-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LyyvNoCy0x7ZlHc1wBm/3+HxCqQcCKA03BSWIh70rZKrg2Bm73tbQu7YKTGAIgcY Ye7f0YrJ5y+kbNa5mU3V6Q== 0000950123-01-508499.txt : 20020411 0000950123-01-508499.hdr.sgml : 20020411 ACCESSION NUMBER: 0000950123-01-508499 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLOBALSTAR LP CENTRAL INDEX KEY: 0001037927 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 133759824 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-25461 FILM NUMBER: 1791870 BUSINESS ADDRESS: STREET 1: 3200 ZARKEN R STREET 2: PO BOX 640670 CITY: SAN JOSE STATE: CA ZIP: 95164 BUSINESS PHONE: 4089334000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLOBALSTAR TELECOMMUNICATIONS LTD CENTRAL INDEX KEY: 0000933401 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 133795510 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25456 FILM NUMBER: 1791869 BUSINESS ADDRESS: STREET 1: CEDAR HOUSE 41 CEDAR AVENUE STREET 2: HAMILTON CITY: BERMUDA HM12 STATE: D0 BUSINESS PHONE: 4412952244 MAIL ADDRESS: STREET 1: 600 THIRD AVENUE CITY: NEW YORK STATE: NY ZIP: 10016 10-Q 1 y54672e10-q.txt FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . GLOBALSTAR TELECOMMUNICATIONS LIMITED CEDAR HOUSE 41 CEDAR AVENUE HAMILTON HM12, BERMUDA TELEPHONE: (441) 295-2244 COMMISSION FILE NUMBER: 0-25456 BERMUDA 13-3795510 (JURISDICTION OF INCORPORATION) (IRS IDENTIFICATION NUMBER)
GLOBALSTAR, L.P. 3200 ZANKER ROAD SAN JOSE, CA 95134 TELEPHONE: (408) 933-4000 COMMISSION FILE NUMBER: 333-25461 DELAWARE 13-3759024 (JURISDICTION OF REGISTRATION) (IRS IDENTIFICATION NUMBER)
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 [ ] As of October 29, 2001, there were 110,451,541 shares of Globalstar Telecommunications Limited common stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GLOBALSTAR TELECOMMUNICATIONS LIMITED AND GLOBALSTAR, L.P. FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Globalstar Telecommunications Limited (A General Partner of Globalstar, L.P.)........................................... 2 Globalstar, L.P............................................. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................ 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 30 Item 2. Changes in Securities and Use of Proceeds................... 31 Item 3. Defaults Upon Senior Securities............................. 31 Item 4. Submission of Matters to Vote of Security Holders........... 31 Item 5. Other Information........................................... 31 Item 6. Exhibits and Reports on Form 8-K............................ 31 Signatures........................................................... 32
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GLOBALSTAR TELECOMMUNICATIONS LIMITED (A GENERAL PARTNER OF GLOBALSTAR, L.P.) CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) (NOTE) ASSETS Investment in Globalstar, L.P.: Redeemable preferred partnership interests................ Dividends receivable...................................... Ordinary partnership interests............................ Ordinary partnership warrants............................. ----------- ----------- Total assets...................................... $ -- $ -- =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Dividends payable......................................... $ 23,590 $ 3,308 Equity losses in excess of partnership interests in Globalstar............................................. 776,956 683,339 ----------- ----------- Total current liabilities......................... 800,546 686,647 ----------- ----------- Commitments and contingencies (Note 5) Shareholders' equity (deficit): Preference shares, $.01 par value, 20,000,000 shares authorized: 8% Series A convertible redeemable preferred stock, (4,382,895 and 4,396,095 shares outstanding at September 30, 2001 and December 31, 2000, respectively, $219 million and $220 million redemption value at September 30, 2001 and December 31, 2000, respectively)......................................... 212,743 213,383 9% Series B convertible redeemable preferred stock (1,713,533 and 2,958,490 shares outstanding at September 30, 2001 and December 31, 2000, respectively, $86 million and $148 million redemption value at September 30, 2001 and December 31, 2000, respectively)......................................... 83,149 143,561 Common stock, $1.00 par value, 600,000,000 shares authorized (110,451,541 and 108,025,016 shares outstanding at September 30, 2001 and December 31, 2000, respectively).................................... 110,452 108,025 Paid-in capital........................................... 1,139,880 1,081,255 Warrants.................................................. 11,268 11,268 Accumulated deficit....................................... (2,358,038) (2,244,139) ----------- ----------- Total shareholders' equity (deficit).............. (800,546) (686,647) ----------- ----------- Total liabilities and shareholders' equity (deficit)...................................... $ -- $ -- =========== ===========
- --------------- Note: The December 31, 2000 balance sheet has been derived from audited consolidated financial statements at that date. See notes to condensed financial statements. 2 GLOBALSTAR TELECOMMUNICATIONS LIMITED (A GENERAL PARTNER OF GLOBALSTAR, L.P.) CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- -------------------- 2001 2000 2001 2000 -------- ------- -------- -------- Equity in net loss applicable to ordinary partnership interests of Globalstar, L.P. ..... $ 29,925 $86,021 $ 93,617 $252,034 Amortization of excess carrying value in Globalstar, L.P. .............................. 11,455 31,840 Dividend income on Globalstar, L.P. redeemable preferred partnership interests................ 7,771 23,051 -------- ------- -------- -------- Net loss......................................... 29,925 89,705 93,617 260,823 Preferred dividends on convertible redeemable preferred stock................................ 6,310 7,771 20,282 23,051 -------- ------- -------- -------- Net loss applicable to common shareholders....... $ 36,235 $97,476 $113,899 $283,874 ======== ======= ======== ======== Net loss per share -- basic and diluted.......... $ 0.33 $ 1.00 $ 1.04 $ 2.95 ======== ======= ======== ======== Weighted average shares outstanding -- basic and diluted........................................ 110,452 97,154 109,540 96,095 ======== ======= ======== ========
See notes to condensed financial statements. 3 GLOBALSTAR TELECOMMUNICATIONS LIMITED (A GENERAL PARTNER OF GLOBALSTAR, L.P.) CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2001 2000 -------- --------- OPERATING ACTIVITIES: Net loss.................................................. $(93,617) $(260,823) Equity in net loss applicable to ordinary partnership interests of Globalstar, L.P. ...................................... 113,899 252,034 Amortization of excess carrying value in Globalstar, L.P. .................................................. 31,840 Dividends accrued on redeemable preferred partnership Interests.............................................. (20,282) -- -------- --------- Net cash provided by operating activities................. -- 23,051 -------- --------- INVESTING ACTIVITIES: Purchase of ordinary partnership interests in Globalstar, L.P. .................................................. (335,510) -------- --------- Net cash used in investing activities..................... -- (335,510) -------- --------- FINANCING ACTIVITIES: Net proceeds from issuance of common stock upon exercise of options and warrants................................ 1,896 Net proceeds from sale of common stock.................... 333,614 Payment of preferred stock dividends...................... (23,051) -------- --------- Net cash provided by financing activities................. -- 312,459 -------- --------- Net increase (decrease) in cash and cash equivalents........ Cash and cash equivalents, beginning of period.............. -------- --------- Cash and cash equivalents, end of period.................... $ -- $ -- ======== ========= NONCASH TRANSACTIONS: Common stock issued upon conversion of convertible preferred securities................................... $ 61,052 $ 1,941 ======== ========= Change in fair value of stock compensation for the benefit Of Globalstar.......................................... $ (17,953) =========
See notes to condensed financial statements. 4 GLOBALSTAR TELECOMMUNICATIONS LIMITED (A GENERAL PARTNER OF GLOBALSTAR, L.P.) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared by Globalstar Telecommunications Limited ("GTL") pursuant to the rules of the Securities and Exchange Commission ("SEC") and, in the opinion of GTL, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows as of and for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules. The results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with GTL's Annual Report on Form 10-K for the year ended December 31, 2000. GTL, a general partner of Globalstar, L.P., a Delaware limited partnership ("Globalstar"), was created to permit public equity ownership in Globalstar. GTL does not have any operations, any personnel or facilities, and does not manage the day-to-day operations of Globalstar. GTL has no other business or investments. GTL's sole asset is its investment in Globalstar and GTL's results of operations reflect its share of the results of operations of Globalstar on an equity accounting basis. Accordingly, GTL's results of operations only reflect its proportionate share of Globalstar's results of operations, as presented on Globalstar's financial statements, and the appropriate amortization and interest associated with this investment. GTL accounts for its investment in Globalstar's ordinary partnership interests on an equity basis, recognizing its allocated share of net loss for each period since its initial investment on February 22, 1995. This investment includes the fair value of warrants received or acquired from Globalstar in 1996 and 1997 and the 8% convertible redeemable preferred partnership interests (the "8% RPPIs") and 9% convertible redeemable preferred partnership interests (the "9% RPPIs"). In 2000, Globalstar's losses reduced GTL's investment in Globalstar ordinary and preferred partnership interests to zero. Accordingly, GTL has discontinued providing for its allocated share of Globalstar's net losses and recognized the remaining unallocated losses as a result of its general partner status in Globalstar in proportion to its interests in the general partner interests outstanding. GTL, as a general partner of Globalstar, is jointly and severally liable with the other general partner for the recourse obligations of Globalstar, which GTL estimates to be approximately $1.4 billion as of September 30, 2001. As a result of its general partner status, GTL has recorded a cumulative liability of $777.0 million. Future funding or other assets, if any, of GTL may be utilized to fund this general partner liability. 2. ORGANIZATION AND BUSINESS As of September 30, 2001, GTL owned 41.8% of the outstanding ordinary partnership interests, 100% of the outstanding 8% RPPIs and 100% of the outstanding 9% RPPIs of Globalstar. As GTL's investment in Globalstar is GTL's only asset, GTL is dependent upon Globalstar's success and achievement of profitable operations for the recovery of its investment. GTL's equity securities and convertible securities are represented by equivalent Globalstar partnership interests on an approximate four-for-one basis. On January 16, 2001, Globalstar suspended indefinitely principal and interest payments on its funded debt and dividend payments on its 8% and 9% convertible redeemable preferred partnership interests in order to conserve cash for operations. Non-payment of interest on Globalstar's debt instruments, credit facility and vendor financing agreements when they become due, and continuance of non-payment for the applicable grace period, are "events of default" under the terms of each of the debt instruments. An event of default has occurred in connection with Globalstar's $500 million credit facility, its vendor financing facility with QUALCOMM, its 11 3/8% senior notes due February 15, 2004, its 11 1/4% senior notes due June 15, 2004, its 10 3/4% senior notes due November 1, 2004, and its 11 1/2% senior notes due June 1, 2005 ("senior notes due 5 GLOBALSTAR TELECOMMUNICATIONS LIMITED (A GENERAL PARTNER OF GLOBALSTAR, L.P.) NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) 2004 and 2005"). Accordingly, for reporting and accounting purposes, Globalstar classified the $500 million credit facility, the QUALCOMM vendor financing and the senior notes as current obligations. Globalstar has retained The Blackstone Group as its financial adviser to assist in evaluating its business plan and developing initiatives, including restructuring its debt, identifying funding opportunities and pursuing other strategic alternatives. At Globalstar's expense, its bondholders have retained legal counsel and financial advisers. Globalstar has developed a new business plan for the purpose of restructuring the company's finances. The business plan assumes the conversion of all outstanding Globalstar debt obligations into equity in a new Globalstar company ("Newco") and the consolidation of certain Globalstar service provider operations into Newco. The service provider consolidation is intended to bring additional efficiencies to the operation of the Globalstar network and allow for increased coordination in the Globalstar service offerings and pricing. Globalstar believes that these steps are required to achieve and maintain financial viability. In addition to the service provider operations to be consolidated into Newco, Globalstar intends to continue to offer its services through existing independent gateway operators in other regions. Globalstar has been discussing its new business plan with its principal creditors, with the objective of achieving an agreement in principle with respect to the terms of a financial restructuring plan. Assuming these discussions are successfully concluded, as to which there can be no assurance, Globalstar and certain of its affiliates will commence voluntary Chapter 11 cases and seek to confirm a Chapter 11 plan which both implements the terms agreed with its creditors and binds all Globalstar's creditors. Globalstar will likely seek protection under the federal bankruptcy laws even without a prenegotiated settlement with its principal creditors. Moreover, its creditors may, at anytime, initiate involuntary bankruptcy proceedings against Globalstar. In any financial restructuring, GTL's equity interest, along with the interests of Globalstar's other partners, will likely be severely diluted, in which event it will have little or no value, or be eliminated entirely. Globalstar's suspension of principal, interest and dividend payments, its continued operating losses, and its difficulty in securing additional financing raise substantial doubt about its ability to achieve financial viability as the company is currently structured. These factors, in turn, raise doubt regarding GTL's ability to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Earnings Per Share Due to GTL's net losses for the three and nine months ended September 30, 2001 and 2000, diluted weighted average common shares outstanding excludes the weighted average effect of: (i) the assumed conversion of GTL's 8% Series A convertible redeemable preferred stock, due 2011 (the "8% Preferred Stock") into 9.4 million and 9.5 million common shares for the three months and nine months ended September 30, 2001 and 2000, respectively, (ii) the assumed conversion of GTL's 9% Series B convertible redeemable preferred stock, due 2011 (the "9% Preferred Stock") into 3.3 million and 5.7 million common shares for the three months ended September 30, 2001 and 2000, respectively, and into 4.2 million and 5.7 million common shares for the nine months ended September 30, 2001 and 2000, respectively, and (iii) the assumed exercise of outstanding options and warrants, into 12.0 million and 12.3 million common shares for the three months ended September 30, 2001 and 2000, respectively, and into 12.0 million and 10.0 million shares for the nine months ended September 30, 2001 and 2000, respectively, as their effect would have been anti-dilutive. Accordingly, basic and diluted net loss per share is based on the net loss applicable to common shareholders and the weighted average common shares outstanding for the three and nine months ended September 30, 2001 and 2000, respectively. 6 GLOBALSTAR TELECOMMUNICATIONS LIMITED (A GENERAL PARTNER OF GLOBALSTAR, L.P.) NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) Comprehensive Loss During the periods presented, GTL had no changes in equity from transactions or other events and circumstances from non-owner sources. Accordingly, a statement of comprehensive loss has not been provided. 4. RESTRUCTURING During 2001, Globalstar reviewed its operating costs and implemented cost saving measures. In the first nine months of 2001, Globalstar incurred a restructuring charge of approximately $9.8 million, of which $8.7 million has been paid out as of September 30, 2001. The charge consisted of the following: employee separation costs of $4.7 million related to a reduction in workforce of 292 employees from March to November, 2001, fees paid to Globalstar's restructuring specialists including financial advisors, legal counsel, and other advisors of $3.8 million, and fees paid to the bondholders' legal counsel and financial advisors of $1.3 million. Globalstar's headcount on September 30, 2001 was approximately 180 employees. Globalstar provided a paid 60 day notice of termination to 52 of the 180 employees on September 19, 2001 and released them from active employment on or around that date. The effective date of termination is November 16, 2001. Expenses related to these terminations were recorded in the quarter ended September 30, 2001. 5. COMMITMENTS AND CONTINGENCIES Eismann v. Globalstar Telecommunications Limited, et al., and other similar actions. On February 28, 2001, plaintiff Eric Eismann filed a purported class action complaint against GTL in the United States District Court for the Southern District of New York. The other defendants named in the complaint are Loral Space & Communications Ltd. and Bernard Schwartz, the former Chief Executive Officer of Globalstar. Globalstar is not a named defendant in these actions. The complaint alleges that (a) GTL and Mr. Schwartz violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, by making material misstatements or failing to state material facts about GTL's business and prospects; and (b) that Loral and Mr. Schwartz are secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as alleged "controlling persons" of GTL. The class of plaintiffs on whose behalf this lawsuit has allegedly been asserted consists of all buyers of GTL common stock from December 6, 1999, through October 27, 2000, excluding the defendants, officers and directors of GTL, and certain persons affiliated therewith (the "Excluded Persons"). Eighteen additional purported class action complaints have been filed in the United States District Court for the Southern District of New York by plaintiffs Chaim Kraus, L.A. Murphy, Eddie Maiorino, Damon Davis, Iskander Batyrev, Shelly Garfinkel, Sequoia Land Development and Phil Sigel, Michael Ceasar as Trustee for Howard Gunty Profit Sharing Plan, Colin Barry, James D. Atlas, Lawrence Phillips, Kent A. Hillemeir, Sarah Harman, Pablo Lozza, Joseph and Eudice Meyers, The 60223 Trust, Antonio and Lucia Maddalena and Chaim Troman on each of March 2, March 2, March 6, March 7, March 7, March 9, March 16, March 21, March 21, March 22, March 23, March 28, March 28, April 2, April 3, April 11, April 27 and May 1, 2001, respectively. These complaints allege claims against GTL, Loral, and Mr. Schwartz (and, in the case of the Sequoia, Atlas and Meyers complaints, two additional individual defendants, Messrs. Navarra and DeBlasio) that are substantially identical to those set forth in the Eismann action. The class of plaintiffs on whose behalf these lawsuits have been allegedly asserted are: with respect to the Kraus, Davis, Maiorino, Batyrev, Ceasar, Phillips, Hillemeir, Harman and The 60223 Trust actions, buyers of GTL common stock in the period from December 6, 1999, through October 27, 2000; with respect to the Murphy, Barry and Troman actions, buyers of GTL securities in the period from December 6, 1999, through October 27, 2000; with respect to the Sequoia/Sigel, Atlas and Meyers actions, buyers of GTL common stock in the period from December 6, 1999, through July 19, 2000; with respect to the Garfinkel and Lozza actions, buyers of GTL debt securities in the period from December 6, 1999, through October 27, 2000; and with respect to the Maddalena action, buyers 7 GLOBALSTAR TELECOMMUNICATIONS LIMITED (A GENERAL PARTNER OF GLOBALSTAR, L.P.) NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) of GTL securities in the period from October 11, 1999 through October 27, 2000. In each case the Excluded Persons are excepted from the class. GTL believes that it has meritorious defenses to these actions and intends to pursue them vigorously. 8 GLOBALSTAR, L.P. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PARTNERSHIP INTERESTS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) (NOTE) ASSETS Current assets: Cash and cash equivalents................................. $ 68,480 $ 174,401 Restricted cash........................................... -- 22,448 Accounts receivable, net of allowance of $405 at September 30, 2001 and $41 at December 31, 2000................... 1,232 422 Production gateways and user terminals.................... 59,117 58,832 Prepaid expenses and other current assets................. 11,272 6,721 ----------- ----------- Total current assets................................ 140,101 262,824 Property and equipment: Globalstar System, net.................................... 235,120 264,856 Other property and equipment, net......................... 917 516 ----------- ----------- 236,037 265,372 Globalstar System under construction........................ 1,400 1,634 Additional spare satellites................................. 22,060 14,758 Deferred financing costs.................................... 82,506 125,176 Other assets................................................ 32,616 32,512 ----------- ----------- Total assets........................................ $ 514,720 $ 702,276 =========== =========== LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY) Current liabilities: Term loans payable to affiliates.......................... $ 400,000 $ 400,000 Revolving credit facility to affiliates................... 100,000 100,000 Senior notes payable ($1,450,000 aggregate principal amount)................................................. 1,415,323 1,407,941 Accounts payable.......................................... 1,244 13,546 Payable to affiliates..................................... 29,851 30,733 Vendor financing liability................................ 681,073 590,372 Dividends payable......................................... 23,590 3,308 Accrued expenses.......................................... 7,714 18,997 Accrued interest.......................................... 195,068 34,224 ----------- ----------- Total current liabilities........................... 2,853,863 2,599,121 Deferred revenues........................................... 32,634 37,952 Vendor financing liability, net of current portion.......... 167,352 198,051 Accrued interest on notes payable........................... 28,410 12,366 Notes payable............................................... 150,000 150,000 Notes payable to affiliates................................. 96,200 100,000 Commitments and contingencies (Note 8) Partners' capital (deficiency): 8% Series A convertible redeemable preferred partnership interests (4,382,895 and 4,396,095 interests outstanding at September 30, 2001 and December 31, 2000, respectively, $219 million and $220 million redemption value at September 30, 2001 and December 31, 2000, respectively)........................................... -- -- 9% Series B convertible redeemable preferred partnership interests (1,713,533 and 2,958,490 interests outstanding at September 30, 2001 and December 31, 2000, respectively, $86 million and $148 million redemption value at September 30, 2001 and December 31, 2000, respectively)........................................... -- -- Ordinary general partnership interests (45,267,375 and 44,668,233 interests outstanding at September 30, 2001 and December 31, 2000, respectively).................... (2,777,324) (2,359,170) Ordinary limited partnership interests (19,937,500 and 19,937,500 interests outstanding at September 30, 2001 and December 31, 2000, respectively).................... (239,740) (239,740) Unearned compensation..................................... (4) (60) Warrants.................................................. 203,329 203,756 ----------- ----------- Total partners' capital (deficiency)................ (2,813,739) (2,395,214) ----------- ----------- Total liabilities and partners' capital (deficiency)........................................ $ 514,720 $ 702,276 =========== ===========
- --------------- Note: The December 31, 2000 balance sheet has been derived from audited consolidated financial statements at that date. See notes to condensed consolidated financial statements. 9 GLOBALSTAR, L.P. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER ORDINARY PARTNERSHIP INTEREST AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- GROSS REVENUE: Gross billings for service.................... $ 1,508 $ 1,000 $ 5,597 $ 1,660 Royalty income................................ 18 427 161 1,215 -------- -------- -------- -------- Total gross revenue............................. 1,526 1,427 5,758 2,875 Less, discounts and promotions on service Revenue.................................... (62) (237) (961) (368) -------- -------- -------- -------- Net revenue..................................... 1,464 1,190 4,797 2,507 -------- -------- -------- -------- OPERATING EXPENSES: Operations.................................... 10,356 29,498 52,179 105,563 Marketing, general and administrative......... 4,516 16,426 28,769 47,684 Restructuring................................. 4,780 9,825 Depreciation and amortization................. 9,238 83,697 28,490 244,715 -------- -------- -------- -------- Total operating expenses.............. 28,890 129,621 119,263 397,962 -------- -------- -------- -------- Operating loss.................................. 27,426 128,431 114,466 395,455 Interest income................................. (811) (5,015) (4,188) (11,856) Interest expense................................ 95,884 87,771 287,494 245,162 -------- -------- -------- -------- Net loss........................................ 122,499 211,187 397,772 628,761 Preferred distributions on redeemable preferred partnership interests......................... 6,310 7,771 20,282 23,051 -------- -------- -------- -------- Net loss applicable to ordinary partnership interests..................................... $128,809 $218,958 $418,054 $651,812 ======== ======== ======== ======== Net loss per ordinary partnership interest -- basic and diluted................. $ 1.98 $ 3.54 $ 6.43 $ 10.57 ======== ======== ======== ======== Weighted average ordinary partnership interests outstanding -- basic and diluted.............. 65,205 61,922 64,980 61,660 ======== ======== ======== ========
See notes to condensed consolidated financial statements. 10 GLOBALSTAR, L.P. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2001 2000 --------- --------- OPERATING ACTIVITIES: Net loss.................................................. $(397,772) $(628,761) Deferred revenues......................................... (5,318) 10,390 Amortization of unearned compensation..................... (44) (2,667) Depreciation and amortization............................. 28,490 244,715 Non-cash interest expense................................. 49,625 49,973 Changes in operating assets and liabilities: Accounts receivable..................................... (968) (801) Prepaid expenses and other current assets............... (10,002) (11,742) Other assets............................................ (3,107) (2,587) Accounts payable........................................ (11,786) 4,269 Payable to affiliates................................... 10,298 (17,944) Accrued expenses........................................ (11,283) (4,074) Accrued interest and other.............................. 236,795 19,191 --------- --------- Net cash used in operating activities.............. (115,072) (340,038) --------- --------- INVESTING ACTIVITIES: Globalstar System......................................... 4,694 (13,039) Payable to affiliates for Globalstar System............... (6,811) (30,882) Accounts payable.......................................... (253) (3,670) Vendor financing liability................................ -- 63,949 --------- --------- Cash used for Globalstar System........................... (2,370) 16,358 Advances for production gateways and user terminals....... (9,410) (156,786) Cash receipts for production gateways and user Terminals............................................... 6,624 88,689 Receipt and use of restricted cash, net................... 22,448 46,246 Additional spare satellites, net of vendor financing...... (7,529) (82,254) Purchases of property and equipment....................... (612) (1,435) --------- --------- Net cash provided by (used in) investing Activities....................................... 9,151 (89,182) --------- --------- FINANCING ACTIVITIES: Sale of ordinary partnership interests upon exercise of options and warrants.................................... -- 1,896 Sale of ordinary partnership interests.................... -- 333,614 Repayment of vendor financing............................. -- (74,995) Distributions on redeemable preferred partnership Interests............................................... -- (23,051) Borrowings under credit facilities........................ -- 350,000 --------- --------- Net cash provided by financing activities.......... -- 587,464 --------- --------- Net increase (decrease) in cash and cash equivalents........ (105,921) 158,244 Cash and cash equivalents, beginning of period.............. 174,401 127,675 --------- --------- Cash and cash equivalents, end of period.................... $ 68,480 $ 285,919 ========= ========= NONCASH TRANSACTIONS: Receivables offset by payables and notes payable.......... $ (8,110) ========= Conversion of redeemable preferred partnership interests into ordinary partnership interests..................... $ 61,052 $ 1,941 ========= ========= Change in fair value of QUALCOMM warrants issued in connection with vendor financing........................ $ (427) ========= Dividends accrued......................................... $ 20,282 ========= Change in fair value of stock compensation................ $ (100) $ 17,953) ========= ========= Issuance of notes to guarantors for repayment of revolving credit line............................................. $ 250,000 ========= Conversion of affiliate payables to vendor financing...... $(387,777) =========
See notes to condensed consolidated financial statements. 11 GLOBALSTAR, L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by Globalstar, L.P., a Delaware limited partnership ("Globalstar") pursuant to the rules of the Securities and Exchange Commission ("SEC") and, in the opinion of Globalstar, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows as of and for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules. The results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with Globalstar's Annual Report on Form 10-K for the year ended December 31, 2000. 2. ORGANIZATION AND BUSINESS The managing general partner of Globalstar is Loral/QUALCOMM Satellite Services, L.P. ("LQSS"). The general partner of LQSS is Loral/QUALCOMM Partnership, L.P. ("LQP"), a Delaware limited partnership comprised of subsidiaries of Loral Space & Communications Ltd., a Bermuda company (and with its subsidiaries "Loral") and QUALCOMM Incorporated ("QUALCOMM"). The managing general partner of LQP is Loral General Partner, Inc. ("LGP"), a subsidiary of Loral. As of September 30, 2001, Loral owned, directly and indirectly, 25,163,141 (approximately 39%) of the ordinary partnership interests of Globalstar, including interests attributable to 9,902,990 shares of Globalstar Telecommunications Limited ("GTL") outstanding common stock. Globalstar was founded to design, construct and operate a worldwide, low-earth orbit ("LEO") satellite-based wireless digital telecommunications system (the "Globalstar System"). The Globalstar System's worldwide coverage is designed to enable its service providers to extend modern telecommunications services to millions of people who currently lack basic telephone service and to enhance wireless communications in areas underserved or not served by existing or future cellular systems, providing a telecommunications solution in parts of the world where the build-out of terrestrial systems cannot be economically justified. On January 31, 1995, the U.S. Federal Communications Commission ("FCC") granted the necessary license to a wholly-owned subsidiary of LQP to construct, launch and operate the Globalstar System. LQP has agreed to use such license for the exclusive benefit of Globalstar. On July 17, 2001, the FCC granted a second, conditional satellite constellation license to Globalstar to operate in the 2GHz spectrum band. On November 23, 1994, GTL was incorporated as an exempted company under the Companies Act 1981 of Bermuda. GTL's sole business is acting as a general partner of Globalstar and its sole assets consist of its equity interests in Globalstar. The partners in Globalstar have the right to convert their partnership interests into shares of GTL common stock on an approximate one-for-four basis following the complete deployment of the Globalstar space segment and after at least two consecutive reported fiscal quarters of positive net income, subject to certain annual limitations. As of September 30, 2001, GTL owned 27,267,375 (41.8%) of Globalstar's outstanding ordinary partnership interests and 100% of the outstanding 8% and 9% convertible redeemable preferred partnership interests ("RPPIs"). On January 16, 2001, Globalstar suspended indefinitely principal and interest payments on its funded debt and dividend payments on its RPPIs in order to conserve cash for operations. Non-payment of interest on Globalstar's debt instruments, credit facility and vendor financing agreements when they become due, and continuance of non-payment for the applicable grace period, are "events of default" under the terms of each of the debt instruments. An event of default has occurred in connection with Globalstar's $500 million credit facility, its vendor financing facility with QUALCOMM, its 11 3/8% senior notes due February 15, 2004, its 11 1/4% senior notes due June 15, 2004, its 10 3/4% senior notes due November 1, 2004, and its 11 1/2% senior 12 GLOBALSTAR, L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) notes due June 1, 2005. Accordingly, for reporting and accounting purposes, Globalstar classified the $500 million credit facility, the QUALCOMM vendor financing and the senior notes as current obligations. Globalstar has retained The Blackstone Group as its financial adviser to assist in evaluating its business plan and developing initiatives, including restructuring its debt, identifying funding opportunities and pursuing other strategic alternatives. At Globalstar's expense, its bondholders have retained legal counsel and financial advisers. Globalstar has developed a new business plan for the purpose of restructuring the company's finances. The business plan assumes the conversion of all outstanding Globalstar debt obligations into equity in a new Globalstar company ("Newco") and the consolidation of certain Globalstar service provider operations into Newco. The service provider consolidation is intended to bring additional efficiencies to the operation of the Globalstar network and allow for increased coordination in the Globalstar service offerings and pricing. Globalstar believes that these steps are required to achieve and maintain financial viability. In addition to the service provider operations to be consolidated into Newco, Globalstar intends to continue to offer its services through existing independent gateway operators in other regions. Globalstar has been discussing its new business plan with its principal creditors, with the objective of achieving an agreement in principle with respect to the terms of a financial restructuring plan. Assuming these discussions are successfully concluded, as to which there can be no assurance, Globalstar and certain of its affiliates will commence voluntary Chapter 11 cases and seek to confirm a Chapter 11 plan which both implements the terms agreed with its creditors and binds all Globalstar's creditors. Globalstar will likely seek protection under the federal bankruptcy laws even without a prenegotiated settlement with its principal creditors. Moreover, its creditors may, at anytime, initiate involuntary bankruptcy proceedings against Globalstar. In any financial restructuring, GTL's equity interest, along with the interests of Globalstar's other partners, will likely be severely diluted, in which event it will have little or no value, or be eliminated entirely. Globalstar's service providers are generally not earning revenues sufficient to cover their operating costs. In order to reduce service provider cash requirements and help sustain service provider operations, Globalstar and its partners agreed on June 25 to defer outstanding gateway purchase and airtime usage payments due to Globalstar for four months as part of a short term operating plan. As of September 30, 2001, $56.8 million of service provider gateway purchase receivables, which are secured by gateway assets, $17.0 million of gateway operational costs due under the production gateway purchase agreement and $1.7 million of Globalstar airtime usage receivables due from service providers were outstanding. Globalstar intends to continue the deferral of the gateway purchase receivables, but has reinitiated collection activity on the outstanding gateway operational costs and airtime usage receivables. In the event that Globalstar is unable to effectuate a restructuring, cash payment of these obligations would be in doubt. As of September 30, 2001, Globalstar had approximately $68 million in cash and cash equivalents. The new Globalstar business plan, currently being reviewed by Globalstar's creditors, projects that Globalstar will complete 2001 with approximately $45 million of cash and cash equivalents on hand, based on predicted net cash outflows for operating expenses, restructuring costs, system development costs and replacement satellites during the fourth quarter of 2001. The projected year end 2001 cash balance assumes no collections from Globalstar service providers for system usage or gateway costs and assume no disbursements for interest, principal or dividend obligations on outstanding debt and RPPIs. In order to preserve cash, Globalstar has reduced its payments to Space Systems/Loral, Inc. ("SS/L") and QUALCOMM and is currently overdue on its contractual payment obligations to these vendors. As of September 30, 2001, approximately $14 million of accounts payable and accrued costs were due to QUALCOMM and approximately $9 million of milestone billings and accrued costs were due to SS/L. The current cash flow projection assumes that these obligations are settled in part during the fourth quarter of 2001 and that Globalstar remains in arrears with respect to its contractual payment obligations at the end of 2001. Under the agreements, failure to make payments is grounds for termination. QUALCOMM has issued a notice of termination of the Development Agreement effective November 15, 2001, and Globalstar is in negotiations with QUALCOMM on this matter. 13 GLOBALSTAR, L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Globalstar's suspension of principal, interest and dividend payments, its continued operating losses, and its difficulty in securing additional financing raise substantial doubt about its ability to achieve financial viability as the company is currently structured. These factors, in turn, raise doubt regarding Globalstar's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Globalstar has incurred cumulative ordinary partnership losses of $4.9 billion from inception through September 30, 2001, which have been funded primarily through the issuance of partnership interests and debt by Globalstar. Globalstar operates in one industry segment, satellite telecommunications, providing global mobile and fixed wireless voice and data services. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Earnings Per Ordinary Partnership Interest Due to Globalstar's net losses for the nine months ended September 30, 2001 and 2000, diluted weighted average ordinary partnership interests outstanding excludes the weighted average effect of: (i) the assumed conversion of the 8% convertible redeemable preferred partnership interests (the "8% RPPIs") into 2.3 million ordinary partnership interests for the three months and nine months ended September 30, 2001 and 2000, (ii) the assumed conversion of the 9% convertible redeemable preferred partnership interests (the "9% RPPIs") into 0.8 million and 1.4 million ordinary partnership interests for the three months ended September 30, 2001 and 2000, respectively, and into 1.0 million and 1.4 million ordinary partnership interests for the nine months ended September 30, 2001 and 2000, respectively, and (iii) the assumed issuance of ordinary partnership interests upon exercise of Globalstar warrants and GTL's outstanding options and warrants, into 10.8 million and 10.9 million ordinary partnership interests for the three months ended September 30, 2001 and 2000, respectively, and into 10.8 million and 8.8 million ordinary partnership interests for the nine months ended September 30, 2001 and 2000, respectively, as their effect would have been anti-dilutive. Accordingly, basic and diluted net loss per ordinary partnership interest are based on the net loss applicable to ordinary partnership interests and the weighted average ordinary partnership interests outstanding for the three and nine months ended September 30, 2001 and 2000, respectively. Additional Spare Satellites In connection with Globalstar's plan to suspend indefinitely principal and interest on its funded debt and dividend payments on its 8% and 9% RPPIs in order to conserve cash for operations, Globalstar has ceased the capitalization of interest for the assets under construction, consisting of eight on-ground spare satellites. Production Gateways and User Terminals These assets include both user terminals and receivables from service providers associated with the reimbursement of gateway acquisition and deployment costs previously paid by Globalstar to QUALCOMM. The collection of some of these receivables is delinquent and Globalstar has sent notices of default where appropriate. If the collection of these payments is unsuccessful, Globalstar will retain title to these gateways. In the quarter ended June 30, 2001, Globalstar suspended collection on all outstanding production gateway receivables. Gross Billings for Service Globalstar provides satellite services under agreements with its service providers and recognizes revenue as satellite services are provided. Gross billings for service represents the billable usage at the contracted rate for the respective services provided net of amounts for which collectibility is not reasonably assured. Net 14 GLOBALSTAR, L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) service revenue reflects Globalstar's service revenue after promotions and discounts provided to service providers. Royalties Royalty income is comprised of royalty payments for Globalstar user terminals sold by user terminal manufacturers. Revenue is recognized as units are shipped by the user terminal manufacturers. In limited circumstances, Globalstar rather than the manufacturer ships the user terminals to service providers. In these cases, the royalties are not recognized until Globalstar ships the user terminal to the service provider. Research and Development Expense Globalstar's research and development costs, which are expensed as incurred, were $0.7 million and $1.1 million for the three months ended September 30, 2001 and 2000, respectively, and $3.9 million and $4.3 million for the nine months ended September 30, 2001 and 2000, respectively, and are included in operations expense. User Terminal Rebates and Subsidies In some cases Globalstar provides rebates to service providers who offer rebates to end users and subsidies to service providers for user terminal purchases from manufacturers. These rebates and subsidies are accounted for as marketing expenses as incurred. These rebates and other financial assistance are not linked to contractual service periods with either the service providers or end users and there is no pattern of billable minutes or revenue that suggests a linkage to these arrangements. Comprehensive Loss During the periods presented, Globalstar had no changes in ordinary partner's capital from transactions or other events and circumstances from non-owners sources. Accordingly, a statement of comprehensive loss has not been provided. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but will rather be tested at least annually for impairment. Globalstar will adopt SFAS No. 142 on January 1, 2002. Management does not believe that adopting this pronouncement will have significant impact on its financial position or its results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. Globalstar will adopt SFAS No. 144 on January 1, 2002. Adoption of this statement is not expected to have a material impact on our financial position or results of operations. 15 GLOBALSTAR, L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reclassifications Certain reclassifications have been made to conform prior period amounts to the current period presentation. 4. PAYABLES TO AFFILIATES AND VENDOR FINANCING In May 2000, Globalstar finalized $531.1 million of vendor financing arrangements (including $31.1 million of accrued interest as of May 2000) with QUALCOMM that replaced the previous $100 million vendor financing agreement. The original terms provided for interest at 6%, a maturity date of August 15, 2003 and required repayment pro rata with the term loans under Globalstar's $500 million credit facility (see Note 5). As of September 30, 2001, $597.9 million was outstanding under this facility (including $97.9 million of accrued interest). In connection with this agreement, QUALCOMM received warrants to purchase 3,450,000 Globalstar partnership interests at an exercise price of $42.25 per interest. The exercise price was determined by reference to the fair market value of GTL's common stock on the closing date of the vendor financing, based on an approximate ratio of one partnership interest for every four shares of GTL common stock. Fifty percent of the warrants vested on the closing date, twenty-five percent vested on September 1, 2000, and the remaining twenty-five percent vested on September 1, 2001. The warrants will expire in 2007. The fair value of the vested warrants totaled approximately $34.0 million and is being amortized over the term of the vendor financing arrangements. SS/L has provided $344 million of billings deferred under its construction contracts with Globalstar, which are comprised of: $120 million of orbital incentives, of which $104 million was repaid by Globalstar through September 30, 2001; $90 million of vendor financing, which bears interest and is repayable over five years commencing in 2001; and $134 million of non-interest bearing vendor financing, due over five years in equal monthly installments, commencing in 2000. In January 2001, Globalstar suspended indefinitely principal and interest payments on all of its vendor financing, in order to conserve cash for operations (see Note 2). Non-payment of interest payments when they become due, and continuance of non-payment for five days, is an "event of default" under the terms of the QUALCOMM vendor financing facility. An event of default occurred on January 16, 2001, when Globalstar failed to pay interest with respect to separate credit extensions made under the QUALCOMM vendor financing facility, such extensions also known as the "Tranche A Facility" and "Tranche B Facility" (or the "Tranche A and B Facilities"). Lenders holding more than sixty-six and seven-tenths percent (66.7%) of the aggregate unpaid principal amount of the Tranche A and B Facilities outstanding have, at their option, the right to declare all of the amounts and obligations under the Tranche A and B Facilities immediately due and payable. QUALCOMM has not made such a declaration. The amounts due under the QUALCOMM vendor financing facility have been presented in these financial statements as current liabilities because we expect such debt to become due by September 30, 2002. Payables and vendor financing due to affiliates is comprised of the following (in thousands):
PAYABLES TO AFFILIATES VENDOR FINANCING ----------------------------- ----------------------------- SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, 2001 2000 2001 2000 ------------- ------------ ------------- ------------ SS/L................................ $ 1,784 $ 4,984 $250,523 $237,706 QUALCOMM............................ 14,477 14,925 597,902 550,717 Other affiliates.................... 13,590 10,824 -- -- ------- ------- -------- -------- 29,851 30,733 848,425 788,423 Less, current portion............... 29,851 30,733 681,073 590,372 ------- ------- -------- -------- Long-term portion................... $ -- $ -- $167,352 $198,051 ======= ======= ======== ========
16 GLOBALSTAR, L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. CREDIT FACILITY In January 2001, Globalstar suspended indefinitely principal and interest payments on its funded debt in order to conserve cash for operations (see Note 2). Non-payment of interest payments when they become due, and continuance of non-payment for five days, is an "event of default" under the terms of the $500 million credit facility. An event of default occurred on January 16, 2001 under the $500 million credit facility when Globalstar failed to pay interest with respect to two separate credit extensions made under the $500 million credit agreement, such extensions also known as "Term Loan A" (defined below) and "Term Loan B" (defined below; or "Term Loans A and B"). Upon an event of default, (i) with the consent of Loral Satellite, Inc., the Administrative Agent, Bank of America, may, or upon the request of Loral Satellite, Inc., the Administrative Agent shall, by notice to Globalstar, declare the Revolver, Term Loan A and Term Loan B to be terminated forthwith and (ii) with the consent of Loral Satellite, Inc., the Administrative Agent, Bank of America, may, or upon the request of Loral Satellite, Inc., the Administrative Agent shall, by notice of default to Globalstar, declare all loans made under the $500 million credit facility (with accrued interest thereon) to be immediately due and payable. No notice of termination or acceleration has been given to Globalstar. The amounts due under the $500 million credit facility have been presented in these financial statements as current liabilities because we expect such debt to become due by September 30, 2002. 6. SENIOR NOTES AND WARRANTS In January 2001, Globalstar suspended indefinitely principal and interest payments on its funded debt in order to conserve cash for operations (see Note 2). Non-payment of interest on Globalstar's debt instruments when they become due, and continuance of non-payment for 30 days, is an "event of default" under the terms of the senior note indentures. An event of default has occurred in connection with Globalstar's $500 million credit facility, its vendor financing facility with QUALCOMM, its 11 3/8% senior notes due February 15, 2004, its 11 1/4% senior notes due June 15, 2004, its 10 3/4% senior notes due November 1, 2004, and its 11 1/2% senior notes due June 1, 2005 (the "Bonds"). Under the terms of the Bonds, the trustees for Globalstar's senior notes or the holders of at least 25% in principal amount of such notes may declare the principal, accrued but unpaid interest, and liquidated damages (if any) on such securities to be due and payable immediately. The amounts due under the senior notes have been presented in these financial statements as current liabilities because we expect such debts to become due by September 30, 2002 (see Note 2). The senior notes rank pari passu with each other and with all of Globalstar's other existing indebtedness. The indentures for the notes contain certain covenants that, among other things, limit the ability of Globalstar to incur additional debt, issue preferred stock, or pay dividends and certain distributions. In certain limited circumstances involving a change of control of Globalstar, as defined, each note is redeemable at the option of the holder for 101% of the principal amount plus accrued interest. 7. RESTRUCTURING During 2001, Globalstar reviewed its operating costs and implemented cost saving measures. In the first nine months of 2001, Globalstar incurred a restructuring charge of approximately $9.8 million, of which $8.7 million has been paid out as of September 30, 2001. The charge consisted of the following: employee separation costs of $4.7 million related to a reduction in workforce of 292 employees from March to November, 2001, fees paid to Globalstar's restructuring specialists including financial advisors, legal counsel, and other advisors of $3.8 million, and fees paid to the bondholders' legal counsel and financial advisors of $1.3 million. Globalstar's headcount on September 30, 2001 was approximately 180 employees. Globalstar provided a paid 60 day notice of termination to 52 of the 180 employees on September 19, 2001 and released them from active employment on or around that date. The effective date of termination is November 16, 2001. Expenses related to these terminations were recorded in the quarter ended September 30, 2001. 17 GLOBALSTAR, L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES On February 20, 2001, a purported class action lawsuit was filed against Globalstar and Globalstar Capital Corporation on behalf of the owners of the 10 3/4% bonds, due November 2004 (the "Bonds") in Superior Court, New Castle County, Delaware. Globalstar Capital Corporation and Globalstar, L.P. issued the Bonds as joint obligors. The complaint alleges that the defendants repudiated the Bonds' registration statement, prospectus and indenture, without consent of the bondholders, when Globalstar announced that it was suspending its future interest payments on the Bonds. On April 23, 2001, the defendants moved to dismiss the complaint for failure to state a cause of action. A second similar class action was filed in Delaware on June 5, 2001. The defendants have also moved to dismiss this complaint. Plaintiffs subsequently amended the complaint and defendants again moved to dismiss the amended complaint for failure to state a cause of action. The motions were heard in September and the parties are awaiting a ruling from the Court. On August 7, 2001, Globalstar received a petition filed on July 13, 2001 in Texas state court by L.E. Creel III, a holder of an 11 3/8% note seeking principal payment of the note plus interest. Globalstar has filed an answer contesting the petition and believes that the petition lacks merit. Ericsson OMC Limited ("Ericsson") has filed two separate demands for arbitration with the American Arbitration Association that seek monetary damages in the combined amount of $64.0 million with respect to two contracts. Ericsson has taken the position that Globalstar has failed to satisfy minimum purchase requirements for phones under two contracts, one for the purchase of Fixed Access Units (FAU) and one for the purchase of mobile R290 units (R290). Globalstar seeks to mitigate these asserted damages and may seek a right of offset to any such damages claimed by Ericsson. Globalstar has responded to both petitions. The parties are in the process of exchanging discovery. The final arbitration hearings for both matters are expected sometime in the first quarter of 2002. Starting in mid-March of this year, Globalstar detected anomalous behavior in the S-Band communications link of three Globalstar satellites and removed them from service. A thorough investigation concluded that the most likely cause of the anomalous behavior was a temporary severe space environment. Globalstar has not experienced any further anomalous behavior. One of the three satellites was successfully returned to full service; however, two were declared failed and are being relocated to a 1500 km "graveyard" orbit. One of the failed satellites was replaced in early October with an in-orbit spare. The second failed satellite is scheduled to be replaced the first week of December. Globalstar has two additional in-orbit spares and plans to have eight ground spares available for future constellation replenishment as required. With one satellite remaining to be replaced, there is a minor effect on service in about half of the Globalstar gateways. In these gateway service areas, which are in the non-temperate zones of the world, a small number of users are currently experiencing brief losses of service. The affected gateways are experiencing between one and two service outages per day for durations ranging from six seconds to less than three minutes per outage. Globalstar expects that these outages will disappear altogether with the replacement of the second failed satellite in early December. The environmental conditions that Globalstar believes caused the anomalies have now passed and are not expected to return for 10 or more years. Globalstar has seen no indication suggesting that the failures were due to a design defect or to a production error. Therefore, Globalstar has no reason to believe that other satellites will experience similar failures. The Globalstar satellite constellation continues to outperform its specified design reliability. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the matters discussed in the following Management's Discussion and Analysis of Financial Condition and Results of Operations are not historical facts, but are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, Globalstar and GTL or its representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts, such as in reports filed with the SEC, press releases or statements made with the approval of an authorized executive officer of either Globalstar or GTL. These forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "plans," "may," "will," "would," "could," "should," "anticipates," "estimates," "project," "intend," or "outlook" or the negative of these words or other variations of these words or other comparable words, or by discussion of strategy that involve risks and uncertainties. These forward-looking statements are only predictions, and actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond Globalstar's or GTL's control. Some of these factors and conditions include: (i) GTL's investment in Globalstar will likely be severely diluted, in which event it will have little or no value, or be eliminated entirely; (ii) Globalstar has limited cash to fund its operations; (iii) an event of default has occurred in connection with Globalstar's $500 million credit facility, its vendor financing facility with QUALCOMM, its 11 3/8% senior notes due February 15, 2004, its 11 1/4% senior notes due June 15, 2004, its 10 3/4% senior notes due November 1, 2004, and its 11 1/2% senior notes due June 1, 2005; as a result, these debt obligations are subject to acceleration; (iv) Globalstar subscriber demand to date has been lower than expected; (v) dependence on service providers to market Globalstar service and implement important parts of its system and on third parties to complete its system; (vi) Globalstar will require additional financing; (vii) satellites in orbit may fail prematurely; (viii) severe competition in the telecommunications industry and (ix) Globalstar is subject to regulation. For a detailed discussion of these factors and conditions, please refer to the section of this Form 10-Q entitled "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS" and to the most recent Report on Form 10-K that Globalstar and GTL filed with the SEC. In addition, Globalstar operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond Globalstar's control. GENERAL OVERVIEW GTL, a general partner of Globalstar, was created to permit public equity ownership in Globalstar. GTL does not have any operations, any personnel or facilities, and does not manage the day-to-day operations of Globalstar. GTL has no other business or investments. GTL's sole asset is its investment in Globalstar, and GTL's results of operations reflect its share of the results of operations of Globalstar on an equity accounting basis. Accordingly, GTL's results of operations only reflect its proportionate share of Globalstar's results of operations, as presented on Globalstar's financial statements, and the appropriate amortization and interest associated with this investment. Therefore, matters discussed in this section address the financial condition and results of operations of Globalstar. On January 16, 2001, Globalstar suspended indefinitely principal and interest payments on its funded debt and dividend payments on its 8% and 9% convertible redeemable preferred partnership interests ("RPPIs") in order to conserve cash for operations. Non-payment of interest on Globalstar's debt instruments, credit facility and vendor financing agreements when they become due, and continuance of non-payment for the applicable grace period, are "events of default" under the terms of each of the debt instruments. An event of default has occurred in connection with Globalstar's $500 million credit facility, its vendor financing facility with QUALCOMM, its 11 3/8% senior notes due February 15, 2004, its 11 1/4% senior notes due June 15, 2004, its 10 3/4% senior notes due November 1, 2004, and its 11 1/2% senior notes due June 1, 2005. Accordingly, for reporting and accounting purposes, Globalstar classified the $500 million credit facility, the QUALCOMM vendor financing and the senior notes as current obligations. RESULTS OF OPERATIONS Globalstar commenced commercial operations in the first quarter of 2000, and as of September 30, 2001, was providing service through 25 gateways, with an additional operational gateway awaiting licensing approval. 19 Those 25 gateways provide coverage to 109 countries, including all of North and South America (excluding northwestern Alaska and portions of Canada above 70 degrees north latitude), Europe, Australia, Russia, much of east Asia and extensive maritime regions. As of September 30, 2001, Globalstar had approximately 58,600 commercial subscribers on the system. For the three months ended September 30, 2001, Globalstar recorded gross billings for service of $1.5 million and provided approximately 7,431,000 minutes of billable telecommunication services compared to $1.0 million and 2,269,000 minutes for the three months ended September 30, 2000. For the nine months ended September 30, 2001, Globalstar recorded gross billings for service of $5.6 million and provided approximately 16,960,000 minutes of billable telecommunication services compared to $2.9 million and 3,957,000 minutes for the nine months ended September 30, 2000. This increase is largely attributable to the continued deployment of service provider gateways and distribution channels and increased penetration of Globalstar's target markets. Gross billings per minute of service provided have declined in the three months and nine months ended September 30, 2001 from equivalent periods in 2000 as Globalstar has implemented a revised wholesale pricing scheme, which provides for reduced basic airtime rates and fewer discounts, in July 2001 and is not recognizing revenue in 2001 from service providers where collection is not reasonably assured. The discounts and promotions offered for Globalstar service decreased to $62,000 for the three months ended September 30, 2001 from $237,000 for the three months ended September 30, 2000 and increased to $961,000 for the nine months ended September 30, 2001 from $368,000 for the nine months ended September 30, 2000. The decrease in discounts and promotions for the three months ended September 30, 2001 was due to the implementation of the revised wholesale pricing scheme in July 2001. The increased discounts and promotions for the nine months ended September 30, 2001 primarily was the result of increased system usage, which occurred prior to the implementation of the revised pricing scheme. Globalstar has offered promotional programs to its service providers, including a 25% discount on mobile usage fees and free minutes for the advance purchase of airtime. A number of Globalstar service providers have committed to pre-purchase discounted minutes of use, amounting to approximately $11.7 million in pre-committed gross revenue ($8.8 million net of 25% discount), all of which had been received as of September 30, 2001. Of the prepaid committed revenue, $4.0 million and $0.5 million has been recognized for the nine months ended September 30, 2001 and 2000, respectively. Royalty income relating to Globalstar user terminals sold by user terminal manufacturers declined to $18,000 for the three months ended September 30, 2001 from $427,000 for the three months ended September 30, 2000 and declined to $161,000 for the nine months ended September 30, 2001 from $1.2 million for the nine months ended September 30, 2000. The decline is primarily the result of reduced shipments of Globalstar user terminals from manufacturers as user terminal distribution channel inventories have increased from early service levels and user terminal sales to subscribers have not achieved initial projections. Operating Expenses. Operations expense decreased to $10.4 million for the three months ended September 30, 2001 from $29.5 million for the three months ended September 30, 2000 and decreased to $52.2 million for the nine months ended September 30, 2001 from $105.6 million for the nine months ended September 30, 2000. The decline is primarily the result of reduced gateway installation and testing activity and cost saving measures, including the reduction in personnel, implemented by Globalstar during the first nine months of 2001. The operations expense for the nine month period ended September 30, 2001 includes a satellite impairment charge of $1.3 million. The impairment is the result of the write-off of the remaining net book value of two failed satellites in the second quarter of 2001, partially offset by warranty recovery payments from the manufacturer. Marketing, general and administrative expenses decreased to $4.5 million for the three months ended September 30, 2001 from $16.4 million for the three months ended September 30, 2000 and decreased to $28.8 million for the nine months ended September 30, 2001 from $47.7 million for the nine months ended September 30, 2000. The decrease is primarily the result of staffing reductions and decreased advertising and promotional costs in 2001, as the intense marketing effort associated with the introduction of Globalstar service in 2000 has not been repeated in 2001. 20 Restructuring costs of $9.8 million were incurred, of which $8.7 million has been paid out as of September 30, 2001. The costs consisted of the following: employee separation costs of $4.7 million related to a reduction in workforce of 292 employees from March to November, 2001, fees paid to Globalstar's restructuring specialists including financial advisors, legal counsel, and other advisors of $3.8 million, and fees paid to the bondholders' legal counsel and financial advisors of $1.3 million. Globalstar's headcount on September 30, 2001 was approximately 180 employees. Globalstar provided a paid 60 day notice of termination to 52 of the 180 employees on September 19, 2001 and released them from active employment on or around that date. The effective date of termination is November 16, 2001. Expenses related to these terminations were recorded in the quarter ended September 30, 2001. Depreciation and amortization expenses decreased to $9.2 million for the three months ended September 30, 2001 from $83.7 million for the three months ended September 30, 2000 and decreased to $28.5 million for the nine months ended September 30, 2001 from $244.7 million for the nine months ended September 30, 2000. The decrease is primarily the result of the reduced asset carrying values resulting from asset impairment charges recognized by Globalstar during the fourth quarter of 2000. Interest income decreased to $0.8 million for the three months ended September 30, 2001 from $5.0 million for the three months ended September 30, 2000 and decreased to $4.2 million for the nine months ended September 30, 2001 from $11.9 million for the nine months ended September 30, 2000. The decrease is primarily the result of lower average cash balances available for investment during 2001. Interest expense increased to $95.9 million for the three months ended September 30, 2001 from $87.8 million for the three months ended September 30, 2000 increased to $287.5 million for the nine months ended September 30, 2001 from $245.2 million for the nine months ended September 30, 2000. This increase is the result of increased outstanding debt balances, which are subject to higher interest rates in the event of default, and Globalstar ceasing to capitalize interest on assets under construction in the first quarter of 2001. Preferred dividends accrued decreased to $6.3 million for the three months ended September 30, 2001 from $7.8 million for the three months ended September 30, 2000 and decreased to $20.3 million for the nine months ended September 30, 2001 from $23.1 million for the nine months ended September 30, 2000. The decrease is primarily the result of conversions of the 8% and 9% convertible redeemable preferred partnership interests that occurred during 2000 and the first nine months of 2001. As a result of the above, the net loss applicable to ordinary partnership interests decreased to $128.8 million for the three months ended September 30, 2001 from $219.0 million for the three months ended September 30, 2000 and decreased to $418.1 million for the nine months ended September 30, 2001 from $651.8 million for the nine months ended September 30, 2000. Income Taxes. Globalstar is organized as a limited partnership. As such, no income tax provision or benefit is included in the accompanying financial statements since U.S. income taxes are the responsibility of its partners. Generally, taxable income or loss, deductions and credits of Globalstar are passed through to its partners. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2001, Globalstar had approximately $68 million in cash and cash equivalents. The new Globalstar business plan, currently being reviewed by Globalstar's creditors, projects that Globalstar will complete 2001 with approximately $45 million of cash and cash equivalents on hand, based on predicted net cash outflows for operating expenses, restructuring costs, system development costs and replacement satellites during the fourth quarter of 2001. In order to preserve cash, Globalstar has reduced its payments to SS/L and QUALCOMM and is currently overdue on its contractual payment obligations to these vendors. As of September 30, 2001, approximately $14 million of accounts payable and accrued costs were due to QUALCOMM and approximately $9 million of milestone billings and accrued costs were due to SS/L. The current cash flow projection assumes that these obligations are settled in part during the fourth quarter of 2001 and that Globalstar remains in arrears with respect to its contractual payment obligations at the end of 2001. Under these agreements, failure to make payments is grounds for termination. QUALCOMM has issued a 21 notice of termination of the Development Agreement effective November 15, 2001, and Globalstar is in negotiations with QUALCOMM on this matter. The projected 2001 cash requirements assume no collections from Globalstar service providers for system usage or gateway costs and assume no disbursements for interest, principal or dividend obligations on outstanding debt and RPPIs. Cash and cash equivalents, including restricted cash, decreased from $197 million at December 31, 2000 to $68 million at September 30, 2001. The net decrease is primarily the result of net cash used in operating activities of $115 million, net expenditures for additional spare satellites of $8 million, net expenditures for Globalstar Systems of $3 million, and net of disbursements for production gateways and user terminals of $3 million. The projected $45 million cash on hand at the beginning of 2002 and the anticipated revenue from service providers will not be sufficient to sustain Globalstar as a going concern for more than a few months in 2002. It is likely that Globalstar, even if its restructuring proposal is effectuated, will require additional financing to sustain operations until breakeven cash flow is achieved. There can be no assurance that a successful restructuring will be completed and that such financing will be available on terms acceptable to Globalstar, if at all. If Globalstar is unable to obtain such financing, it may cease to operate as a going concern. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but will rather be tested at least annually for impairment. Globalstar will adopt SFAS No. 142 on January 1, 2002. Management does not believe that adopting this pronouncement will have significant impact on its financial position or its results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. Globalstar will adopt SFAS No. 144 on January 1, 2002. Adoption of this statement is not expected to have a material impact on our financial position or results of operations. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, from time to time, Globalstar or GTL or their representatives have made or may make forward-looking statements, orally or in writing. They can be identified by the use of forward-looking words such as "believes", "expects", "plans", "may", "will", "should", or "anticipates" or their negatives or other variations of these words or other comparable words, or by discussions of strategy that involve risks and uncertainties. Such forward-looking statements may be included in, but are not limited to, various filings made by Globalstar or GTL with the Securities and Exchange Commission, press releases or oral statements made by or with the approval of an authorized executive officer of Globalstar or GTL. We warn you that forward-looking statements are only predictions. Actual events or results may differ materially as a result of risks that we face, including those presented below. The following are representative of factors that could affect the outcome of the forward-looking statements. 22 GLOBALSTAR EXPECTS TO FILE FOR BANKRUPTCY PROTECTION; GTL'S EQUITY INTEREST IN GLOBALSTAR WILL LIKELY BE SEVERELY DILUTED, IN WHICH EVENT IT WILL HAVE LITTLE OR NO VALUE, OR BE ELIMINATED ENTIRELY. Globalstar has developed a new business plan for the purposes of restructuring the company's finances. The business plan assumes the conversion of all outstanding Globalstar debt obligations into equity in a new Globalstar company ("Newco") and the consolidation of certain Globalstar service provider operations into Newco. The service provider consolidation is intended to bring additional efficiencies to the operation of the Globalstar network and allow for increased coordination in the Globalstar service offerings and pricing. Globalstar believes that these steps are required to achieve and maintain financial viability. In addition to the service provider operations to be consolidated into Newco, Globalstar intends to continue to offer its services through existing independent gateway operators in other regions. Globalstar has been discussing its new business plan with its principal creditors, with the objective of achieving an agreement in principle with respect to the terms of a financial restructuring plan. Assuming these discussions are successfully concluded, as to which there can be no assurance, Globalstar and certain of its affiliates will commence voluntary Chapter 11 cases and seek to confirm a Chapter 11 plan which both implements the terms agreed with its creditors and binds all Globalstar's creditors. Globalstar will likely seek protection under the federal bankruptcy laws even without a prenegotiated settlement with its principal creditors. Moreover, its creditors may, at anytime, initiate involuntary bankruptcy proceedings against Globalstar. In any financial restructuring, GTL's equity interest, along with the interests of Globalstar's other partners, will likely be severely diluted, in which event it will have little or no value, or be eliminated entirely. GLOBALSTAR HAS LIMITED CASH TO FUND ITS OPERATIONS. As of September 30, 2001, Globalstar had approximately $68 million in cash and cash equivalents. The new Globalstar business plan, currently being reviewed by Globalstar's creditors, projects that Globalstar will complete 2001 with approximately $45 million of cash and cash equivalents on hand, based on predicted net cash outflows for operating expenses, restructuring costs, system development costs and replacement satellites during the fourth quarter of 2001. In order to preserve cash, Globalstar has reduced its payments to SS/L and QUALCOMM and is currently overdue on its contractual payment obligations to these vendors. As of September 30, 2001, approximately $14 million of accounts payable and accrued costs were due to QUALCOMM and approximately $9 million of milestone billings and accrued costs were due to SS/L. The current cash flow projection assumes that these obligations are settled in part during the fourth quarter of 2001 and that Globalstar remains in arrears with respect to its contractual payment obligations at the end of 2001. Under the agreements, failure to make payments is grounds for termination. QUALCOMM has issued a notice of termination of the Development Agreement effective November 15, 2001, and Globalstar is in negotiations with QUALCOMM on this matter. The projected 2001 cash requirements assume no collections from Globalstar service providers for system usage or gateway costs and assume no disbursements for interest, principal or dividend obligations on outstanding debt and RPPIs. The projected $45 million cash on hand at the beginning of 2002 and the anticipated revenue from service providers will not be sufficient to sustain Globalstar as a going concern for more than a few months in 2002. It is likely that Globalstar, even if its restructuring proposal is effectuated, will require additional financing to sustain operations until breakeven cash flow is achieved. There can be no assurance that a successful restructuring will be completed and that such financing will be available on terms acceptable to Globalstar, if at all. If Globalstar is unable to obtain such financing, it may cease to operate as a going concern. GLOBALSTAR HAS DEFAULTED ON CERTAIN DEBT PAYMENTS. See Note 2, "Organization and Business," for a discussion of the "event of default" under certain of Globalstar's debt obligations. THE RATE OF GROWTH FOR THE SERVICE HAS NOT BEEN SUFFICIENT TO SUSTAIN GLOBALSTAR'S COST OF OPERATIONS. Low earth orbit satellite telecommunications systems are a new business sector that has not yet succeeded in the marketplace. Globalstar commenced commercial service in early 2000 but had acquired only 23 58,600 commercial subscribers by September 30, 2001, too few to generate sufficient revenue to cover Globalstar's operating costs and service its debt. On January 16, 2001, Globalstar announced that it was not generating sufficient cash flow from operations and that it would suspend indefinitely payments on its funded debt. By announcing a financial restructuring, Globalstar became vulnerable to additional risks, namely, that potential subscribers may defer subscribing for fear that Globalstar will cease operating in the near future, and that potential investors, partners and service providers would withhold investment because of Globalstar's uncertain future. If Globalstar is unable to restructure its debt obligations and, ultimately, generate positive additional cash flows from operations, Globalstar is unlikely to survive as a going concern. GLOBALSTAR DEPENDS ON SERVICE PROVIDERS TO MARKET ITS SERVICE AND IMPLEMENT IMPORTANT PARTS OF ITS SYSTEM. Globalstar depends on unaffiliated service providers to purchase, install and operate gateway equipment, to sell phones and to market Globalstar service in each country where the service provider holds exclusive rights. Not all of these service providers have been successful, and in some countries they have not initiated service according to their schedules, or sold as much usage as they originally anticipated. Globalstar service providers are generally not earning revenues sufficient to fund their operating costs. We cannot be sure that they will continue operations until Globalstar's financial restructuring is completed. We have been informed by one service provider that the service provider has decided to terminate services from one of its gateways. The schedule for the termination of services from this gateway, the coverage area of which can largely be served by remaining gateways, has not been finalized, but it is likely that services from the subject gateway will be discontinued before the end of 2001. A second service provider, which had not initiated service in its territories in the Middle East, terminated its relationship with Globalstar on June 30, 2001. We expect other service providers to acquire some or all of these rights. A third service provider, which has not initiated services in Southern Africa territories due to licensing difficulties, has informed us that it is discontinuing its service provider operations. Globalstar has been unable to find suitable new or replacement service providers for several important regions and countries, including Japan, India, Malaysia and Indonesia, the Philippines and other parts of Southeast Asia. Neither has Globalstar been able to find purchasers for gateways which were ordered and later cancelled. Our inability to offer service in these areas ultimately reduces overall demand for our service and undermines its value for potential users who require global service or service in Southeast Asia and the Indian subcontinent. In addition to the lack of global service availability, roaming is not yet available in certain countries because the affected service providers have been unable to date to reach business arrangements with one another. GTL HAS BEEN DE-LISTED BY THE NASDAQ NATIONAL MARKET. On June 14, 2001, GTL's listing was transferred to the Nasdaq SmallCap Market. This change, while still permitting public trading of GTL's shares, does reduce their liquidity and may also have an adverse effect on their trading value. On November 14 Nasdaq notified GTL that it halted trading in GTL shares pending the receipt of additional information. GTL is cooperating with Nasdaq on this matter and is providing the information requested. There can be no assurance that there will be any future trading market for the GTL common stock. LOCKHEED MARTIN IS DISPUTING GLOBALSTAR'S RIGHT TO ISSUE IT A $150 MILLION NOTE IN SATISFACTION OF PAYMENTS MADE UNDER A GUARANTY. On June 30, 2000, Globalstar's $250 million credit facility with The Chase Manhattan Bank, which was fully drawn, matured and was thereupon repaid in full by its guarantors, including Lockheed Martin Corporation. Pursuant to the relevant agreements entered into in 1996, Globalstar issued to all the guarantors three-year notes in proportion to the principal amount of the credit facility guaranteed. Lockheed Martin, however, has rejected the notes it received and is instead asking Globalstar to issue new securities with additional rights and enhanced value without waiving its claim that it is entitled to receive an immediate cash reimbursement by Globalstar of its $150 million payment to the bank lenders. Globalstar disputes Lockheed Martin's interpretation of the relevant agreements. If the dispute is not resolved, we cannot be sure that if the 24 matter were litigated, a court would agree with Globalstar's interpretation of the agreements. Management believes, however, that a court would agree with Globalstar's interpretation of the relevant agreements. GLOBALSTAR MAY ENCOUNTER ADDITIONAL DELAYS AND INCREASED COSTS. A number of factors have caused, and may continue to cause, delay in Globalstar's achievement of revenues and positive cash flow. These factors, many of which are beyond Globalstar's control, include: - slower-than-anticipated consumer acceptance; - insufficient marketing efforts by service providers; - delays in selling gateways held in storage to new or existing service providers; - delays in implementing roaming services between Globalstar service regions; and - regulatory delays. GLOBALSTAR'S SATELLITES HAVE A LIMITED USEFUL LIFE AND MAY FAIL PREMATURELY. Globalstar's system has performed well. The satellites in orbit and have certain redundant systems in case of failure. However, in-orbit failure may result from various causes, including: - component failure; - loss of power or fuel; - inability to control positioning of the satellite; - solar and other astronomical events; and - space debris. Repair of satellites in space is not feasible. Factors that affect the useful lives of Globalstar's satellites include the quality of construction, gradual degradation of solar panels and the durability of components. Random failure of satellite components may result in damage to or loss of a satellite before the end of its expected life. Because Globalstar has a large constellation and will have a number of spare satellites, Globalstar has not insured its satellites against in-orbit failures. Starting in mid-March of this year, Globalstar detected anomalous behavior in the S-Band communications link of three Globalstar satellites and removed them from service. A thorough investigation concluded that the most likely cause of the anomalous behavior was a temporary severe space environment. Globalstar has not experienced any further anomalous behavior. One of the three satellites was successfully returned to full service; however, two were declared failed and are being relocated to a 1500 km "graveyard" orbit. One of the failed satellites was replaced in early October with an in-orbit spare. The second failed satellite will be replaced the first week of December. Globalstar has two additional in-orbit spares and plans to have eight ground spares available for future constellation replenishment as required. With one satellite remaining to be replaced, there is a minor effect on service in about half of the Globalstar gateways. In these gateway service areas, which are in the non-temperate zones of the world, a small number of users are currently experiencing brief losses of service. The affected gateways are experiencing between one and two service outages per day for durations ranging from six seconds to less than three minutes per outage. Globalstar expects that these outages will disappear altogether with the replacement of the second failed satellite in early December. The environmental conditions that Globalstar believes caused the anomalies have now passed and are not expected to return for 10 or more years. Globalstar has seen no indication suggesting that the failures were due to a design defect or to a production error. Therefore, Globalstar has no reason to believe that other satellites will experience similar failures. The Globalstar satellite constellation continues to outperform its specified design reliability. 25 GLOBALSTAR FACES SPECIAL RISKS BY DOING BUSINESS IN DEVELOPING MARKETS AND FACES CURRENCY RISKS. Based on business operations in 2000, in which we earned about 87% of our revenue overseas, we expect that most of our business in the future will be conducted outside the United States. International operations are subject to changes in domestic and foreign government regulations and telecommunications standards, tariffs or taxes and other trade barriers. Political, economic or social instability or other developments, including currency fluctuations, could also adversely affect Globalstar's operations. In addition, Globalstar's contracts may be governed by foreign law or enforceable only in foreign jurisdictions. As a result, Globalstar may find it hard to enforce its rights under these agreements if there is a dispute. Globalstar's largest potential markets are in developing countries or regions that are substantially underserved and are not expected to be served by existing telecommunications systems. Developing countries are more likely than industrialized countries to experience market, currency and interest fluctuations and may have higher inflation. In addition, these countries present risks relating to government policy, price and wage, exchange control, tax related and social instability, expropriation and other economic, political and diplomatic conditions. Although Globalstar anticipates that it will receive payments from its service providers in U.S. dollars, limited availability of U.S. currency in some local markets may prevent a service provider from making payments in U.S. dollars. In addition, exchange rate fluctuations may affect Globalstar's ability to control the prices charged for its services. GLOBALSTAR'S BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS. Globalstar's operations are and will continue to be subject to United States and foreign regulation. Globalstar's service providers must be authorized in each of the markets in which they intend to provide service. Globalstar and its service providers may not be able to obtain or retain all regulatory approvals needed for operations. For example, Vodafone's affiliate, Globalstar Southern Africa, has not yet received a license from the government although its gateway has been operational for more than a year. Regulatory changes, such as those resulting from judicial decisions and/or adoption of treaties, legislation or regulation in countries where Globalstar intends to operate, may also significantly affect Globalstar's business. GLOBALSTAR FACES INTENSE COMPETITION FROM BOTH DIRECT AND INDIRECT COMPETITORS, AND ADDITIONAL DIRECT COMPETITORS PLAN TO ENTER THE MARKET SOON. Iridium L.L.C. has emerged from bankruptcy with no debt under new ownership and resumed commercial service in competition with Globalstar in April 2001. It has secured a two-year contract valued at $72 million from the U.S. Department of Defense. ICO has also emerged from bankruptcy, and is expected to complete its system and compete with Globalstar in the future. It now appears that Constellation Communications, Inc. and Mobile Communications Holdings, Inc., which have held licenses from the Federal Communications Commission since July 1997, will not attract financing or build their systems. The FCC recently cancelled MCHI's license for failure to comply with construction milestones. Existing fixed satellite systems, including those of Motient (formerly American Mobile Satellite Corporation), Comsat Corporation's Planet-1, and Inmarsat, and recently developed systems, including those of ACeS and Thuraya Satellite Communications Company, also provide competing service on a regional basis at potentially lower costs. TECHNOLOGICAL ADVANCES AND A CONTINUING TREND TOWARD STRATEGIC ALLIANCES IN THE TELECOMMUNICATIONS INDUSTRY COULD GIVE RISE TO SIGNIFICANT NEW COMPETITORS. Satellite-based telecommunications systems are characterized by high up-front costs and relatively low operating costs. Several systems are being proposed and, while the proponents of these systems believe that there will be significant demand for their services, actual demand will not become known until such systems are operational. If the capacity of Globalstar and competing systems exceeds demand, price competition could be intense. Further, the reorganizations of Iridium L.L.C. and ICO have allowed them to dramatically reduce 26 or eliminate their debt and the need to service that debt. We anticipate, therefore, that their operating costs will be relatively low compared with Globalstar's. NEW TECHNOLOGIES AND THE EXPANSION OF LAND-BASED SYSTEMS MAY REDUCE DEMAND FOR GLOBALSTAR'S SERVICE. We believe that the extension of land-based telecommunications services to regions previously underserved or not served by wireline or cellular services has reduced demand for Globalstar service in those regions. These land-based telecommunications services have been built more quickly than we anticipated; therefore, demand for Globalstar's service is expected to be reduced sooner than Globalstar assumed in formulating earlier business plans. This development has been responsible, in part, for Globalstar's effort in 2000 to identify and sell into vertical markets and to deploy data products, rather than focusing more resources on areas formerly underserved by terrestrial systems. Globalstar may also 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 Globalstar obsolete or less competitive by satisfying consumer demand in more attractive ways or through the introduction of incompatible standards. In addition, Globalstar depends on technologies developed by third parties, and we cannot be certain that these technologies will continue to be available to Globalstar on a timely basis or on reasonable terms. GLOBALSTAR COULD FACE LIABILITY BASED ON ALLEGED HEALTH RISKS. There has been adverse publicity concerning alleged health risks associated with the use of portable hand-held telephones which have transmitting antennae. Recent medical studies, however, have again failed to confirm such health risks. In any event because hand-held Globalstar telephones will use on average lower power to transmit signals than traditional cellular telephones, Globalstar does not believe that any new guidelines from the Federal Communications Commission, or any other regulatory agency, will require any significant modifications of its system or of its hand-held telephones. Even so, we cannot be certain that these guidelines, or any associated health issues, will not have an adverse effect on Globalstar's business. GLOBALSTAR RELIES ON KEY PERSONNEL. Globalstar must hire and retain highly qualified personnel to operate its system and manage its business successfully. None of GTL's or Globalstar's officers has an employment contract with GTL or Globalstar except that Mr. Olof Lundberg has a written agreement to serve as chairman of Globalstar's Committee of General Partners and chief executive officer of Globalstar and that Mr. Ira E. Goldberg has a written agreement to serve as the restructuring officer of GTL. In addition, neither GTL nor Globalstar maintains "key man" life insurance. The departure of any of its executives or other key employees could have an adverse effect on Globalstar's business, especially during this critical restructuring period. Globalstar has implemented a retention bonus program in 2001 in an effort to retain its executives and key employees. There can be no assurance that such efforts will be successful or that Globalstar will be able to attract qualified persons to replace departing personnel. DEPENDENCE ON KEY VENDORS. Globalstar is dependent on QUALCOMM for gateway hardware and software, on QUALCOMM as the exclusive manufacturer of phones using the IS-41 CDMA North American standard, and on Telit for the manufacture of GSM dual-mode phones. Ericsson has discontinued manufacturing our products, and there is no assurance that QUALCOMM or Telit will not choose to terminate its business relationship with us. If either does, we may not be able to find a replacement; if we do find a replacement, there may be a substantial period of time in which our products, as well as software upgrades and "bug fixes" for those products, are not available. Ericsson has further taken the position that Globalstar has failed to satisfy minimum purchase requirements for phones under two contracts, one for the purchase of Fixed Access Units (FAU) and one for 27 the purchase of mobile R290 units (R290). Ericsson has initiated arbitration proceedings under the provisions of both of these contracts, the outcome of which is uncertain. CERTAIN POTENTIAL CONFLICTS OF INTEREST COULD RESULT IN DECISIONS ADVERSE TO GLOBALSTAR'S INTERESTS. Potential conflicts of interest include the following: - Globalstar partners, or their affiliates, are suppliers of the major parts of the Globalstar System. They also manufacture the system elements which are sold to service providers and subscribers. - Globalstar is dependent upon the management skills of Loral and technologies developed by Loral, QUALCOMM and others. - Partners and affiliates of Globalstar, including companies affiliated with or controlled by Loral, are among Globalstar's main customers. Accordingly, they may have conflicts of interest with respect to the terms of Globalstar's service provider agreements. - Globalstar is currently managed by a committee of its general partners, a majority of the representatives on which may be designated by Loral, which in turn owns SS/L, a contractor of Globalstar. Loral is also a significant creditor of Globalstar. - Several Globalstar service providers and their retail distributors are cellular operators and may have an incentive to favor terrestrial wireless services over satellite services in certain markets. AS A GENERAL PARTNER, GTL IS LIABLE FOR THE RECOURSE DEBT AND OTHER OBLIGATIONS OF GLOBALSTAR. Because GTL is a general partner of Globalstar, GTL is jointly and severally liable with the other general partners for the recourse debt and other recourse obligations of Globalstar to the extent Globalstar is unable to pay such debts. GTL believes that such recourse obligations totaled approximately $1.4 billion as of September 30, 2001. Certain of Globalstar's debt, including the public debt, is non-recourse to the general partners. Future funding, if any, or assets of GTL, may be utilized to fund this general partner liability. A CHANGE OF CONTROL OF GTL OR REDUCTION IN GTL'S OWNERSHIP OF GLOBALSTAR COULD RESULT IN GTL HAVING TO PAY ADDITIONAL TAXES AND BECOMING SUBJECT TO ONEROUS REQUIREMENTS UNDER THE INVESTMENT COMPANY ACT. If either of the following occurs, GTL will become a limited partner in Globalstar and will no longer appoint representatives to serve on its committee of general partners: - a change of control of GTL at a time when GTL owns less than 50% of the Globalstar partnership interests outstanding, including changes in GTL's board of directors; or - a sale or other disposition of partnership interests following which GTL's equity interest is reduced to less than 5%, without prior approval by the managing general partner of Globalstar or by the limited partners of Globalstar. If GTL were to become a limited partner in Globalstar, GTL could be deemed to be an investment company under the Investment Company Act of 1940. If this happens, GTL would become subject to the registration and other requirements of that law. In order to register, GTL might be required to reincorporate as a domestic U.S. corporation and would thereafter be subject to U.S. tax on our worldwide income. GTL currently intends to conduct its operations so as to avoid being deemed an investment company under the Investment Company Act. HOLDERS OF GTL PREFERRED STOCK WILL HAVE THE RIGHT UNDER CERTAIN CIRCUMSTANCES TO APPOINT DIRECTORS TO GTL'S BOARD OF DIRECTORS AND TO APPOINT A MEMBER TO GLOBALSTAR'S GENERAL PARTNERS' COMMITTEE. In January 2001, GTL announced that it was suspending indefinitely dividend payments on its 8% preferred stock and its 9% preferred stock. Under the terms of each such series of preferred stock, if GTL should fail to pay dividend payments on such series for an aggregate of six quarters, holders of the majority of 28 the outstanding shares of that series will have the right to elect up to two additional members to GTL's Board of Directors. Globalstar's partnership agreement further provides that in the event accrued and unpaid dividends accumulate to an amount equal to six quarterly dividends on the 8% preferred stock and/or the 9% preferred stock, holders of the majority of such outstanding preferred stock, voting together as a class, will have the right to appoint one additional member to Globalstar's general partners committee. PATENTS HELD BY OTHER FIRMS OR INDIVIDUALS MAY BLOCK GLOBALSTAR'S PATENTS. Because the U.S. patent application process is confidential, there can be no assurance that third parties, including competitors of Globalstar, do not have patents pending or issued that could result in infringement by Globalstar. In such an event, Globalstar could be required to redesign some part of its system or pay royalties for use of the third parties' patents, which could increase cost or delay implementation of certain features or functions. In January 2000, TRW asserted in a letter to Globalstar that certain TRW patents may be infringed. Globalstar denied the assertion, and has not had any communication from TRW since February 2001. VOLATILITY OF MARKET VALUES. Our stock price and the fair value of our senior notes experienced substantial price volatility in the period before we announced that we would restructure our debt. This volatility may continue as Globalstar restructures its debt obligations and increases cash flows from operations. These factors, as well as general economic conditions, actions of our competitors, and political conditions may materially adversely affect our market values in the future. GTL IS DEPENDENT UPON PAYMENTS FROM GLOBALSTAR TO MEET ITS OBLIGATIONS. Because GTL is a holding company whose only assets are its interests in Globalstar, GTL is dependent upon payments from Globalstar to meet its obligations, including those under its preferred stock. Further, GTL's rights and the rights of holders of its securities, including the holders of preferred stock, to participate in the distribution of assets upon Globalstar's liquidation or recapitalization will be subject to the prior claims of Globalstar's creditors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of September 30, 2001 and December 31, 2000, the fair value of Globalstar's long-term debt and interest bearing vendor financing (collectively, "long-term obligations") was estimated to be $91 million and $330 million, respectively, using quoted market prices or, in the case of vendor financing and term-loans with variable interest rates, the ratio of the carrying amount to fair value of the senior notes for 2001 and 2000. The long-term obligations carrying value exceeded fair value by $3.0 billion and $2.6 billion as of September 30, 2001 and December 31, 2000, respectively. Market rate risk on long-term obligations is estimated as the potential increase in annual interest expense resulting from a hypothetical one percentage point increase in interest rates and amounted to approximately $30 million and $29 million as of September 30, 2001 and December 31, 2000, respectively. 29 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 20, 2001, a purported class action lawsuit was filed against Globalstar and Globalstar Capital Corporation on behalf of the owners of the 10 3/4% bonds, due November 2004 (the "Bonds") in Superior Court, New Castle County, Delaware. Globalstar Capital Corporation and Globalstar, L.P. issued the Bonds as joint obligors. The complaint alleges that the defendants repudiated the Bonds' registration statement, prospectus and indenture, without consent of the bondholders, when Globalstar announced that it was suspending its future interest payments on the Bonds. On April 23, 2001, the defendants moved to dismiss the complaint for failure to state a cause of action. A second similar class action was filed in Delaware on June 5, 2001. The defendants have also moved to dismiss this complaint. Plaintiffs subsequently amended the complaint and defendants again moved to dismiss the amended complaint for failure to state a cause of action. The motions were heard in September and the parties are awaiting a ruling from the Court. On August 7, 2001, Globalstar received a petition filed on July 13, 2001 in Texas state court by L.E. Creel III, a holder of an 11 3/8% note seeking principal payment of the note plus interest. Globalstar has filed an answer contesting the petition and believes that the petition lacks merit. Eismann v. Globalstar Telecommunications Limited, et al., and other similar actions. On February 28, 2001, plaintiff Eric Eismann filed a purported class action complaint against GTL in the United States District Court for the Southern District of New York. The other defendants named in the complaint are Loral Space & Communications Ltd. and Bernard Schwartz, the former Chief Executive Officer of Globalstar. Globalstar is not a named defendant in these actions. The complaint alleges that (a) GTL and Mr. Schwartz violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, by making material misstatements or failing to state material facts about GTL's business and prospects; and (b) that Loral and Mr. Schwartz are secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as alleged "controlling persons" of GTL. The class of plaintiffs on whose behalf this lawsuit has allegedly been asserted consists of all buyers of GTL common stock from December 6, 1999, through October 27, 2000, excluding the defendants, officers and directors of GTL, and certain persons affiliated therewith (the "Excluded Persons"). Eighteen additional purported class action complaints have been filed in the United States District Court for the Southern District of New York by plaintiffs Chaim Kraus, L.A. Murphy, Eddie Maiorino, Damon Davis, Iskander Batyrev, Shelly Garfinkel, Sequoia Land Development and Phil Sigel, Michael Ceasar as Trustee for Howard Gunty Profit Sharing Plan, Colin Barry, James D. Atlas, Lawrence Phillips, Kent A. Hillemeir, Sarah Harman, Pablo Lozza, Joseph and Eudice Meyers, The 60223 Trust, Antonio and Lucia Maddalena and Chaim Troman on each of March 2, March 2, March 6, March 7, March 7, March 9, March 16, March 21, March 21, March 22, March 23, March 28, March 28, April 2, April 3, April 11, April 27 and May 1, 2001, respectively. These complaints allege claims against GTL, Loral, and Mr. Schwartz (and, in the case of the Sequoia, Atlas and Meyers complaints, two additional individual defendants, Messrs. Navarra and DeBlasio) that are substantially identical to those set forth in the Eismann action. The class of plaintiffs on whose behalf these lawsuits have been allegedly asserted are: with respect to the Kraus, Davis, Maiorino, Batyrev, Ceasar, Phillips, Hillemeir, Harman and The 60223 Trust actions, buyers of GTL common stock in the period from December 6, 1999, through October 27, 2000; with respect to the Murphy, Barry and Troman actions, buyers of GTL securities in the period from December 6, 1999, through October 27, 2000; with respect to the Sequoia/Sigel, Atlas and Meyers actions, buyers of GTL common stock in the period from December 6, 1999, through July 19, 2000; with respect to the Garfinkel and Lozza actions, buyers of GTL debt securities in the period from December 6, 1999, through October 27, 2000; and with respect to the Maddalena action, buyers of GTL securities in the period from October 11, 1999 through October 27, 2000. In each case the Excluded Persons are excepted from the class. GTL believes that it has meritorious defenses to these actions and intends to pursue them vigorously. Ericsson OMC Limited ("Ericsson") has filed two separate demands for arbitration with the American Arbitration Association that seek monetary damages in the combined amount of $64.0 million with respect to two contracts. Ericsson has taken the position that Globalstar has failed to satisfy minimum purchase 30 requirements for phones under two contracts, one for the purchase of Fixed Access Units (FAU) and one for the purchase of mobile R290 units (R290). Globalstar seeks to mitigate these asserted damages and may seek a right of offset to any such damages claimed by Ericsson. Globalstar has responded to both petitions. The parties are in the process of exchanging discovery. The final arbitration hearings for both matters are expected sometime in the first quarter of 2002. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES As previously reported in Globalstar's Form 10-K for the year ended December 31, 2000, on January 16, 2001, Globalstar suspended indefinitely principal and interest payments on its funded debt and dividend payments on its 8% and 9% convertible redeemable preferred partnership interests ("RPPIs") in order to conserve cash for operations. Non-payment of interest on Globalstar's debt instruments, credit facility and vendor financing agreements when they become due, and continuance of non-payment for the applicable grace period, are "events of default" under the terms of each of the debt instruments. An event of default has occurred in connection with Globalstar's $500 million credit facility, its vendor financing facility with QUALCOMM, its 11 3/8% senior notes due February 15, 2004, its 11 1/4% senior notes due June 15, 2004, its 10 3/4% senior notes due November 1, 2004, and its 11 1/2% senior notes due June 1, 2005. Accordingly, for reporting and accounting purposes, Globalstar classified the $500 million credit facility, the QUALCOMM vendor financing and the senior notes as current obligations. As of the date of filing of this Form 10-Q, the total arrearages on the defaulted issues of securities are as follows: $41.4 million with respect to the $500 million credit facility, $103.0 million with respect to the vendor financing facility with QUALCOMM, $42.7 million with respect to the 11 3/8% senior notes due February 15, 2004, $27.4 million with respect to the 11 1/4% senior notes due June 15, 2004, $26.2 million with respect to the 10 3/4% senior notes due November 1, 2004, $25.9 million with respect to the 11 1/2% senior notes due June 1, 2005, $13.2 million with respect to the 8% convertible redeemable preferred partnership interests, and $7.1 million with respect to the 9% convertible redeemable preferred partnership interests. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report: Exhibit 12 Statement Regarding Computation of Ratios Exhibit Financial Statements for Loral QUALCOMM Satellite Services, 99.1 L.P. Exhibit Financial Statements for Globalstar Capital Corporation 99.2
(b) Reports on Form 8-K None 31 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. GLOBALSTAR TELECOMMUNICATIONS LIMITED Registrant /s/ IRA E. GOLDBERG -------------------------------------- Ira E. Goldberg Restructuring Officer and Registrant's Authorized Officer GLOBALSTAR, L.P. /s/ DANIEL P. MCENTEE -------------------------------------- Daniel P. McEntee Vice President and Chief Financial Officer (Principal Financial Officer) and Registrant's Authorized Officer Date: November 14, 2001 32 EX-12 3 y54672ex12.txt STATEMENT REGARDING COMPUTATION OF RATIOS EXHIBIT 12 STATEMENT REGARDING COMPUTATION OF RATIOS (IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED) GLOBALSTAR TELECOMMUNICATIONS LIMITED RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2001 2000 -------- --------- Earnings: Net loss.................................................. $(93,617) $(260,823) Add: Equity in loss applicable to ordinary partnership interests of Globalstar, L.P........................ 93,617 252,034 Amortization of excess carrying value in Globalstar, L.P................................................. 31,840 -------- --------- Earnings available to cover fixed charges(1)................ $ -- $ 23,051 ======== ========= Fixed charges -- preferred dividends........................ $ 20,282 $ 23,051 ======== ========= Ratio of earnings to fixed charges.......................... N/A 1x ======== ========= Deficiency to cover fixed charges........................... $ 20,282 N/A ======== =========
- --------------- (1) The earnings of GTL available to cover fixed charges, consist solely of dividends from Globalstar, L.P. on the redeemable preferred partnership interests held by GTL. GLOBALSTAR, L.P. DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2001 2000 --------- --------- Net loss.................................................... $(397,772) $(628,761) Dividends on redeemable preferred partnership interests..... (20,282) (23,051) Capitalized interest........................................ -- (4,492) --------- --------- Deficiency of earnings to cover fixed charges............... $(418,054) $(656,304) ========= =========
33 EX-99.1 4 y54672ex99-1.txt FINANCIAL STATEMENTS EXHIBIT 99.1 GLOBALSTAR CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY OF GLOBALSTAR, L.P.) BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) (NOTE) ASSETS: Receivable from Parent...................................... $1,000 $1,000 ====== ====== LIABILITIES AND STOCKHOLDER'S EQUITY Commitments and contingencies (Note 4) Stockholder's equity Common stock, par value $.10; 1,000 shares authorized, issued and outstanding.................................... $ 10 $ 10 Paid-in capital............................................. 990 990 ------ ------ $1,000 $1,000 ====== ======
- --------------- Note: The December 31, 2000 balance sheet has been derived from audited consolidated financial statements at that date. See notes to balance sheets. 34 GLOBALSTAR CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY OF GLOBALSTAR, L.P.) NOTES TO BALANCE SHEETS 1. ORGANIZATION AND BUSINESS Globalstar Capital Corporation ("Globalstar Capital"), a wholly-owned subsidiary of Globalstar, L.P. ("Globalstar") was formed on July 24, 1995, for the primary purpose of serving as a co-issuer and co-obligor with respect to certain debt obligations of Globalstar. 2. BASIS OF PRESENTATION On January 16, 2001, Globalstar suspended indefinitely principal and interest payments on its funded debt and dividend payments on its 8% and 9% convertible redeemable preferred partnership interests ("RPPIs") in order to conserve cash for operations. Non-payment of interest on Globalstar's debt instruments, credit facility and vendor financing agreements when they become due, and continuance of non-payment for the applicable grace period, are "events of default" under the terms of each of the debt instruments. An event of default has occurred in connection with Globalstar's $500 million credit facility, its vendor financing facility with QUALCOMM, its 11 3/8% senior notes due February 15, 2004, its 11 1/4% senior notes due June 15, 2004, its 10 3/4% senior notes due November 1, 2004, and its 11 1/2% senior notes due June 1, 2005. Accordingly, for reporting and accounting purposes, Globalstar classified the $500 million credit facility, the QUALCOMM vendor financing and the senior notes as current obligations. Globalstar has retained The Blackstone Group as its financial adviser to assist in evaluating its business plan and developing initiatives, including restructuring its debt, identifying funding opportunities and pursuing other strategic alternatives. At Globalstar's expense, its bondholders have retained legal counsel and financial advisers. Globalstar has developed a new business plan for the purpose of restructuring the company's finances. The business plan assumes the conversion of all outstanding Globalstar debt obligations into equity in a new Globalstar company ("Newco") and the consolidation of certain Globalstar service provider operations into Newco. The service provider consolidation is intended to bring additional efficiencies to the operation of the Globalstar network and allow for increased coordination in the Globalstar service offerings and pricing. Globalstar believes that these steps are required to achieve and maintain financial viability. In addition to the service provider operations to be consolidated into Newco, Globalstar intends to continue to offer its services through existing independent gateway operators in other regions. Globalstar has been discussing its new business plan with its principal creditors, with the objective of achieving an agreement in principle with respect to the terms of a financial restructuring plan. Assuming these discussions are successfully concluded, as to which there can be no assurance, Globalstar and certain of its affiliates will commence voluntary Chapter 11 cases and seek to confirm a Chapter 11 plan which both implements the terms agreed with its creditors and binds all Globalstar's creditors. Globalstar will likely seek protection under the federal bankruptcy laws even without a prenegotiated settlement with its principal creditors. Moreover, its creditors may, at anytime, initiate involuntary bankruptcy proceedings against Globalstar. In any financial restructuring, Globalstar Capital's equity interest, along with the interests of Globalstar's other partners, will likely be severely diluted, in which event it will have little or no value, or be eliminated entirely. Globalstar's suspension of principal, interest and dividend payments, its continued operating losses, and its difficulty in securing additional financing raise substantial doubt about its ability to achieve financial viability as the company is currently structured. These factors, in turn, raise doubt regarding Globalstar Capital's ability to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Globalstar has incurred cumulative ordinary partnership losses of $4.9 billion from inception through September 30, 2001, which have been funded primarily through the issuance of partnership interests and debt by Globalstar. 35 3. RESTRUCTURING During 2001, Globalstar reviewed its operating costs and implemented cost saving measures. In the first nine months of 2001, Globalstar incurred a restructuring charge of approximately $9.8 million, of which $8.7 million has been paid out as of September 30, 2001. The charge consisted of the following: employee separation costs of $4.7 million related to a reduction in workforce of 292 employees from March to November, 2001, fees paid to Globalstar's restructuring specialists including financial advisors, legal counsel, and other advisors of $3.8 million, and fees paid to the bondholders' legal counsel and financial advisors of $1.3 million. Globalstar's headcount on September 30, 2001 was approximately 180 employees. Globalstar provided a paid 60 day notice of termination to 52 of the 180 employees on September 19, 2001 and released them from active employment on or around that date. The effective date of termination is November 16, 2001. Expenses related to these terminations were recorded in the quarter ended September 30, 2001. 4. COMMITMENTS AND CONTINGENCIES On February 20, 2001, a purported class action lawsuit was filed against Globalstar and Globalstar Capital Corporation on behalf of the owners of the 10 3/4% bonds, due November 2004 (the "Bonds") in Superior Court, New Castle County, Delaware. Globalstar Capital Corporation and Globalstar, L.P. issued the Bonds as joint obligors. The complaint alleges that the defendants repudiated the Bonds' registration statement, prospectus and indenture, without consent of the bondholders, when Globalstar announced that it was suspending its future interest payments on the Bonds. On April 23, 2001, the defendants moved to dismiss the complaint for failure to state a cause of action. A second similar class action was filed in Delaware on June 5, 2001. The defendants have also moved to dismiss this complaint. Plaintiffs subsequently amended the complaint and defendants again moved to dismiss the amended complaint for failure to state a cause of action. The motions were heard in September and the parties are awaiting a ruling from the Court. On August 7, 2001, Globalstar received a petition filed on July 13, 2001 in Texas state court by L.E. Creel III, a holder of an 11 3/8% note seeking principal payment of the note plus interest. Globalstar has filed an answer contesting the petition and believes that the petition lacks merit. On June 30, 2000, Globalstar's $250 million credit facility with The Chase Manhattan Bank, which was fully drawn, matured and was thereupon repaid in full by its guarantors, including Lockheed Martin Corporation. Pursuant to the relevant agreements entered into in 1996, Globalstar issued to all the guarantors three-year notes in proportion to the principal amount of the credit facility guaranteed. Lockheed Martin, however, has rejected the notes it received and is instead asking Globalstar to issue new securities with additional rights and enhanced value without waiving its claim that it is entitled to receive an immediate cash reimbursement by Globalstar of its $150 million payment to the bank lenders. Globalstar disputes Lockheed Martin's interpretation of the relevant agreements. If the dispute is not resolved, we cannot be sure that if the matter were litigated, a court would agree with Globalstar's interpretation of the agreements. Moreover, if, as a result of this dispute, a holder of Globalstar's public bonds claimed a cross default under the applicable indenture, and a court ruled against Globalstar, the maturity date of the bonds would be accelerated. Management believes, however, that a court would agree with Globalstar's interpretation of the relevant agreements. 36 EX-99.2 5 y54672ex99-2.txt FINANCIAL STATEMENTS EXHIBIT 99.2 LORAL/QUALCOMM SATELLITE SERVICES, L.P. (A GENERAL PARTNER OF GLOBALSTAR, L.P.) BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) (NOTE) ASSETS: Investment in Globalstar, L.P............................... $ -- $ -- ========== ========== Total assets................................................ $ -- $ -- ========== ========== LIABILITIES AND PARTNERS' CAPITAL: Current liabilities: Equity losses in excess of partnership interests in Globalstar............................................. $ 512,897 $ 461,227 ========== ========== Partners' capital: Partnership interests (18,000 interests outstanding)...... $ -- $ -- Accumulated deficit....................................... (512,897) (461,227) Total partners' capital..................................... (512,897) (461,227) ---------- ---------- Total liabilities and partners' capital..................... $ -- $ -- ========== ==========
- --------------- Note: The December 31, 2000 balance sheet has been derived from audited consolidated financial statements at that date. See notes to balance sheets. 37 LORAL/QUALCOMM SATELLITE SERVICES, L.P. (A GENERAL PARTNER OF GLOBALSTAR, L.P.) NOTES TO BALANCE SHEETS 1. ORGANIZATION AND BUSINESS Loral/QUALCOMM Satellite Services, L.P. ("LQSS"), was formed in November 1993 as a Delaware limited partnership with a December 31 fiscal year end. The general partner of LQSS is Loral/QUALCOMM Partnership, L.P. ("LQP"), a limited partnership whose general partner is Loral General Partner, Inc. ("LGP"), a subsidiary of Loral Space & Communications Ltd., a Bermuda company ("Loral") and whose limited partners include a subsidiary of QUALCOMM Incorporated ("QUALCOMM"). LQSS's only activity is acting as the managing general partner of Globalstar. In the first quarter of 2000, Globalstar commenced commercial operations and began the transition from a development stage entity to an operating entity. Prior to the first quarter of 2000, Globalstar devoted substantially all of its efforts to the design, development and construction of the Globalstar System and preparation for commercial operations. In 2000, Globalstar focused on operating the Globalstar System and providing global wireless telecommunications services. At September 30, 2001, LQSS held a 27.6% interest in Globalstar's outstanding ordinary partnership interests. As LQSS's investment in Globalstar is LQSS's only asset, LQSS is dependent upon Globalstar's success and achievement of profitable operations for the recovery of its investment. Globalstar operates in one industry segment, satellite telecommunications, providing global mobile and fixed wireless voice and data services. 2. BASIS OF PRESENTATION LQSS is a holding company that acts as a general partner of Globalstar and has no other business or investments. LQSS's sole asset is its investment in Globalstar and LQSS's results of operations reflect its share of the results of operations of Globalstar on an equity accounting basis. Accordingly, LQSS's results of operations only reflect its share of Globalstar's results of operations, as presented on Globalstar's financial statements, and the appropriate amortization and interest associated with this investment. On January 16, 2001, Globalstar suspended indefinitely principal and interest payments on its funded debt and dividend payments on its 8% and 9% convertible redeemable preferred partnership interests ("RPPIs") in order to conserve cash for operations. Non-payment of interest on Globalstar's debt instruments, credit facility and vendor financing agreements when they become due, and continuance of non-payment for the applicable grace period, are "events of default" under the terms of each of the debt instruments. An event of default has occurred in connection with Globalstar's $500 million credit facility, its vendor financing facility with QUALCOMM, its 11 3/8% senior notes due February 15, 2004, its 11 1/4% senior notes due June 15, 2004, its 10 3/4% senior notes due November 1, 2004, and its 11 1/2% senior notes due June 1, 2005. Accordingly, for reporting and accounting purposes, Globalstar classified the $500 million credit facility, the QUALCOMM vendor financing and the senior notes as current obligations. Globalstar has retained The Blackstone Group as its financial adviser to assist in evaluating its business plan and developing initiatives, including restructuring its debt, identifying funding opportunities and pursuing other strategic alternatives. At Globalstar's expense, its bondholders have retained legal counsel and financial advisers. Globalstar has developed a new business plan for the purpose of restructuring the company's finances. The business plan assumes the conversion of all outstanding Globalstar debt obligations into equity in a new Globalstar company ("Newco") and the consolidation of certain Globalstar service provider operations into Newco. The service provider consolidation is intended to bring additional efficiencies to the operation of the Globalstar network and allow for increased coordination in the Globalstar service offerings and pricing. Globalstar believes that these steps are required to achieve and maintain financial viability. In addition to the service provider operations to be consolidated into Newco, Globalstar intends to continue to offer its services through existing independent gateway operators in other regions. 38 Globalstar has been discussing its new business plan with its principal creditors, with the objective of achieving an agreement in principle with respect to the terms of a financial restructuring plan. Assuming these discussions are successfully concluded, as to which there can be no assurance, Globalstar and certain of its affiliates will commence voluntary Chapter 11 cases and seek to confirm a Chapter 11 plan which both implements the terms agreed with its creditors and binds all Globalstar's creditors. Globalstar will likely seek protection under the federal bankruptcy laws even without a prenegotiated settlement with its principal creditors. Moreover, its creditors may, at anytime, initiate involuntary bankruptcy proceedings against Globalstar. In any financial restructuring, LQSS's equity interest, along with the interests of Globalstar's other partners, will likely be severely diluted, in which event it will have little or no value, or be eliminated entirely. Globalstar's suspension of principal, interest and dividend payments, its continued operating losses, and its difficulty in securing additional financing raise substantial doubt about its ability to achieve financial viability as the company is currently structured. These factors, in turn, raise doubt regarding LQSS's ability to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Investment in Globalstar, L.P. LQSS accounts for its investment in Globalstar's ordinary partnership interests on an equity basis, recognizing its allocated share of net loss for each period since its initial investment in March 1994. During 1995, LQSS's investment in Globalstar was reduced to zero. Accordingly, LQSS has discontinued providing for its allocated share of Globalstar's net losses and recognized the remaining unallocated losses as a result of its general partner status in Globalstar in proportion to its interests in the general partner interests outstanding. LQSS, as general partner of Globalstar, is jointly and severally liable with the other general partner for the recourse obligations of Globalstar, which LQSS estimates to be approximately $1.4 billion as of September 30, 2001. As a result of its general partner status, LQSS recorded a liability of $512.9 million. Future funding or other assets, if any, of GTL may be utilized to fund this general partner liability. 4. RESTRUCTURING During 2001, Globalstar reviewed its operating costs and implemented cost saving measures. In the first nine months of 2001, Globalstar incurred a restructuring charge of approximately $9.8 million, of which $8.7 million has been paid out as of September 30, 2001. The charge consisted of the following: employee separation costs of $4.7 million related to a reduction in workforce of 292 employees from March to November, 2001, fees paid to Globalstar's restructuring specialists including financial advisors, legal counsel, and other advisors of $3.8 million, and fees paid to the bondholders' legal counsel and financial advisors of $1.3 million. Globalstar's headcount on September 30, 2001 was approximately 180 employees. Globalstar provided a paid 60 day notice of termination to 52 of the 180 employees on September 19, 2001 and released them from active employment on or around that date. The effective date of termination is November 16, 2001. Expenses related to these terminations were recorded in the quarter ended September 30, 2001. 39 -----END PRIVACY-ENHANCED MESSAGE-----