontario   Canada   13,600   Canada Office   Leased
Managua   Nicaragua   10,900   Gateway   Owned
Clifton, Texas   USA   10,000   Gateway   Owned
Los Velasquez, Edo Miranda   Venezuela   9,700   Gateway   Owned
Sebring, Florida   USA   9,000   Gateway   Leased
Aussaguel   France   7,500   Satellite Control Center and Gateway   Leased
Smith Falls, Ontario   Canada   6,500   Gateway   Owned
High River, Alberta   Canada   6,500   Gateway   Owned
Barrio of Las Palmas, Cabo Rojo   Puerto Rico   6,000   Gateway   Owned
Wasilla, Alaska   USA   5,000   Gateway   Owned
Seletar Satellite Earth Station   Singapore   4,500   Gateway   Leased
Petrolina   Brazil   2,500   Gateway   Owned
Manaus   Brazil   1,900   Gateway   Owned
El Dorado Hills, California   USA   1,586   Satellite and Ground Control Center   Leased
Rio de Janeiro   Brazil   1,313   Brazil Office   Leased
Presidente Prudente   Brazil   1,300   Gateway   Owned
Dublin   Ireland   1,280   Europe Office   Leased
Panama City   Panama   1,100   GAT Office   Leased

 

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Our owned properties in Clifton, Texas and Wasilla, Alaska are encumbered by liens in favor of the administrative agent under our Facility Agreement for the benefit of the lenders thereunder. See "Management's Discussion and Analysis - Contractual Obligations and Commitments."

 

Item 3. Legal Proceedings

 

For a description of our material pending legal and regulatory proceedings and settlements, see Note 8 to our Consolidated Financial Statements.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters

 

Common Stock Information

 

Our common stock trades on the OTCQB under the symbol "GSAT." The following table sets forth the high and low closing prices for our common stock as reported for each fiscal quarter during the periods indicated.

 

Quarter Ended:  High   Low 
March 31, 2012  $0.85   $0.53 
June 30, 2012  $0.75   $0.25 
September 30, 2012  $0.53   $0.25 
December 31, 2012  $0.48   $0.26 
           
March 31, 2013  $0.58   $0.30 
June 30, 2013  $0.62   $0.27 
September 30, 2013  $1.09   $0.58 
December 31, 2013  $1.99   $1.15 

 

As of February 28, 2014, there were 543,718,177 shares of our voting common stock outstanding, which were held by 121 holders of record.

 

Dividend Information

 

We have never declared or paid any cash dividends on our common stock. Our Facility Agreement prohibits us from paying dividends. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.

 

Item 6. Selected Financial Data

 

The following table presents our selected consolidated financial data for the periods indicated. We derived the historical data from our audited Consolidated Financial Statements.

 

You should read the data set forth below together with our Consolidated Financial Statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Annual Report on Form 10-K. The financial data is in thousands.

  

   December 31, 
   2013   2012   2011   2010   2009 
Statement of Operations Data (year ended):                    
Revenues  $82,711   $76,318   $72,827   $67,941   $64,279 
Operating loss   (87,396)   (94,993)   (73,235)   (59,769)   (53,791)
Other income (expense)   (502,582)   (16,792)   18,202    (37,302)   (21,148)
Loss before income taxes   (589,978)   (111,785)   (55,033)   (97,071)   (74,939)
Net loss   (591,116)   (112,198)   (54,924)   (97,467)   (74,923)
                          
Balance Sheet Data (end of period):                         
Cash and cash equivalents   17,408    11,792    9,951    33,017    67,881 
Property and equipment, net   1,169,785    1,215,156    1,217,718    1,150,470    964,921 
Total assets   1,372,608    1,403,775    1,420,405    1,386,808    1,266,640 
Current maturities of long-term debt   4,046    655,874    -    -    2,259 
Long-term debt, less current maturities   665,236    95,155    723,888    664,543    463,551 
Stockholders’ equity   116,755    494,544    533,795    535,418    595,792 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and applicable notes to our Consolidated Financial Statements and other information included elsewhere in this Annual Report on Form 10-K, including risk factors disclosed in Part I, Item IA. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements. See “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.

 

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Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. Note 1 to our Consolidated Financial Statements contains a description of the accounting policies used in the preparation of our financial statements as well as the consideration of recently issued accounting standards and the estimated impact these standards will have on our financial statements. We evaluate our estimates on an ongoing basis, including those related to revenue recognition; property and equipment; income taxes; derivative instruments; inventory; allowance for doubtful accounts; pension plan; stock-based compensation; long-lived assets; and litigation, commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual amounts could differ significantly from these estimates under different assumptions and conditions.

 

We define a critical accounting policy or estimate as one that is both important to our financial condition and results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. We believe that the following are the critical accounting policies and estimates used in the preparation of our Consolidated Financial Statements. In addition, there are other items within our Consolidated Financial Statements that require estimates but are not deemed critical as defined in this paragraph.

 

Revenue Recognition

 

Our primary types of revenue include (i) service revenue from two-way voice communication and data transmissions and one-way data transmissions between a mobile or fixed device and (ii) subscriber equipment revenue from the sale of Duplex two-way transmission products, SPOT consumer retail products, and Simplex one-way transmission products. Additionally, we generate revenue by providing engineering and support services to certain customers. We provide Duplex, SPOT and Simplex services directly to customers and indirectly through resellers and IGOs.

 

Duplex Service Revenue

 

For our Duplex customers and resellers, we recognize revenue for monthly access fees in the period we render services.  Access fees represent the minimum monthly charge for each line of service based on its associated rate plan. We also recognize revenue for airtime minutes in excess of the monthly access fees in the period such minutes are used. Under certain annual plans where customers prepay for a predetermined amount of minutes, we defer revenue until the minutes are used or the prepaid time period expires. Unused minutes accumulate until they expire, at which point we recognize revenue for any remaining unused minutes. For annual access fees charged for certain annual plans, we recognize revenue on a straight-line basis over the term of the plan.

 

We expense or charge credits granted to customers against revenue or deferred revenue upon issuance.

 

We expense certain subscriber acquisition costs, including such items as dealer commissions and internal sales commissions at the time of the related sale.

 

SPOT and Simplex Service Revenue

 

We sell SPOT and Simplex services as annual or multi-year plans and recognize revenue ratably over the service term or as service is used, beginning when the service is activated by the customer. We record amounts received in advance as deferred revenue.

 

IGO Service Revenue

 

We earn a portion of our revenues through the sale of airtime minutes or data packages on a wholesale basis to IGOs. We recognize revenue from services provided to IGOs based upon airtime minutes or data packages used by their customers and in accordance with contractual fee arrangements. If collection is uncertain, we recognize revenue when cash payment is received.

 

Equipment Revenue

 

Subscriber equipment revenue represents the sale of fixed and mobile user terminals, accessories and our SPOT and Simplex products. We recognize revenue upon shipment provided title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, the fee is fixed and determinable, and collection is probable.

 

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Other Service Revenue

 

We also provide certain engineering services to assist customers in developing new technologies related to our system. We recognize the revenues associated with these services when the services are rendered, and we recognize the expenses when incurred. We recognize revenues and costs associated with long-term engineering contracts on the percentage-of-completion basis of accounting.

 

Property and Equipment

 

We capitalize costs associated with the design, manufacture, test and launch of our low earth orbit satellites. We track capitalized costs associated with our satellites by fixed asset category and allocate them to each asset as it comes into service. For assets that are sold or retired, including satellites that are de-orbited and no longer providing services, we remove the estimated cost and accumulated depreciation. We recognize a loss from an in-orbit failure of a satellite as an expense in the period it is determined that the satellite is not recoverable.

 

We depreciate satellites over their estimated useful lives, beginning on the date each satellite is placed into service. We evaluate the appropriateness of estimated useful lives assigned to our property and equipment and revise such lives to the extent warranted by changing facts and circumstances.

 

We capitalize costs associated with the design, manufacture and test of our ground stations and other capital assets. We track capitalized costs associated with our ground stations and other capital assets by fixed asset category and allocate them to each asset as it comes into service.

 

We review the carrying value of our assets for impairment whenever events or changes in circumstances indicate that the recorded value may not be recoverable. We look to current and future undiscounted cash flows, excluding financing costs, as primary indicators of recoverability. If we determine that impairment exists, we calculate any related impairment loss based on fair value.

 

Income Taxes

 

 We use the asset and liability method of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment of certain transactions. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Our deferred tax calculation requires us to make certain estimates about our future operations. Changes in state, federal and foreign tax laws, as well as changes in our financial condition or the carrying value of existing assets and liabilities, could affect these estimates. We recognize the effect of a change in tax rates as income or expense in the period that the rate is enacted.

 

We assess whether it is more likely than not that we will be able to realize some or all of our deferred tax assets. If we cannot determine that deferred tax assets are more likely than not recoverable, we are required to provide a valuation allowance against those assets. This assessment takes into account factors including: (a) the nature, frequency, and severity of current and cumulative financial reporting losses; (b) sources of estimated future taxable income; and (c) tax planning strategies.

 

Derivative Instruments

 

We recognize all derivative instruments as either assets or liabilities on the balance sheet at their respective fair values. We record recognized gains or losses on derivative instruments in the consolidated statements of operations.

 

We estimate the fair values of our derivative financial instruments using various techniques that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that embody it and the expected means of settlement. We determine the fair value of our interest rate cap using pricing models developed based on the LIBOR rate and other observable market data. We adjust the value to reflect nonperformance risk of both the counterparty and us. There are various features embedded in our debt instruments that require bifurcation from the debt host. For the conversion options and the contingent put features in the Amended and Restated Thermo Loan, the 8.00% Notes Issued in 2009 and the 8.00% Notes Issued in 2013, we use the Monte Carlo valuation technique to determine fair value. For warrants issued with the 8.00% Notes Issued in 2009, we use the Monte Carlo valuation technique to determine fair value. Valuations derived from these models are subject to ongoing internal and external verification and review. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. Our financial position and results of operations may vary materially from quarter-to-quarter based on conditions other than our operating revenues and expenses.

 

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Inventory

 

Inventory consists of purchased products and accessories. We compute cost using the first-in, first-out (FIFO) method and state inventory transactions at the lower of cost or market. We measure inventory write-downs as the difference between the cost of inventory and market, record them as a cost of subscriber equipment sales - reduction in the value of inventory. At the point of any inventory write-downs to market, we establish a new, lower cost basis for that inventory, and any subsequent changes in facts and circumstances do not result in the restoration of the former cost basis or increase in that newly established cost basis.

 

We review product sales and returns from the previous 12 months and future demand forecasts and write off any excess or obsolete inventory. We also assess inventory for obsolescence by testing finished goods to ensure they have been properly stored and maintained so that they will perform according to specifications. In addition, we assess the market for competing products to determine that the existing inventory will be competitive in the marketplace. We also record a liability for firm, noncancelable, and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory.

 

If there were to be a sudden and significant decrease in future demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to write down our inventory, and our liability for purchase commitments with contract manufacturers and suppliers, and accordingly gross margin could be adversely affected.

 

Allowance for Doubtful Accounts

 

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of some of our customers to make required payments. We review these estimated allowances on a case by case basis, analyzing the customer's payment history and information regarding the customer's creditworthiness known to us. In addition, we record a reserve based on the size and age of all receivable balances against those balances that do not have specific reserves. If the financial condition of our customers deteriorates, resulting in their inability to make payments, we would record additional allowances.

 

Pension Plan

 

We calculate our pension benefit obligation and expense using actuarial models. Critical assumptions and estimates we use in the actuarial calculations include discount rate, expected rate of return on plan assets and other participant data, such as demographic factors, mortality, and termination.

 

We determine discount rates annually based on our calculated average of rates of return of long-term corporate bonds. We based discount rates on Prudential’s yield curve index as of December 31, 2013. We based discount rates on Moody’s and Citigroup’s annualized yield curve index as of December 31, 2012. The discount rate used at the measurement date increased to 4.8% from 3.75% in 2012. A 100 basis point increase in our discount rate would reduce our benefit obligation by $1.8 million.

 

We determine expected long-term rates of return on plan assets based on an evaluation of our plan assets, historical trends and experience, taking into account current and expected market conditions. Plan assets are comprised primarily of equity and debt securities. The rate of return on plan assets remained consistent at 7.12% in 2013 and 2012. To determine the rates of return, we consider historical experience and expected future performance of plan assets.

 

Stock-Based Compensation

 

To measure compensation expense, we use valuation models which require estimates such as, forfeitures, vesting terms (calculated based on market conditions associated with a certain award), volatility, and risk free interest rates. Additionally we recognize stock-based compensation expense over the requisite service periods of the awards on a straight-line basis, which is generally commensurate with the vesting term.

 

Long-Lived Assets

 

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. In the event of impairment, we write the asset down to its fair market value.

   

Litigation, Commitments and Contingencies

 

We are subject to various claims and lawsuits that arise in the ordinary course of business. Estimating liabilities and costs associated with these matters requires judgment and assessment based on professional knowledge and experience of our management and legal counsel. The ultimate resolution of any such exposure may vary from earlier estimates as further facts and circumstances become known.

 

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Performance Indicators

 

Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality of and potential variability of our earnings and cash flows. These key performance indicators include:

 

total revenue, which is an indicator of our overall business growth;
subscriber growth and churn rate, which are both indicators of the satisfaction of our customers;
average monthly revenue per user, or ARPU, which is an indicator of our pricing and ability to obtain effectively long-term, high-value customers. We calculate ARPU separately for each type of our Duplex, Simplex, SPOT and IGO revenue;
operating income and adjusted EBITDA, which are both indicators of our financial performance; and
capital expenditures, which are an indicator of future revenue growth potential and cash requirements.

 

Comparison of the Results of Operations for the years ended December 31, 2013 and 2012

 

Revenue:

 

Total revenue increased $6.4 million, or 8%, to $82.7 million during 2013 from $76.3 million in 2012. This increase was due primarily to a $7.2 million increase in service revenue offset by a $0.8 million decrease in revenue from subscriber equipment sales. The primary driver for the increase in service revenue was Duplex service revenue as we continue to see increases in new subscriber activations as a result of equipment sales over the past 12 months and subscribers moving to higher rate plans. Demand for our Duplex products and services has increased as we successfully completed the restoration of our second-generation constellation in August 2013 by placing our last second-generation satellite into commercial service. We also experienced increases in our SPOT and Simplex service lines due primarily to growth in both of the related subscriber bases. The decrease in equipment sales revenue was due primarily to higher demand for our Simplex and SPOT products in 2012 compared to 2013, offset partially by increased demand for our Duplex products in 2013.

 

The following table sets forth amounts and percentages of our revenue by type of service for 2013 and 2012 (dollars in thousands):

 

   Year Ended
December 31, 2013
   Year Ended
December 31, 2012
 
   Revenue   % of Total
Revenue
   Revenue   % of Total
Revenue
 
Service Revenues:                    
Duplex  $22,788    28%  $18,438    24%
SPOT   27,902    34    25,227    33 
Simplex   7,619    9    6,146    8 
IGO   1,029    1    804    1 
Other   5,306    6    6,853    9 
Total Service Revenues  $64,644    78%  $57,468    75%

 

The following table sets forth amounts and percentages of our revenue from equipment sales for 2013 and 2012 (dollars in thousands).

 

   Year Ended
December 31, 2013
   Year Ended
December 31, 2012
 
   Revenue   % of Total
Revenue
   Revenue   % of Total
Revenue
 
Equipment Revenues:                    
Duplex  $6,565    8%  $3,447    5%
SPOT   4,546    6    5,196    7 
Simplex   5,927    7    9,081    12 
IGO   841    1    990    1 
Other   188    -    136    - 
Total Equipment Revenues  $18,067    22%  $18,850    25%

 

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The following table sets forth our average number of subscribers, ARPU, and ending number of subscribers by type of revenue for 2013 and 2012. The following numbers are subject to immaterial rounding inherent in calculating averages.   

 

   December 31, 
   2013   2012 
         
Average number of subscribers for the period (year ended):          
Duplex   84,247    88,189 
SPOT   231,488    221,911 
Simplex   209,756    164,459 
IGO   40,249    42,252 
           
ARPU (monthly):          
Duplex  $22.54   $17.42 
SPOT   10.04    9.47 
Simplex   3.03    3.11 
IGO   2.13    1.59 
           
Number of subscribers (end of period):          
Duplex   84,163    84,330 
SPOT   221,895    241,081 
Simplex   231,353    188,158 
IGO   39,351    41,146 
Other   6,364    7,239 
Total   583,126    561,954 

  

 Other service revenue includes revenue generated from engineering services and third party sources, which is not subscriber driven. Accordingly, we do not present average subscribers or ARPU for other revenue in the above charts.

 

Service Revenue

 

Duplex service revenue increased 24% in 2013 from 2012. During 2012, we began a process to convert certain of our Duplex customers to higher rate plans commensurate with our improved service levels. This process resulted in churn among lower rate paying subscribers. However, this churn was offset by the transition of subscribers to higher rate plans and the addition of new subscribers at higher rate plans, resulting in increases to service revenue and ARPU. We have also experienced an increase in Duplex equipment units sold over the past 12 months, which has further contributed to the increase in Duplex service revenue as more customers are activating units on our network. We have worked over the past several years to improve our coverage, which was impacted by Duplex limitations in our first-generation satellites. However, as we completed our second-generation constellation in August 2013, Duplex service levels have improved. New pricing plans, which were introduced in March 2013, are driving increases in Duplex revenue even though some subscribers deactivate when we discontinue lower priced legacy plans.

 

SPOT service revenue increased 11% in 2013 from 2012. As previously stated, during the first quarter of 2013, we deactivated approximately 36,000 suspended subscribers. Suspended subscribers are subscribers who have activated their devices, have access to our network, but from which we recognize no service revenue while we are in the process of collecting payment of their fees.  Ending SPOT subscribers decreased 8% from December 31, 2012 to December 31, 2013. Excluding the suspended subscribers we deactivated in the first quarter of 2013 from our December 31, 2012 subscriber count, total SPOT subscribers increased 8% from December 31, 2012 to December 31, 2013. The total decrease in SPOT subscribers in 2013 due to these deactivations was offset by growth in our non-suspended SPOT subscriber base, which generated the increase in SPOT service revenue during 2013. Total suspended accounts included in our subscriber count were 7% and 19% as of December 31, 2013 and 2012, respectively.

 

Simplex service revenue increased 24% in 2013 from 2012 due to a 23% increase in our Simplex subscribers during 2013. Throughout 2012, we experienced high demand for our Simplex products, resulting in increased subscriber activations in 2012 and 2013, thus generating additional Simplex service revenue recognized in 2013. Revenue growth for our Simplex customers is not necessarily commensurate with subscriber growth due to the various competitive pricing plans we offer.

 

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Other service revenue decreased $1.5 million, or 23%, in 2013 from 2012. This decrease was due primarily to decreases in our engineering service revenue and third party revenue. $0.7 million, or 43%, of this total decrease in other service revenue was due to the timing and lower amount of engineering service revenue recognized in 2012 compared to 2013, which was driven by the contracts in place during the respective periods. The decrease in other service revenue was also driven by a decrease in third party revenue. While we were manufacturing and deploying our second-generation constellation, we purchased service from other satellite providers which we re-sold to certain of our loyal subscribers. This revenue is recorded in other service revenue as third party revenue. As our coverage is now fully restored, we have begun to transition these subscribers to our network, which has contributed to the increase in our Duplex service revenue. As third party revenue decreases, other service revenue will also decrease and Duplex revenue will increase. The decrease in third party revenue represented approximately $0.7 million, or 44%, of the total decrease in other service revenue.

 

Equipment Revenue

 

Revenue from Duplex equipment sales increased over 90% in 2013 from 2012. As a result of launching and placing into service our second-generation satellites, we are experiencing increased demand for our Duplex two-way voice and data products. As previously discussed, we introduced SPOT Global Phone in the second quarter of 2013; this product contributed approximately 57% of the total increase in equipment units sold during 2013.

 

Revenue from SPOT equipment sales decreased 13% in 2013 from 2012. As previously discussed, we experienced higher demand for our SPOT2 in 2012 due to a few large volume sales to certain customers throughout 2012 and particularly in the second quarter of 2012; this demand did not recur at the same levels in 2013 as sales of our SPOT2 slowed in our reseller channel due to the anticipation of the release of SPOT Gen3. This decrease was offset in part by the introduction of SPOT Gen3 in the third quarter of 2013. The decrease in SPOT equipment sales was also reduced by the introduction of SPOT Trace in the fourth quarter of 2013.

 

Revenue from Simplex equipment sales decreased 35% in 2013 from 2012. We continue to experience demand for our commercial applications for M2M asset monitoring and tracking, however, revenue related to these products decreased in 2013 from 2012 due to the mix of products sold during 2013 as well as higher demand for products in 2012.

 

Operating Expenses:

 

Total operating expenses decreased $1.2 million, or less than 1%, to $170.1 million in 2013 from $171.3 million in 2012. The fluctuation in operating expenses year over year is due to various one-time items in 2012. During 2012, we recognized a $22.0 million termination charge related to the settlement with Thales regarding the construction of Phase 3 satellites, as well as the recognition of a loss of approximately $7.1 million related to an adjustment made to the carrying value of our first-generation constellation. These items did not recur in 2013. Excluding these one-time items, operating expenses increased $27.9 million, or 20%, in 2013 from 2012, due primarily to an increase in depreciation expense of $20.8 million. 

 

The increase in operating expenses, excluding one-time items discussed above, during 2013 from 2012 was driven primarily by the $20.8 million increase in non-cash depreciation expense as a result of additional second-generation satellites coming into service throughout the fourth quarter of 2012 and the first eight months of 2013 with our final second-generation satellite was placed into service in August 2013. This increase was also due to higher expense recorded related to the reduction in the value of equipment, discussed further below.

 

Cost of Services

 

Cost of services increased $0.1 million, or less than 1%, to $30.2 million in 2013 from $30.1 million in 2012. Cost of services comprises primarily network operating costs, which are generally fixed in nature. The slight increase in cost of services was due primarily to higher salaries and other expense categories as we expand and repair our gateway infrastructure as well as timing of costs incurred related to our engineering service contracts in the current and prior year. We also experienced an increase in research and development costs in 2013 as we continue to develop and launch new products to support our growing commercial and retail channels. These increases were offset slightly by additional cost savings experienced as a result of our increased focus on monitoring telecommunication service expenses.

 

Cost of Subscriber Equipment Sales

 

Cost of subscriber equipment sales increased $0.3 million, or 3%, to $13.6 million in 2013 from $13.3 million in 2012. The fluctuations in cost of subscriber equipment sales are due primarily to the mix and volume of products sold during the respective years.

 

Cost of Subscriber Equipment Sales - Reduction in the Value of Inventory

 

Cost of subscriber equipment sales - reduction in the value of inventory was $5.8 million in 2013 compared to $1.4 million in 2012. During 2013, we recorded an inventory reserve of $5.8 million related primarily to certain Duplex accessories, including car kit bases. We recognized these charges after assessing our inventory quantities, forecasted equipment sales and prices, and attachment rates for our accessories. This evaluation showed that there was an excess of certain Duplex accessories included in inventory on hand. During 2012, we recorded an inventory reserve of $1.0 million related to component parts that will not be utilized in the manufacturing or production of current or future products.

 

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Marketing, general and administrative

 

Marketing, general and administrative expenses increased $2.4 million, or 9%, to $29.9 million in 2013 from $27.5 million in 2012. As disclosed in Note 14 to our Consolidated Financial Statements, we incurred additional compensation cost of approximately $0.8 million, $0.6 million of this $0.8 million was additional compensation cost resulting from the modification and subsequent vesting of our market based stock options during the third quarter of 2013. This additional compensation cost represented approximately 34% of the total increase in marketing, general and administrative expenses in 2013. The remaining increase was due to strategic investments made for our sales and marketing initiatives and higher bad debt expense as our accounts receivable balance increased. These increases were offset partially by higher legal fees incurred in 2012 related to the 2012 Thales arbitration as well as the write off of deferred financing costs in the third quarter of 2012; these items did not recur in 2013.

 

Reduction in the Value of Long-Lived Assets

  

We did not reduce the value of long-lived assets in 2013 compared to a $7.2 million reduction in 2012. During the second quarter of 2012, we recorded a loss of $7.1 million related to an adjustment made to the carrying value of our first-generation constellation. See Note 7 to our Consolidated Financial Statements for further discussion. This did not recur in 2013.

 

Contract Termination Charge

 

During the second quarter of 2012, we recorded a contract termination charge of €17.5 million. This charge resulted from the agreement between us and Thales regarding the termination charge related to the construction of Phase 3 second-generation satellites. See Note 8 to our Consolidated Financial Statements for further discussion. This charge did not recur in 2013.

 

Depreciation, Amortization and Accretion

 

Depreciation, amortization, and accretion expense increased $20.8 million, or 30%, to $90.6 million in 2013 compared to $69.8 million in 2012. This increase relates primarily to additional depreciation expense for the second-generation satellites placed into service during the fourth quarter of 2012 and the first eight months of 2013 with our last second-generation satellite placed into service in August 2013. 

 

Other Income (Expense):

 

Loss on Extinguishment of Debt

 

In May 2013 we entered into the Exchange Agreement (as defined later) with the holders of approximately 91.5% of our outstanding 5.75% Notes. The Exchanging Note Holders (as defined later) received a combination of cash, shares of our common stock and 8.00% Notes Issued in 2013. We redeemed the remaining 5.75% Notes for cash in an amount equal to their outstanding principal amount. As a result of the exchange and redemption, we recorded a loss on extinguishment of debt of approximately $47.2 million in the second quarter of 2013, representing the difference between the net carrying amount of the old 5.75% Notes and the fair value of consideration given in the exchange (including the new 8.00% Notes Issued in 2013, cash payments to both Exchanging and non-Exchanging Note Holders, equity issued to the Exchanging Note Holders and fees incurred in connection with the exchange). Approximately 12.9% of the outstanding principal amount of 8.00% Notes Issued in 2013 was converted into shares of our common stock on July 19, 2013. As a result of this conversion, we recorded a gain on extinguishment of debt of approximately $2.5 million in the third quarter of 2013, which represented the difference between the reacquisition price and net carrying amount of the debt related to this conversion. In the fourth quarter of 2013, additional 8.00% Notes Issued in 2013 were converted, resulting in our recognizing an additional gain on extinguishment of debt of approximately $1.7 million.

 

In July 2013, we entered into an amended and restated Loan Agreement with Thermo. As a result of the amendment and restatement, we recorded a loss on extinguishment of debt of $66.1 million in the third quarter of 2013, representing the difference between the fair value of the indebtedness under the Loan Agreement, as amended and restated, and its carrying value just prior to amendment and restatement.

 

Loss on Equity Issuance

 

In May 2013, we entered into a Common Stock Purchase Agreement with Thermo. As a result of issuing stock under the Common Stock Purchase agreement with Thermo, we recognized a loss on the sale of shares of $14.0 million during the second quarter of 2013, representing the difference between the sale price of our common stock sold to Thermo and its fair value on the date of each sale (measured as the closing stock price on the date of each sale).

 

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In October 2013, we entered into a Common Stock Purchase and Option Agreement with Thermo. As a result of issuing stock under the Common Stock Purchase and Option Agreement, we recognized a loss on the sale of these shares to Thermo of approximately $2.4 million during the third quarter of 2013, representing the difference between the sale price and the fair value of our common stock (measured as the closing stock price on the date of each sale). 

 

In July 2013, a holder of our 5.0% Warrants exercised warrants in a net share exercise. The fair value of the common stock issued with respect to this exercise was recorded as a loss on shares issued of $0.3 million, representing the fair value of the stock on the date the warrant was exercised.

 

Interest Income and Expense

 

Interest income and expense, net, increased by $46.3 million to $67.8 million in 2013 from $21.5 million in 2012. During 2013 all of our 5.0% Notes were converted into shares of our common stock. The total expense recorded in 2013 as a result of these conversions was $29.3 million. We recorded a beneficial conversion feature in connection with the issuance of the 5.0% Notes; when an instrument with a beneficial conversion feature is converted prior to the full accretion of the debt discounts, the unamortized discounts are recorded as interest expense. See Note 3 to our Consolidated Financial Statements for further discussion. Similar charges did not occur in 2012.

 

The increase in interest expense was due also to a reduction in our capitalized interest due to the decline in our construction in progress balance. As we place satellites into service, our construction in progress balance related to our second-generation satellites decreases, which reduces the amount of interest we can capitalize under GAAP. As a result of this decrease in our construction in progress balance, we recorded approximately $28.2 million in interest expense during 2013 compared to $17.1 million in 2012.

 

Derivative Gain (Loss)

 

Derivative losses increased by $313.0 million to a loss of $306.0 million in 2013 compared to a gain of $7.0 million in 2012. We recognize gains or losses due to the change in the value of certain embedded features within our debt instruments that require standalone derivative accounting. These fluctuations are due primarily to changes in our stock price as well as other inputs used in our valuation models. Our stock price increased over 400% from December 31, 2012 to December 31, 2013; this increase in stock price is one of the most significant drivers for the change in value of these derivative instruments.

 

Other

 

Other income (expense) fluctuated by $0.7 million to an expense of $3.0 million in 2013 from an expense of $2.3 million in 2012. Changes in other income (expense) are due primarily to foreign currency gains and losses recognized during the respective periods. In February 2013, the Venezuelan government devalued its currency. As a result of this devaluation, we recorded a foreign currency gain of approximately $0.8 million during the first quarter of 2013. This devaluation did not have a material impact on our operations. This gain was offset by a $1.0 million loss recorded as a result of issuing stock to Hughes in the fourth quarter of 2013 (see Note 7 to the Consolidated Financial Statements for further discussion); a $0.6 million loss related to an equity method investment; and other foreign currency losses recognized during 2013.

 

Comparison of the Results of Operations for the years ended December 31, 2012 and 2011

 

Revenue:

 

Total revenue increased by $3.5 million, or approximately 5%, to $76.3 million for 2012 from $72.8 million in 2011. During the first quarter of 2011, we recognized $2.0 million in nonrecurring revenue as a result of the termination of our Open Range partnership. Excluding this revenue recognized, total revenue increased $5.5 million, or approximately 8%. We attribute this increase to higher sales of Simplex equipment and increased service revenue as a result of growth in our SPOT and Simplex subscriber base. These increases were offset primarily by decreases in sales of SPOT equipment due to the introduction of new product offerings in early 2011. The majority of the subscribers we gained as a result of higher SPOT equipment sales in 2011 is in our current subscriber base and continues to generate service revenue.

 

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The following table sets forth amounts and percentages of our revenue by type of service for 2012 and 2011 (dollars in thousands):

 

   Year Ended
December 31, 2012
   Year Ended
December 31, 2011
 
   Revenue   % of Total
Revenue
   Revenue   % of Total
Revenue
 
Service Revenues:                    
Duplex  $18,438    24%  $19,778    27%
SPOT   25,227    33    19,753    27 
Simplex   6,146    8    5,495    8 
IGO   804    1    1,533    2 
Other   6,853    9    8,838    12 
Total Service Revenues  $57,468    75%  $55,397    76%

 

The following table sets forth amounts and percentages of our revenue for equipment sales for 2012 and 2011 (dollars in thousands).

 

   Year Ended
December 31, 2012
   Year Ended
December 31, 2011
 
   Revenue   % of Total
Revenue
   Revenue   % of Total
Revenue
 
Equipment Revenues:                    
Duplex  $3,447    5%  $2,607    3%
SPOT   5,196    7    7,968    11 
Simplex   9,081    12    6,431    9 
IGO   990    1    1,128    1 
Other   136    -    (704)   - 
Total Equipment Revenues  $18,850    25%  $17,430    24%

 

The following table sets forth our average number of subscribers, ARPU, and ending number of subscribers by type of revenue for 2012 and 2011. The following numbers are subject to immaterial rounding inherent in calculating averages.   

 

   December 31, 
   2012   2011 
         
Average number of subscribers for the period (year ended):          
Duplex   88,189    93,963 
SPOT   221,911    177,247 
Simplex   164,459    136,037 
IGO   42,252    47,920 
           
ARPU (monthly):          
Duplex  $17.42   $17.54 
SPOT   9.47    9.29 
Simplex   3.11    3.37 
IGO   1.59    2.67 
           
Number of subscribers (end of period):          
Duplex   84,330    92,047 
SPOT   241,081    202,741 
Simplex   188,158    140,760 
IGO   41,146    43,357 
Other   7,239    7,548 
Total   561,954    486,453 

  

 Other service revenue includes revenue generated from engineering services, third party sources and our former Open Range partnership, which is not subscriber driven. Accordingly, we do not present average subscribers or ARPU for other revenue in the above charts.

 

Service Revenue

 

Duplex revenue decreased approximately 7% in 2012 from 2011. Our two-way communication issues continue to affect our Duplex revenue. Despite our efforts to maintain our Duplex subscriber base by lowering prices for our Duplex equipment, our subscriber base decreased by approximately 8% during 2012. During 2012, we began a process to convert certain Duplex customers to higher rate plans commensurate with our improved service levels. As a result, we have experienced some additional churn in our subscriber base. As a result of launching and placing into service our second-generation satellites, we are experiencing increases in demand for our Duplex two-way voice and data products. As these units are activated, we expect to see increases in the related Duplex service in the future.

 

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SPOT revenue increased approximately 28% in 2012. We generated increased service revenue from SPOT and added additional service revenue from the release of other SPOT consumer retail products sold during 2011, which are reflected in our 2012 subscriber base. Our SPOT subscriber base increased by approximately 19% during 2012. Our subscriber count includes suspended subscribers, who are subscribers who have activated their devices, have access, but no service revenue is being recognized for their fees while we are in the process of collecting payment. These suspended accounts represented 19% and 20% of our total SPOT subscribers as of December 31, 2012 and 2011, respectively. Beginning in 2013, we initiated a process to deactivate these suspended accounts.

 

Simplex revenue increased approximately 12% in 2012 from 2011. We generated increased service revenue due to a 34% increase in our Simplex subscribers during 2012. Revenue growth for our Simplex customers is not necessarily commensurate with subscriber growth due to the various competitive pricing plans we offer and product mix.

 

Other revenue decreased approximately 22% in 2012. This decrease related to the nonrecurrence in 2012 of revenue recognized as a result of the termination of our Open Range contract in the first quarter of 2011. Excluding the recognition of Open Range revenue of approximately $2.0 million, other revenue remained consistent, which was due primarily to higher engineering services revenue and higher activation fees recognized during 2012 compared to 2011. These increases were offset by decreases in service revenue recognized from third party sources.

 

Equipment Revenue

 

Duplex equipment sales increased by approximately 32% in 2012. As a result of launching and placing into service our second-generation satellites, we are experiencing increased demand for our Duplex two-way voice and data products. As these units are activated, we expect to see increases in the related Duplex service in the future. As we place into service the remaining second-generation satellites that we launched in February 2013, our two-way communication reliability will continue to improve, and we expect Duplex equipment revenue to increase. 

 

 Our inventory and advances for inventory balances were $42.2 million and $9.2 million, respectively, as of December 31, 2012, compared with subscriber equipment sales of $18.9 million for 2012. A significant portion of our inventory consists of Duplex products which are designed to operate with both our first-generation and our second-generation satellites. Our advances for inventory relate to our commitment with Qualcomm to purchase additional Duplex products. In May 2008, we entered into an agreement with Hughes under which Hughes will design, supply and implement (a) RAN ground network equipment and software upgrades for installation at a number of our satellite gateway ground stations and (b) satellite interface chips to be used in various next-generation Globalstar devices.

  

We sold a limited number of Duplex products in 2012 and 2011, compared to the high level of inventory on hand. However, we have several initiatives underway intended to increase future sales of Duplex products, which depend upon successfully completing the deployment of our second-generation constellation. With the improvement of both coverage and quality for our Duplex services resulting from the deployment of our second-generation constellation, we expect an increase in the sale of Duplex products which would result in a reduction in the inventory currently on hand.

 

SPOT equipment sales decreased approximately 35% in 2012. The decrease relates primarily to higher sales of certain new SPOT consumer retail products which were released in early 2011 which did not recur in 2012. We anticipate introducing additional SPOT products during 2013 that we expect will further drive sales, subscriber and revenue growth.

 

Simplex equipment sales increased approximately 41% in 2012. The increase is due primarily to continued success of our commercial applications for M2M asset monitoring and tracking.

  

Operating Expenses:

 

Total operating expenses increased $25.2 million, or approximately 17%, to $171.3 million from $146.1 million in 2011. This increase is primarily due to the $22.0 million agreed termination charge related to the settlement with Thales regarding the construction of Phase 3 satellites, as well as the recognition of a loss of approximately $7.1 million related to an adjustment made to the carrying value of our first-generation constellation. Excluding these one-time items, total operating expenses decreased $3.9 million, or 3%, during 2012 due to decreases in various components of operating expenses, partially offset by higher depreciation expense of $19.8 million as a result of additional second-generation satellites coming into service throughout 2011 and 2012.

 

Cost of Services

 

Cost of services decreased $7.8 million, or approximately 21%, to $30.1 million from $37.9 million in 2011. Cost of services is comprised primarily of network operating costs, which are generally fixed in nature. The decrease during the year was due primarily to implementation of our plans to lower costs by monitoring operating expenses and streamlining operations.

 

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Cost of Subscriber Equipment Sales

 

Cost of subscriber equipment sales increased $1.4 million, or approximately 11%, to $13.3 million from $11.9 million in 2011. These increases were due primarily to increases in equipment revenue of 8% for 2012 from 2011. These increases were offset slightly by lower manufacturing costs for our SPOT and Simplex products.

 

Marketing, general and administrative

 

Marketing, general and administrative expenses decreased $6.3 million, or approximately 19%, to $27.5 million from $33.8 million in 2011. This decrease was due primarily to higher legal fees incurred during 2011 related to the arbitration with Thales, and our recording a provision for contingent payroll reimbursements as a result of our relocation agreement with the State of Louisiana during 2011. We also experienced decreases across all expense categories due to improvements in our cost structure from monitoring operating costs and streamlining operations.

 

Contract Termination Charge

 

During the second quarter of 2012, we recorded a contract termination charge of €17.5 million. This charge related to the agreement between us and Thales regarding construction of additional second-generation satellites. See Note 8 to our Consolidated Financial Statements for further discussion.

 

Reduction in the Value of Inventory

 

Cost of subscriber equipment sales - reduction in the value of inventory was $1.4 million compared to $8.8 million in 2011. During 2012, we recorded an inventory reserve of $1.0 million related to component parts that will not be utilized in the manufacturing or production of current or future products. In 2011, we recorded impairment charges on our phones and related inventory that use our two-way communication services. These charges were recognized after assessment of our inventory quantities and our forecasted equipment sales and prices given the current and expected market conditions for this type of equipment. During 2011, we also recorded impairment charges of $1.0 million as a result of discontinuing the sale of certain products resulting from our strategic decision to focus on our core products and curtail substantially all on-going product development activities.

 

Reduction in the Value of Long-Lived Assets

  

Reduction in the value of long-lived assets was $7.2 million during 2012 and $3.6 million during 2011. During the second quarter of 2012, we recorded a loss of $7.1 million related to an adjustment made to the carrying value of our first-generation constellation. See Note 7 to our Consolidated Financial Statements for further discussion. During 2011, we recorded an impairment charge of $3.0 million related to intangible assets, equipment, and capitalized software costs as a result of discontinuing the sale of certain products resulting from our strategic decision to focus on our core products and curtail substantially all on-going product development activities.  

 

Depreciation, Amortization and Accretion

 

Depreciation, amortization, and accretion expense increased $19.8 million, or approximately 39%, to $69.8 million from $50.0 million in 2011. The increase relates primarily to additional depreciation expense for our second-generation satellites placed into service throughout 2011 and 2012. 

 

Other Income (Expense):

 

Interest Income and Expense

 

 Interest income and expense, net, increased by $16.7 million to a net expense of $21.5 million for 2012 from $4.8 million in 2011. This increase was due primarily to a reduction in our capitalized interest due to the status of our construction in progress. As we place satellites into service, our construction in progress balance related to our second-generation satellites decreases, which reduces the amount of interest we can capitalize under Generally Accepted Accounting Principles (“GAAP”). As a result of this decrease in our construction in progress balance, we recorded approximately $17.1 million of interest expense during 2012 and $0 in 2011.

 

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Derivative Gain (Loss)

 

Derivative gain (loss) decreased by $16.9 million to a gain of $6.9 million for 2012 from a gain of $23.8 million in 2011, due primarily to changes in our stock price. 

  

Other

 

Other income (expense) increased by $1.5 million to expense of $2.3 million for 2012 from expense of $0.8 million in 2011. Changes in other income (expense) are due primarily to foreign currency gains and losses recognized during the respective periods.

 

Liquidity and Capital Resources

 

Our principal liquidity requirements include paying remaining amounts outstanding related to the deployment of our second-generation constellation, making improvements to our ground infrastructure, repaying our debt and funding our operating costs. Our principal sources of liquidity include cash on hand, cash flows from operations and funds available under the equity line agreement with Terrapin. We also have funds available under the Consent Agreement and the Common Stock Purchase and Option Agreement with Thermo. See below for further discussion. Additionally, we have approximately $37.9 million in restricted cash which must be maintained through the term of the Facility Agreement and may be used to pay the final principal and interest payments under the Facility Agreement.

 

Cash Flows for the years ended December 31, 2013, 2012 and 2011

 

The following table shows our cash flows from operating, investing and financing activities for 2013, 2012 and 2011 (in thousands):

  

   Year Ended December 31, 
Statements of Cash Flows  2013   2012   2011 
Net cash provided by (used in) operating activities  $(6,462)  $6,874   $(5,503)
Net cash used in investing activities   (37,119)   (58,010)   (99,419)
Net cash provided by financing activities   48,972    52,386    82,638 
Effect of exchange rate changes on cash   225    591    (782)
Net increase (decrease) in cash and cash equivalents  $5,616   $1,841   $(23,066)

 

Cash Flows Used in Operating Activities

 

Net cash used in operating activities during 2013 was $6.5 million compared to net cash provided by operating activities during 2012 of $6.9 million. During 2013, we used cash from operating activities to decrease certain accounts payable and accrued liabilities. Compared to the same period in 2012, net cash provided by (used in) operating activities fluctuated by $13.3 million, which was due primarily to a $6.0 million refund received in the third quarter of 2012 related to the termination of a contingent agreement with a potential vendor for services related to our second-generation constellation.

 

Net cash provided by operating activities during 2012 was $6.9 million compared to net cash used of $5.5 million in 2011. During the third quarter of 2012, we received a $6.0 million refund related to the termination of an agreement with a vendor for services related to our second-generation constellation. We also experienced favorable changes in operating assets and liabilities during 2012, which resulted in positive cash flows from operations for 2012.

  

Cash Flows Used in Investing Activities

 

Cash used in investing activities was $37.1 million during 2013 compared to $58.0 million during 2012. The decrease in cash used in investing activities of $20.9 million was due primarily to a fluctuation in our restricted cash balance as well as a decrease in costs related to our second-generation constellation and ground upgrades. During 2013, we drew $8.8 million of excess funds held in our debt service reserve account to pay launch related expenses. The decrease in cash used in investing activities was also due to decreased payments related to the construction of our second-generation satellites as they were deployed fully by August 2013. We expect to continue to incur capital expenditures throughout 2014 and in future years relating to capital expenditures to upgrade our gateways and other ground facilities.

 

Cash used in investing activities was $58.0 million during 2012 compared to $99.4 million during 2011. The decrease in cash used during 2012 when compared to 2011 resulted primarily from decreased payments related to the construction of our second-generation constellation as the second-generation satellites neared completion and the deferral of payments to contactors working on the construction of our next-generation ground upgrades.

 

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Cash Flows Provided by Financing Activities

 

Net cash provided by financing activities was $49.0 million in 2013 compared to $52.4 million in 2012. The fluctuation in cash provided by financing activities during 2013 was due primarily to transactions related to our debt instruments and equity commitments. In May 2013, we exchanged our 5.75% Notes for new 8.00% Notes Issued in 2013. In connection with this exchange, we paid $20.0 million in cash as a reduction of principal outstanding. We also received $65.0 million in equity from Thermo pursuant to the Consent Agreement and the Common Stock Purchase and Option Agreement. We also made payments for financing costs associated with this exchange and the amendment and restatement of our Facility Agreement in August 2013. See Note 3 to our Consolidated Financial Statements for further discussion.

 

During the third quarter of 2013, we drew the remaining amount under our Facility Agreement and the interest earned from amounts held in our contingent equity account. The total drawn from these accounts totaled $1.7 million whereas we drew $53.2 million from these accounts during 2012.

 

We also received cash for the issuance of shares through warrants exercised, funds received from shares issued to Terrapin and the cancellation of our 2008 Share Lending Agreement. As a result of these transactions, we received $21.4 million.

 

Net cash provided by financing activities in 2012 decreased by $30.2 million to $52.4 million from $82.6 million in 2011. The decrease from 2011 to 2012 was attributable primarily to the issuance of $38.0 million of our 5% Notes during June 2011, which did not recur in 2012. We funded 2012 activities by borrowing under our Facility Agreement and drawing from our contingent equity account. We continue to seek additional financing to fund capital expenditures.

 

Cash Position and Indebtedness

 

As of December 31, 2013, we held cash and cash equivalents of $17.4 million, and $24.0 million was available under the equity line agreement with Terrapin. We also have funds available under the Consent Agreement and the Common Stock Purchase and Option Agreement. Thermo’s remaining commitment under the Consent Agreement is $5.0 million. This commitment will be reduced to the extent that we exercise our option to require Thermo to purchase up to $11.5 million of our common stock under the Common Stock Purchase and Option Agreement. Additionally, we have approximately $37.9 million in restricted cash which must be maintained through the term of the Facility Agreement and may be used to pay the final principal and interest payments under the Facility Agreement.

 

As of December 31, 2012, cash and cash equivalents were $11.8 million; cash available under our Facility Agreement was $0.7 million; interest earned on funds previously held in our contingent equity account was $1.1 million, and excess funds held in our debt service reserve account was $8.9 million.

 

The carrying amount of our current and long-term debt outstanding was $4.0 million and $665.2 million, respectively, at December 31, 2013, compared to $655.9 million and $95.1 million, respectively, at December 31, 2012. The fluctuations in our debt balances from December 31, 2012 to December 31, 2013 are due primarily to the restructuring of our Facility Agreement in August 2013, which cured all of the then existing events of default. As a result of certain events of default then existing under our Facility Agreement, GAAP required us to show the amounts outstanding as current on our December 31, 2012 balance sheet. The fluctuations in our debt balances from December 31, 2012 to December 31, 2013 are also due to the exchange and redemption of our 5.75% Notes in May 2013. As the first put date of the 5.75% Notes was April 1, 2013, we classified these notes as current debt on our December 31, 2012 consolidated balance sheet. As a result of our exchanging these Notes for 8.00% Notes Issued in 2013, cash and common stock, we have classified the new notes as noncurrent on our December 31, 2013 consolidated balance sheet. The current portion of long-term debt outstanding at December 31, 2013 represents the first principal payment under our Facility Agreement, currently scheduled for December 2014. See Note 3 to the Consolidated Financial Statements for further discussion. 

 

Facility Agreement

 

 We have a $586.3 million senior secured credit facility agreement (the “Facility Agreement”) that, as described below, was amended and restated effective in August 2013 and is scheduled to mature in December 2022. Semi-annual principal repayments are scheduled to begin in December 2014. The facility bears interest at a floating LIBOR rate plus a margin of 2.75% through June 2017, increasing by an additional 0.5% each year to a maximum rate of LIBOR plus 5.75%. Ninety-five percent of our obligations under the Facility Agreement are guaranteed by COFACE, the French export credit agency. Our obligations under the Facility Agreement are guaranteed on a senior secured basis by all of our domestic subsidiaries and are secured by a first priority lien on substantially all of the assets of us and our domestic subsidiaries (other than their FCC licenses), including patents and trademarks, 100% of the equity of our domestic subsidiaries and 65% of the equity of certain foreign subsidiaries. The Facility Agreement contains customary events of default and requires that we satisfy various financial and nonfinancial covenants. We were in compliance with all covenants as of December 31, 2013.

 

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The Facility Agreement requires the Company to maintain a total of $37.9 million in a debt service reserve account. The use of the funds in this account is restricted to making principal and interest payments under the Facility Agreement. As of December 31, 2013, the balance in the debt service reserve account was $37.9 million and classified as restricted cash.

 

Former Terms of Facility Agreement

 

On June 5, 2009, we entered into the Facility Agreement with a syndicate of bank lenders, including BNP Paribas, Natixis, Société Générale, Caylon, Crédit Industriel et Commercial as arrangers and BNP Paribas as the security agent and the agent for the lenders under our Facility Agreement. COFACE, the French export credit agency, has provided a 95% guarantee to the lending syndicate of our obligations under the Facility Agreement. Prior to its amendment and restatement in August 2013, the Facility Agreement was scheduled to mature 84 months after the first repayment date, as amended. Semi-annual principal repayments were scheduled to begin in June 2013, as amended. The facility bore interest at a floating LIBOR rate, plus a margin of 2.25% through December 2017 and 2.40% thereafter. Interest payments were due on a semi-annual basis.

 

Pursuant to the terms of the Facility Agreement, in June 2009 we were required to maintain a total of $46.8 million in a debt service reserve account. The required amount was to be funded until the date that was six months prior to the first principal repayment date, scheduled for June 2013. The minimum required balance fluctuated over time based on the timing of principal and interest payment dates. In December 2012, the amount required to be funded into the debt service reserve account was reduced by approximately $8.9 million due to the timing of the first principal repayment date. The agent for our Facility Agreement permitted us to withdraw this amount to pay certain capital expenditure costs associated with the fourth launch of our second-generation satellites in February 2013. 

 

As a result of the Thales arbitration ruling and the settlement agreements reached with Thales in 2012 related to the arbitration ruling, the lenders concluded that events of default occurred under the Facility Agreement. We were also in default of certain other financial and nonfinancial covenants, including, but not limited to, lack of payment of principal in June 2013 in accordance with the terms of the Facility Agreement, required minimum funding of our debt service account and in-orbit acceptance of all of our second-generation satellites by April 2013. At June 30, 2013, the borrowings were shown as current on our consolidated balance sheet in accordance with applicable accounting rules.

 

The Facility Agreement, as previously amended, required that:

 

following December 31, 2014, we maintain a minimum liquidity of $5.0 million;

 

we achieve for each period the following minimum adjusted consolidated EBITDA (as defined in the Facility Agreement):

 

Period  Minimum Amount 
7/1/12-6/30/13  $65.0 million 
1/1/13-12/31/13  $78.0 million 

 

beginning in June 2013, we maintain a minimum debt service coverage ratio of 1.00:1.00, gradually increasing to a ratio of 1.50:1.00 through 2019; and

 

beginning in June 2013, we maintain a maximum net debt to adjusted consolidated EBITDA ratio of 7.25:1.00 on a last twelve months basis, gradually decreasing to 2.50:1.00 through 2019.

 

Due to delays in launching our second-generation constellation, we projected that we might not be in compliance with certain financial and nonfinancial covenants specified in the Facility Agreement during the next 12 months.  Projected noncompliance with covenants included, but was not limited to, minimum consolidated adjusted EBITDA, minimum debt service coverage ratio and minimum net debt to adjusted consolidated EBITDA. If we could not obtain either a waiver or an amendment, any of these failures to comply would have represented an additional event of default. An event of default under the Facility Agreement would have permitted the lenders to accelerate the indebtedness under the Facility Agreement. That acceleration would have permitted acceleration of our obligations under other indebtedness that contains cross-acceleration provisions. These events of default were waived or cured in connection with the amendment and restatement of the Facility Agreement.

 

Amended and Restated Facility Agreement

 

On July 31, 2013, we entered into the GARA with Thermo, our domestic subsidiaries (the “Subsidiary Guarantors”), the Lenders and BNP Paribas as the security agent and COFACE Agent, providing for the amendment and restatement of our Facility Agreement and certain related credit documents. The GARA became effective on August 22, 2013 and, among other things, waived all of our existing defaults under the Facility Agreement and restructured the financial covenants.

 

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The Facility Agreement requires that:

 

For the period July 1, 2013 through December 31, 2013, we will not exceed maximum capital expenditures of $34.4 million, $42.3 million for the full year 2014, $18.8 million for the full year 2015, $13.2 million for the full year 2016 and $15.0 million for each year thereafter. Pursuant to the terms of the Facility Agreement, if, in any relevant period, the capital expenditures are less than the permitted amount for that relevant period, a permitted excess amount may be added to the maximum amount of capital expenditures in the next period;

 

We maintain at all times a minimum liquidity balance of $4.0 million;

 

We achieve for each period the following minimum adjusted consolidated EBITDA (as defined in the Facility Agreement):

 

Period  Minimum Amount 
7/1/13-12/31/13  $5.5 million 
1/1/14-6/30/14  $9.9 million 
7/1/14-12/31/14  $ 14.1 million 
1/1/15-6/30/15  $ 17.0 million 
7/1/15-12/31/15  $ 23.5 million 

 

Beginning in July 2013, we maintain a minimum debt service coverage ratio of 1.00:1; and

 

Beginning with the twelve month period ended December 31, 2013, we maintain a maximum net debt to adjusted consolidated EBITDA ratio of 62.00:1, gradually decreasing to 2.50:1 through 2022.

 

 See Note 3 to our Consolidated Financial Statements for further discussion of the Facility Agreement and other debt.

 

The Consent Agreement and the Common Stock Purchase (and Option) Agreement

 

The Consent Agreement

 

On May 20, 2013, we entered into the Consent Agreement with Thermo. Pursuant to the Consent Agreement, Thermo agreed that it would make, or arrange for third parties to make, cash contributions to us in exchange for equity, subordinated convertible debt or other equity-linked securities as follows:

 

·At the closing of the exchange transaction and thereafter each week until the earlier of the restructuring of the Facility Agreement and July 31, 2013, an amount sufficient to enable us to maintain a consolidated unrestricted cash balance of at least $4.0 million;
·At the closing of the exchange transaction, $25.0 million to satisfy all cash requirements associated with the exchange transaction, including agreed principal and interest payments to the holders of the 5.75% Notes as contemplated by the Exchange Agreement, with any remaining portion being retained by us for working capital and general corporate purposes;
·Contemporaneously with, and as a condition to the closing of, any restructuring of the Facility Agreement, $20.0 million (less any amount contributed pursuant to the commitment described above with respect to our minimum cash balance);
·Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 26, 2013, $20.0 million; and
·Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 31, 2014, $20.0 million, less the amount by which the aggregate amount of cash received by us under the first, third and fourth commitments described above exceeds $40 million.

 

 The parties agreed that the lenders could terminate the Consent Agreement if, among other things:

 

·The restructuring of the Facility Agreement was not consummated on or before June 28, 2013 (later extended to August 16, 2013); or
·Globalstar or Thermo materially breached any representations, warranties or covenants under the Consent Agreement, which breach was not cured (if curable) within 15 days of receipt of notice by us or Thermo, as the case may be.

 

In accordance with the terms of the Common Stock Purchase Agreement and the Common Stock Purchase and Option Agreement discussed below, as of December 31, 2013, Thermo has contributed a total of $65.0 million to us in exchange for 171.9 million shares of our nonvoting common stock. As of December 31, 2013, an additional $15.0 million had been contributed to us through warrant exercises and other equity issuances, reducing Thermos’s remaining commitment to $5.0 million.

 

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The Common Stock Purchase Agreement

 

 On May 20, 2013, we entered into a Common Stock Purchase Agreement with Thermo to price certain equity purchases made by Thermo pursuant to the Consent Agreement. Pursuant to the Consent Agreement, Thermo purchased 78,125,000 shares of our common stock for $25.0 million ($0.32 per share). Thermo also agreed to purchase additional shares of our common stock at $0.32 per share as and when required to fulfill its equity commitment described above to maintain our consolidated unrestricted cash balance at not less than $4.0 million until the earlier of July 31, 2013 and the closing of a restructuring of the Facility Agreement. In furtherance thereof, at the closing of the exchange transaction, Thermo purchased an additional 15,625,000 shares of our common stock for an aggregate purchase price of $5.0 million. In June 2013, Thermo purchased an additional 28,125,000 shares of our common stock for an aggregate purchase price of $9.0 million. In total, during the second quarter of 2013, Thermo purchased in total approximately 121.9 million shares of our common stock pursuant to the Common Stock Purchase Agreement for an aggregate $39.0 million.

 

The terms of the Common Stock Purchase Agreement were approved by a special committee of our board of directors consisting solely of our unaffiliated directors. The committee, which was represented by independent legal counsel, determined that the terms of the Common Stock Purchase Agreement were fair and in the best interests of us and our shareholders. 

 

 The Common Stock Purchase and Option Agreement

 

On October 14, 2013, we entered into a Common Stock Purchase and Option Agreement with Thermo to price certain previously made and anticipated equity purchases made by Thermo pursuant to the Consent Agreement. Pursuant to the terms of the Common Stock Purchase and Option Agreement, Thermo agreed to purchase 11,538,461 shares of our non-voting common stock at a purchase price of $0.52 per share in exchange for the $6.0 million invested in July and an additional 12,500,000 shares of our common stock in exchange for the $6.5 million funded in August 2013. During the third quarter of 2013, Thermo purchased approximately 24.0 million shares of our common stock pursuant to the terms of the Common Stock Purchase and Option Agreement for an aggregate purchase price of $12.5 million.

 

The Common Stock Purchase and Option Agreement also granted us a First Option and a Second Option, as defined in the agreement, whereby we could require Thermo to purchase $13.5 million at a fixed price regardless of the Company’s underlying stock price when such stock was purchased and an additional $11.5 million of nonvoting common stock, as and when requested to do so by the special committee through November 28, 2013 and December 31, 2013, respectively. The First Option provided we could sell up to $13.5 million in shares to Thermo at a purchase price of $0.52 per share. The Second Option provided we could sell up to $11.5 million in shares to Thermo at a price equal to 85% of the average closing price of our voting common stock during the ten trading days immediately preceding the date of the special committee’s notice of exercise of the option. In November 2013, the special committee and Thermo amended the Common Stock Purchase and Option Agreement to defer the expiration date of the Second Option to March 31, 2014.

 

In November 2013, we exercised the First Option, pursuant to which on December 27, 2013 we sold Thermo 26.0 million shares of our common stock for a total purchase price of $13.5 million.

 

The terms of the Common Stock Purchase and Option Agreement were approved by a special committee of our board of directors consisting solely of our unaffiliated directors. The Committee, which was represented by independent legal counsel, determined that the terms of the Common Stock Purchase and Option Agreement were fair to and in the best interests of us and our shareholders. 

 

See Note 3 to our Consolidated Financial Statements for further discussion of the Consent Agreement and the Common Stock Purchase and Option Agreement.

 

Terrapin Common Stock Purchase Agreement

 

On December 28, 2012 we entered into a Common Stock Purchase Agreement with Terrapin pursuant to which we may, subject to certain conditions, require Terrapin to purchase up to $30.0 million of shares of our voting common stock over the 24-month term following the effective date of a resale registration statement, which became effective on August 2, 2013. This type of arrangement is sometimes referred to as a committed equity line financing facility. From time to time over the 24-month term, and in our sole discretion, we may present Terrapin with up to 36 draw down notices requiring Terrapin to purchase a specified dollar amount of shares of our voting common stock. We will not sell Terrapin a number of shares of voting common stock which, when aggregated with all other shares of voting common stock then beneficially owned by Terrapin and its affiliates, would result in the beneficial ownership by Terrapin or any of its affiliates of more than 9.9% of our then issued and outstanding shares of voting common stock.

 

Since entering into this agreement, Terrapin has purchased a total of 6.1 million shares of voting common stock at a purchase price of $6.0 million.

 

43
 

 

See Note 3 to our Consolidated Financial Statements for further discussion of the Terrapin agreement.

 

Capital Expenditures

 

We have entered into various contractual agreements related to the procurement and deployment of our second-generation network, as summarized below. The discussion below is based on our current contractual obligations to these contractors.

 

Second-Generation Satellites

 

We have a contract with Thales for the construction of the second-generation low-earth orbit satellites and related services. We successfully completed the launches of our second-generation satellites. We have also incurred additional costs for certain related services, of which a portion are still owed to Thales. Discussions between us and Thales are ongoing regarding the remaining amounts owed by both parties under the contracts. These amounts are included in “Other Capital Expenditures and Capitalized Labor” in the table below.

 

We have a contract with Arianespace for the launch of these second-generation satellites and certain pre and post-launch services. We have also incurred additional obligations to Arianespace for launch delays. These amounts are included in “Other Capital Expenditures and Capitalized Labor” in the table below.

  

The amount of capital expenditures incurred as of December 31, 2013 and estimated future capital expenditures (excluding capitalized interest) related to the construction and deployment of the satellites for our second-generation constellation and the launch services contract is presented in the table below (in thousands): 

 

   Payments through
December 31,
   Estimated Future Payments 
Capital Expenditures  2013   2014   2015   Thereafter   Total 
Thales Second-Generation Satellites  $622,690    -   $-   $-   $622,690 
Arianespace Launch Services   216,000    -    -    -    216,000 
Launch Insurance   39,903    -    -    -    39,903 
Other Capital Expenditures and Capitalized Labor   53,533    6,936    -    -    60,469 
Total  $932,126   $6,936   $-   $-   $939,062 

 

As of December 31, 2013, we had recorded $6.9 million of these capital expenditures in accounts payable.

 

Next-Generation Gateways and Other Ground Facilities

 

In May 2008, we entered into an agreement with Hughes to design, supply and implement (a) RAN ground network equipment and software upgrades for installation at a number of our satellite gateway ground stations and (b) satellite interface chips to be used in various next-generation Globalstar devices. The parties have subsequently amended this agreement to revise certain payment milestones and add features.

 

In October 2008, we signed an agreement with Ericsson, a leading global provider of technology and services to telecom operators. According to the contract, including subsequent additions, Ericsson will work with us to develop, implement and maintain a ground interface, or core network, system that will be installed at our satellite gateway ground stations.

 

The following table presents the amount of actual and contractual capital expenditures (excluding capitalized interest) related to the construction of the ground component and related costs (in thousands): 

 

   Payments through
December 31,
   Estimated Future Payments 
Capital Expenditures  2013   2014   2015   Thereafter   Total 
Hughes second-generation ground component (including research and development expense)  $82,400   $8,377   $10,598   $-   $101,375 
Ericsson ground network   6,049    9,211    13,431    -    28,691 
Other Capital Expenditures   1,181    402    -    -    1,583 
Total  $89,630   $17,990   $24,029   $-   $131,649 

 

As of December 31, 2013, we had recorded $0.7 million of these capital expenditures in accounts payable.

 

44
 

  

In August 2013, we entered into an agreement with Hughes which specified a payment schedule for approximately $15.8 million of deferred amounts outstanding at the time of the agreement. Under the terms of the agreement, we were also required to pay interest of approximately $4.9 million in January 2014 for amounts accrued at a rate of 10% on previously deferred balances. Upon our payment of all previously deferred amounts, interest and an advance payment of $4.3 million for the next milestone pursuant to the terms of the contract, Hughes will restart work. Under the terms of the agreement, Hughes had the option to receive all or any portion of the deferred payments and accrued interest in our common stock. If Hughes chose to receive any payment in stock, shares would be provided at a 7% discount based upon a trailing volume weighted average price calculation. Since August 2013, we have paid Hughes approximately $10.8 million in cash, and Hughes has elected to receive payment in the form of shares of our common stock for approximately $14.4 million of certain milestone payments and accrued interest. In valuing our obligation to issue discounted shares to Hughes, we recorded a loss of approximately $1.0 million in our statement of operations for the year ended December 31, 2013.

 

In December 2013, we amended our contract with Hughes to extend the schedule of the program and to revise the remaining payment milestones and program milestones to reflect the revised program timeline. This amendment extended certain payments previously due in 2013 to 2014 and beyond.

 

In September 2013, we entered into an agreement with Ericsson which deferred to November 2013 approximately $2.3 million in milestone payments scheduled under the core contract, provided we made one payment of $1.6 million, which offsets the total deferred amount, in September 2013. We made this $1.6 million payment. The remaining milestone payments previously due under the contract were deferred to 2014 and beyond. The deferred payments continue to incur interest at a rate of 6.5% per annum. As of December 31, 2013, we had recorded $0.7 million in accounts payable, excluding interest, related to these required payments and had incurred and capitalized $6.8 million of costs related to this contract. We record the costs as an asset in property and equipment. We are currently negotiating a revised milestone schedule which will include the remaining $0.7 million outstanding as of December 31, 2013. If we are unable to agree on revised technical requirements and pricing for certain contract deliverables with Ericsson, the contract may be terminated without liability to either party upon our payment of the outstanding $0.7 million deferred amount plus associated interest. We may, however, be required to record an impairment charge. If the contract is terminated for convenience, we must make a final payment of $10.0 million in either cash or shares of our common stock at our election.  If we elect to make payment in shares of our common stock, Ericsson will have the option either to accept the shares of common stock or instruct us to complete a block sale of the common stock and deliver the proceeds to Ericsson. If Ericsson chooses to accept common stock, the number of shares it will receive will be calculated based on the final payment amount plus 5%.

  

Contractual Obligations and Commitments

 

Contractual obligations at December 31, 2013 are as follows (in thousands): 

 

Contractual Obligations:  2014   2015   2016   2017   2018   Thereafter   Total 
Debt obligations (1)  $4,046   $6,450   $32,835   $75,755   $129,935   $688,948   $937,969 
Interest on long-term debt (2)   21,381    21,264    20,914    21,160    19,026    42,654    146,399 
Purchase obligations (3), (4), (5)   24,926    24,029    -    -    -    -    48,955 
Contract termination charge (6)   24,133    -    -    -    -    -    24,133 
Operating lease obligations   1,216    1,157    1,104    1,097    1,030    650    6,254 
Pension obligations   981    967    956    946    955    4,961    9,766 
Liability for contingent consideration (7)   1,626    -    -    -    -    -    1,626 
Total  $78,309   $53,867   $55,809   $98,958   $150,946   $737,213   $1,175,102 

 

(1)Amounts include payment in kind interest (“PIK”), which is shown as due in the year the underlying debt is due.

 

The maturity date of the 8.00% Convertible Senior Notes Issued in 2013 (the “8.00% Notes Issued in 2013”) is April 1, 2028; however the holders of these Notes can require us to purchase any or all of the Notes at par in cash on April 1, 2018. For purposes of this schedule, these Notes are shown as due in 2018 as a result of this put option. Pursuant to the terms of the Indenture for the 8.00% Notes issued in 2013, a holder may elect to convert up to 15% of the Notes on March 20, 2014. If a holder elects to convert on that date it will receive, at our option, either cash equal to the par value of the Notes being converted plus accrued interest (provided that, under the Facility Agreement, we may pay cash only with the consent of the Majority Lenders) or shares of our common stock equal to the principal amount of Notes being converted plus accrued interest divided by the lower of the average price of our common stock in a specified period and $0.50. The table above does not consider potential conversion as we cannot predict the amount, if any, of the notes that may be converted. 

 

45
 

 

 See Note 3 to our Consolidated Financial Statements for further discussion.

 

(2)Amounts include projected interest payments to be made in cash. Approximately $586.3 million of our debt bears interest at a floating rate and, accordingly, we estimated our interest costs in future periods. Amounts also include projected cash interest to be paid on the 8.00% Notes Issued in 2013 through the first put date of April 1, 2018.

 

(3)We have purchase commitments with Thales, Arianespace, Ericsson, Hughes and other vendors related to the procurement and deployment of our second-generation network. Amounts in the table above exclude estimated accrued interest of approximately $0.4 million at December 31, 2013 on amounts owed to Ericsson on amounts previously due under the agreement.

 

See Note 7 to our Consolidated Financial Statements for further discussion of our contractual obligations.

 

(4)We have converted the remaining purchase obligations for our second-generation satellites and other launch costs to U.S. dollars using the exchange rate in effect at December 31, 2013.

 

(5)Amounts based on when cash payment is scheduled to be made.

 

(6)In June 2012, we settled our prior commercial disputes with Thales, including those disputes that were the subject of an arbitration award, for €17,530,000. This amount represented one-third of the termination charges awarded to Thales in the arbitration. The payment is due on the later of the effective date of the new contract for the purchase of additional second-generation satellites and the occurrence of the effective date of the financing for the purchase of these satellites and the first draw from the financing. We included this amount in 2014 above, although the timing of any payment is indefinite and undeterminable. For purposes of the table above, we converted the termination charge to U.S. dollars using the exchange rate in effect at December 31, 2013. See Note 8 to our Consolidated Financial Statements for further discussion.

 

(7)In connection with our acquisition of Axonn in 2009, we are obligated to pay contingent consideration in stock for earnouts based on sales of existing and new products over a five-year earnout period ending December 31, 2014. Amounts above are an estimate of the future liability based on projected 2014 sales of certain products.

  

Liquidity

   

We have developed a plan to improve operations, maintain our second-generation constellation, and continue to upgrade our next-generation ground infrastructure. We must execute our business plan, which assumes the funding of the financial arrangements with Thermo and Terrapin. Uncertainties remain related to the impact and timing of these items. If the resolution of these uncertainties materially and negatively impacts cash and liquidity, our ability to continue to execute our business plans will be adversely affected. Completion of the foregoing actions is not solely within our control and we may be unable to successfully complete one or all of these actions.

 

Satisfying our principal long-term liquidity needs depends upon maintaining service coverage levels and continuing to make improvements to our ground infrastructure, funding our working capital and cash operating needs, including any growth in our business, and funding repayment of our indebtedness, both principal and interest, when due. We expect sources of long-term liquidity to include the exercise of warrants and other additional debt and equity financings which have not yet been arranged. We cannot assure you that we can obtain sufficient additional financing on acceptable terms, if at all. We also expect cash flows from operations to be a source of long-term liquidity now that we have fully deployed our second-generation satellite constellation. Additionally, we have approximately $37.9 million in restricted cash which must be maintained through the term of the Facility Agreement and can be used to pay the final principal and interest payments under the Facility Agreement. We are not in a position to estimate when, or if, these longer-term plans will be completed and the effect this will have on our performance and liquidity.

 

Off-Balance Sheet Transactions 

 

We have no material off-balance sheet transactions.

 

Recently Issued Accounting Pronouncements

 

For a discussion of recent accounting guidance and the expected impact that the guidance could have on our Consolidated Financial Statements, see Note 1 to our Consolidated Financial Statements - Summary of Significant Accounting Policies.

 

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Our services and products are sold, distributed or available in over 120 countries. Our international sales are made primarily in U.S. dollars, Canadian dollars, Brazilian Reais and Euros. In some cases, insufficient supplies of U.S. currency may require us to accept payment in other foreign currencies. We reduce our currency exchange risk from revenues in currencies other than the U.S. dollar by requiring payment in U.S. dollars whenever possible and purchasing foreign currencies on the spot market when rates are favorable. We currently do not purchase hedging instruments to hedge foreign currencies. We are obligated to enter into currency hedges with the original lenders no later than 90 days after any fiscal quarter during which more than 25% of revenues is denominated in a single currency other than U.S. or Canadian dollars. Otherwise, we cannot enter into hedging agreements other than interest rate cap agreements or other hedges described above without the consent of the agent for the Facility Agreement, and with that consent the counterparties may only be the original lenders.

 

As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual Obligations and Commitments," we have entered into a contract with Thales for the construction of low earth orbit satellites for our second-generation satellite constellation and related launch and support services. A substantial majority of the payments under the Thales agreements are denominated in Euros.

 

Our interest rate risk arises from our variable rate debt under our Facility Agreement, under which loans bear interest at a floating rate based on the LIBOR. In order to minimize the interest rate risk, we completed an arrangement with the lenders under the Facility Agreement to limit the interest to which we are exposed. The interest rate cap provides limits on the 6-month Libor rate (Base Rate) used to calculate the coupon interest on outstanding amounts on the Facility Agreement to be capped at 5.50% should the Base Rate not exceed 6.5%. Should the Base Rate exceed 6.5%, our Base Rate will be 1% less than the then 6-month Libor rate. Assuming that we borrowed the entire $586.3 million under the Facility Agreement, a 1.0% change in interest rates would result in a change to interest expense of approximately $5.9 million annually.

 

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Item 8. Financial Statements and Supplementary Data

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    Page
Audited Consolidated Financial Statements of Globalstar, Inc.   48
Report of Crowe Horwath LLP, independent registered public accounting firm   49
Consolidated balance sheets at December 31, 2013 and 2012   50
Consolidated statements of operations for the years ended December 31, 2013, 2012 and 2011   51
Consolidated statements of comprehensive loss for the years ended December 31, 2013, 2012 and 2011   52
Consolidated statements of stockholders’ equity for the years ended December 31, 2013, 2012 and 2011   53
Consolidated statements of cash flows for the years ended December 31, 2013, 2012 and 2011   54
Notes to Consolidated Financial Statements   55

 

48
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Globalstar, Inc.

 

We have audited the accompanying consolidated balance sheets of Globalstar, Inc. (“Globalstar”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited Globalstar’s internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Globalstar’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company's internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's report. Globalstar’s internal controls over the valuation of non-cash derivative liabilities did not operate with sufficient precision to prevent or detect a material misstatement in the models prepared by a third-party valuation service organization. One out of the four derivative valuations had a computational error that was not detected. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2013 consolidated financial statements and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Globalstar as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, because of the material weakness described above, Globalstar has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

Crowe Horwath LLP

Oak Brook, Illinois

March 10, 2014

 

49
 

 

GLOBALSTAR, INC.

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share data)

 

   December 31, 
   2013   2012 
ASSETS          
Current assets:          
Cash and cash equivalents  $17,408   $11,792 
Restricted cash   -    46,777 
Accounts receivable, net of allowance of $7,419 and $6,667, respectively   15,723    13,944 
Inventory   31,817    42,181 
Advances for inventory   9,359    - 
Deferred financing costs   -    34,622 
Prepaid expenses and other current assets   7,059    5,233 
Total current assets   81,366    154,549 
Property and equipment, net   1,169,785    1,215,156 
Restricted cash   37,918    - 
Deferred financing costs   76,436    16,883 
Advances for inventory   -    9,158 
Intangible and other assets, net   7,103    8,029 
Total assets  $1,372,608   $1,403,775 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Current portion of long-term debt  $4,046   $655,874 
Accounts payable, including contractor payables of $7,665 and $27,747, respectively   14,627    35,685 
Accrued contract termination charge   24,133    23,166 
Accrued expenses   22,700    28,164 
Payables to affiliates   202    230 
Derivative liabilities   57,048    - 
Deferred revenue   17,284    18,041 
Total current liabilities   140,040    761,160 
Long-term debt, less current portion   665,236    95,155 
Employee benefit obligations   3,529    7,221 
Derivative liabilities   405,478    25,175 
Deferred revenue   7,079    4,640 
Debt restructuring fees   20,795    - 
Other non-current liabilities   13,696    15,880 
Total non-current liabilities   1,115,813    148,071 
           
Commitments and contingent liabilities (Notes 7 and 8)          
           
Stockholders’ equity:          
Preferred Stock of $0.0001 par value; 100,000,000 shares authorized and none issued and outstanding at December 31, 2013 and 2012:          
Series A Preferred Convertible Stock of $0.0001 par value; one share authorized and none issued and outstanding at December 31, 2013 and 2012   -    - 
Voting Common Stock of $0.0001 par value; 1,200,000,000 and 865,000,000 shares authorized; 535,883,461 and 354,085,753 shares issued and outstanding at December 31, 2013 and 2012, respectively   54    35 
Nonvoting Common Stock of $0.0001 par value; 400,000,000 and 135,000,000 shares authorized; 309,008,656 and 135,000,000 shares issued and outstanding at December 31, 2013 and 2012, respectively   31    14 
Additional paid-in capital   1,074,837    864,175 
Accumulated other comprehensive income (loss)   871    (1,758)
Retained deficit   (959,038)   (367,922)
Total stockholders’ equity   116,755    494,544 
Total liabilities and stockholders’ equity  $1,372,608   $1,403,775 

 

See accompanying notes to Consolidated Financial Statements.

 

50
 

 

GLOBALSTAR, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

   Year Ended December 31, 
   2013   2012   2011 
Revenue:               
Service revenues  $64,644   $57,468   $55,397 
Subscriber equipment sales   18,067    18,850    17,430 
Total revenue   82,711    76,318    72,827 
Operating expenses:               
Cost of services (exclusive of depreciation, amortization and accretion shown separately below)   30,210    30,071    37,863 
Cost of subscriber equipment sales   13,623    13,280    11,927 
Cost of subscriber equipment sales - reduction in the value of inventory   5,794    1,397    8,826 
Marketing, general and administrative   29,888    27,496    33,819 
Reduction in the value of long-lived assets   -    7,218    3,578 
Contract termination charge   -    22,048    - 
Depreciation, amortization and accretion   90,592    69,801    50,049 
Total operating expenses   170,107    171,311    146,062 
Loss from operations   (87,396)   (94,993)   (73,235)
Other income (expense):               
Loss on extinguishment of debt   (109,092)   -    - 
Loss on equity issuance   (16,701)   -    - 
Interest income and expense, net of amounts capitalized   (67,828)   (21,486)   (4,809)
Derivative gain (loss)   (305,999)   6,974    23,839 
Other   (2,962)   (2,280)   (828)
Total other income (expense)   (502,582)   (16,792)   18,202 
Loss before income taxes   (589,978)   (111,785)   (55,033)
Income tax expense (benefit)   1,138    413    (109)
Net loss  $(591,116)  $(112,198)  $(54,924)
Loss per common share:               
Basic  $(0.96)  $(0.29)  $(0.18)
Diluted   (0.96)   (0.29)   (0.18)
Weighted-average shares outstanding:               
Basic   614,959    388,453    299,144 
Diluted   614,959    388,453    299,144 

 

See accompanying notes to Consolidated Financial Statements.

 

51
 

 

GLOBALSTAR, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

 

   Year Ended December 31, 
   2013   2012   2011 
Net loss  $(591,116)  $(112,198)  $(54,924)
Other comprehensive income (loss):               
Defined benefit pension plan liability adjustment   3,485    78    (3,190)
Net foreign currency translation adjustment   (856)   1,264    358 
Total comprehensive loss  $(588,487)  $(110,856)  $(57,756)

  

See accompanying notes to Consolidated Financial Statements.

 

52
 

 

GLOBALSTAR, INC.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

  

Common

Shares

  

Common

Stock

Amount

  

Additional

Paid-In

Capital

  

Accumulated

Other

Comprehensive

Income (Loss)

  

Retained

Deficit

   Total 
Balances - December 31, 2010   309,959   $31   $736,455   $(268)  $(200,800)  $535,418 
Net issuance of restricted stock awards and recognition of stock-based compensation   994    -    2,017    -    -    2,017 
Contribution of services   -    -    319    -    -    319 
Warrants issued associated with Contingent Equity Agreement   -    -    5,955    -    -    5,955 
Common stock issued in connection with conversions of 8.00% Notes Issued in 2009   773    -    942    -    -    942 
Warrants exercised associated with the 8.00% Notes Issued in 2009   575    -    1,064    -    -    1,064 
Issuance of stock in connection with interest payments for 8.00% Notes Issued in 2009   1,300    -    572    -    -    572 
Issuance of stock in connection with contingent consideration   1,857    -    1,827    -    -    1,827 
Issuance of warrants and beneficial conversion feature associated with 5.0% Notes   -    -    24,868    -    -    24,868 
Issuance of stock for legal settlements and other transactions   566    -    644    -    -    644 
Issuance of stock to Thermo for contingent equity draws   36,606    4    17,746    -    -    17,750 
Issuance of stock through employee stock purchase plan   428    -    175    -    -    175 
Other comprehensive loss   -    -    -    (2,832)   -    (2,832)
Net loss   -    -    -    -    (54,924)   (54,924)
Balances - December 31, 2011   353,058    35    792,584    (3,100)   (255,724)   533,795 
Net issuance of restricted stock awards and recognition of stock-based compensation   711    -    706    -    -    706 
Contribution of services   -    -    529    -    -    529 
Warrants issued associated with Contingent Equity Agreement   -    -    8,079    -    -    8,079 
Common stock issued in connection with conversions of 8.00% Notes Issued in 2009   1,903    -    1,338    -    -    1,338 
Warrants exercised associated with the 8.00% Notes Issued in 2009   191    -    420    -    -    420 
Issuance of stock in connection with interest payments for 8.00% Notes Issued in 2009   2,737    1    911    -    -    912 
Issuance of stock in connection with contingent consideration   5,232    1    2,208    -    -    2,209 
Issuance of stock for legal and consulting services   -    -    24    -    -    24 
Issuance of stock to Thermo for contingent equity draws   124,310    12    57,238    -    -    57,250 
Issuance of stock through employee stock purchase plan   944    -    138    -    -    138 
Other comprehensive income   -    -    -    1,342    -    1,342 
Net loss   -    -    -    -    (112,198)   (112,198)
Balances - December 31, 2012   489,086    49    864,175    (1,758)   (367,922)   494,544 
Net issuance of restricted stock awards and recognition of stock-based compensation   1,213    -    1,823    -    -    1,823 
Contribution of services   -    -    548    -    -    548 
Issuance of stock in connection with interest payments for 8.00% Notes Issued in 2009   1,279    -    644    -    -    644 
Issuance of stock to Exchanging Note Holders   30,319    3    12,124    -    -    12,127 
Common stock issued in connection with conversions of 5.0% Notes   93,006    10    48,194    -    -    48,204 
Warrants exercised associated with the 5.0% Notes   6,707    1    2,312    -    -    2,313 
Common stock issued in connection with conversions of 8.00% Notes Issued in 2013   14,863    2    10,226    -    -    10,228 
Warrants exercised associated with the 8.00% Notes Issued in 2009   21,353    2    22,216    -    -    22,218 
Issuance of stock to Thermo in connection with the Consent Agreement, Common Stock Purchase Agreement, and Common Stock Purchase and Option Agreement   174,009    17    82,709    -    -    82,726 
Purchase of stock in connection with the termination of Share Lending Arrangement   -    -    4,429    -    -    4,429 
Return of stock in connection with the termination of Share Lending Arrangement   (10,185)   (1)   -    -    -    (1)
Issuance of stock to Terrapin   6,131    1    5,999    -    -    6,000 
Issuance of stock to vendor   9,501    1    15,412    -    -    15,413 
Issuance of stock for employee stock option exercises   2,621    -    1,874    -    -    1,874 
Issuance of stock through employee stock purchase plan   952    -    207    -    -    207 
Issuance of stock in connection with contingent consideration   3,939    -    1,844    -    -    1,844 
Other issuances of stock and equity transactions   98    -    101    -    -    101 
Other comprehensive income   -    -    -    2,629    -    2,629 
Net loss   -    -    -    -    (591,116)   (591,116)
   Balances – December 31, 2013   844,892   $85   $1,074,837   $871   $(959,038)  $116,755 

 

See accompanying notes to Consolidated Financial Statements.

 

53
 

 

GLOBALSTAR, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   Year Ended December 31, 
   2013   2012   2011 
Cash flows provided by (used in) operating activities:               
Net loss  $(591,116)  $(112,198)  $(54,924)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:               
Depreciation, amortization, and accretion   90,592    69,801    50,049 
Change in fair value of derivative assets and liabilities   305,155    (6,974)   (23,839)
Stock-based compensation expense   2,127    793    1,995 
Amortization of deferred financing costs   8,792    7,907    3,673 
Reduction in the value of long-lived assets and inventory   5,794    8,615    12,404 
Provision for bad debts   2,321    1,097    1,995 
Noncash interest and accretion expense   44,488    6,525    - 
Contract termination charge   -    22,048    - 
Loss on extinguishment of debt   109,092    -    - 
Loss on equity issuance   16,701    -    - 
Discount on shares issued to vendor   1,008    -    - 
Unrealized foreign currency loss   1,013    1,456    1,001 
Other, net   1,370    1,574    2,937 
Changes in operating assets and liabilities:               
Accounts receivable   (4,321)   (2,875)   (978)
Inventory   3,124    (1,018)   4,252 
Prepaid expenses and other current assets   (727)   855    354 
Other assets   (89)   5,427    (1,485)
Accounts payable and accrued expenses   (2,595)   3,431    (1,291)
Payables to affiliates   (29)   (148)   (332)
Other non-current liabilities   (1,079)   (224)   (173)
Deferred revenue   1,917    782    (1,141)
Net cash provided by (used in) operating activities   (6,462)   6,874    (5,503)
Cash flows used in investing activities:               
Second-generation satellites, ground and related launch costs (including interest)   (43,693)   (56,679)   (85,589)
Property and equipment additions   (1,651)   (781)   (2,594)
Investment in businesses   (634)   (550)   (800)
Restricted cash   8,859    -    (10,436)
Net cash used in investing activities   (37,119)   (58,010)   (99,419)
Cash flows provided by financing activities:               
Borrowings from Facility Agreement   672    7,375    18,659 
Proceeds from contingent equity account   1,071    45,800    14,200 
Proceeds from the issuance of 5.0% convertible notes   -    -    38,000 
Borrowings from Thermo Loan Agreement   -    -    12,500 
Payments to reduce principal amount of exchanged 5.75% Notes   (13,544)   -    - 
Payments for 5.75% Notes not exchanged   (6,250)   -    - 
Payments to lenders and other fees associated with exchange   (2,482)   -    - 
Proceeds from equity issuance to related party   65,000    -    - 
Proceeds from issuance of stock to Terrapin   6,000    -    - 
Payment of deferred financing costs   (16,909)   (1,033)   (1,246)
Proceeds from issuance of common stock and exercise of warrants   15,414    244    525 
Net cash provided by financing activities   48,972    52,386    82,638 
Effect of exchange rate changes on cash   225    591    (782)
Net (decrease) increase in cash and cash equivalents   5,616    1,841    (23,066)
Cash and cash equivalents, beginning of period   11,792    9,951    33,017 
Cash and cash equivalents, end of period  $17,408   $11,792   $9,951 
Supplemental disclosure of cash flow information:               
Cash paid for:               
Interest  $21,413   $27,383   $19,357 
Income taxes   116    223    97 
Supplemental disclosure of non-cash financing and investing activities:               
Reduction in accrued second-generation satellites and ground costs   19,005    10,214    4,798 
Increase in non-cash capitalized accrued interest for second-generation satellites and ground costs   4,291    2,752    1,529 
Capitalization of the accretion of debt discount and amortization of prepaid financing costs   5,600    15,680    24,200 
Capitalized accrued interest and other payments made in convertible notes and common stock   12,056    7,948    6,892 
Conversion of debt into common stock   49,757    2,000    1,000 
Extinguishment of principal amount of 5.75% Notes   (71,804)   -    - 
Issuance of principal amount of 8.00% Notes Issued in 2013   54,611    -    - 
Issuance of common stock to exchanging note holders at fair value   12,127    -    - 
Reduction in carrying amount of Thermo Loan Agreement due to amendment   (35,026)   -    - 
Issuance of common stock to vendor for payment of invoices   9,227    -    - 
Conversion of contingent equity account derivative liability to equity   -    5,853    5,955 
Value of warrants issued in connection with the contingent equity account loan fee   -    2,226    8,318 
Recognition of a beneficial conversion feature and contingent put feature on long-term debt   -    -    18,603 
Value of warrants issued in connection with raising capital and debt   -    -    8,081 

 

See accompanying notes to Consolidated Financial Statements.

 

54
 

 

GLOBALSTAR, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business

 

Globalstar, Inc. (“Globalstar” or the “Company”) was formed as a Delaware limited liability company in November 2003 and was converted into a Delaware corporation on March 17, 2006.

 

Globalstar is a leading provider of Mobile Satellite Services (“MSS”) including voice and data communications services globally via satellite. Globalstar’s first-generation network, originally owned by Globalstar, L.P. (“Old Globalstar”), was designed, built and launched in the late 1990s by a technology partnership led by Loral Space and Communications (“Loral”) and Qualcomm Incorporated (“Qualcomm”). On February 15, 2002, Old Globalstar and three of its subsidiaries filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. In 2004, Thermo Capital Partners LLC (“Thermo”) became Globalstar’s principal owner, and Globalstar completed the acquisition of the business and assets of Old Globalstar. Thermo remains Globalstar’s largest stockholder. Globalstar’s Executive Chairman and CEO controls Thermo and its affiliates. Two other members of Globalstar’s Board of Directors are also directors, officers or minority equity owners of various Thermo entities.

 

The Company’s satellite communications business, by providing critical mobile communications to subscribers, serves principally the following markets: recreation and personal; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources, mining and forestry; construction; utilities; and transportation.

 

Globalstar currently provides the following communications services via satellite which are available only with equipment designed to work on the Globalstar network:

two-way voice communication and data transmissions (“Duplex”) using mobile or fixed devices; and
one-way data transmissions using a mobile or fixed device that transmits its location and other information to a central monitoring station, which includes certain SPOT and Simplex products.

 

Globalstar provides Duplex, SPOT and Simplex products and services to customers directly and through a variety of independent agents, dealers and resellers, and independent gateway operators (“IGOs”).

 

Use of Estimates in Preparation of Financial Statements

 

 The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. Certain reclassifications have been made to prior year Consolidated Financial Statements to conform to current year presentation. The Company evaluates estimates on an ongoing basis. Significant estimates include the value of derivative instruments, the allowance for doubtful accounts, the net realizable value of inventory, the useful life and value of property and equipment, the value of stock-based compensation, the reserve for product warranties, and income taxes.

 

Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of Globalstar and all its subsidiaries. All significant inter-company transactions and balances have been eliminated in the consolidation.

 

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.

  

Restricted Cash

 

 Restricted cash is comprised of funds held in escrow by the agent for the Company’s senior secured facility agreement (the “Facility Agreement”) to secure the Company’s principal and interest payment obligations under certain circumstances related to its Facility Agreement. The Company classifies restricted cash for certain debt instruments consistent with the classification of the related debt outstanding at the end of the reporting period.

 

55
 

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and restricted cash. Cash and cash equivalents and restricted cash consist primarily of highly liquid short-term investments deposited with financial institutions that are of high credit quality.

  

Accounts Receivable

 

Accounts receivable are uncollateralized, without interest and consist primarily of service revenue and equipment receivables. The Company performs ongoing credit evaluations of its customers and records specific allowances for bad debts based on factors such as current trends, the length of time the receivables are past due and historical collection experience. Accounts receivable are considered past due in accordance with the contractual terms of the arrangements. Accounts receivable balances that are determined likely to be uncollectible are included in the allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

 

The following is a summary of the activity in the allowance for doubtful accounts (in thousands):

 

   Year Ended December 31, 
   2013   2012   2011 
Balance at beginning of period  $6,667   $7,296   $5,971 
Provision, net of recoveries   2,321    1,097    1,995 
Write-offs and other adjustments   (1,569)   (1,726)   (670)
Balance at end of period  $7,419   $6,667   $7,296 

 

Inventory

 

Inventory consists primarily of purchased products. Inventory is stated at the lower of cost or market value. Cost is computed using the first-in, first-out (FIFO) method. Inventory write downs are measured as the difference between the cost of inventory and the market value, and are recorded as a cost of subscriber equipment sales - reduction in the value of inventory in the Company’s Consolidated Financial Statements. At the point of any inventory write downs to market, a new, lower cost basis for that inventory is established, and any subsequent changes in facts and circumstances do not result in the restoration of the former cost basis or increase in that newly established cost basis. Product sales and returns from the previous 12 months and future demand forecasts are reviewed and excess and obsolete inventory is written off. A liability is recorded for firm, noncancelable, and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of future demand forecasts consistent with the valuation of excess and obsolete inventory. The Company wrote down the value of inventory by $5.8 million, $1.4 million and $8.8 million in the years ended December 31, 2013, 2012, and 2011, respectively.

 

Property and Equipment

 

The Globalstar System includes costs for the design, manufacture, test, and launch of a constellation of low earth orbit satellites (the “Space Component”), and primary and backup control centers and gateways (the “Ground Component”).  Property and equipment is stated at cost, net of accumulated depreciation.

  

Costs associated with the design, manufacture, test and launch of the Company’s Space and Ground Components are capitalized. Capitalized costs associated with the Company’s Space Component, Ground Component, and other assets are tracked by fixed asset category and are allocated to each asset as it comes into service. When a second-generation satellite was incorporated into the second-generation constellation, the Company began depreciation on the date the satellite was placed into service, which was the point that the satellite reached its orbital altitude, over its estimated useful life.

 

The Company capitalizes interest costs associated with the costs of assets in progress, including primarily the construction of its Space and Ground Components. Capitalized interest is added to the cost of the underlying asset and is amortized over the useful life of the asset after it is placed into service. As the status of the Company’s construction in progress decreases, specifically due to the Company placing second-generation satellites into service, the Company records interest expense under GAAP.

 

Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, as follows:

 

Globalstar System:    
Space component   6.5 years from commencement of service for the first-generation satellites launched in 2007
    15 years from the commencement of service for the second-generation satellites
Ground component   Up to periods of 15 years from commencement of service
Furniture, fixtures & equipment   3 to 10 years
Leasehold improvements   Shorter of lease term or the estimated useful lives of the improvements
Buildings   18 years

 

56
 

 

 

The Company evaluates the appropriateness of estimated useful lives assigned to property and equipment and revises such lives to the extent warranted by changing facts and circumstances. When adjustments are made to the estimated useful lives, the remaining carrying amount of these satellites is depreciated prospectively over the remaining useful lives.

 

For assets that are sold or retired, including satellites that are de-orbited and no longer providing services, the estimated cost and accumulated depreciation is removed from property and equipment.

  

The Company assesses the impairment of long-lived assets when indicators of impairment are present.  Recoverability of assets is measured by comparing the carrying amounts of the assets to the future undiscounted cash flows, excluding financing costs. If impairment is determined to exist, any related impairment loss is calculated based on fair value. The Company records losses from the in-orbit failure of a satellite in the period it is determined that the satellite is not recoverable.

 

Derivative Instruments

 

The Company enters into financing arrangements that are hybrid instruments that contain embedded derivative features. Derivative instruments are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair value with gains or losses recognized in earnings. The Company determines the fair value of derivative instruments based on available market data using appropriate valuation models.

 

Deferred Financing Costs

 

Deferred financing costs are those incurred in obtaining long-term debt. These costs are amortized as additional interest expense over the term of the corresponding debt, or the first put option date for the Company’s 8.00% Convertible Senior Notes Issued in 2013 (“8.00% Notes Issued in 2013”). As of December 31, 2013 and 2012, the Company had net deferred financing costs of $76.4 million and $51.5 million, respectively. The Company classifies deferred financing costs consistent with the classification of the related debt outstanding at the end of the reporting period.

 

Fair Value of Financial Instruments

 

The carrying amount of accounts receivable and accounts payable is equal to or approximates fair value.

 

The Company believes it is not practicable to determine the fair value of certain of its long-term debt instruments, including the Facility Agreement and the Company’s 8.00% Convertible Senior Notes Issued in 2009 (“8.00% Notes Issued in 2009”). Unlike typical long-term debt, interest rates and other terms for long-term debt are not readily available and generally involve a variety of factors, including due diligence by the debt holders. As such, it is not practicable to determine the fair value of long-term debt without incurring significant additional costs.

 

For the Company’s Amended and Restated Loan Agreement with Thermo (the “Loan Agreement”) and the 8.00% Notes Issued in 2013, the Company was required to record these instruments at fair value at inception. This Loan Agreement was amended and restated in 2013 and qualified for extinguishment accounting under applicable accounting rules. In May 2013, the Company issued 8.00% Notes Issued in 2013 and other consideration in exchange for a portion of the Company’s 5.75% Convertible Senior Notes (the “5.75% Notes”). This transaction qualified for extinguishment accounting. See Note 3 for further discussion.

 

Gain/Loss on Extinguishment of Debt

 

Gain or loss on extinguishment of debt is generally recorded upon an extinguishment of a debt instrument or the conversion of certain of the Company’s convertible notes. Gain or loss on extinguishment of debt is calculated as the difference between the reacquisition price and net carrying amount of the debt. Differences are recorded as an extinguishment gain or loss in the Company’s consolidated statement of operations.

 

Revenue Recognition and Deferred Revenue

 

Duplex Service Revenue

 

For Duplex customers and resellers, the Company recognizes revenue for monthly access fees in the period services are rendered.  Access fees represent the minimum monthly charge for each line of service based on its associated rate plan.  The Company also recognizes revenue for airtime minutes in excess of the monthly access fees in the period such minutes are used. Under certain annual plans where customers prepay for minutes, revenue is deferred until the minutes are used or the prepaid time period expires. Unused minutes are accumulated until they expire, usually one year after activation. In addition, the Company offers other annual plans whereby the customer is charged an annual fee to access the Company’s system.  These fees are recognized on a straight-line basis over the term of the plan.  In some cases, the Company charges a per minute rate whereby it recognizes the revenue when each minute is used.

 

57
 

  

Credits granted to customers are expensed or charged against revenue or deferred revenue upon issuance.

 

Certain subscriber acquisition costs, including such items as dealer commissions and internal sales commissions, are expensed at the time of the related sale, except when related to a multi-element contract as discussed below.

   

SPOT and Simplex Service Revenue

 

The Company sells SPOT and Simplex services as annual plans or multi-year plans and defers and recognizes revenue ratably over the service term or as service is used, beginning when the service is activated by the customer. Royalty payments are deferred and recognized as expense over the contract term.

 

IGO Service Revenue

 

The Company owns and operates its satellite constellation and earns a portion of its revenues through the sale of airtime minutes or data on a wholesale basis to IGOs. Revenue from services provided to IGOs is recognized based upon airtime minutes used by customers of the IGOs and contractual fee arrangements. Where collection is uncertain, revenue is recognized when cash payment is received.

 

 Equipment Revenue

 

Subscriber equipment revenue represents the sale of fixed and mobile user terminals, accessories and SPOT and Simplex products. The Company recognizes revenue upon shipment provided title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, the fee is fixed and determinable and collection is probable.

 

Other Service Revenue

 

At times, the Company will sell subscriber equipment through multi-element contracts with services. When the Company sells subscriber equipment and services in bundled arrangements and determines that it has separate units of accounting, the Company will allocate the bundled contract price among the various contract deliverables based on each deliverable’s relative fair value. The Company will determine vendor specific objective evidence of fair value by assessing sales prices of subscriber equipment and services when they are sold to customers on a stand-alone basis. Initial direct costs incurred related to these contracts will be deferred to the extent they exceed the profit margin recognized at the time of sale.

 

The Company does not record sales taxes collected from customers in revenue.

 

The Company provides certain engineering services to assist customers in developing new applications related to its system. The revenues associated with these services are recorded when the services are rendered, and the expenses are recorded when incurred. The Company records revenues and costs associated with long term engineering contracts on the percentage-of-completion method of accounting.

 

Stock-Based Compensation

 

The Company recognizes compensation expense in the financial statements for both employee and non-employee share-based awards based on the grant date fair value of those awards. Additionally, stock-based compensation expense includes an estimate for pre-vesting forfeitures and is recognized over the requisite service periods of the awards on a straight-line basis, which is generally commensurate with the vesting term.

  

Foreign Currency 

 

The functional currency of the Company’s foreign consolidated subsidiaries is their local currency. Assets and liabilities of its foreign subsidiaries are translated into United States dollars based on exchange rates at the end of the reporting period. Income and expense items are translated at the average exchange rates prevailing during the reporting period. For 2013, 2012 and 2011, the foreign currency translation adjustments recorded were $0.9 million of loss, $1.3 million of income and $0.4 million of income, respectively. These adjustments are classified in the consolidated statements of comprehensive loss.

 

Foreign currency transaction losses were $1.0 million, $2.0 million and $0.5 million for 2013, 2012, and 2011, respectively. These were classified as other income (expense) on the statement of operations.

 

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In February 2013, the Venezuelan government devalued its currency. This devaluation did not have a material impact on the Company’s operations or financial performance.

 

Asset Retirement Obligation

 

Liabilities arising from legal obligations associated with the retirement of long-lived assets are measured at fair value and recorded as a liability. Upon initial recognition of a liability for retirement obligations, the Company records an asset, which is depreciated over the life of the asset to be retired.

 

The Company capitalizes, as part of the carrying amount, the estimated costs associated with the eventual retirement of gateways owned by the Company. As of December 31, 2013 and 2012, the Company had accrued approximately $1.1 million and $1.0 million, respectively, for asset retirement obligations. The Company believes this estimate will be sufficient to satisfy the Company’s obligation under leases to remove the gateway equipment and restore the sites to their original condition.

 

Warranty Expense

 

Warranty terms extend from 90 days on equipment accessories to one year for fixed and mobile user terminals. An accrual is made when it is estimable and probable that a loss has been incurred based on historical experience. Warranty costs are based on historical trends in warranty charges as a percentage of gross product shipments. A provision for estimated future warranty costs is recorded as cost of sales when products are shipped. The resulting accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates.

 

Research and Development Expenses

 

Research and development costs were $0.6 million, $0.3 million and $1.9 million for 2013, 2012 and 2011, respectively. These costs are expensed as incurred as cost of services and primarily include the cost of new product development, chip set design, software development and engineering.

 

Advertising Expenses 

 

Advertising costs were $2.9 million, $1.9 million and $2.0 million for 2013, 2012, and 2011, respectively. These costs are expensed as incurred as marketing, general, and administrative expenses.

 

Income Taxes

 

 Until January 1, 2006, the Company and its U.S. operating subsidiaries were treated as partnerships for U.S. tax purposes. Generally, taxable income or loss, deductions and credits of the partnerships were passed through to the partners. Effective January 1, 2006, the Company elected to be taxed as a C corporation for U.S. tax purposes, and the Company and its U.S. operating subsidiaries began accounting for income taxes as a corporation.

 

The Company recognizes deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, operating losses and tax credit carry-forwards. The Company measures deferred tax assets and liabilities using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company recognizes the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date.

  

The Company also recognizes valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers: (i) future reversals of existing taxable temporary differences; (ii) future taxable income exclusive of reversing temporary differences and carry-forwards; (iii) taxable income in prior carry-back year(s) if carry-back is permitted under applicable tax law; and (iv) tax planning strategies.

 

Comprehensive Income (Loss)

 

All components of comprehensive income (loss), including the minimum pension liability adjustment and foreign currency translation adjustment, are reported in the financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources.

 

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Loss Per Share

 

The Company is required to present basic and diluted earnings per share. Basic loss per share is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding during the period. For 2013, 2012, and 2011, diluted net loss per share of common stock was the same as basic net loss per share of common stock, because the effects of potentially dilutive securities are anti-dilutive.

 

 As of December 31, 2012 and 2011, 17.3 million Borrowed Shares, as defined, related to the Company’s Share Lending Agreement were outstanding. The Company did not consider the Borrowed Shares to be outstanding for the purposes of computing and reporting its earnings per share. Effective in July 2013, the Company and the Borrower, as defined, terminated the Share Lending Agreement resulting in the Borrower returning 10.2 million Borrowed Shares to Globalstar and agreeing to pay a cash settlement for the remaining 7.1 million Borrowed Shares at an average of the volume weighted stock prices over a 20-day trading period ending in August 2013.

 

Recently Issued Accounting Pronouncements

 

There are no recently issued accounting standards that the Company believes will have a material impact on its financial position, results of operations or cash flow.  

 

2. PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following (in thousands):

  

   December 31,   December 31, 
   2013   2012 
Globalstar System:          
Space component          
Second-generation satellites in service  $1,212,099   $934,900 
Prepaid long-lead items   17,040    17,040 
 Second-generation satellite, on-ground spare   32,365    - 
Ground component   48,378    49,089 
Construction in progress:          
Space component   -    299,209 
Ground component   116,377    84,423 
Other   1,115    880 
Total Globalstar System   1,427,374    1,385,541 
Internally developed and purchased software   14,931    14,414 
Equipment   12,385    12,800 
Land and buildings   3,768    4,003 
Leasehold improvements   1,644    1,512 
Total property and equipment   1,460,102    1,418,270 
Accumulated depreciation   (290,317)   (203,114)
Total property and equipment, net  $1,169,785   $1,215,156 

 

Amounts in the above table consist primarily of costs incurred related to the construction of the Company’s second-generation constellation and ground upgrades. Amounts included in the Company’s second-generation satellite, on-ground spare balance as of December 31, 2013 consist primarily of costs related to a spare second-generation satellite that is capable of being included in a future launch of satellites.

 

Capitalized Interest and Depreciation Expense

 

The following table summarizes capitalized interest for the periods indicated below (in thousands):

   

   Year Ended December 31, 
   2013   2012   2011 
             
Interest cost eligible to be capitalized  $45,308   $57,249   $54,139 
Interest cost recorded in interest expense, net   (28,211)   (17,133)   - 
                
Net interest capitalized  $17,097   $40,116   $54,139 

 

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The following table summarizes depreciation expense for the periods indicated below (in thousands):

 

   Year Ended December 31, 
   2013   2012   2011 
                
Depreciation Expense  $89,828   $67,289   $46,952 

 

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3. LONG-TERM DEBT

 

Long-term debt consists of the following (in thousands): 

 

   December 31, 2013   December 31, 2012 
   Principal   Carrying   Principal   Carrying 
   Amount   Value   Amount   Value 
Facility Agreement  $586,342   $586,342   $585,670   $585,670 
Thermo Loan Agreement   60,383    22,854    53,499    49,822 
5.75% Convertible Senior Unsecured Notes   -    -    71,804    70,204 
8.00% Convertible Senior Notes Issued in 2013   46,971    26,291    -    - 
5.0% Convertible Senior Unsecured Notes   -    -    40,920    16,701 
8.00% Convertible Senior Unsecured Notes Issued in 2009   51,652    33,795    48,228    28,632 
Total Debt   745,348    669,282    800,121    751,029 
Less: Current Portion   4,046    4,046    657,474    655,874 
Long-Term Debt  $741,302   $665,236   $142,647   $95,155 

 

The table above represents the principal amount and carrying value of long-term debt at December 31, 2013 and 2012. The principal amounts shown above include payment of in kind interest, if any. The carrying value is net of any discounts to the loan amounts at issuance, including accretion, as further described below. The amount included in the table above as the current portion of long-term debt represents the first scheduled principal repayment under the Facility Agreement, due in December 2014.

 

Facility Agreement

 

The Company’s Facility Agreement, as described below, was amended and restated in August 2013 and is scheduled to mature in December 2022. Semi-annual principal repayments are scheduled to begin in December 2014. The facility bears interest at a floating LIBOR rate plus a margin of 2.75% through June 2017, increasing by an additional 0.5% each year to a maximum rate of LIBOR plus 5.75%. Ninety-five percent of the Company’s obligations under the Facility Agreement are guaranteed by COFACE, the French export credit agency. The Company’s obligations under the Facility Agreement are guaranteed on a senior secured basis by all of its domestic subsidiaries and are secured by a first priority lien on substantially all of the assets of the Company and its domestic subsidiaries (other than their FCC licenses), including patents and trademarks, 100% of the equity of the Company’s domestic subsidiaries and 65% of the equity of certain foreign subsidiaries. 

 

The Facility Agreement contains customary events of default and requires that the Company satisfy various financial and nonfinancial covenants. If the Company violates any of these covenants and is unable to obtain waivers, the Company would be in default under the agreement and payment of the indebtedness could be accelerated.  The acceleration of the Company’s indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-acceleration provisions. The Company was in compliance with all covenants as of December 31, 2013. See Part II – Item 5 – Liquidity and Capital Resources - to this Report for further discussion on the Company’s debt covenants.

 

The Facility Agreement requires the Company to maintain a total of $37.9 million in a debt service reserve account. The use of the funds in this account is restricted to making principal and interest payments under the Facility Agreement. As of December 31, 2013, the balance in the debt service reserve account was $37.9 million and classified as restricted cash.

 

Former Terms of Facility Agreement

 

In 2009, the Company entered into the Facility Agreement with a syndicate of bank lenders, including BNP Paribas, Natixis, Société Générale, Caylon, Crédit Industriel et Commercial as arrangers and BNP Paribas as the security agent and agent for the Company’s Facility Agreement. Prior to its amendment and restatement in 2013, the Facility Agreement had a maturity date of 84 months after the first principal repayment date, as amended. Semi-annual principal repayments were scheduled to begin on June 30, 2013, as amended. The Facility Agreement bore interest at a floating LIBOR rate, plus a margin of 2.25% through December 2017, increasing to 2.40% thereafter.

 

The Facility Agreement required the Company to maintain a total of $46.8 million in a debt service reserve account. The use of the funds in this account was restricted to making principal and interest payments under the Facility Agreement. The minimum required balance, not to exceed $46.8 million, fluctuated over time based on the timing of principal and interest payment dates. In December 2012, the amount required to be funded into the debt service reserve account was reduced by approximately $8.9 million due to the timing of the first principal repayment date scheduled for June 2013. In January 2013, the agent for the Facility Agreement permitted the Company to withdraw from the debt service reserve account $8.9 million that was in excess of the required balance to enable the Company to pay capital expenditure costs relating to the fourth launch of its second-generation satellites.

 

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The Facility Agreement contained customary events of default and required that the Company satisfy various financial and nonfinancial covenants. As a result of the Thales arbitration ruling and the subsequent settlement agreements reached with Thales related to the arbitration ruling in 2012, the lenders concluded that events of default had occurred under the Facility Agreement. The Company was also in default of certain other financial and nonfinancial covenants, including, but not limited to, lack of payment of principal in June 2013 in accordance with the terms of the Facility Agreement, failure to maintain minimum required funding for the Company’s debt service account, and failure to achieve in-orbit acceptance of all of its second-generation satellites by April 2013. Prior to the Facility Agreement’s amendment and restatement in August 2013, the borrowings were shown as current on the Company’s consolidated balance sheet in accordance with applicable accounting rules. The Company also projected that it would not be in compliance with certain future financial and nonfinancial covenants specified under the Facility Agreement. These events of default were waived or cured by the amendment and restatement of the Facility Agreement.

 

Amended and Restated Facility Agreement

 

As previously disclosed, on July 31, 2013, the Company entered into the Global Deed of Amendment and Restatement (the “GARA”) with Thermo, the Company’s domestic subsidiaries (the “Subsidiary Guarantors”), a syndicate of bank lenders, including BNP Paribas, Société Générale, Natixis, Credit Agricole Corporate and Investment Bank and Credit Industrial et Commercial as arrangers and BNP Paribas as the security agent and COFACE Agent, providing for the amendment and restatement of the Facility Agreement and certain related credit documents. The GARA became effective on August 22, 2013 and, among other things, waived all of the Company’s defaults under the Facility Agreement and restructured the financial covenants.

 

Pursuant to the GARA,

 

·In August 2013, Globalstar paid the lenders a restructuring fee plus an additional underwriting fee to COFACE in the aggregate amount of approximately $13.9 million, representing 40% of the total restructuring and underwriting fee, the balance of $20.8 million is due no later than December 31, 2017. This remaining amount is included in noncurrent liabilities on the December 31, 2013 consolidated balance sheet. Globalstar also paid all outstanding incurred transaction expenses for the Lenders.

 

·In August 2013, Globalstar drew the remaining approximately $0.7 million not previously borrowed under the Facility Agreement for certain milestone payments due to Thales for the construction of the second-generation satellites.

 

·In August 2013, all amounts remaining under the Thermo Contingent Equity Account (approximately $1.1 million) and approximately $0.2 million in the Debt Service Reserve Account were paid to the Company’s launch services provider for the account of Globalstar to pay certain costs for the launch of the Company’s second-generation satellites.

 

·Thermo confirmed its obligations under the Equity Commitment, Restructuring and Consent Agreement dated as of May 20, 2013 to make, or arrange for third parties to make, cash contributions to the Company, in exchange for equity, subordinated convertible debt or other equity-linked securities, of $20.0 million on or prior to December 26, 2013, and an additional amount of up to $20 million on or prior to December 31, 2014. See further discussion below on the details of the Consent Agreement and subsequent cash contributions to Globalstar.

 

·The Lenders waived all existing defaults or events of default under the Facility Agreement.

 

The GARA made the following changes to the terms of the Facility Agreement:

 

·The initial principal payment date, formerly June 30, 2013, was postponed to December 31, 2014, and the final maturity date was extended from June 30, 2020 to December 31, 2022.

 

·The remaining principal payments, with the final payment due December 31, 2022, were also restructured, resulting in an aggregate postponement of $235.3 million in principal payments through 2019.

 

·The annual interest rate increased by 0.5% to LIBOR plus 2.75% through July 1, 2017, and increases by an additional 0.5% each year thereafter to a maximum rate of LIBOR plus 5.75%.

 

·Mandatory prepayments were expanded in specified circumstances and amounts, including if the Company generates excess cash flow, monetizes its spectrum rights, receives the proceeds of certain asset dispositions or receives more than $145.0 million from the sale of additional debt or equity securities (excluding the Thermo commitments described above and up to $19.5 million under the Company’s equity line with Terrapin).

 

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·The financial covenants were modified, including changing the amount of permitted capital expenditures, reducing the required minimum liquidity amount from $5.0 million to $4.0 million, restructuring the other existing financial covenants to correspond to the Company’s revised business plan reflecting the delays in delivery of the Company’s second-generation satellites, and adding a new covenant with respect to the Company’s interest coverage ratio.
 ·The definition of Change of Control was amended to require a mandatory prepayment of the entire facility if Thermo and certain of its affiliates own less than 51% of the Company’s common stock.
 ·The required balance of the Debt Service Reserve Account was fixed at the current amount of approximately $37.9 million for the length of the Facility Agreement.
 ·Any new subordinated indebtedness of the Company may not mature or pay cash interest prior to the final maturity date of the Facility Agreement.
 ·The Company, while the Facility Agreement is outstanding, is prohibited from paying any cash dividends or repaying any principal or interest with respect to its indebtedness to Thermo under the Thermo Loan Agreement.
 ·The Company is prohibited from amending its material agreements without the lenders’ prior consent.

 

 ·An event of default was added if any litigation against the Company results in a final judgment that imposes a material liability that was not anticipated by the Company’s business plan.

 

The Company evaluated the GARA under applicable accounting guidance and determined that the amendment and restatement of the Company’s Facility Agreement was a modification of the former indebtedness. As a result of the modification of the Facility Agreement, all financing costs paid to the Company’s legal and other advisors, a total of $0.3 million, was recorded in other income and expense in the Company’s consolidated statements of operations during the third quarter of 2013. Financing costs paid to the lenders were capitalized as a deferred asset on the Company’s consolidated balance sheet during the third quarter of 2013 and will be amortized using the effective interest rate method to interest expense through the maturity of the Facility Agreement.

 

Contingent Equity Agreement

 

In June 2009, the Company entered into a Contingent Equity Agreement with Thermo whereby Thermo agreed to deposit $60.0 million into a contingent equity account to fulfill a condition precedent for borrowing under the Facility Agreement. Under the terms of the Facility Agreement, the Company had the right to make draws from this account if and to the extent it had an actual or projected deficiency in its ability to meet obligations due within a forward-looking 90-day period. Thermo pledged the contingent equity account to secure the Company’s obligations under the Facility Agreement.

 

 The Contingent Equity Agreement provided that the Company would pay Thermo an availability fee of 10% per year for maintaining funds in the contingent equity account. This annual fee was payable solely in warrants to purchase common stock at $0.01 per share with a five-year exercise period from issuance. The number of shares issuable under the warrants was calculated by taking the outstanding funds available in the contingent equity account multiplied by 10% divided by the lower of the Company’s common stock price on the issuance date or $1.37, but not to be lower than $0.20. Prior to June 19, 2012, the common stock price was subject to a reset provision on certain valuation dates whereby the warrant price used in the calculation would be the lower of the warrant price on the issuance date or the Company’s common stock price on the valuation date. The warrants issued to Thermo are no longer subject to any reset provisions. The Company determined that the warrants issued in conjunction with the availability fee were derivatives and recorded the value of the derivatives as a component of other non-current liabilities, at issuance. The offset was recorded in other assets and was amortized over the one year availability period. The warrants issued on June 19, 2012 were not subject to a reset provision subsequent to issuance and are therefore not considered a derivative instrument. The value of the warrants issued was recorded as equity, and the offset was recorded in other assets and was amortized over the one-year availability period.

 

When the Company made draws on the contingent equity account, it issued Thermo shares of common stock calculated using a price per share equal to 80% of the average closing price of the common stock for the 15 trading days immediately preceding the draw. The 20% discount on the value of the shares issued to Thermo is treated as a deferred financing cost and is amortized over the remaining term of the Facility Agreement. The Company has drawn the entire $60.0 million from this account as well as interest earned from the funds previously held in this account of approximately $1.1 million.

 

Since the origination of the Contingent Equity Agreement, the Company has issued to Thermo warrants to purchase 41,467,980 shares of common stock for the annual availability fee and subsequent resets due to provisions in the Contingent Equity Agreement and 160,916,223 shares of common stock resulting from the Company’s draws on the contingent equity account pursuant to the terms of the Contingent Equity Agreement. The Company has also issued to Thermo 2,133,656 shares of common stock resulting from draw of the interest earned from the funds previously held in this account.

 

On June 19, 2010, the warrants issued on June 19, 2009 and on December 31, 2009 were no longer variable, and the related $11.9 million liability was reclassified to equity.  On June 19, 2011, the warrants issued on June 19, 2010 were no longer variable, and the related $6.0 million liability was reclassified to equity. On June 19, 2012, the warrants issued on June 19, 2011 were no longer variable, and the related $5.9 million liability was reclassified to equity.

 

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As of December 31, 2012, no warrants issued in connection with the Contingent Equity Agreement had been exercised.

 

No voting common stock is issuable if it would cause Thermo and its affiliates to own more than 70% of the Company’s outstanding voting stock. The Company may issue nonvoting common stock in lieu of common stock to the extent issuing common stock would cause Thermo and its affiliates to exceed this 70% ownership level.

 

Thermo Loan Agreement

 

The Company has an Amended and Restated Loan Agreement (the “Loan Agreement”) with Thermo whereby Thermo agreed to lend the Company $25.0 million for the purpose of funding the debt service reserve account required under the Facility Agreement. In 2011, this loan was increased to $37.5 million. This loan is subordinated to, and the debt service reserve account is pledged to secure, all of the Company’s obligations under the Facility Agreement. Amounts deposited in the debt service reserve account are restricted to payments due under the Facility Agreement, unless otherwise authorized by the lenders.

 

The loan accrues interest at 12% per annum, which is capitalized and added to the outstanding principal in lieu of cash payments. The Company will make payments to Thermo only when permitted under the Facility Agreement. The loan becomes due and payable six months after the obligations under the Facility Agreement have been paid in full, the Company has a change in control or any acceleration of the maturity of the loans under the Facility Agreement occurs. As of December 31, 2013, $22.9 million of interest was outstanding; this amount is included in long-term debt on the Company’s consolidated balance sheet.

 

As additional consideration for the loan, the Company issued Thermo a warrant to purchase 4,205,608 shares of common stock at $0.01 per share with a five-year exercise period. No voting common stock is issuable upon such exercise if such issuance would cause Thermo and its affiliates to own more than 70% of the Company’s outstanding voting stock. The Company may issue nonvoting common stock in lieu of common stock to the extent issuing common stock would cause Thermo and its affiliates to exceed this 70% ownership level. The Company determined that the warrant was an equity instrument and recorded it as a part of stockholders’ equity with a corresponding debt discount of $5.2 million, which is netted against the principal amount of the loan. The Company accreted this debt discount associated with the warrant using an effective interest method to interest expense over the term of the loan agreement prior to the amendment and restatement as further discussed below.

 

As previously disclosed, in connection with the amendment and restatement of the Company’s Facility Agreement, the Company also amended and restated the Loan Agreement in July 2013. The Amended and Restated Loan Agreement made the following changes:

 

 ·Provided that the indebtedness would be represented by a promissory note.
 ·Provided that if a Fundamental Change (as defined in the Fourth Supplemental Indenture with respect to the 8.00% Notes issued in 2013) occurs prior to the repayment of the indebtedness, the Company would pay Thermo an amount equal to the Fundamental Make-Whole Amount (as defined in that indenture).
 ·Provided that the indebtedness is convertible into common stock of Globalstar on substantially the same terms as the 8.00% Notes Issued in 2013, excluding the conversion features on special conversion dates as defined in the Indenture.

 

The terms of the amendment and restatement were approved by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors. The committee was represented by independent legal counsel.

 

Based on the Company’s evaluation of the Amended and Restated Loan Agreement, this transaction was determined to be an extinguishment of the debt under the prior Loan Agreement. The Company recorded a loss on the extinguishment of this debt of $66.1 million in its consolidated statement of operations during the third quarter of 2013. This loss represents the difference between the fair value of the Loan Agreement, as amended and restated, and its carrying value just prior to amendment and restatement. See Note 5 for further discussion on the fair value of this instrument.

 

The Company evaluated the various embedded derivatives within the Loan Agreement. The Company determined that the conversion option and the contingent put feature upon a fundamental change required bifurcation from the Loan Agreement. The conversion option and the contingent put feature were not deemed clearly and closely related to the Loan Agreement and were separately accounted for as a standalone derivative. The Company recorded this compound embedded derivative liability as a non-current liability on its consolidated balance sheet with a corresponding debt discount which is netted against the face value of the Loan Agreement.

 

 The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense through the maturity of the Loan Agreement using an effective interest rate method. The fair value of the compound embedded derivative liability will be marked-to-market at the end of each reporting period, with any changes in value reported in the consolidated statements of operations. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model.

 

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The Company netted the debt discount associated with the compound embedded derivative against the fair value of the Loan Agreement to determine the carrying amount of the Loan Agreement. The accretion of the debt discount will increase the carrying amount of the debt through the maturity of the Loan Agreement. The Company allocated the fair value at issuance as follows (in thousands):

 

Loan Agreement  $18,958 
Compound embedded derivative liability   101,114 
Fair value of Loan Agreement  $120,072 

 

5.75% Convertible Senior Unsecured Notes

 

In 2008, the Company issued $150.0 million aggregate principal amount of 5.75% Notes. The 5.75% Notes were senior unsecured debt obligations of the Company. The 5.75% Notes were to mature on April 1, 2028 and bore interest at a rate of 5.75% per annum. Interest on the 5.75% Notes was payable semi-annually in arrears on April 1 and October 1 of each year.

 

The 5.75% Notes were subject to repurchase by the Company for cash at the option of the holders in whole or part on April 1, 2013 at a purchase price equal to 100% of the principal amount ($71.8 million aggregate principal was outstanding at April 1, 2013) of the 5.75% Notes, plus accrued and unpaid interest, if any.

 

 On March 29, 2013, U.S. Bank National Association, the Trustee under the Indenture and the First Supplemental Indenture governing the 5.75% Notes, each dated as of April 15, 2008, between the Company and the Trustee (collectively, as amended and supplemented or otherwise modified, the "Indenture"), notified the Company in writing that holders of approximately $70.7 million principal amount of 5.75% Notes had exercised their purchase rights pursuant to the Indenture. Under the Indenture, the Company was required to deposit with the Trustee on April 1, 2013, the purchase price of approximately $70.7 million in cash to effect the repurchase of the 5.75% Notes from the exercising holders. The Company did not have sufficient funds to pay the purchase price when due, which constituted an event of default under the Indenture.

 

In addition, the Indenture also required that, on April 1, 2013, the Company pay interest on the 5.75% Notes in the aggregate amount of approximately $2.1 million for the six months ended March 31, 2013. The Company did not make this payment. Under the Indenture, failure to pay this interest by April 30, 2013 also constituted an event of default.

 

As discussed below, these events of default were cured pursuant to the Exchange Agreement transactions consummated on May 20, 2013.

 

 Exchange Agreement

 

On May 20, 2013, the Company entered into an Exchange Agreement with the beneficial owners and investment managers for beneficial owners (the “Exchanging Note Holders”) of approximately 91.5% of its outstanding 5.75% Notes and completed the transactions contemplated by the Exchange Agreement.

 

Pursuant to the Exchange Agreement, the Exchanging Note Holders surrendered their 5.75% Notes (the “Exchanged Notes”) to the Company for cancellation in exchange for:

 

·Approximately $13.5 million in cash, with respect to a portion of the principal amount of the Exchanged Notes, plus approximately $0.5 million in cash, equal to all accrued and unpaid interest on the Exchanged Notes from April 1, 2013 to the closing;
·Approximately 30.3 million shares of voting common stock of the Company; and
·Approximately $54.6 million principal amount of the Company’s new 8.00% Convertible Senior Notes due April 1, 2028 (the “8.00% Notes Issued in 2013”), with an initial conversion price of $0.80 per share, subject to adjustment as described below.

 

In the Exchange Agreement, the Company also agreed that, if the Company grants certain liens to Thermo or its affiliates in connection with future financing transactions, the Exchanging Note Holders may participate in such transactions in an amount up to 50% of the participation of Thermo and its affiliates.

 

Pursuant to the Exchange Agreement, the Company also cured outstanding defaults under the 5.75% Notes by:

 

·Cancelling the Exchanged Notes as described above;
·Depositing with the Trustee approximately $2.1 million, an amount equal to the interest due on all of the 5.75% Notes on April 1, 2013 and accumulated interest thereon, for distribution to the holders of record of the 5.75% Notes as of March 15, 2013;

 

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·Depositing with the Trustee approximately $6.3 million, an amount equal to the principal amount of the 5.75% Notes (other than the Exchanged Notes) and interest thereon from April 1, 2013 to June 26, 2013 and directing the Trustee to pay such amounts to the holders of the 5.75% Notes (other than the Exchanged Notes); and
·Redeeming the remaining 5.75% Notes.

 

On May 20, 2013, the Company called for redemption the remaining 5.75% Notes for cash equal to their principal amount.

 

Based on the Company’s evaluation of the exchange transaction, the Exchange Agreement was determined to be an extinguishment of the 5.75% Notes. As a result of this exchange, the Company recorded a loss on the extinguishment of debt of $47.2 million in its consolidated statement of operations during the second quarter of 2013. This loss represented the difference between the carrying value of the 5.75% Notes and the fair value of the consideration given in the exchange (including the new 8.00% Notes Issued in 2013, cash payments to both exchanging and non-exchanging holders, equity issued to the holders and other fees incurred in the exchange). See Note 5 for further discussion on the fair value of this instrument.

 

The Consent Agreement

 

To obtain the lenders’ consent to the transactions contemplated by the Exchange Agreement, pursuant to the Consent Agreement, Thermo agreed that it would make, or arrange for third parties to make, cash contributions to the Company in exchange for equity, subordinated convertible debt or other equity-linked securities as follows:

 

·At the closing of the exchange transaction and thereafter each week until no later than July 31, 2013, an amount sufficient to enable the Company to maintain a consolidated unrestricted cash balance of at least $4.0 million;
·At the closing of the exchange transaction, $25.0 million to satisfy all cash requirements associated with the exchange transaction, including agreed principal and interest payments to the holders of the 5.75% Notes as contemplated by the Exchange Agreement, with any remaining portion being retained by the Company for working capital and general corporate purposes;
·Contemporaneously with, and as a condition to the closing of, any restructuring of the Facility Agreement, $20.0 million (less any amount contributed pursuant to the commitment described above with respect to the Company’s minimum cash balance);
·Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 26, 2013, $20.0 million; and
·Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 31, 2014, $20.0 million, less the amount by which the aggregate amount of cash received by the Company under the first, third and fourth commitments described above exceeds $40 million.

 

 In accordance with the terms of the Common Stock Purchase Agreement and Common Stock Purchase and Option Agreement discussed below, as of December 31, 2013, Thermo has contributed a total of $65.0 million to the Company in exchange for 171.9 million shares of the Company’s nonvoting common stock. As of December 31, 2013, an additional $15.0 million had been contributed to the Company through warrant exercises and other equity issuances, reducing Thermo’s remaining commitment to $5.0 million.

 

The Common Stock Purchase Agreement

 

On May 20, 2013, the Company and Thermo entered into a Common Stock Purchase Agreement pursuant to which Thermo purchased 78,125,000 shares of the Company’s common stock for $25.0 million ($0.32 per share). Thermo also agreed to purchase additional shares of common stock at $0.32 per share as and when required to fulfill its equity commitment described above to maintain the Company’s consolidated unrestricted cash balance at not less than $4.0 million until the earlier of July 31, 2013 and the closing of a restructuring of the Facility Agreement. In furtherance thereof, at the closing of the transactions contemplated by the Exchange Agreement, Thermo purchased an additional 15,625,000 shares of common stock for an aggregate purchase price of $5.0 million. In June 2013, Thermo purchased an additional 28,125,000 shares of common stock for an aggregate purchase price of $9.0 million pursuant to the Common Stock Purchase Agreement. Pursuant to its commitment, Thermo invested a further $6.0 million on July 29, 2013 and $6.5 million on August 19, 2013, on terms later determined by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors as described below.

 

During the second quarter of 2013, Thermo purchased in total approximately 121.9 million shares of the Company’s common stock pursuant to the Common Stock Purchase Agreement for an aggregate $39.0 million. During the second quarter of 2013, the Company recognized a loss on the sale of these shares of approximately $14.0 million (included in other income/expense on the consolidated statement of operations), representing the difference between the purchase price and the fair value of the Company’s common stock (measured as the closing stock price on the date of each sale). Pursuant to the Common Stock Purchase Agreement, the shares of common stock are intended to be shares of nonvoting common stock.

 

The terms of the Common Stock Purchase Agreement were approved by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors. The committee, which was represented by independent legal counsel, determined that the terms of the Common Stock Purchase Agreement were fair and in the best interests of the Company and its shareholders.

 

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The Common Stock Purchase and Option Agreement

 

On October 14, 2013, the Company and Thermo entered into a Common Stock Purchase and Option Agreement pursuant to which Thermo agreed to purchase 11,538,461 shares of the Company’s non-voting common stock at a purchase price of $0.52 per share in exchange for the $6.0 million invested in July and an additional $20 million, or 38,461,538 shares, of which $6.5 million was invested in August 2013 and the remaining $13.5 million was invested under the First Option, described below.. The Common Stock Purchase and Option Agreement also granted the Company a First Option and a Second Option, as defined in the agreement, to sell to Thermo up to $13.5 million and $11.5 million, respectively, of nonvoting common stock, as and when exercised by the special committee through November 28, 2013 and December 31, 2013, respectively. The First Option to sell up to $13.5 million in shares to Thermo is at a purchase price of $0.52 per share. The Second Option to sell up to $11.5 million in shares to Thermo is at a price equal to 85% of the average closing price of the voting common stock during the ten trading days immediately preceding the date of the special committee’s request. In November 2013, the special committee amended the Common Stock Purchase and Option Agreement to defer the expiration date of the Second Option to March 31, 2014.

 

During the third quarter of 2013, Thermo purchased approximately 24.0 million shares of the Company’s common stock pursuant to the terms of the Common Stock Purchase and Option Agreement for an aggregate purchase price of $12.5 million. During the third quarter of 2013, the Company recognized a loss on the sale of these shares of approximately $2.4 million (included in other income/expense on the consolidated statement of operations), representing the difference between the purchase price and the fair value of the Company’s common stock (measured as the closing stock price on the date of each sale).

 

In November 2013, the Company exercised the First Option, and on December 27, 2013 Thermo purchased 26.0 million shares of common stock at a purchase price of $0.52 per share for a total additional investment of $13.5 million.

 

The terms of the Common Stock Purchase and Option Agreement were approved by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors. The committee, which was represented by independent legal counsel, determined that the terms of the Common Stock Purchase and Option Agreement were fair and in the best interests of the Company and its shareholders.

 

Share Lending Agreement

 

Concurrently with the 2008 offering of the 5.75% Notes, the Company entered into a share lending agreement (the “Share Lending Agreement”) with Merrill Lynch International (the “Borrower”), pursuant to which the Company agreed to lend up to 36,144,570 shares of common stock (the “Borrowed Shares”) to the Borrower, subject to certain adjustments, for a period ending on the earliest of (i) at the Company’s option, at any time after the entire principal amount of the 5.75% Notes ceases to be outstanding, (ii) the written agreement of the Company and the Borrower to terminate, (iii) the occurrence of a Borrower default, at the option of Lender, and (iv) the occurrence of a Lender default, at the option of the Borrower. Pursuant to the Share Lending Agreement, upon the termination of the share loan, the Borrower was required to return the Borrowed Shares to the Company. Upon the conversion of 5.75% Notes (in whole or in part), a number of Borrowed Shares proportional to the conversion rate for such notes was required to be returned to the Company. At the Company’s election, the Borrower was permitted to deliver cash equal to the market value of the corresponding Borrowed Shares instead of returning to the Company the Borrowed Shares otherwise required by conversions of 5.75% Notes.

 

Pursuant to and upon the terms of the Share Lending Agreement, the Company issued and loaned the Borrowed Shares to the Borrower as a share loan. The Borrowing Agent also acted as an underwriter with respect to the Borrowed Shares, which were offered to the public. The Borrowed Shares included approximately 32.0 million shares of common stock initially loaned by the Company to the Borrower on separate occasions, delivered pursuant to the Share Lending Agreement and the Underwriting Agreement, and an additional 4.1 million shares of common stock that, from time to time, could be borrowed from the Company by the Borrower pursuant to the Share Lending Agreement and the Underwriting Agreement and subsequently offered and sold at prevailing market prices at the time of sale or negotiated prices. The Borrowed Shares are free trading shares.

 

During July 2013, in connection with the exchange or redemption of all of the 5.75% Notes, the Company and the Borrower terminated the Share Lending Agreement. In connection with this termination, the Borrower returned 10.2 million Borrowed Shares to Globalstar and paid approximately $4.4 million in cash for the remaining 7.1 million Borrowed Shares. As of December 31, 2012, approximately 17.3 million Borrowed Shares are outstanding. At December 31, 2013, the Share Lending Arrangement had been terminated, and all Borrowed Shares had been either returned to the Company or purchased by the Borrower.

 

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8.00% Convertible Senior Notes Issued in 2013

 

On May 20, 2013, pursuant to the Exchange Agreement, the Company issued $54.6 million aggregate principal amount of 8.00% Convertible Senior Notes (the “8.00% Notes Issued in 2013”) to the Exchanging Note Holders. The 8.00% Notes Issued in 2013 are convertible into shares of common stock at an initial conversion price of $0.80 per share of common stock, or 1,250 shares of the Company’s common stock per $1,000 principal amount of the 8.00% Notes Issued in 2013, subject to adjustment as provided in the Fourth Supplemental Indenture between the Company and U.S. Bank National Association, as Trustee (the “New Indenture”). The conversion price of the 8.00% Notes Issued in 2013 will be adjusted in the event of certain stock splits or extraordinary share distributions, or as a reset of the base conversion and exercise price as described below.

 

The 8.00% Notes Issued in 2013 are senior unsecured debt obligations of the Company and rank pari passu with the Company’s existing 8.00% Convertible Senior Unsecured Notes Issued in 2009. There is no sinking fund for the 8.00% Notes Issued in 2013. The 8.00% Notes Issued in 2013 will mature on April 1, 2028, subject to various call and put features as described below, and bear interest at a rate of 8.00% per annum. Interest on the 8.00% Notes Issued in 2013 is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2013. Interest is paid in cash at a rate of 5.75% per annum and additional 8.00% Notes Issued in 2013 at a rate of 2.25% per annum.

 

Subject to certain conditions set forth in the New Indenture, including prior approval of the Majority Lenders (as defined in the Facility Agreement), the Company could have redeemed the 8.00% Notes Issued in 2013, in whole or in part, on December 10, 2013, if the average of the volume-weighted prices of the Company’s common stock for the 30-day period ending November 29, 2013, were less than $0.20, at a price equal to the principal amount of the 8.00% Notes Issued in 2013 to be redeemed plus an amount equal to 32% of such principal amount minus all interest which is paid on the 8.00% Notes Issued in 2013 prior to their redemption. The Company did not redeem any portion of these notes on December 10, 2013. The Company may also redeem the 8.00% Notes Issued in 2013, with the prior approval of the Majority Lenders, in whole or in part, at any time on or after April 1, 2018, at a price equal to the principal amount of the 8.00% Notes Issued in 2013 to be redeemed plus all accrued and unpaid interest thereon.

 

A holder of 8.00% Notes Issued in 2013 has the right, at the Holder’s option, to require the Company to purchase some or all of the 8.00% Notes Issued in 2013 held by it on each of April 1, 2018 and April 1, 2023 at a price equal to the principal amount of the 8.00% Notes Issued in 2013 to be purchased plus accrued and unpaid interest.

 

A holder of the 8.00% Notes Issued in 2013 has the right, at the holder’s option, to require the Company to purchase some or all of the 8.00% Notes Issued in 2013 held by it at any time if there is a Fundamental Change. A Fundamental Change occurs if the Company’s common stock ceases to be traded on a stock exchange or an established over-the-counter market or if there is a change of control of the Company. If there is a Fundamental Change, the purchase price of any 8.00% Notes Issued in 2013 purchased by the Company will be equal to its principal amount plus accrued and unpaid interest and a Fundamental Change Make-Whole Amount calculated as provided in the New Indenture.

 

Subject to the procedures for conversion and other terms and conditions of the New Indenture, a holder may convert its 8.00% Notes Issued in 2013 at its option at any time prior to the close of business on the business day immediately preceding April 1, 2028, into shares of common stock (or, at the option of the Company, cash in lieu of all or a portion thereof, provided that, under the Facility Agreement, the Company may pay cash only with the consent of the Majority Lenders). Upon conversion, the holder will be entitled to receive shares of common stock, cash or a combination thereof (provided that, under the Facility Agreement, the Company may pay cash only with the consent of the Majority Lenders), in such amounts and subject to terms and conditions set forth in the New Indenture. The Company will pay cash in lieu of fractional shares otherwise issuable upon conversion of the 8.00% Notes Issued in 2013 as specified in the Indenture.

 

A holder may elect to convert up to 15% of its 8.00% Notes Issued in 2013 on each of July 19, 2013 and March 20, 2014. If a holder elects to convert on either of those dates, it will receive, at the Company’s option, either cash equal to the par value of the 8.00% Notes Issued in 2013 plus accrued interest (provided that, under the Facility Agreement, the Company may pay cash only with the consent of the Majority Lenders) or shares of the Company’s common stock equal to the principal amount of the 8.00% Notes Issued in 2013 to be converted plus accrued interest divided by the lower of the average price of the common stock in a specified period and $0.50. On July 19, 2013, $7.0 million principal amount (approximately 12.9% of the outstanding principal amount) of 8.00% Notes Issued in 2013 were converted, resulting in the issuance of 14.3 million shares. During the fourth quarter of 2013, an additional $1.0 million principal amount of 8.00% Notes Issued in 2013 were converted, resulting in the issuance of approximately 0.6 million shares through December 31, 2013 related to these conversions.

 

The base conversion rate may be adjusted on each of April 1, 2014 and April 1, 2015 based on the average price of the Company’s common stock in the 30-day period ending on that date. If the base conversion rate is adjusted on April 1, 2014, the Company also will provide additional consideration to the holders of the 8.00% Notes Issued in 2013 in an amount equal to 25% of the principal amount of the outstanding 8.00% Notes Issued in 2013, payable in equity or cash at the Company’s election (provided, under the Facility Agreement, that the Company may pay cash only with the consent of the Majority Lenders). That consideration will not reduce the principal amount of the 8.00% Notes Issued in 2013 or any interest otherwise payable on the 8.00% Notes Issued in 2013.

 

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The New Indenture also provides for other customary adjustments of the base conversion rate, including upon the Company’s sale of additional equity securities at a price below the then applicable conversion price. If a 8.00% Note Issued in 2013 is converted after May 20, 2014, the holder is entitled to receive additional shares of common stock as a make-whole premium equal to the first three years of interest on the Notes (i.e., 24% of the Notes less any interest already paid through the date of the conversion) as provided in the New Indenture. Due to common stock issuances by the Company since May 20, 2013, the base conversion rate had been reduced to $0.73 per share of common stock as of December 31, 2013.

 

The New Indenture provides that the Company and its subsidiaries may not, with specified exceptions, including the liens securing the Facility and liens approved in writing by the Agent, create, incur, assume or suffer to exist any lien on any of their assets, provided that if the Company or any of its subsidiaries creates, incurs or assumes any lien which is junior to the most senior lien securing the Facility Agreement (other than a lien pursuant to a restructuring of the Facility Agreement in which Thermo and its affiliates do not participate as a secured lender), the Company must promptly issue to the holders of the 8.00% Notes Issued in 2013 $3,590,200 (representing 5.0% of the principal amount of the 5.75% Notes outstanding on the date of the Exchange Agreement, which was $71.8 million) of shares of the Company’s common stock. At December 31, 2013, the Company did not expect that a lien will be created that does not meet at least one of the specified exceptions in the New Indenture, and therefore no amount is accrued for this feature at December 31, 2013.

 

The New Indenture requires that on or before December 31, 2013, but subject to the conditions described below, the Company must cause all of its subsidiaries that guaranty the obligations of the Company under the Facility Agreement or any notes of another series issued under the Indenture dated as of April 15, 2008 (the “Base Indenture”) to execute and deliver to the Trustee a guaranty of the Company’s obligations under the 8.00% Notes Issued in 2013 in the form attached to the New Indenture. The subsidiaries’ obligations under the guaranty will be subordinated to their obligations under their guaranty of the Facility Agreement. The execution and delivery of the guaranty was conditioned on the prior completion of the restructuring of the Facility Agreement, the absence of any payment default under the Facility Agreement, and the absence of any breach by Thermo of its obligations to provide funds to the Company (the “Contribution Obligations”) as required by the Consent Agreement (or, as applicable, the anticipated corresponding provision in the Facility Agreement. The Company’s subsidiaries issued the guarantee required by this provision on December 27, 2013.

 

The New Indenture provides for customary events of default, including without limitation, failure to pay principal or premium on the 8.00% Notes Issued in 2013 when due or to distribute cash or shares of common stock when due as described above; failure by the Company to comply with its obligations and covenants in the New Indenture; default by the Company in the payment of principal or interest on any other indebtedness for borrowed money with a principal amount in excess of $10.0 million, if such indebtedness is accelerated and not rescinded with 30 days; rendering of certain final judgments; failure by Thermo to fulfill the contribution obligations described above; and certain events of insolvency or bankruptcy. If there is an event of default, the Trustee may, at the direction of the holders of 25% or more in aggregate principal amount of the 8.00% Notes Issued in 2013, accelerate the maturity of the 8.00% Notes Issued in 2013. The Company was not in default under the 8.00% Notes Issued in 2013 as of December 31, 2013.

 

The Company evaluated the various embedded derivatives within the New Indenture. The Company determined that the conversion option and the contingent put feature within the New Indenture required bifurcation from the 8.00% Notes Issued in 2013. The conversion option and the contingent put feature were not deemed clearly and closely related to the 8.00% Notes Issued in 2013 and were separately accounted for as a standalone derivative. The Company recorded this compound embedded derivative liability as a non-current liability on its consolidated balance sheet with a corresponding debt discount which is netted against the face value of the 8.00% Notes Issued in 2013.

 

The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense through the first put date of the 8.00% Notes Issued in 2013 (April 1, 2018) using an effective interest rate method. The fair value of the compound embedded derivative liability is being marked-to-market at the end of each reporting period, with any changes in value reported in the condensed consolidated statements of operations. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model.

 

The Company netted the debt discount associated with compound embedded derivative against the fair value of the 8.00% Notes Issued in 2013 to determine the carrying amount of the 8.00% Notes Issued in 2013. The accretion of the debt discount will increase the carrying amount of the debt through April 1, 2018 (the first put date of the 8.00% Notes Issued in 2013). The Company allocated the fair value at issuance as follows (in thousands):

 

Senior notes  $27,890 
Compound embedded derivative liability   56,752 
Fair value of 8.00% Notes Issued in 2013  $84,642 

 

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5.0% Convertible Senior Notes

 

In June 2011, the Company issued $38.0 million in aggregate principal amount of the 5.0% Convertible Senior Unsecured Notes (the “5.0% Notes”) and warrants (the “5.0% Warrants”) to purchase 15,200,000 shares of voting common stock of the Company. The 5.0% Notes were convertible into shares of common stock at an initial conversion price of $1.25 per share of common stock, or 800 shares of the Company’s common stock per $1,000 principal amount of the 5.0% Notes, subject to adjustment in the manner set forth in the Indenture. The 5.0% Notes were guaranteed on a subordinated basis by substantially all of the Company’s domestic subsidiaries, on an unconditional joint and several basis, pursuant to a Guaranty Agreement. The 5.0% Warrants are exercisable until five years after their issuance. The 5.0% Notes and 5.0% Warrants have anti-dilution protection in the event of certain stock splits or extraordinary share distributions, and a reset of the conversion and exercise price on April 15, 2013 if the Company’s common stock were below the initial conversion and exercise price at that time. On April 15, 2013, the base conversion rate for the 5.0% Notes and the exercise price of the 5.0% Warrants were reset to $0.50 and $0.32, respectively.

 

The 5.0% Notes were senior unsecured debt obligations of the Company and ranked pari passu with the Company’s existing 8.00% Notes Issued in 2009 and 8.00% Notes Issued in 2013 and were subordinated to the Company’s obligations pursuant to its Facility Agreement. There was no sinking fund for the 5.0% Notes. The 5.0% Notes were scheduled to mature at the earlier to occur of (i) December 14, 2021, or (ii) six months following the maturity date of the Facility Agreement and bore interest at a rate of 5.0% per annum. Interest on the Notes was paid in-kind semi-annually in arrears on June 15 and December 15 of each year. Under certain circumstances, interest on the 5.0% Notes may have been payable in cash at the election of the holder if such payments are permitted under the Facility Agreement.

 

Subject to certain exceptions set forth in the Indenture, the 5.0% Notes were subject to repurchase for cash at the option of the holders of all or any portion of the 5.0% Notes upon a fundamental change at a purchase price equal to 100% of the principal amount of the 5.0% Notes, plus a make-whole payment and accrued and unpaid interest, if any. A fundamental change would have occurred upon certain changes in the ownership of the Company or certain events relating to the trading of the common stock.

 

Holders could convert their 5.0% Notes into voting common stock at their option at any time. Upon conversion of the 5.0% Notes, the Company paid the holders of the 5.0% Notes a make-whole premium by increasing the number of shares of common stock delivered upon such conversion. The number of additional shares constituting the make-whole premium per $1,000 principal amount of 5.0% Notes was equal to the quotient of (i) the aggregate principal amount of the Securities so converted multiplied by 25.00%, less the aggregate interest paid on such Securities prior to the applicable Conversion Date divided by (ii) 95% of the volume-weighted average Closing Price of the Common Stock for the 10 trading days immediately preceding the conversion date.

 

  Pursuant to the terms of the 5.0% Notes Indenture, if, at any time on or after June 14, 2013 and on or prior to Stated Maturity, the closing price of the Globalstar’s common stock exceeded two hundred percent of the conversion price then in effect for at least 30 consecutive trading days, then, at the option of the Company, all Securities then outstanding were to convert automatically into shares of common stock. The conditions for the automatic conversion were met, and the Company elected to convert all outstanding 5.0% Notes into shares of common stock on November 7, 2013.

 

Prior to November 7, 2013, approximately $17.5 million principal amount of 5.0% Notes had been converted resulting in the issuance of 41.1 million shares of Company common stock and 7.2 million 5.0% Warrants had been exercised, which resulted in the Company issuing 6.7 million shares of common stock and receiving $2.0 million. On November 7, 2013, approximately $24.2 million, representing the remaining principal amount of 5.0% Notes plus paid in kind interest added to the principal amount of the 5.0% Notes, of 5.0% Notes were converted, resulting in the issuance of 51.9 million shares of Globalstar common stock. Eight million 5.0% Warrants were outstanding as of December 31, 2013.

 

The Company evaluated the various embedded derivatives resulting from the conversion rights and features within the Indenture for bifurcation from the 5.0% Notes.  Due to the provisions and reset features in the 5.0% Warrants, the Company recorded the 5.0% Warrants as equity with a corresponding debt discount which is netted against the face value of the 5.0% Notes. The Company accreted the debt discount associated with the 5.0% Warrants to interest expense over the term of the 5.0% Warrants using the effective interest rate method. The Company determined the relative fair value of the 5.0% Warrants using a Monte Carlo simulation model based upon a risk-neutral stock price model.

 

The Company evaluated the embedded derivative resulting from the contingent put feature within the Indenture for bifurcation from the 5.0% Notes. The contingent put feature was not deemed clearly and closely related to the 5.0% Notes and had to be bifurcated as a standalone derivative. The Company recorded this embedded derivative liability as a non-current liability on its consolidated balance sheet with a corresponding debt discount which was netted against the principal amount of the 5.0% Notes.

 

The Company evaluated the conversion option within the convertible notes to determine whether the conversion price was beneficial to the note holders. The Company recorded a beneficial conversion feature (“BCF”) related to the issuance of the 5.0% Notes.  The BCF for the 5.0% Notes was recognized and measured by allocating a portion of the proceeds to beneficial conversion feature, based on relative fair value, and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion feature. The Company accreted the discount recorded in connection with the BCF valuation as interest expense over the term of the 5.0% Notes, using the effective interest rate method.

 

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As the remaining amount of 5.0% Notes converted prior to full accretion of the discounts created by the BCF the Company recorded approximately $12.9 million of the unamortized discount for the BCF and other separable instruments to interest expense during the fourth quarter of 2013. The Company also recorded approximately $0.8 million to derivative gain for the derivative embedded in the 5.0% Notes that is no long outstanding as a result of this conversion.

 

The Company netted the debt discount associated with the 5.0% Warrants, the beneficial conversion feature, and the contingent put feature against the face value of the 5.0% Notes to determine the carrying amount of the 5.0% Notes. The accretion of debt discount will increase the carrying amount of the debt over the term of the 5.0% Notes. The Company allocated the proceeds at issuance as follows (in thousands):

 

Debt  $11,316 
Fair value of 5.0% Warrants   8,081 
Beneficial Conversion Feature   17,100 
Contingent Put Feature   1,503 
Face Value of 5.0% Notes  $38,000 

 

8.00% Convertible Senior Unsecured Notes Issued in 2009

 

In June 2009, the Company sold $55.0 million in aggregate principal amount of 8.00% Convertible Senior Unsecured Notes (the “8.00% Notes Issued in 2009”) and Warrants (the “8.00% Warrants”) to purchase 15.3 million shares of the Company’s common stock. The 8.00% Notes Issued in 2009 are subordinated to all of the Company’s obligations under the Facility Agreement. The 8.00% Notes Issued in 2009 are the Company’s senior unsecured debt obligations and, except as described in the preceding sentence, rank pari passu with its existing unsecured, unsubordinated obligations, including its 8.00% Notes Issued in 2013. The 8.00% Notes Issued in 2009 mature at the later of the tenth anniversary of closing (June 19, 2019) or six months following the maturity date of the Facility Agreement and bear interest at a rate of 8.00% per annum. Interest on the 8.00% Notes Issued in 2009 is payable in the form of additional 8.00% Notes Issued in 2009 or, subject to certain restrictions, in common stock at the option of the holder. Interest is payable semi-annually in arrears on June 15 and December 15 of each year.

 

The 8.00% Warrants have full ratchet anti-dilution protection and the exercise price of the Warrants is subject to adjustment under certain other circumstances. In the event of certain transactions that involve a change of control, the holders of the 8.00% Warrants have the right to make the Company purchase the warrants for cash, subject to certain conditions. The exercise period for the 8.00% Warrants began on December 19, 2009 and will end on June 19, 2014.

 

Holders may convert their 8.00% Notes Issued in 2009 at any time. If the Company issues or sells shares of its common stock at a price per share less than the base conversion price on the trading day immediately preceding such issuance or sale subject to certain limitations, the base conversion rate will be adjusted lower based on a formula described in the supplemental indenture governing the 8.00% Notes Issued in 2009. However, no adjustment to the base conversion rate shall be made if it would cause the Base Conversion Price to be less than $1.00. No adjustment to the Base Conversion Rate will be required unless the adjustment would require an increase or decrease of at least 1% of the Base Conversion Rate. If the adjustment is not made because the adjustment does not change the Base Conversion Rate by at least 1%, then the adjustment that is not made will be carried forward and taken into account in any future adjustment. All required calculations will be made to the nearest cent of 1/1,000th of a share, as the case may be. Notwithstanding the foregoing, (i) upon any conversion of 8.00% Notes Issued in 2009 (solely with respect to 8.00% Notes Issued in 2009 to be converted), (ii) on every one year anniversary from the Issue Date of the 8.00% Notes Issued in 2009 and (iii) on the Stated Maturity for the payment of principal of the 8.00% Notes Issued in 2009, the Company will give effect to all adjustments that have otherwise been deferred, and those adjustments will no longer be carried forward and taken into account in any future adjustment. If at any time the closing price of the common stock exceeds 200% of the conversion price of the 8.00% Notes Issued in 2009 then in effect for 30 consecutive trading days, all of the outstanding 8.00% Notes Issued in 2009 will be automatically converted into common stock. Upon certain automatic and optional conversions of the 8.00% Notes Issued in 2009, the Company will pay holders of the 8.00% Notes Issued in 2009 a make-whole premium by increasing the number of shares of common stock delivered upon such conversion. The number of additional shares per $1,000 principal amount of 8.00% Notes Issued in 2009 constituting the make-whole premium shall be equal to the quotient of (i) the aggregate principal amount of the 8.00% Notes Issued in 2009 so converted multiplied by 32.00%, less the aggregate interest paid on such Securities prior to the applicable Conversion Date divided by (ii) 95% of the volume-weighted average Closing Price of the common stock for the 10 trading days immediately preceding the Conversion Date.

 

The current exercise price of the 8.00% Warrants is $0.32 and the base conversion price of the 8.00% Notes Issued in 2009 is $1.14.

 

As of December 31, 2013, approximately $17.6 million 8.00% Notes Issued in 2009 had been converted resulting in the issuance of approximately 16.1 million shares of common stock. No 8.00% Notes Issued in 2009 had been converted during 2013. For the year ended December 31, 2013, approximately 21.8 million 8.00% Warrants were exercised, which resulted in the Company issuing 21.4 million shares of common stock and receiving $6.7 million in cash.

 

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Subject to certain exceptions set forth in the supplemental indenture, if certain changes of control of the Company or events relating to the listing of the common stock occur (a “fundamental change”), the 8.00% Notes Issued in 2009 are subject to repurchase for cash at the option of the holders of all or any portion of the 8.00% Notes Issued in 2009 at a purchase price equal to 100% of the principal amount of the 8.00% Notes Issued in 2009, plus a make-whole payment and accrued and unpaid interest, if any. Holders that require the Company to repurchase 8.00% Notes Issued in 2009 upon a fundamental change may elect to receive shares of common stock in lieu of cash. Such holders will receive a number of shares equal to (i) the number of shares they would have been entitled to receive upon conversion of the 8.00% Notes Issued in 2009, plus (ii) a make-whole premium of 12% or 15%, depending on the date of the fundamental change and the amount of the consideration, if any, received by the Company’s stockholders in connection with the fundamental change.

 

The indenture governing the 8.00% Notes Issued in 2009 contains customary financial reporting requirements. The indenture also provides that upon certain events of default, including without limitation failure to pay principal or interest, failure to deliver a notice of fundamental change, failure to convert the 8.00% Notes Issued in 2009 when required, acceleration of other material indebtedness and failure to pay material judgments, either the trustee or the holders of 25% in aggregate principal amount of the 8.00% Notes Issued in 2009 may declare the principal of the 8.00% Notes Issued in 2009 and any accrued and unpaid interest through the date of such declaration immediately due and payable. In the case of certain events of bankruptcy or insolvency relating to the Company or its significant subsidiaries, the principal amount of the 8.00% Notes Issued in 2009 and accrued interest automatically becomes due and payable. The Company was not in default under the 8.00% Notes Issued in 2009 as of December 31, 2013.

 

The Company recorded the conversion rights and features and the contingent put feature embedded within the 8.00% Notes Issued in 2009 as a compound embedded derivative liability on its consolidated balance sheets with a corresponding debt discount, which is netted against the principal amount of the 8.00% Notes Issued in 2009. Due to the cash settlement provisions and reset features in the 8.00% Warrants issued with the 8.00% Notes Issued in 2009, the Company recorded the 8.00% Warrants as an embedded derivative liability on its consolidated balance sheets with a corresponding debt discount, which is netted against the principal amount of the 8.00% Notes Issued in 2009.

 

The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense over the term of the 8.00% Notes Issued in 2009 using an effective interest rate method. The fair value of the compound embedded derivative liability is being marked-to-market at the end of each reporting period, with any changes in value reported in the consolidated statements of operations. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model.

 

Due to the cash settlement provisions and reset features in the 8.00% Warrants, the Company initially recorded the 8.00% Warrants as a component of other non-current liabilities on its consolidated balance sheet with a corresponding debt discount which is netted with the face value of the 8.00% Notes Issued in 2009. The Company is accreting the debt discount associated with the 8.00% Warrants liability to interest expense over the term of the 8.00% Notes Issued in 2009 using an effective interest rate method. The fair value of the 8.00% Warrants liability is being marked-to-market at the end of each reporting period, with any changes in value reported in the consolidated statements of operations. The Company determined the fair value of the 8.00% Warrants derivative using a Monte Carlo simulation model. As the exercise period for the 8.00% Warrants expires in June 2014, the Company has classified this derivative liability as current on its consolidated balance sheet at December 31, 2013.

 

The Company allocated the proceeds received from the 8.00% Notes Issued in 2009 among the compound embedded derivative liability, the detachable 8.00% Warrants and the remainder to the underlying debt. The Company netted the debt discount associated with the compound embedded derivative and 8.00% Warrants against the face value of the 8.00% Notes Issued in 2009 to determine the carrying amount of the 8.00% Notes Issued in 2009. The accretion of debt discount will increase the carrying amount of the debt over the term of the 8.00% Notes Issued in 2009. The Company allocated the proceeds at issuance as follows (in thousands):

 

Fair value of compound embedded derivative  $23,542 
Fair value of Warrants   12,791 
Debt   18,667 
Face Value of 8.00% Notes Issued in 2009  $55,000 

 

Warrants Outstanding

 

As a result of the Company’s borrowings described above, as of December 31, 2013 and 2012 there were warrants outstanding to purchase 93.5 million and 122.5 million shares, respectively, of the Company’s common stock as shown in the table below:

 

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   Outstanding Warrants   Strike Price 
   December 31,
  2013
   December 31,
 2012
   December 31,
  2013
   December 31,
 2012
 
Contingent Equity Agreement (1)   41,467,980    41,467,980   $0.01   $0.01 
Thermo Loan Agreement (2)   4,205,608    4,205,608    0.01    0.01 
5.0% Notes (3)   8,000,000    15,200,000    0.32    1.25 
8.00% Notes Issued in 2009 (4)   39,842,813    61,606,706    0.32    0.32 
    93,516,401    122,480,294           

  

(1) Warrants issued in connection with the Contingent Equity Agreement have a five year exercise period from issuance. These warrants were issued between June 2009 and June 2012 and the exercise periods will expire from June 2014 to June 2017.
(2) The exercise period of the warrants issued in connection with the Thermo Loan Agreement is five years from issuance, which is June 2014.
(3) On April 15, 2013, the exercise price of the 5.0% Warrants was reset to $0.32 due to the reset provision in the indenture. The 5.0% Warrants are exercisable until five years after their issuance, which is June 2016.
(4) According to the terms of the indenture, additional 8.00% Warrants may be issued to holders if shares of common stock are issued below the then current warrant strike price. The exercise period for the 8.00% Warrants began on December 19, 2009 and will end on June 14, 2014.

 

Maturities of long-term debt

 

Annual maturities of long-term debt for each of the five years following December 31, 2013 and thereafter are as follows (in thousands):

 

2014  $4,046 
2015   6,450 
2016   32,835 
2017   75,755 
2018   124,837 
Thereafter   501,425 
Total  $745,348 

 

Amounts in the above table are calculated based on current amounts outstanding at December 31, 2013, and therefore exclude paid-in-kind interest payments that will be made in future periods.

 

The 8.00% Notes Issued in 2013 are subject to repurchase by the Company at the option of the holders on April 1, 2018. As such, the amounts are included in the 2018 maturities in the table above.

 

Terrapin Opportunity, L.P. Common Stock Purchase Agreement

 

On December 28, 2012 the Company entered into a Common Stock Purchase Agreement with Terrapin pursuant to which the Company may, subject to certain conditions, require Terrapin to purchase up to $30.0 million of shares of voting common stock over the 24-month term following the effectiveness of a resale registration statement, which became effective on August 2, 2013. This type of arrangement is sometimes referred to as a committed equity line financing facility. From time to time over the 24-month term, and in the Company’s sole discretion, the Company may present Terrapin with up to 36 draw down notices requiring Terrapin to purchase a specified dollar amount of shares of voting common stock, based on the price per share per day over 10 consecutive trading days (a "Draw Down Period"). The per share purchase price for these shares equals the daily volume weighted average price of common stock on each date during the Draw Down Period on which shares are purchased, less a discount ranging from 3.5% to 8.0% based on a minimum price that the Company solely specifies. In addition, in the Company’s sole discretion, but subject to certain limitations, the Company may require Terrapin to purchase a percentage of the daily trading volume of its common stock for each trading day during the Draw Down Period. The Company has agreed not to sell to Terrapin a number of shares of voting common stock which, when aggregated with all other shares of voting common stock then beneficially owned by Terrapin and its affiliates, would result in the beneficial ownership by Terrapin or any of its affiliates of more than 9.9% of the then issued and outstanding shares of voting common stock.

 

When the Company makes a draw under the Terrapin equity line agreement, it will issue Terrapin shares of common stock calculated using a price per share as specified in the agreement. As of December 31, 2013, Terrapin had purchased a total of 6.1 million shares of voting common stock at a purchase price of $6.0 million pursuant to the terms of the agreement.

 

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4. DERIVATIVES

 

In connection with certain borrowings disclosed in Note 3, the Company was required to record derivative instruments on its consolidated balance sheets. None of these derivative instruments are designated as a hedge. The following tables disclose the fair values and classification of the derivative instruments on the Company’s consolidated balance sheets (in thousands):

 

   December 31, 2013   December 31, 2012 
Intangible and other assets:          
Interest rate cap  $185   $84 
Total intangible and other assets  $185   $84 
           
Derivative liabilities, current:          
Warrants issued with 8.00% Notes Issued in 2009   (57,048)   - 
           
Derivative liabilities, non-current:          
Compound embedded derivative with 8.00% Notes Issued in 2009  $(66,022)  $(4,163)
Warrants issued with 8.00% Notes Issued in 2009   -    (18,034)
Contingent put feature embedded in the 5.0% Notes   -    (2,978)
Compound embedded derivative with 8.00% Notes Issued in 2013   (109,794)   - 
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement   (229,662)   - 
Total derivative liabilities, non-current:   (405,478)   (25,175)
           
Total derivative liabilities, current and non-current  $(462,526)  $(25,175)

 

The following tables disclose the changes in value during the twelve months ended December 31, 2013, 2012 and 2011 recorded as derivative gain (loss) on the Company’s consolidated statement of operations (in thousands):

 

   Year ended December 31, 
   2013   2012   2011 
Interest rate cap  $101   $(171)  $(745)
Warrants issued with 8.00% Notes Issued in 2009   (54,518)   4,218    6,687 
Compound embedded derivative with 8.00% Notes Issued in 2009   (61,859)   2,546    15,361 
Warrants issued in conjunction with Contingent Equity Agreement   -    302    4,090 
Contingent put feature embedded in the 5.0% Notes   2,978    79    (1,554)
Compound embedded derivative with 8.00% Notes Issued in 2013   (64,153)   -    - 
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement   (128,548)   -    - 
Total derivative gain (loss)  $(305,999)  $6,974   $23,839 

 

 Intangible and Other Assets

 

Interest Rate Cap

 

In June 2009, in connection with entering into the Facility Agreement, which provides for interest at a variable rate, the Company entered into five ten-year interest rate cap agreements. The interest rate cap agreements reflect a variable notional amount ranging from $586.3 million to $14.8 million at interest rates that provide coverage to the Company for exposure resulting from escalating interest rates over the term of the Facility Agreement. The interest rate cap provides limits on the six-month Libor rate (“Base Rate”) used to calculate the coupon interest on outstanding amounts on the Facility Agreement and is capped at 5.50% should the Base Rate not exceed 6.5%. Should the Base Rate exceed 6.5%, the Company’s Base Rate will be 1% less than the then six-month Libor rate. The Company paid an approximately $12.4 million upfront fee for the interest rate cap agreements. The interest rate cap did not qualify for hedge accounting treatment, and changes in the fair value of the agreements are included in the consolidated statements of operations.

 

Derivative Liabilities

 

The Company has identified various embedded derivatives resulting from certain features in the Company’s debt instruments. These embedded derivatives required bifurcation from the debt host agreement. All embedded derivatives that required bifurcation, excluding the warrants issued in connection with the Company’s contingent equity agreement (see below for further discussion), are recorded as a derivative liability on the Company’s consolidated balance sheet with a corresponding debt discount netted against the principal amount of the related debt instrument. The Company accretes the debt discount associated with each derivative liability to interest expense over the term of the related debt instrument using an effective interest rate method. The fair value of each embedded derivative liability is marked-to-market at the end of each reporting period with any changes in value reported in its consolidated statements of operations. See below for further discussion for each liability and the features embedded in the debt instrument which required the Company to account for the instrument as a derivative.

 

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Compound Embedded Derivative with 8.00% Notes Issued in 2009

 

As a result of the conversion rights and features and the contingent put feature embedded within the 8.00% Notes Issued in 2009, the Company recorded a compound embedded derivative liability on its consolidated balance sheet with a corresponding debt discount which is netted against the principal amount of the 8.00% Notes Issued in 2009. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model.

 

Warrants Issued with 8.00% Notes Issued in 2009

 

Due to the cash settlement provisions and reset features in the 8.00% Warrants issued with the 8.00% Notes Issued in 2009, the Company recorded the 8.00% Warrants as an embedded derivative liability on its consolidated balance sheet with a corresponding debt discount which is netted against the principal amount of the 8.00% Notes Issued in 2009. The Company determined the fair value of the warrant derivative using a Monte Carlo simulation model. As the exercise period for the 8.00% Warrants expires in June 2014, the Company has classified this derivative liability as current on its consolidated balance sheet at December 31, 2013.

 

Warrants Issued in Conjunction with Contingent Equity Agreement

 

Prior to June 19, 2012, the Company determined that the warrants issued in conjunction with the availability fee for the Contingent Equity Agreement were a liability at issuance. The offset was recorded in other non-current assets and was amortized over the one-year availability period. The Company determined the principal amount of the warrant derivative using a Monte Carlo simulation model.

 

On June 19, 2012, the Company issued additional warrants in conjunction with the availability fee for the Contingent Equity Agreement. This tranche of warrants was not subject to a reset provision in the agreement and therefore is not marked-to-market at the end of each reporting period. The Company determined that the warrant was an equity instrument and recorded it as equity on its consolidated balance sheet.

 

Contingent Put Feature Embedded in the 5.0% Notes

 

As a result of the contingent put feature within the 5.0% Notes, the Company recorded a derivative liability on its consolidated balance sheet with a corresponding debt discount which is netted against the principal amount of the 5.0% Notes.  The Company determined the fair value of the contingent put feature derivative using a Monte Carlo simulation model. On November 7, 2013, the remaining principal amount of the 5.0% Notes was converted into common stock; therefore the derivative liability embedded in the 5.0% Notes is longer outstanding and the balance at December 31, 2013 is $0 (see further discussion in Note 3).

 

Compound Embedded Derivative with 8.00% Notes Issued in 2013

 

As a result of the conversion option and the contingent put feature within the 8.00% Notes Issued in 2013, the Company recorded a compound embedded derivative liability on its consolidated balance sheet with a corresponding debt discount which is netted against the face value of the 8.00% Notes Issued in 2013. The Company determined the fair value of the compound embedded derivative liability using a Monte Carlo simulation model.

 

Compound Embedded Derivative with the Amended and Restated Thermo Loan Agreement

 

As a result of the conversion option and the contingent put feature within the Loan Agreement with Thermo entered into in July 2013, the Company recorded a compound embedded derivative liability on its consolidated balance sheet with a corresponding debt discount which is netted against the face value of the Amended and Restated Loan Agreement. The Company determined the fair value of the compound embedded derivative liability using a Monte Carlo simulation model.

 

5. FAIR VALUE MEASUREMENTS

 

The Company follows the authoritative guidance for fair value measurements relating to financial and non-financial assets and liabilities, including presentation of required disclosures herein.  This guidance establishes a fair value framework requiring the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities.  Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.  The three levels are defined as follows:

 

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Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

 

Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

Recurring Fair Value Measurements

 

The following table provides a summary of the financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012 (in thousands):

 

   Fair Value Measurements at December 31, 2013: 
   (Level 1)   (Level 2)   (Level 3)   Total
 Balance
 
Assets:                    
Interest rate cap  $-   $185   $-   $185 
Total assets measured at fair value  $-   $185   $-   $185 
                     
Liabilities:                    
Derivative Liabilities:                    
Warrants issued with 8.00% Notes Issued in 2009  $-   $-   $(57,048)  $(57,048)
Compound embedded derivative with 8.00% Notes Issued in 2009   -    -    (66,022)   (66,022)
Compound embedded derivative with 8.00% Notes Issued in 2013   -    -    (109,794)   (109,794)
Compound embedded derivative with the  Amended and Restated Thermo Loan Agreement   -    -    (229,662)   (229,662)
Total Derivative Liabilities   -    -    (462,526)   (462,526)
                     
Other Liabilities:                    
Liability for contingent consideration   -    -    (1,923)   (1,923)
                     
Total liabilities measured at fair value  $-   $-   $(464,449)  $(464,449)

 

   Fair Value Measurements at December 31, 2012: 
   (Level 1)   (Level 2)   (Level 3)   Total
 Balance
 
Assets:                    
Interest rate cap  $-   $84   $-   $84 
Total assets measured at fair value  $-   $84   $-   $84 
                     
Liabilities:                    
Derivative Liabilities:                    
Warrants issued with 8.00% Notes Issued in 2009  $-   $-   $(18,034)  $(18,034)
Compound embedded derivative with 8.00% Notes Issued in 2009   -    -    (4,163)   (4,163)
Contingent put feature embedded in 5.0% Notes   -    -    (2,978)   (2,978)
Total Derivative Liabilities   -    -    (25,175)   (25,175)
                     
Other Liabilities:                    
Liability for contingent consideration   -    -    (3,916)   (3,916)
                     
Total liabilities measured at fair value  $-   $-   $(29,091)  $(29,091)

 

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Assets

 

Interest Rate Cap

 

The fair value of the interest rate cap is determined using observable pricing inputs including benchmark yields, reported trades, and broker/dealer quotes at the reporting date. See Note 4 for further discussion.

 

Liabilities

 

The derivative liabilities in Level 3 include the 8.00% Warrants issued with the 8.00% Notes Issued in 2009, the compound embedded derivative in the 8.00% Notes Issued in 2009, the contingent put feature embedded in the 5.0% Notes (prior to November 7, 2013, see further discussion below), the compound embedded derivative in the 8.00% Notes Issued in 2013 and the compound embedded derivative in the Amended and Restated Loan Agreement with Thermo. The Company marks-to-market these liabilities at each reporting date with the changes in fair value recognized in the Company’s consolidated statements of operations. See Note 4 for further discussion.

 

 The significant quantitative Level 3 inputs utilized in the valuation models as of December 31, 2013 and December 31, 2012 are shown in the tables below:

  

   Level 3 Inputs at December 31, 2013:
   Stock Price
 Volatility
  Risk-Free
 Interest
 Rate
   Note
 Conversion
 Price
   Warrant
 Exercise
 Price
   Market Price of
 Common Stock
 
Compound embedded derivative with
8.00% Notes Issued in 2009
  65 - 100 %   1.5%  $1.14   $N/A   $1.75 
Warrants issued with 8.00% Notes Issued in 2009  100%   0.1%  $ N/A   $0.32   $1.75 
Compound embedded derivative with 8.00% Notes Issued in 2013  65 - 100 %   1.5%  $0.73   $N/A   $1.75 
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement  65 - 100 %   3.0%  $0.73   $N/A   $1.75 

 

   Level 3 Inputs at December 31, 2012:
   Stock Price
 Volatility
  Risk-Free
 Interest Rate
  Note
 Conversion
 Price
   Warrant
 Exercise
 Price
   Market Price of
 Common Stock
 
Compound embedded derivative with 8.00% Notes Issued in 2009  34 -107 %  0.02 - 1.78 %  $1.59   $N/A   $0.31 
Warrants issued with 8.00% Notes Issued in 2009  34 -107 %  0.02 - 1.78 %  $N/A   $0.32   $0.31 
Contingent put feature embedded in 5.0% Notes  34 -107 %  0.02 - 1.78 %  $1.25   $N/A   $0.31 

 

Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. The Company’s stock price increased over 400% from December 31, 2012 to December 31, 2013. As the stock price increases above the current conversion prices or exercise prices for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Company’s consolidated balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Decreases in expected volatility would generally result in a lower fair value measurement.

 

Assumptions for future issuances of the Company’s common stock are also used in the fair value measurement of the Company’s derivative instruments. The Company is obligated to make certain equity issuances under various agreements, including primarily the equity line with Terrapin and the Consent Agreement with Thermo. Certain provisions in the Company’s debt instruments may result in adjustments to the current base conversion rates or warrant exercise prices if equity is issued at prices lower than the conversion or exercise prices then in effect, with certain exclusions. As these conversion and exercise prices decrease, the value of the note or warrant to the holder of the instrument increases, thereby increasing the fair value measurement of the derivative liability.

 

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Probability of a change of control is another significant unobservable input used in the fair value measurement of the Company’s derivative instruments, excluding the 8.00% Warrants issued with the 8.00% Notes Issued in 2009. Subject to certain restrictions in each indenture, the Company’s debt instruments contain certain provisions whereby holders may require the Company to purchase all or any portion of the convertible debt instrument upon a change of control. A change of control will occur upon certain changes in the ownership of the Company or certain events relating to the trading of the Company’s common stock. The simulated fair value of the derivative liabilities above is sensitive to changes in the assumed probabilities of a change of control. Decreases in the assumed probability of a change of control would generally result in a lower fair value measurement.

 

In addition to the Level 3 inputs described above, the indentures governing the related debt instrument for each of the derivative liabilities included in the Company’s Level 3 fair value measurements have specific features that impact the valuation of each liability at reporting periods. These features are further described below for each of the Company’s derivative liabilities.

 

Compound Embedded Derivative with 8.00% Notes Issued in 2009

 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded derivative with the 8.00% Notes Issued in 2009 includes payment in kind interest payments, make whole premiums and automatic conversions. Pursuant to the terms of the 8.00% Notes Issued in 2009, the base conversion rate cannot reset to lower than $1.00; therefore if the Company makes future equity issuances at prices below the then current conversion price, this conversion price may be adjusted downward to as low as $1.00.

 

Warrants Issued with 8.00% Notes Issued in 2009

 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the 8.00% Warrants issued with the 8.00% Notes Issued in 2009 includes certain reset features. Pursuant to the terms of the 8.00% Warrants, there is no floor within the reset feature for the exercise price of the 8.00% Warrants; therefore if the Company makes future equity issuances at prices below the current exercise price, this exercise price may be adjusted downward. If the stock price on the issuance date is less than the then current exercise price of the outstanding 8.00% Warrants, additional warrants may be issued, which will increase the fair value of the warrant liability. As the exercise period for the 8.00% Warrants expires in June 2014, the Company utilizes certain assumptions in the valuation models consistent with this remaining outstanding period.

 

Contingent Put Feature Embedded in 5.0% Notes

 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the contingent put feature embedded in the Company’s 5.0% Notes included payment in kind interest and other reset features in the indenture. Pursuant to the terms of the 5% Notes Indenture, if at any time on or after June 14, 2013 and on or prior to Stated Maturity, the closing price of the Globalstar’s common stock has exceeded 200% of the conversion price then in effect for at least 30 consecutive trading days, then, at the option of the Company, all securities then outstanding shall automatically convert to common stock. On November 7, 2013, the remaining principal amounts of the 5.0% Notes were converted into common stock; therefore the derivative liability embedded in the 5.0% Notes is no longer outstanding at December 31, 2013.

 

Compound Embedded Derivative with 8.00% Notes Issued in 2013

 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded derivative within the Company’s 8.00% Notes Issued in 2013 includes payment in kind interest payments, make whole premiums, and automatic conversions. Pursuant to the terms of the 8.00% Notes Issued in 2013 Indenture, there are also special distributions and certain put and call features within the notes which impact the valuation model. See Note 3 for further discussion on this feature.

 

Compound Embedded Derivative with Amended and Restated Thermo Loan Agreement

 

In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded derivative within the Amended and Restated Loan Agreement with Thermo includes payment in kind interest payments, make whole premiums, and automatic conversions.

 

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Other Liabilities

 

Liability for Contingent Consideration

 

In connection with the acquisition of Axonn LLC (“Axonn”) in December 2009, the Company is obligated to pay up to an additional $10.8 million in contingent consideration for earnouts based on sales of existing and new products over a five-year earnout period beginning January 1, 2010. The Company will make earnout payments in stock not to exceed 26,684,807 shares of common stock (10% of the Company’s pre-transaction outstanding shares of common stock), but at its option may make payments in cash after 13.0 million shares have been issued. The Company’s initial estimate of the total earnout expected to be paid was $10.8 million. Since the earnout period started, the Company has made revisions to this estimate, which was $9.3 million at December 31, 2013. Through December 31, 2013, the Company had made $7.1 million in earnout payments by issuing 18,085,621 shares of voting common stock. The liability of $1.9 million recorded at December 31, 2013 represents the present value of the remaining projected earnout payments to be made under the agreement.

 

The fair value of the accrued contingent consideration was determined using a probability-weighted discounted cash flow approach at the acquisition date and reporting date. The approach is based on significant inputs that are not observable in the market, which are referred to as Level 3 inputs. The fair value is based on the Company reaching specific performance metrics through the remaining earnout period. The change in fair value of the contingent consideration is recorded through accretion expense in the Company’s consolidated statements of operations.

 

The significant unobservable inputs used in the fair value measurement of the Company’s liability for contingent consideration are projected future sales of existing and new products as well as earnout payments made each quarter determined by actual product sales. Decreases in forecasted sales would result in a lower fair value measurement.

 

The following table presents a rollforward for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for 2013 as follows (in thousands):

 

Balance at December 31, 2012  $(29,091)
Issuance of compound embedded derivative with 8.00% Notes Issued in 2013   (56,752)
Issuance of compound embedded derivative with the Amended and Restated Loan Agreement with Thermo   (101,114)
Third party issuance costs expensed to derivative gain (loss) in connection with issuance of 8.00% Notes Issued in 2013   (905)
Derecognition of derivative liability embedded in 5.0% Notes   845 
Earnout payments made related to liability for contingent consideration   1,844 
Change in fair value of contingent consideration   149 
Derivative adjustment related to conversions and exercises   25,710 
Unrealized loss, included in derivative gain (loss)   (305,135)
Balance at December 31, 2013  $(464,449)

 

Nonrecurring Fair Value Measurements

 

The Company follows the authoritative guidance regarding non-financial assets and non-financial liabilities that are remeasured at fair value on a nonrecurring basis.  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. During 2013, items measured on a nonrecurring basis included the 8.00% Notes Issued in 2013, the Amended and Restated Thermo Loan Agreement with Thermo and equity issued in connection with the Exchange Agreement and the Consent Agreement. As a result of certain transactions that have occurred with the Company’s debt instruments, the Company was required to record these items at fair value as of the date of the respective agreements. See below for a further discussion of the fair value measurement for each item measured on a nonrecurring basis.

 

8.00% Notes Issued in 2013

 

The Company was required to record the 8.00% Notes Issued in 2013 initially at fair value as the issuance was considered to be an extinguishment of debt. Level 3 inputs were required to be used as there was not an active market for a substantial period of time between the issuance date and the balance sheet date. As of the issuance date, the fair value of the Notes was $27.9 million and the fair value of the compound embedded derivative liability was $56.7 million, for a total fair value of the 8.00% Notes Issued in 2013 of $84.6 million. As stated above, the value of the compound embedded derivative was bifurcated from the 8.00% Notes Issued in 2013 and is marked to market on a recurring basis. The Company recorded a loss on extinguishment of debt of $47.2 million in its consolidated statement of operations during the second quarter of 2013. This loss was computed as the difference between the net carrying amount of the old 5.75% Notes of $71.8 million and the fair value of consideration given in the exchange of $119.0 million (including the new 8.00% Notes Issued in 2013, cash payments to both exchanging and non-exchanging holders, equity issued to the exchanging holders and other fees incurred for the exchange). See Notes 3 and 4 for further discussion.

 

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The significant quantitative Level 3 inputs utilized in the valuation models as of the issuance date of the 8.00% Notes Issued in 2013 are shown in the table below:

 

   Level 3 Inputs at May 20, 2013:
   Stock Price
 Volatility
  Risk-Free
 Interest Rate
   Note
 Conversion
 Price
   Discount
 Rate
   Market Price of
 Common Stock
 
Compound embedded derivative with 8.00% Notes Issued in 2013  65 - 100 %   0.9%  $0.80    27%  $0.40 

 

Other inputs used in the valuation model of the 8.00% Notes Issued in 2013 include the underlying features of the compound embedded derivative, including payment in kind interest payments, make whole premiums, automatic conversions, future equity issuances and probability of change of control of the Company. See further discussion above in “Derivative Liabilities” for the impact these inputs have on the fair value measurement.

 

Amended and Restated Loan Agreement with Thermo

 

The Company was required to record this Loan Agreement initially at fair value as the amendment and restatement of the Loan Agreement was considered to be an extinguishment of debt. Level 3 inputs were required to be used as there is not an active market for this debt instrument. As of the amendment and restatement date, the fair value of the Loan Agreement was $19.0 million and the fair value of the compound embedded derivative liability was $101.1 million, for a total fair value of the Loan Agreement of $120.1 million. As stated above, the value of the compound embedded derivative was bifurcated from the Loan Agreement and is marked to market on a recurring basis. The Company recorded a loss on extinguishment of debt of $66.1 million in its consolidated statement of operations for the third quarter of 2013. This loss was computed as the difference between the fair value of the debt, as amended and restated, and its carrying value just prior to amendment and restatement. See Notes 3 and 4 for further discussion.

 

The significant quantitative Level 3 inputs utilized in the valuation models as of the amendment and restatement date of the Loan Agreement are shown in the table below:

 

   Level 3 Inputs at July 31, 2013:
   Stock Price
 Volatility
  Risk-Free
 Interest Rate
   Note
 Conversion
 Price
   Discount
 Rate
   Market Price of
 Common Stock
 
Compound embedded derivative with the Amended and Restated Thermo Loan Agreement  65 - 100 %   2.6%  $0.75    26%  $0.60 

 

Other inputs used in the valuation model of the Amended and Restated Loan Agreement include the underlying features of the compound embedded derivative, including payment in kind interest payments, make whole premiums, automatic conversions, future equity issuances and probability of change of control of the Company. See further discussion above in “Derivative Liabilities” for the impact these inputs have on the fair value measurement.

 

Equity issued in connection with the Exchange Agreement

 

The stockholders’ equity balances measured on a nonrecurring basis in Level 1 include the approximately 30.3 million shares of voting common stock of the Company issued to Exchanging Note Holders in partial payment for exchanged 5.75% Notes in connection with the Exchange Agreement executed on May 20, 2013. The Company was required to record this equity issuance at fair value initially as the Exchange Agreement was considered to be an extinguishment of debt. See Note 3 for further discussion. The Company calculated the aggregate fair value of the shares issued as approximately $12.1 million using the closing stock price on the issuance date (May 20, 2013) and included that amount in stockholders’ equity in its consolidated balance sheet.

 

Equity issued in connection with the Consent Agreement

 

On May 20, 2013, the Company and Thermo entered into the Consent Agreement. The commitments between the Company and Thermo pursuant to the Consent Agreement represent a written forward contract under the applicable accounting rules the equity issuances under the Consent Agreement are therefore required to be recorded at fair value. On May 20, 2013, the Company and Thermo also entered into the Common Stock Purchase Agreement, and subsequently on October 14, 2013, the Common Stock Purchase and Option Agreement. Those agreements defined the pricing terms for certain equity purchases under the Consent Agreement. The following table summarizes the amount invested in the Company pursuant to the Consent Agreement with Thermo as of December 31, 2013 (dollars in thousands, except amounts per share):

 

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   Amount
 Invested
   Issuance
 Price per Share
   Closing
 Price per Share
   Discount Value
 (4)
   Total Fair Value   Shares Issued
 (5)
 
May 20, 2013 (1)  $25,000   $0.32   $0.40   $6,250   $31,250    78,125,000 
May 20, 2013 (1)   5,000    0.32    0.40    1,250    6,250    15,625,000 
June 28, 2013 (1)   9,000    0.32    0.55    6,469    15,469    28,125,000 
July 29, 2013 (2)   6,000    0.52    0.62    1,154    7,154    11,538,462 
August 19, 2013 (2)   6,500    0.52    0.62    1,250    7,750    12,500,000 
Total  (3)  $51,500             $16,373   $67,873    145,913,462 

 

(1)Amounts were invested pursuant to the terms of the Consent Agreement and the Common Stock Purchase Agreement. The fair value of these investments of $53.0 million is recorded in additional paid-in-capital on the Company’s consolidated balance sheet.
(2)Amounts were invested pursuant to the terms of the Consent Agreement and the Common Stock Purchase and Option Agreement. . The fair value of these investments of $14.9 million is recorded in additional paid-in-capital on the Company’s consolidated balance sheet.
(3)Pursuant to the terms of the Consent Agreement, certain equity transactions which result in cash invested into Globalstar may reduce the amounts committed by Thermo. As of December 31, 2013, the Company had received approximately $15.0 million through warrant exercises and other equity issuances as well as $13.5 million through the Company’s exercise of the First Option under the Common Stock Purchase and Option Agreement (see Note 3 for further discussion). These equity transactions reduced the remaining amount available under the Consent Agreement to $5.0 million as of December 31, 2013. Pursuant to the terms of the Common Stock Purchase and Option Agreement, the Second Option of $11.5 million is still outstanding at December 31, 2013.
(4)The discount on shares issued is recorded on the Company’s consolidated statement of operations in loss on equity issuance. This expense item represents the discount on shares issued to Thermo as well as certain other losses recorded on equity issued during 2013 related to cashless exercises of warrants issued with the 5.0% Notes.
(5)All shares issued to Thermo in connection with these agreements were shares of the Company’s nonvoting common stock.

 

Long-Lived Assets

 

The following tables reflect the fair value measurements used in testing the impairment of long-lived assets at December 31, 2012 and 2011. For the year ended December 31, 2013, there were no events or changes in circumstances indicating that the carrying amount of long-lived assets may not be recoverable. Therefore, no impairment loss was recorded. Amounts shown below are in thousands.

 

   Fair Value Measurements at December 31, 2012: 
   (Level 1)   (Level 2)   (Level 3)   Total Losses 
Other assets:                    
Property and equipment, net  $-   $-   $1,215,156   $7,218 
Total  $-   $-   $1,215,156   $7,218 

  

   Fair Value Measurements at December 31, 2011: 
   (Level 1)   (Level 2)   (Level 3)   Total Losses 
Other assets:                    
Property and equipment, net  $-   $-   $1,217,718   $2,669 
Intangible and other assets, net   -    -    23,798    909 
Total  $-   $-   $1,241,516   $3,578 

 

For assets that are no longer providing service, the Company removes the estimated cost and accumulated depreciation from property and equipment. During the second quarter of 2012, the Company reduced the carrying value of its first-generation constellation by approximately $7.1 million. This loss, which represents primarily the impairment of long-lived assets during 2012, is recorded in operating expenses for the year ended December 31, 2012.

 

Capitalized costs related to the development of various retail products that were discontinued during the third quarter and capitalized costs related to the internal development of software were written down to its implied fair value, resulting in an impairment charge of $2.7 million. The carrying value of these costs prior to write down was $2.7 million and was included in property and equipment, net. The impairment charge is included in the Company’s results of operations for the year ended December 31, 2011.

 

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In 2011, intangible assets related to developed technology acquired from Axonn in 2009 were written down to fair value, resulting in an impairment charge of $0.9 million. These assets had a carrying value of $6.1 million prior to the write down. The impairment charge is included in the Company’s results of operations for the year ended December 31, 2011.

 

6. ACQUISITION OF AXONN

 

On December 18, 2009, Globalstar entered into an agreement with Axonn pursuant to which one of the Company’s wholly-owned subsidiaries acquired certain assets and assumed certain liabilities of Axonn in exchange for $1.5 million in cash and $5.5 million in shares of the Company’s voting common stock (6,298,058 shares). Of these amounts, $500,000 in cash was withheld and used to cover expenses related to the voluntary replacement of first production models of the Company’s SPOT Satellite GPS Messenger devices and warranty obligations related to other products. Prior to the acquisition, Axonn was the principal supplier of the Company’s SPOT products.

 

As a result of the Axonn acquisition, the Company recorded other intangible assets of $7.6 million at December 31, 2009. During 2011, the Company wrote down the value of intangibles by $0.9 million due to the discontinuance of the sale of certain products resulting from a strategic decision to focus on core products and curtail substantially all on-going product development activities.

 

Intangible assets consist of the following (in thousands):