GLOBALSTAR
ANNUAL REPORT
2013
Dear Fellow Stockholders,
2013 represented an extraordinary year for Globalstar as the Company emerged with a completed second-
generation constellation, an improved balance sheet and a re-established core MSS operating business. In
August, we were able to complete both the balance sheet restructuring efforts and place the final second-
generation satellite into service. These milestones form the platform and provide the runway for our resurgent
areas of focus as we re-establish our Duplex business, continue to develop and introduce innovative MSS
products, expand our international operations and restore our core markets. Put simply, our new network
provides the lowest cost, highest quality service offering in MSS and we look forward to regaining market
share with a resolute focus on reducing equipment costs, enhancing functionality and growing our addressable
market.
Throughout 2013, the Company made significant progress on the FCC spectrum proceeding culminating in the
release of the Notice of Proposed Rulemaking (NPRM) in November. The result of this rulemaking will be to
provide the nation with an incremental 22 MHz of spectrum for innovative broadband services utilizing
terrestrial low power service (TLPS). We have continued real-world testing which has confirmed the technical
capabilities of this service and we look forward to the successful conclusion of this process during 2014.
FINANCIAL AND OPERATIONAL ACCOMPLISHMENTS
2013 Financial Performance
Our financial performance in 2013 was marked by significant improvements throughout our core business
lines. We successfully restructured certain debt instruments, including the amendment of the COFACE Facility
Agreement and the exchange of our 5.75% Notes. We also experienced significant improvements in the
principal metrics of our Duplex business including gross additions, service revenue, equipment revenue and
ARPU. When comparing the performance of our Duplex business to 2012, gross subscriber additions more
than doubled, service revenue increased 24%, equipment revenue grew 90%, and ARPU increased 29%. These
metrics serve as leading indicators for the future of Duplex operations and are indicative of the Company’s
ability to both compete for new MSS market subscribers and drive usage and higher value plans from our
current subscribers.
During 2013, we reported Adjusted EBITDA of $11.9 million, an improvement of $2.1 million, or 21% from
2012. Total revenue for the year increased to $82.7 million from $76.3 million, representing an increase of
8.4%. Going forward, we expect growth to be driven by a combination of international expansion, increasing
market share in existing markets, expansion of the distribution network and continued focus on the
introduction of new products and services.
Re-established MSS Operations
After a difficult multi-year period, on February 6, 2013 we successfully completed our fourth launch campaign
from the Cosmodrome in Baikonur, Kazakhstan. All second-generation satellites are in commercial service,
which is years ahead of our closest competitor. We believe this will give us a crucial competitive advantage as
we compete and work to re-build our historical MSS distribution system of resellers and dealers. Voice and
data minutes on our system have increased materially and we expect both total volume and subscriber usage to
increase and drive revenue over the coming quarters and years.
During 2013, the Company continued its innovation initiatives with the introduction of the SPOT Global
Phone, SPOT Gen 3™ and SPOT Trace™. The SPOT Global Phone leverages our existing SPOT brand and
distribution network and expands the addressable market incrementally beyond our traditional channels. SPOT
Gen 3™ provides enhanced functionality and a smaller form factor while engineering enhancements have
simplified the unit’s electronics which will expand SPOT equipment margins. SPOT Trace™ enhances our
product suite to be able to penetrate the personal asset market. We will be able to leverage our robust Simplex
commercial asset tracking business as we build this new product line.
FCC Spectrum Proceeding
Following the FCC’s release of the NPRM in November, we are pleased to have a discrete comment period
timeline which will run through June 4, 2014. We believe the FCC can reach a final decision adopting its
proposed rules this year. TLPS not only offers vastly superior range and throughput capabilities vs. traditional
Wi-Fi, but is capable of immediate deployment with attractive build-out economics. TLPS provides for low
cost coverage given the network topology and we look forward to the deployment of a service that will
immediately free up 22 MHz of nationwide spectrum. We already offer the highest quality mobile satellite
services in the industry. With the addition of TLPS to our product and service portfolio, we will offer an
unparalleled terrestrial mobile broadband experience to students, teachers, medical personnel, and all others
who are currently suffering degrading service quality over the saturated legacy spectrum bands.
While 2013 was very much an inflection point for the Company where we were able to make significant
progress across multiple fronts, we look forward to 2014 with great enthusiasm. We believe we are well
positioned to capitalize on the opportunities that are now available as a result of our recent work and thank all
of our investors for their patience and commitment to our vision and the opportunities within Globalstar.
Sincerely,
James Monroe III
Chairman and Chief Executive Officer
GLOBALSTAR, INC.
RECONCILIATION OF GAAP NET LOSS TO ADJUSTED EBITDA
(Dollars in thousands)
(unaudited)
Tw elve Months Ended Decem ber 31,
2013
2012
Net loss
$
(591,116)
$
(112,198)
Interest income and expense, net
Derivative (gain) loss
Income tax expense
Depreciation, amortization, and accretion
EBITDA
Reduction in the value of long-lived assets and inventory
Non-cash compensation
Research and development
Severance
Foreign exchange and other
Thales arbitration expenses
Contract termination charge
Gain (loss) on extinguishment of debt
Loss on equity issuance
Write off of deferred financing costs
Adjusted EBITDA (1)
67,828
305,999
1,138
90,592
(125,559)
5,794
2,282
572
5
2,962
-
-
109,092
16,702
-
11,850
$
21,486
(6,974)
413
69,801
(27,472)
8,615
1,322
336
51
2,280
1,803
22,048
-
-
833
9,816
$
(1) EBITDA represents earnings before interest, income taxes, depreciation, amortization, accretion and derivative
(gains)/losses. Adjusted EBITDA excludes non-cash compensation expense, reduction in the value of assets,
foreign exchange (gains)/losses, R&D costs associated with the development of new products, and certain other
significant charges. Management uses Adjusted EBITDA in order to manage the Company’s business and to
compare its results more closely to the results of its peers. EBITDA and Adjusted EBITDA do not represent and
should not be considered as alternatives to GAAP measurements, such as net income/(loss). These terms, as
defined by us, may not be comparable to a similarly titled measures used by other companies.
The Company uses Adjusted EBITDA as a supplemental measurement of its operating performance. The
Company believes it best reflects changes across time in the Company’s performance, including the effects of
pricing, cost control and other operational decisions. The Company’s management uses Adjusted EBITDA for
planning purposes, including the preparation of its annual operating budget. The Company believes that
Adjusted EBITDA also is useful to investors because it is frequently used by securities analysts, investors and
other interested parties in their evaluation of companies in similar industries. As indicated, Adjusted EBITDA
does not include interest expense on borrowed money or depreciation expense on our capital assets or the
payment of income taxes, which are necessary elements of the Company’s operations. Because Adjusted
EBITDA does not account for these expenses, its utility as a measure of the Company’s operating performance
has material limitations. Because of these limitations, the Company’s management does not view Adjusted
EBITDA in isolation and also uses other measurements, such as revenues and operating profit, to measure
operating performance.
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
For the Fiscal Year Ended December 31, 2013
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 001-33117
GLOBALSTAR, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
41-2116508
(I.R.S. Employer
Identification No.)
300 Holiday Square Blvd.
Covington, Louisiana 70433
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (985) 335-1500
Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, $.0001 par value
5.75% Convertible Senior Notes due 2028
Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller
reporting company)
Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes No
The aggregate market value of the Registrant's common stock held by non-affiliates at June 30, 2013, the last business day of the
Registrant's most recently completed second fiscal quarter, was approximately $99.9 million.
As of February 28, 2014, 643,718,177 shares of voting common stock and 209,008,656 shares of nonvoting common stock were
outstanding. Unless the context otherwise requires, references to common stock in this Report mean Registrant's voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2014 Annual Meeting of Stockholders are incorporated by reference in Part III of
this Report.
FORM 10-K
For the Fiscal Year Ended December 31, 2013
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Signatures
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant's Common Equity and Related Stockholder Matters
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
PART III
Exhibits, Financial Statements Schedules
PART IV
2
Page
3
14
25
25
26
26
27
27
27
47
48
106
106
107
107
107
107
107
107
108
109
PART I
Forward-Looking Statements
Certain statements contained in or incorporated by reference into this Report, other than purely historical information, including, but not
limited to, estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon
which those statements are based, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend,"
"strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions, although not all
forward-looking statements contain these identifying words. These forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.
Forward-looking statements, such as the statements regarding our ability to develop and expand our business, our anticipated capital spending,
our ability to manage costs, our ability to exploit and respond to technological innovation, the effects of laws and regulations (including tax
laws and regulations) and legal and regulatory changes, the opportunities for strategic business combinations and the effects of consolidation in
our industry on us and our competitors, our anticipated future revenues, our anticipated financial resources, our expectations about the future
operational performance of our satellites (including their projected operational lives), the expected strength of and growth prospects for our
existing customers and the markets that we serve, commercial acceptance of new products, problems relating to the ground-based facilities
operated by us or by independent gateway operators, worldwide economic, geopolitical and business conditions and risks associated with doing
business on a global basis and other statements contained in this Report regarding matters that are not historical facts, involve predictions.
Risks and uncertainties that could cause or contribute to such differences include, without limitation, those in "Item 1A. Risk Factors" of this
Report. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Report to reflect
actual results or future events or circumstances.
Item 1. Business
Overview
Globalstar, Inc. (“we,” “us” or “the Company”) provides Mobile Satellite Services (“MSS”) including voice and data communications
services globally via satellite. By providing wireless communications services in areas not served or underserved by terrestrial wireless and
wireline networks and in circumstances where terrestrial networks are not operational due to natural or man-made disasters, we seek to meet
our customers' increasing desire for connectivity. We offer voice and data communication services over our network of in-orbit satellites and
our active ground stations (or “gateways”), which we refer to collectively as the Globalstar System.
In 2006 we began a process of designing, manufacturing and deploying a second-generation constellation of Low Earth Orbit (“LEO”)
satellites to replace our first-generation constellation. Our second-generation satellites are designed to last twice as long in space, have 40%
greater capacity and be built at a significantly lower cost compared to our first-generation satellites. This effort has culminated in the successful
launch of our second-generation satellites, with the fourth launch occurring on February 6, 2013. Three prior launches of second-generation
satellites were successfully completed in October 2010, July 2011 and December 2011.We have integrated all of the new second-generation
satellites with certain of our first-generation satellites to form our second-generation constellation. The restoration of our constellation’s Duplex
capabilities was complete after the final satellite from our February 2013 launch was placed into service in August 2013. The restoration of
Duplex capabilities has resulted in a substantial increase in service levels, making our products and services more desirable to existing and
potential customers. Existing subscribers have started to utilize our services more, measured by minutes of use on the Globalstar System year
over year, a trend that we expect to continue. We are gaining new customers and winning back former customers, which continues to contribute
to increases in Duplex revenue. We offer a range of price-competitive products to the industrial, governmental and consumer markets. Due to
the unique design of the Globalstar System (and based on customer input), we believe that we offer the best voice quality among our peer
group.
We define a successful level of service for our customers as measured by their ability to make uninterrupted calls of average duration for a
system-wide average number of minutes per month. Our goal is to provide service levels and call success rates equal to or better than our MSS
competitors so our products and services are attractive to potential customers. We define voice quality as the ability to easily hear, recognize
and understand callers with imperceptible delay in the transmission. Due to the unique design of the Globalstar System, by this measure our
system outperforms geostationary (“GEO”) satellites used by some of our competitors. Due to the difference in signal travel distance, GEO
satellite signals must travel approximately 42,000 additional nautical miles, which introduces considerable delay and signal degradation to
GEO calls. For our competitors using cross-linked satellite architectures, which require multiple inter-satellite connections to complete a call,
signal degradation and delay can result in compromised call quality as compared to that experienced over the Globalstar System.
3
We also compete aggressively on price. In 2004 we were the first MSS company to offer bundled pricing plans that we adapted from the
terrestrial wireless industry. We expect to continue to innovate and retain our position as the low cost, high quality leader in the MSS industry.
Our satellite communications business, by providing critical mobile communications to our subscribers, serves principally the following
markets: recreation and personal; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources, mining and
forestry; construction; utilities; and transportation.
At December 31, 2013, we served approximately 583,000 subscribers. We increased our net subscribers by 4% from December 31, 2012 to
December 31, 2013. Beginning in 2013, we initiated a process to deactivate certain suspended subscribers in our SPOT subscriber base. We
deactivated approximately 36,000 subscribers during the first quarter of 2013. Excluding these deactivated subscribers from our December 31,
2012 subscriber count, total subscribers increased 11% from December 31, 2012 to December 31, 2013. We count "subscribers" based on the
number of devices that are subject to agreements which entitle them to use our voice or data communications services rather than the number of
persons or entities who own or lease those devices.
We currently provide the following communications services via satellite which are available only with equipment designed to work on our
network:
•
•
two-way voice communication and data transmissions, which we call “Duplex,” using mobile or fixed devices; and
one-way data transmissions using a mobile or fixed device that transmits its location and other information to a central monitoring
station, which includes certain SPOT and Simplex products.
We designed our second-generation constellation to support our current lineup of Duplex, SPOT and Simplex products. With the
improvement in both coverage and service quality for our Duplex product offerings resulting from the deployment of our second-generation
constellation, we anticipate further expansion of our subscriber base and increases in our average revenue per user, or “ARPU.”
Our products and services are sold through a variety of independent agents, dealers and resellers, and independent gateway operators
(“IGOs”). Our success in marketing these products and services is enhanced through diversification of our distribution channels, consumer and
commercial markets, and product offerings.
Duplex Two-Way Voice and Data Products
Mobile Voice and Data Satellite Communications Services and Equipment
We provide mobile voice and data services to a wide variety of commercial, government and recreational customers for remote business
continuity, recreational, emergency response and other applications. Subscribers under these plans typically pay an initial activation fee to an
agent or dealer or to us, a monthly usage fee to us that entitles the customer to a fixed or unlimited number of minutes, and fees for additional
services such as voicemail, call forwarding, short messaging, email, data compression and internet access. Extra fees may also apply for non-
voice services, roaming and long-distance. We regularly monitor our service offerings in accordance with customer demands and market
changes and offer pricing plans such as bundled minutes, annual plans and unlimited plans.
We offer our services for use only with equipment designed to work on our network, which users generally purchase in conjunction with an
initial service plan. We offer the GSP-1700 phone, which includes a user-friendly color LCD screen and a variety of accessories. The phone
design represents a significant improvement over earlier-generation equipment that we believe will facilitate increased adoption from
prospective users. We also believe that the GSP-1700 is among the smallest, lightest and least-expensive satellite phones available. We are the
only MSS provider using the patented Qualcomm CDMA technology that we believe provides superior voice quality when compared to
competitive handsets.
Fixed Voice and Data Satellite Communications Services and Equipment
We provide fixed voice and data services in rural villages, at remote industrial, commercial and residential sites and on ships at sea, among
other places, primarily with our GSP-2900 fixed phone. Fixed voice and data satellite communications services are in many cases an attractive
alternative to mobile satellite communications services in environments where multiple users will access the service within a defined
geographic area and cellular or ground phone service is not available. Our fixed units also may be mounted on vehicles, barges and
construction equipment and benefit from the ability to have higher gain antennas. Our fixed voice and data service plans are similar to our
mobile voice and data plans and offer similar flexibility. In addition to offering monthly service plans, our fixed phones can be configured as
pay phones installed at a central location, for example, in a rural village.
4
Satellite Data Modem Services
In addition to data utilization through fixed and mobile services described above, we offer data-only services. Duplex devices have two-way
transmission capabilities. Asset-tracking applications enable customers to control directly their remote assets and perform complex monitoring
activities. We offer asynchronous and packet data service in all of our Duplex territories. Customers can use our products to access the internet,
corporate virtual private networks and other customer specific data centers. Our satellite data modems can be activated under any of our current
pricing plans. Customers can access satellite data modems in every Duplex region we serve. We provide store-and-forward capabilities to
customers who do not require real-time transmission and reception of data. Additionally, we offer a data acceleration and compression service
to the satellite data modem market. This service increases web-browsing, email and other data transmission speeds without any special
equipment or hardware.
Qualcomm GSP-1720 Satellite Voice and Data Modem
The GSP-1720 is a satellite voice and data modem board with multiple antenna configurations and an enlarged set of commands for modem
control. This board is attractive to integrators because it has more user interfaces that are easily programmable. This makes it easier for value
added resellers to integrate the satellite modem processing with the specific application, such as monitoring and controlling oil and gas pumps,
electric power plants and other remote facilities.
Sat-Fi
In January 2014, we announced Sat-Fi, a revolutionary new Duplex technology that we expect to bring to market during the second quarter
of 2014. Sat-Fi will permit customers to use their existing smartphones and other Wi-Fi enabled devices to communicate over our satellite
system. We believe Sat-Fi represents a major step forward in our desire to integrate seamlessly our mobile satellite capabilities into the
communications services that people use on a daily basis. With Sat-Fi, our subscribers can initiate and receive voice calls using their existing
mobile telephone numbers and existing smartphones any time they are in range of a Sat-Fi device. With future enhancements, customers will
not necessarily know, nor will they care, when they are communicating via the Globalstar System, given our superior voice quality and low-
priced service plans.
New Products, Services and the Next-Generation IMS Ground Network
We have a contract with Hughes Network Systems, LLC (“Hughes”) under which Hughes will design, supply and implement (a) the Radio
Access Network ("RAN") ground network equipment and software upgrades for installation at a number of our satellite gateway ground
stations and (b) satellite interface chips to be used in our various next-generation Globalstar devices. These upgrades will be part of our next-
generation ground network.
We also have a contract with Ericsson, Inc. (“Ericsson”) to work with us to develop, implement and maintain a ground interface, or core
network, system that will be installed at our satellite gateway ground stations. The core network system is wireless 3G/4G compatible and will
link our radio access network to the public-switched telephone network (“PSTN”) and/or Internet. This new core network system will be part
of our next-generation ground network.
Our second-generation constellation, when combined with our next-generation ground network, is designed to provide our customers with
enhanced future services featuring increased data speeds of up to 256 kbps in a flexible Internet protocol multimedia subsystem (“IMS”)
configuration. We will be able to support multiple products and services, including multicasting; advanced messaging capabilities such as
Multimedia Messaging Service (“MMS”); geo-location services; multi-band and multi-mode handsets; and data devices with GPS integration.
Direct Sales, Dealers and Resellers
Our sales group is responsible for conducting direct sales with key accounts and for managing indirect agent, dealer and reseller
relationships in assigned territories in the countries in which we operate.
The reseller channel for Duplex equipment and service is comprised primarily of communications equipment, retailer companies, and
commercial communications equipment rental companies that retain and bill clients directly, outside of our billing system. Many of our
resellers specialize in niche vertical markets where high-use customers are concentrated. We have sales arrangements with major resellers to
market our services, including some value added resellers that integrate our products into their proprietary end products or applications.
Our typical dealer is a communications services business-to-business equipment retailer. We offer competitive service and equipment
commissions to our network of dealers to encourage sales.
In addition to sales through our distribution managers, agents, dealers and resellers, customers can place orders through our existing sales
force and through our direct e-commerce website.
5
SPOT Consumer Retail Products
We have differentiated ourselves from other MSS providers by offering affordable, high utility mobile satellite products that appeal to the
mainstream consumer market. With the 2009 acquisition of satellite asset tracking and consumer messaging products manufacturer Axonn LLC
(“Axonn”), we believe we are the only vertically integrated mobile satellite company, which results in decreased pre-production costs and
shorter time to market for our retail consumer products. Since their introduction, our SPOT products have been responsible for initiating over
2,900 rescues in over 70 countries and at sea. We are not aware of any other competitive offering that can match the life-saving record of our
SPOT line of products.
SPOT Satellite GPS Messenger
We began commercial sales of the first SPOT products and services when we introduced the SPOT Personal Tracker in 2007. In 2009, we
introduced an updated version of this product, the SPOT Satellite GPS Messenger (“SPOT 2”). In September 2013, we introduced SPOT Gen3,
the next generation of the SPOT Satellite GPS Messenger. SPOT Gen3 offers enhanced functionality with more tracking features, improved
battery performance and more power options, including rechargeable and USB direct line power. We believe the sales volumes of SPOT
products and services to date show a viable market for affordable emergency and tracking functionality worldwide.
We have targeted our SPOT Satellite GPS Messenger to recreational and commercial markets that require personal tracking, emergency
location and messaging solutions that operate beyond the reach of terrestrial, wireless and wireline coverage. Using our network and web-based
mapping software, this device provides consumers with the ability to trace geographically or map the location of individuals or equipment. The
product also enables users to transmit messages to a specific preprogrammed email address, phone or data device, including a request for
assistance and an “SOS” message in the event of an emergency.
SPOT Satellite GPS Messenger products and services are available in the U.S. and Canada, as well as in our overseas markets, including
South and Central America, Western Europe, and through independent gateway operators in their respective territories.
SPOT Global Phone
In May 2013, we introduced SPOT Global Phone to the consumer mass market. This product leverages our retailer distribution channels and
SPOT brand name. The related service and subscriber equipment revenue generated from this product is included in our Duplex business.
SPOT Trace
In November 2013, we introduced SPOT Trace, an anti-theft asset tracking device. SPOT Trace helps ensure that cars, motorcycles, boats,
ATVs, snowmobiles and other valuable assets are where they should be by notifying owners via email or text messages when movement is
detected.
Product Distribution
We distribute and sell our SPOT products through a variety of distribution channels. We have also expanded our distribution channels
through product alliances. We have distribution relationships with a number of "Big Box" retailers and other similar distribution channels
including Amazon.com, Bass Pro Shops, Best Buy, Big 5 Sporting Goods, Big Rock Sports, Cabela's, Wholesale Sports, London Drugs,
Outdoor and More, Gander Mountain, REI, Sportsman's Warehouse, West Marine, and CWR Electronics. We also sell SPOT products and
services directly using our existing sales force and through our direct e-commerce website, www.findmespot.com.
Commercial Simplex One-Way Transmission Products
Simplex service is a one-way burst data transmission from a commercial Simplex device over the Globalstar System that can be used to
track and monitor assets. Our subscribers presently use our Simplex devices to track cargo containers and rail cars; to monitor utility meters; as
well as a host of other applications. At the heart of the Simplex service is a demodulator and RF interface, called an appliqué, which is located
at a gateway and an application server located in our facilities. The appliqué-equipped gateways provide coverage over vast areas of the globe.
The server receives and collates messages from all Simplex telemetry devices transmitting over our satellite network. Simplex devices consist
of a telemetry unit, an application specific sensor, a battery and optional global positioning functionality. The small size of the devices makes
them attractive for use in tracking asset shipments, monitoring unattended remote assets, trailer tracking and mobile security. Current users
include various governmental agencies, including the Federal Emergency Management Agency (“FEMA”), the U.S. Army, the U.S. Air Force,
the National Oceanic and Atmospheric Administration (“NOAA”), the U.S. Forest Service and British Ministry of Defense, as well as other
organizations, including BP, Shell and The Salvation Army.
We designed our Simplex service to address the market for a small and cost-effective solution for sending data, such as geographic
coordinates, from assets or individuals in remote locations to a central monitoring station. Customers are able to realize an efficiency advantage
from tracking assets on a single global system as compared to several regional systems.
6
We offer a small Satellite Transmitter, such as the STX-2 and STX-3, which enables an integrator’s product designs to access our Simplex
network. We also offer complete products that utilize these transmitters. Our Simplex units, including the enterprise products MMT and
SMARTONE, are used worldwide by industrial, commercial and government customers. These products provide cost-effective, low power,
ultra-reliable, secure monitoring that help solve a variety of security applications and asset tracking challenges.
The reseller channel for Simplex equipment and service is comprised primarily of communications equipment retailer companies and
commercial communications equipment rental companies that retain and bill clients directly, outside of our billing system. Many of our
resellers specialize in niche vertical markets where high-use customers are concentrated. We have sales arrangements with major resellers to
market our services, including some value added resellers that integrate our STX-2, or our products based on it, into their proprietary solutions
designed to meet certain specialized niche market applications.
Independent Gateway Operators
Our wholesale operations encompass primarily bulk sales of wholesale minutes to IGOs around the globe. IGOs maintain their own
subscriber bases that are mostly exclusive to us and promote their own service plans. The IGO system allows us to expand in regions that hold
significant growth potential but are harder to serve without sufficient operational scale or where local regulatory requirements do not permit us
to operate directly.
Currently, 12 of the 24 active gateways in our network are owned and operated by unaffiliated companies, some of whom operate more than
one gateway. Except for the gateway in Nigeria, in which we hold a 30% equity interest, and Globalstar Asia Pacific, our joint venture in South
Korea in which we hold a 49% equity interest, we have no financial interest in these IGOs and conduct business with them through arms’
length contracts for wholesale minutes of service. Some of these IGOs have been unable to grow their businesses adequately due in part to
limited resources and the prior inability of our constellation to provide reliable Duplex service. With the completion of our second-generation
constellation, we expect the IGOs to grow their businesses significantly in the future.
Set forth below is a list of IGOs as of December 31, 2013:
Location
Argentina
Australia
Australia
Australia
South Korea
Mexico
Nigeria
Peru
Russia
Russia
Russia
Turkey
Gateway
Bosque Alegre
Dubbo
Mount Isa
Meekatharra
Yeo Ju
San Martin
Kaduna
Lurin
Khabarovsk
Moscow
Novosibirsk
Ogulbey
Independent Gateway Operators
TE.SA.M Argentina
Pivotel Group PTY Limited
Pivotel Group PTY Limited
Pivotel Group PTY Limited
Globalstar Asia Pacific
Globalstar de Mexico
Globaltouch (West Africa) Limited
TE.SA.M Peru
GlobalTel
GlobalTel
GlobalTel
Globalstar Avrasya
We currently hold two gateways in storage that we are actively marketing for future deployment in new territories.
Other Services
We also provide certain engineering services to assist customers in developing new applications related to our system. These services
include hardware and software designs to develop specific applications operating over our network, as well as, the installation of gateways and
antennas.
Our Spectrum and Regulatory Structure
Globalstar has access to a world-wide allocation of radio frequency spectrum through the international radio frequency tables administered
by the International Telecommunications Union (“ITU”). We believe access to this global spectrum enables us to design satellites, networks
and terrestrial infrastructure enhancements more cost effectively because the products and services can be deployed and sold worldwide. In
addition, this broad spectrum assignment enhances our ability to capitalize on existing and emerging wireless and broadband applications.
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First Generation Constellation
In the United States, the U.S. Federal Communications Commission (“FCC”) has authorized us to operate our first-generation satellites in
25.225 MHz of radio spectrum comprising two blocks of non-contiguous radio frequencies in the 1.6/2.4 GHz band commonly referred to as
the Big LEO Spectrum Band. Specifically, the FCC has authorized us to operate between 1610-1618.725 MHz for “Uplink” communications
from mobile earth terminals to our satellites and between 2483.5-2500 MHz for “Downlink” communications from our satellites to our mobile
earth terminals. The FCC has also authorized us to operate our four domestic gateways with our first-generation satellites in the 5091-5250 and
6875-7055 MHz bands.
Three of our subsidiaries hold our FCC licenses. Globalstar Licensee LLC holds our mobile satellite services license. GUSA Licensee LLC
(“GUSA”) is authorized by the FCC to distribute mobile and fixed subscriber terminals and to operate gateways in the United States. GUSA
holds the licenses for our gateways in Texas, Florida and Alaska. Another subsidiary, GCL Licensee LLC (“GCL”), holds an FCC license to
operate a gateway in Puerto Rico. GCL is also subject to regulation by the Puerto Rican regulatory agency.
Second-Generation Constellation
We licensed and registered our second-generation satellites in France. In October 2010, the French Ministry for the Economy, Industry and
Employment authorized Globalstar Europe SARL, now Globalstar Europe SAS (“Globalstar Europe”), our wholly owned subsidiary, to operate
our second-generation satellites. In November 2010, ARCEP, the French independent administrative authority of post and electronic
communications regulations, granted a license to Globalstar Europe to provide mobile satellite service. In August 2011, the French Ministry in
charge of space operations issued us final authorization and has undertaken the registration of our second-generation satellites with the United
Nations as provided under the Convention on Registration of Objects Launched into Outer Space. In accordance with this authorization to
operate the second-generation satellites, in early 2014, we completed the enhancements to the existing gateway operations in Aussaguel, France
to include satellite operations and control functions. We now have redundant satellite operation control facilities in Milpitas, California and
Aussaguel, France.
The French National Frequencies Agency (“ANFR”) is representing us before the ITU for purposes of receiving assignments of orbital
positions and conducting international coordination efforts to address any interference concerns. ANFR submitted the technical papers to the
ITU on our behalf in July 2009. As with the first-generation constellation, the ITU will require us to coordinate our spectrum assignments with
other companies that use any portion of our spectrum bands. We cannot predict how long the coordination process will take; however, we are
able to use the frequencies during the coordination process in accordance with our national licenses.
In addition to having completed the French licensing and registration of our second-generation satellites, in March 2011 we obtained all
authorizations necessary from the FCC to operate our domestic gateways with our second-generation satellites.
Our former Non-Geostationary Satellite Orbit (“NGSO”) satellite constellation license issued by the FCC was valid until April 2013. We
have filed an application to modify and extend this license. Under the FCC’s rules, we may continue to operate our constellation pending the
FCC’s approval of our application. This license application applies only to our continued use of our first-generation satellites.
Potential Terrestrial Use of Globalstar Spectrum
In February 2003, the FCC adopted rules that permit satellite service providers such as Globalstar to establish terrestrial networks utilizing
the ancillary terrestrial component (“ATC”) of their licensed spectrum. ATC authorization enables the integration of a satellite-based service
with terrestrial wireless services, resulting in a hybrid mobile satellite services/ATC network designed to provide advanced services and broad
coverage throughout the United States. An ATC deployment could extend our services to urban areas and inside buildings where satellite
services are currently not available, as well as to rural and remote areas that lack terrestrial wireless services.
In order to establish an ATC network, a satellite service provider must first meet certain specified requirements commonly known as the
“gating criteria.” Currently, these criteria would require us to provide continuous coverage over the United States and have an in-orbit spare
satellite. Additionally, ATC services must be complementary or ancillary to mobile satellite services in an "integrated service offering," which
can be achieved by using "dual-mode" devices capable of transmitting and receiving mobile satellite and ATC signals, or providing “other
evidence” that the satellite service provider meets the requirement. Further, user subscriptions that include ATC services must also include
mobile satellite services. Because of these requirements, the number of potential early stage competitors in providing ATC services is limited,
as only mobile satellite services operators who offer commercial satellite services can provide ATC services.
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In January 2006, the FCC granted our application to add an ATC service to our existing mobile satellite services. In April 2008, the FCC
issued a decision extending our ATC authorization from 11MHz to a total of 19.275 MHz of our spectrum. Outside the United States, other
countries are considering implementing regulations to facilitate ATC services. We expect to pursue ATC and/or terrestrial licenses in
jurisdictions such as Canada and the European Community as market conditions dictate.
In July 2010, the FCC instituted a rulemaking proceeding and notice of inquiry to consider whether certain gating criteria should be revised
or eliminated so as to permit satellite operators to exercise greater flexibility in utilizing ATC. Interested parties, including Globalstar, filed
comments in these proceedings in September 2010. In these proceedings, we have proposed the elimination of, or substantial modifications to,
the existing gating criteria.
On November 13, 2012, we filed a petition for rulemaking with the FCC, requesting the substantial revision and/or elimination of the gating
criteria for ATC services as well as regulatory flexibility to offer terrestrial wireless services, including mobile broadband services, over 19.275
MHz of our licensed Big LEO spectrum allocation. In our petition, we proposed a “near-term” plan for terrestrial relief in the 11.5 MHz of our
“downlink” spectrum at 2483.5-2495 MHz to offer innovative services such as a proposed Terrestrial Low Power Service (“TLPS”). Under this
proposal, we would utilize both our exclusively licensed 11.5 MHz of MSS spectrum at 2483.5 to 2495 MHz, as well as the contiguous 10.5
MHz of unlicensed Industrial, Scientific and Medical (“ISM”) spectrum located at 2473 to 2483.5 MHz to provide a carrier-grade fourth non
overlapping 22 MHz channel under the IEEE 802.11 standard where most WiFi use currently exists. Significantly, we proposed to use the 10.5
MHz of unlicensed ISM spectrum on a non-exclusive basis with no special protections against interference from adjacent bands.
Additionally, in our petition for rulemaking, we have also proposed a “long-term” plan to obtain authority over our exclusively licensed
spectrum at 1610-1617.775 MHz in order to provide additional mobile broadband services based on the Long Term Evolution (“LTE”)
standard.
On November 1, 2013, the FCC issued a Notice of Proposed Rulemaking (“NPRM”) commencing a formal proceeding to permit us to
deploy a terrestrial broadband network over 22 MHz of spectrum in the 2.4 GHz band. The proposed rules essentially eliminate the former
gating criteria and would allow us to provide low power terrestrial broadband services over our licensed 11.5 MHz S-band spectrum at 2483.5
– 2495 MHz, as well as the non-exclusive use of the adjacent 10.5 MHz unlicensed spectrum at 2473 – 2483.5 MHz.
During 2014, we will actively participate in this formal rulemaking proceeding, as well as actively prosecute our petition for rulemaking
regarding our long-term plan.
National Regulation of Service Providers
In order to operate gateways, applicable laws and regulations require the IGOs and our affiliates in each country to obtain a license or
licenses from that country's telecommunications regulatory authority. In addition, the gateway operator must enter into appropriate
interconnection and financial settlement agreements with local and interexchange telecommunications providers. All 24 active gateways, which
we and the IGOs operate, are licensed.
Our subscriber equipment generally must be type certified in countries in which it is sold or leased. The manufacturers of the equipment and
our affiliates or IGOs are jointly responsible for securing type certification. We have received type certification in multiple countries for each
of our products.
Satellites
Beginning in the late 1990’s, we launched our first-generation satellite constellation. In 2007 we launched spare first-generation satellites to
provide support for our Duplex, Simplex and SPOT services.
We launched second-generation satellites in four batches during the period October 2010 through February 2013. As of August 2013, we
had placed into service all of these second-generation satellites. We designed our second-generation satellites to support our current lineup of
Duplex, SPOT, and Simplex products and services, and these satellites are backwards compatible with our first-generation ground network and
satellites, as well as forward compatible with our second-generation ground network.
We designed the second-generation satellites to have a 15-year life from the date the satellites are first positioned into their operational
orbits, twice the useful life of the first-generation satellites. This longer life is achieved by increasing the solar array and battery capacity, using
a larger fuel tank, more redundancy for key satellite equipment, and improved radiation specifications and additional lot level testing for all
susceptible electronic components, in order to account for the accumulated dosage of radiation encountered during a 15-year mission at the
operational altitude of the satellites. The second-generation satellites use passive S-band antennas on the body of the spacecraft providing
additional shielding for the active amplifiers which are located inside the spacecraft, unlike the first-generation amplifiers that were located on
the outside as part of the active antenna array.
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Each satellite has a high degree of on-board subsystem redundancy, an on-board fault detection system and isolation and recovery for safe
and quick risk mitigation. Our ability to reconfigure the orbital location of each satellite provides us with operating flexibility and continuity of
service. The design of our space segment and primary and secondary ground control system facilitates the real-time intervention and
management of the satellite constellation and service upgrades via hardware and software enhancements.
Today we have adequate satellites to provide Duplex, SPOT and Simplex services.
Ground Network
Our satellites communicate with a network of 24 active gateways, each of which serves an area of approximately 700,000 to 1,000,000
square miles. The design of our orbital planes ensures that generally at least one satellite is visible from any point on the earth's surface
between 70° north latitude and 70° south latitude. A gateway must be within line-of-sight of a satellite and the satellite must be within line-of-
sight of the subscriber to provide services. We have positioned our gateways to cover most of the world's land and population. We own 12 of
these gateways and the rest are owned by IGOs. In addition, we have spare parts in storage, including antennas and gateway electronic
equipment, including two un-deployed stored gateways.
Each of our gateways has multiple antennas that communicate with our satellites and pass calls seamlessly between antenna beams and
satellites as the satellites traverse the gateways, thereby reflecting the signals from our users' terminals to our gateways. Once a satellite
acquires a signal from an end-user, the Globalstar System authenticates the user and establishes the voice or data channel to complete the call to
the public switched telephone network, to a cellular or another wireless network or to the internet (for a data call including Simplex).
We believe that our terrestrial gateways provide a number of advantages over the in-orbit switching used by our main competitor, including
better call quality, reduced call latency and convenient regionalized local phone numbers for inbound and outbound calling. We also believe
that our network's design, which relies on terrestrial gateways rather than in-orbit switching, enables faster and more cost-effective system
maintenance and upgrades because the system's software and much of its hardware is based on the ground. Our multiple gateways allow us to
reconfigure our system quickly to extend another gateway's coverage to make up some or all of the coverage of a disabled gateway or to handle
increased call capacity resulting from surges in demand.
Our network uses Qualcomm's patented CDMA technology to permit diversity combining of the strongest available signals. Patented
receivers in our handsets track the pilot channel or signaling channel as well as three additional communications channels simultaneously.
Compared to other satellite and network architectures, we offer superior call clarity with virtually no discernible delay. Our system architecture
provides full frequency re-use. This maximizes diversity (which maximizes quality) and capacity as we can reuse the assigned spectrum in
every satellite beam in every satellite. Our network also works with internet protocol (“IP”) data for reliable transmission of IP messages.
We designed our second-generation satellites to support our current lineup of Duplex, SPOT, and Simplex products and services, and to be
backwards compatible with our first-generation ground network and satellites, as well as forward compatible with our second-generation
ground network.
Although our network is currently CDMA-based, it is configured so that it can also support one or more other air interfaces that we may
select in the future. For example, we have developed a non-Qualcomm proprietary CDMA technology for our SPOT and Simplex services.
Because our satellites are essentially "mirrors in the sky," and all of our network's switches and hardware are located on the ground, we can
easily and relatively inexpensively modify our ground hardware and software to use other wave forms to meet customer demands for new and
innovative services and products.
We own and operate gateways in the United States, Canada, Venezuela, Puerto Rico, France, Brazil and Singapore.
Industry
We compete in the mobile satellite services sector of the global communications industry. Mobile satellite service operators provide voice
and data services using a network of one or more satellites and associated ground facilities. Mobile satellite services are usually complementary
to, and interconnected with, other forms of terrestrial communications services and infrastructure and are intended to respond to users' desires
for connectivity at all times and locations. Customers typically use satellite voice and data communications in situations where existing
terrestrial wireline and wireless communications networks are impaired or do not exist.
Worldwide, government organizations, military, natural disaster aid associations, event-driven response agencies and corporate security
teams depend on mobile and fixed voice and data communications services on a regular basis. Businesses with global operating scope require
communications services when operating in remote locations around the world. Mobile satellite services users span the forestry, maritime,
government, oil and gas, mining, leisure, emergency services, construction and transportation sectors, among others. We believe many such
customers increasingly view satellite communications services as critical to their daily operations.
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Over the past two decades, the global mobile satellite services market has experienced significant growth. Increasingly, better-tailored,
improved-technology products and services are creating new channels of demand for mobile satellite services. Growth in demand for mobile
satellite voice services is driven by the declining cost of these services, the diminishing size and lower costs of the handsets, as well as,
heightened demand by governments, businesses and individuals for ubiquitous global voice coverage. Growth in mobile satellite data services
is driven by the rollout of new applications requiring higher bandwidth, as well as low cost data collection and asset tracking devices and
technological improvements permitting integration of mobile satellite services over smartphones and other Wi-Fi enabled devices.
Communications industry sectors that are relevant to our business include:
•
•
•
mobile satellite services, which provide customers with connectivity to mobile and fixed devices using a network of satellites and
ground facilities;
fixed satellite services, which use geostationary satellites to provide customers with voice and broadband communications links
between fixed points on the earth's surface; and
terrestrial services, which use a terrestrial network to provide wireless or wireline connectivity and are complementary to satellite
services.
Within the major satellite sectors, fixed satellite services and mobile satellite services operators differ significantly from each other. Fixed
satellite services providers, such as Intelsat Ltd., Eutelsat Communications and SES S.A., and aperture terminal companies, such as Hughes and
Gilat Satellite Networks, are characterized by large, often stationary or "fixed," ground terminals that send and receive high-bandwidth signals
to and from the satellite network for video and high speed data customers and international telephone markets. On the other hand, mobile
satellite services providers, such as Globalstar, Inmarsat P.L.C. (“Inmarsat”) and Iridium Communications, Inc. (“Iridium”), focus more on
voice and data services (including data services which track the location of remote assets such as shipping containers), where mobility or small
sized terminals are essential. As mobile satellite terminals begin to offer higher bandwidth to support a wider range of applications, we expect
mobile satellite services operators will increasingly compete with fixed satellite services operators.
LEO systems reduce transmission delay compared to a geosynchronous system due to the shorter distance signals have to travel. In addition,
LEO systems are less prone to signal blockage and, consequently, we believe provide a better overall quality of service.
Competition
The global communications industry is highly competitive. We currently face substantial competition from other service providers that offer
a range of mobile and fixed communications options. Our most direct competition comes from other global mobile satellite services providers.
Our two largest global competitors are Inmarsat and Iridium. We compete primarily on the basis of coverage, quality, portability and pricing of
services and products.
Inmarsat owns and operates a fleet of geostationary satellites. Due to its multiple-satellite geostationary system, Inmarsat's coverage area
extends to and covers most bodies of water more completely than we do. Accordingly, Inmarsat is the leading provider of satellite
communications services to the maritime sector. Inmarsat also offers global land-based and aeronautical communications services. Inmarsat
generally does not sell directly to customers. Rather, it markets its products and services principally through a variety of distributors, who, in
most cases, sell to additional downstream entities who sell to the ultimate customer. We compete with Inmarsat in several key areas,
particularly in our maritime markets. During 2011, Inmarsat launched a mobile handset designed to compete with both Iridium’s mobile
handset service and our GSP-1700 handset service.
Iridium owns and operates a fleet of low earth orbit satellites that is similar to our network of satellites. Iridium provides voice and data
communications to businesses, United States and foreign governments, non-governmental organizations and consumers. Iridium sells its
products and services to commercial end users through a wholesale distribution network. We have faced increased competition from Iridium in
some of our target markets. During 2011, Iridium introduced a product that delivers remote communication features including send and receive
text messaging, interactive SOS, and message delivery information.
We compete with regional mobile satellite communications services in several markets. In these cases, our competitors serve customers who
require regional, not global, mobile voice and data services, so our competitors present a viable alternative to our services. All of these
competitors operate geostationary satellites. Our regional mobile satellite services competitors currently include Thuraya, principally in the
Middle East and Africa and ACeS (now operated by Inmarsat) in Asia.
In some of our markets, such as rural telephony, we compete directly or indirectly with very small aperture terminal (“VSAT”) operators
that offer communications services through private networks using very small aperture terminals or hybrid systems to target business users.
VSAT operators have become increasingly competitive due to technological advances that have resulted in smaller, more flexible and cheaper
terminals.
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We compete indirectly with terrestrial wireline (“landline”) and wireless communications networks. We provide service in areas that are
inadequately covered by these ground systems. To the extent that terrestrial communications companies invest in underdeveloped areas, we
will face increased competition in those areas.
Our SPOT products compete indirectly with Personal Locator Beacons (“PLB”s). A variety of manufacturers offer PLBs to an industry
specification.
Our industry has significant barriers to entry, including the cost and difficulty associated with obtaining spectrum licenses and successfully
building and launching a satellite network. In addition to cost, there is a significant amount of lead-time associated with obtaining the required
licenses, designing and building the satellite constellation and synchronizing the network technology. We will continue to face competition
from Inmarsat and Iridium and other businesses that have developed global mobile satellite communications services in particular regions.
United States International Traffic in Arms Regulations
The United States International Traffic in Arms regulations under the United States Arms Export Control Act authorize the President of the
United States to control the export and import of articles and services that can be used in the production of arms. The President has delegated
this authority to the U.S. Department of State, Directorate of Defense Trade Controls. Among other things, these regulations limit the ability to
export certain articles and related technical data to certain nations. Some information involved in the performance of our operations falls within
the scope of these regulations. As a result, we may have to obtain an export authorization or restrict access to that information by international
companies that are our vendors or service providers. We have received and expect to continue to receive export licenses for our telemetry and
control equipment located outside the United States.
Environmental Matters
We are subject to various laws and regulations relating to the protection of the environment and human health and safety (including those
governing the management, storage and disposal of hazardous materials). Some of our operations require continuous power supply. As a result,
current and historical operations at our ground facilities, including our gateways, include storing fuel and batteries, which may contain
hazardous materials, to power back-up generators. As an owner or operator of property and in connection with our current and historical
operations, we could incur significant costs, including cleanup costs, fines, sanctions and third-party claims, as a result of violations of or in
connection with liabilities under environmental laws and regulations.
Customers
The specialized needs of our global customers span many markets. Our system is able to offer our customers cost-effective communications
solutions in areas unserved or underserved by existing telecommunications infrastructures. Although traditional users of wireless telephony and
broadband data services have access to these services in developed locations, our targeted customers often operate, travel to or live in remote
regions or regions with under-developed telecommunications infrastructure where these services are not readily available or are not provided
on a reliable basis.
Our top revenue generating markets in the United States and Canada are (i) government (including federal, state and local agencies), public
safety and disaster relief, (ii) recreation and personal and (iii) telecommunications. We also serve customers in the maritime and fishing, oil and
gas, natural resources (mining and forestry), and construction, utilities markets, and transportation.
No one customer was responsible for more than 10% of our revenue in 2013, 2012, or 2011.
Domestic/Foreign
We supply services and products to a number of foreign customers. Although most of our sales are denominated in U.S. dollars, we are
exposed to currency risk for sales in Canada, Europe, Brazil and other countries. In 2013, approximately 32% of our sales were denominated in
foreign currencies. See Note 13 to the Consolidated Financial Statements for additional information regarding revenue by country.
Intellectual Property
We hold various U.S. and foreign patents and patents pending that expire between 2014 and 2031. These patents cover many aspects of our
satellite system, our global network and our user terminals. In recent years, we have reduced our foreign filings and allowed some previously-
granted foreign patents to lapse based on (a) the significance of the patent, (b) our assessment of the likelihood that someone would infringe in
the foreign country, and (c) the probability that we could or would enforce the patent in light of the expense of filing and maintaining the
foreign patent which, in some countries, is quite substantial. We continue to maintain all of the patents in the United States, Canada and Europe
which we believe are important to our business. Our intellectual property is pledged as security for our obligations under our senior secured
credit facility agreement (“Facility Agreement”).
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Employees
As of December 31, 2013, we had 267 employees, 13 of whom were located in Brazil and subject to collective bargaining agreements. We
consider our relationship with our employees to be good.
Seasonality
Usage on the network, and to some extent sales, is subject to seasonal and situational changes. April through October are typically our peak
months for service revenues and equipment sales. Most notably, emergencies, natural disasters, and sizable projects where satellite based
communications devices are the only solution. In the consumer area, SPOT devices are subject to outdoor and leisure activity opportunities, as
well as our promotional efforts.
Services and Equipment
Sales of services accounted for approximately 78% 75% and 76% of our total revenues for 2013, 2012, and 2011, respectively. We also sell
the related voice and data equipment to our customers, which accounted for approximately 22%, 25% and 24% of our total revenues for 2013,
2012, and 2011, respectively.
Company History
Our first-generation network, originally owned by Globalstar, L.P. (“Old Globalstar”), was designed, built and launched in the late 1990s by
a technology partnership led by Loral Space and Communications (“Loral”) and Qualcomm Incorporated (“Qualcomm”). In 2002, Old
Globalstar filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. In 2004, we completed the acquisition of the
business and assets of Old Globalstar. Thermo Capital Partners LLC, which owns and operates companies in diverse business sectors and is
referred to in this report, together with its affiliates, as "Thermo," became our principal owner in this transaction. We were formed as a
Delaware limited liability company in November 2003 and were converted into a Delaware corporation in March 2006.
In July 2010, we announced the relocation of our corporate headquarters to Covington, Louisiana. Our product development center, our
international customer care operations, call center, software development and other global business functions including finance, accounting,
legal and regulatory, sales, marketing and corporate communications have also relocated to Louisiana.
Additional Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission
(“SEC”). You may read and copy any document we file with the SEC at the SEC's public reference room at 100 F Street, NE, Washington, DC
20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains
annual, quarterly and current reports, proxy and information statements and other information that issuers (including Globalstar) file
electronically with the SEC. Our electronic SEC filings are available to the public at the SEC's internet site, www.sec.gov .
We make available free of charge financial information, news releases, SEC filings, including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practical after we electronically file
such material with, or furnish it to, the SEC, on our website at www.globalstar.com . The documents available on, and the contents of, our
website are not incorporated by reference into this Report.
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Item 1A. Risk Factors
You should carefully consider the risks described below, as well as all of the information in this Report and our other past and future filings
with the SEC, in evaluating and understanding us and our business. Additional risks not presently known or that we currently deem immaterial
may also impact our business operations and the risks identified below may adversely affect our business in ways we do not currently
anticipate. Our business, financial condition or results of operations could be materially adversely affected by any of these risks.
Risks Related to Our Business
If either Thermo or Terrapin Opportunity, L.P. fail to fulfill its capital commitment, our ability to execute our business plan will be
adversely affected.
Our current sources of liquidity include cash on hand ($17.4 million at December 31, 2013), future cash flows from operations, and funds
available from our equity line agreement with Terrapin Opportunity, L.P. (“Terrapin”) ($24.0 million at December 31, 2013). We also have
available funds from Thermo under the Equity Commitment, Restructuring Support and Consent Agreement dated as of May 20, 2013 among
Globalstar, Thermo, BNP Paribas, as agent, and the lenders under the Facility Agreement (the “Consent Agreement”) and the Global Deed of
Amendment and Restatement (the “GARA”) with Thermo. Thermo’s remaining commitment under the Consent Agreement is $5.0 million at
December 31, 2013. These current sources of liquidity are sufficient to meet our existing contractual obligations over the next 12 months.
We also have available funds of $11.5 million under the Common Stock Purchase and Option Agreement. To the extent that we exercise
our option to require Thermo to purchase up to $11.5 million under the Common Stock Purchase and Option Agreement, it will reduce
Thermo’s remaining commitment under the Consent Agreement on a dollar for dollar basis.
Our business plan assumes the funding of the financial arrangements with Thermo and Terrapin referred to above. If either is unable or
fails to fulfill its commitment under these financial arrangements, it could materially and negatively impact our cash and liquidity and our
ability to continue to execute our business plan will be adversely affected
We incurred operating losses in the past three years, and these losses are likely to continue.
We incurred operating losses of $87.4 million, $95.0 million and $73.2 million in 2013, 2012, and 2011, respectively. These losses are
largely a result of non-cash depreciation expense as all of our second-generation satellites have been placed into service since 2010. Our
second-generation satellites were designed to have a 15-year life from the date the satellites are placed into their operational orbit and we will
continue to recognize high levels of depreciation expense commensurate with their estimated 15-year life.
We have substantial contractual obligations and capital expenditure plans, which may require additional capital, the terms of which
have not been arranged. The terms of the Facility Agreement could complicate raising this additional capital.
We have various contractual agreements related to remaining amounts outstanding for the procurement and deployment of our second-
generation constellation and upgrades to our ground infrastructure, including internal labor costs and interest on outstanding debt, which we
expect will be reflected in capital expenditures primarily through 2015. The nature of these purchases requires us to enter into long-term fixed
price contracts. We cannot be assured that operating cash flows and other previously committed funding will be sufficient to meet obligations
over the term of these agreements. Restrictions in the Facility Agreement limit the types of financings we may undertake. Should we need to
obtain additional financing, we cannot assure you that we will be able to obtain this financing on reasonable terms or at all. If we cannot obtain
it in a timely manner, we may be unable to execute our business plan and fulfill our financial commitments.
The implementation of our business plan and our ability to generate income from operations assume we are able to maintain a healthy
constellation and ground network capable of providing commercially acceptable levels of coverage and service quality, which are
contingent on a number of factors.
In prior periods our ability to generate revenue and cash flow was impacted adversely by our inability to offer commercially acceptable
levels of Duplex service due to the degradation of our first-generation constellation. As a result, we improved the design of our second-
generation constellation to last twice as long in space, have 40% greater capacity and be built at a significantly lower cost as compared to our
first-generation constellation. The health of our constellation depends on the maintenance of these satellites, which are technically complex.
Anomalies with our satellites may develop, and we cannot guarantee that we could successfully develop and implement a solution to them.
Our ground stations were initially designed to operate with our first-generation satellites. Certain of these ground stations will require
upgrades to enable us to integrate the technology and service offerings with our second-generation satellites. We have entered into various
contracts to upgrade our ground network but the completion of these upgrades may not be successful.
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Our ability to generate revenue and positive cash flow will depend upon our ability to maintain and operate all of our existing Duplex-
capable satellites, upgrade and maintain our ground stations, maintain a sufficient number of subscribers, introduce new product and service
offerings successfully, and compete successfully against other mobile satellite service providers to gain new subscribers.
Our satellites have a limited life and will degrade over time, which may cause our network to be compromised and which may
materially and adversely affect our business, prospects and profitability. We may not be able to procure additional second-generation
satellites on reasonable terms.
Since our first satellites were launched in the 1990’s, some first-generation satellites have failed in orbit and have been retired, and we
expect others to fail in the future. We consider a satellite "failed" only when it can no longer provide any communications service, and we do
not intend to undertake any further efforts to return it to service or when the other satellite subsystems can no longer support operations. In-
orbit failure may result from various causes, including component failure, loss of power or fuel, inability to control positioning of the satellite,
solar or other astronomical events, including solar radiation and flares, the quality of construction, gradual degradation of solar panels, the
durability of components, and collision with other satellites or space debris. Any of these causes, including radiation induced failure of satellite
components, may result in damage to or loss of a satellite before the end of its currently expected life.
As a result of the issues described above, some of our in-orbit satellites may experience temporary outages or may not otherwise be fully
functioning at any given time. There are some remote tools we use to remedy certain types of problems affecting the performance of our
satellites, but the physical repair of satellites in space is not feasible. As it is not economically feasible, we do not insure our satellites against
in-orbit failures after an initial period of six months, whether the failures are caused by internal or external factors. Although our second-
generation satellites were designed to provide commercial service over a 15-year life, we can provide no assurance as to whether any or all of
them will continue in operation for their full 15-year design life.
All satellites have a limited life and degrade over time. In order to maintain commercially acceptable service coverage long-term, we must
obtain and launch additional satellites. As discussed in Note 8 to our Consolidated Financial Statements, we and Thales may negotiate the
terms of a follow-on contract for additional satellites, but we can provide no assurance as to whether we will ultimately agree on commercial
terms for such a purchase. If we are unable to agree with Thales on commercial terms for the purchase of additional satellites, we may enter
into negotiations with one or more other satellite manufacturers, but we cannot provide any assurance that these negotiations will be successful
either.
Rapid and significant technological changes in the satellite communications industry may impair our competitive position and require
us to make significant additional capital expenditures.
The hardware and software we currently utilize in operating our gateways were designed and manufactured over 15 years ago and portions
have deteriorated. We have contracted to replace the digital hardware and software in the future; however the original equipment may become
less reliable as it ages and will be more difficult and expensive to service. It may be difficult or impossible to obtain all necessary replacement
parts for the hardware before the new equipment and software is fully deployed. We expect to face competition in the future from companies
using new technologies and new satellite systems. The space and communications industries are subject to rapid advances and innovations in
technology. New technology could render our system obsolete or less competitive by satisfying consumer demand in more attractive ways or
through the introduction of incompatible standards. Particular technological developments that could adversely affect us include the
deployment by our competitors of new satellites with greater power, greater flexibility, greater efficiency or greater capabilities, as well as
continuing improvements in terrestrial wireless technologies. We have had to commit, and must continue to commit, to make significant capital
expenditures to keep up with technological changes and remain competitive. Customer acceptance of the services and products that we offer
will continually be affected by technology-based differences in our product and service offerings. New technologies may be protected by
patents and therefore may not be available to us.
We may be unable to establish a worldwide service network due to the absence of gateways in certain important regions of the world,
which may limit our growth and our ability to compete.
Our objective is to establish a worldwide service network, either directly or through IGOs, but to date we have been unable to do so in
certain areas of the world and we may not succeed in doing so in the future. We have been unable to finance our own gateways or to find
capable IGOs for several important regions and countries, including Eastern and Southern Africa, India, China, and certain parts of Southeast
Asia. In addition to the lack of global service availability, cost-effective roaming is not yet available in certain countries because the IGOs have
been unable to reach business arrangements with one another. This could reduce overall demand for our products and services and undermine
our value for potential users who require service in these areas.
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Restrictive covenants in our Facility Agreement may limit our operating and financial flexibility.
Our Facility Agreement contains a number of significant restrictions and covenants that limit our ability to:
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incur or guarantee additional indebtedness;
pay dividends or make distributions to our stockholders;
make investments, acquisitions or capital expenditures;
repurchase or redeem capital stock or subordinated indebtedness;
grant liens on our assets;
incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us;
enter into transactions with our affiliates;
merge or consolidate with other entities or transfer all or substantially all of our assets; and
transfer or sell assets.
Complying with these restrictive covenants, as well as the financial and other nonfinancial covenants in the Facility Agreement and certain
of our other debt obligations, as well as those that may be contained in any agreements governing future indebtedness, may impair our ability to
finance our operations or capital needs or to take advantage of other favorable business opportunities. Our ability to comply with these
covenants will depend on our future performance, which may be affected by events beyond our control.
An inability to comply with the financial and nonfinancial covenants contained in the Facility Agreement could have significant
implications.
Our Facility Agreement contains a number of financial and nonfinancial covenants. Our ability to comply with these covenants will depend
on our future performance, which may be affected by events beyond our control. Our failure to comply with these covenants would represent
an event of default. An event of default under the Facility Agreement would permit the lenders to accelerate the indebtedness under the Facility
Agreement. That acceleration would permit holders of our obligations under other agreements that contain cross-acceleration provisions to
accelerate that indebtedness. See Part II – Item 5 – Liquidity and Capital Resources - to this report for further discussion on our debt covenants.
Our business plan to use a portion of our licensed MSS spectrum to provide terrestrial wireless services depends upon action by the
FCC, which we cannot control.
Our business plan includes utilizing approximately 20 MHz of our licensed MSS spectrum to provide terrestrial wireless services, including
mobile broadband applications, within the United States. In pursuit of these plans, the FCC has released an NPRM to substantially eliminate
the gating criteria under the existing ATC regime and permit us to offer low power terrestrial mobile broadband services over a portion of our
licensed MSS spectrum. As part of this formal proceeding, if the FCC does not ultimately adopt satisfactory rules, our anticipated future
revenues and profitability could be reduced. We can provide no assurance that the FCC will finalize satisfactorily this NRPM or how long the
regulatory process to obtain this relief will take. If we are unable to achieve the rule changes in the NPRM, then our only ability to utilize our
MSS spectrum for terrestrial applications will be pursuant to the existing ATC regulatory regime that requires many restrictive conditions
called gating criteria.
Future regulatory decisions could reduce our existing spectrum allocation or impose additional spectrum sharing agreements on us,
which could adversely affect our services and operations.
Under the FCC's plan for mobile satellite services in our frequency bands, we must share frequencies in the United States with other
licensed mobile satellite services operators. To date, there are no other authorized CDMA-based mobile satellite services operators and no
pending applications for authorization. However the FCC or other regulatory authorities may require us to share spectrum with other systems
that are not currently licensed by the United States or any other jurisdiction. On February 11, 2013, Iridium filed its own petition for
rulemaking seeking to have the FCC reallocate 2.725 MHz of Big LEO spectrum from 1616-1618.725 MHz to Iridium’s exclusive use. Iridium
also filed a motion to consolidate its petition with our petition for rulemaking. Although the FCC has received comments on Iridium’s petition,
it has not taken any substantive action with respect to it. An adverse result in this proceeding could materially affect our ability to provide both
Duplex and Simplex mobile satellite services.
We registered our second-generation constellation with the ITU through France rather than the United States. The French radiofrequency
spectrum regulatory agency, ANFR, submitted the technical papers filing to the ITU on our behalf in July 2009. As with the first-generation
constellation, the ITU requires us to coordinate our spectrum assignments with other administrators and operators that use any portion of our
spectrum frequency bands. We are actively engaged in but cannot predict how long the coordination process will take; however, we are able to
use the frequencies during the coordination process in accordance with our national licenses.
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In 2013, the FCC issued a notice of proposed rulemaking and commenced a proceeding to consider, among other things, expanding the use
of terrestrial mobile broadband devices within the 5 GHz band. Our C-band Forward Link (Earth Station to Satellite) operates within the 5 GHz
band at 5091-5250 MHz. As part of this proceeding, the FCC has requested comments regarding increasing power limits and eliminating the
restriction against outdoor uses of U-NII-1 devices, essentially outdoor WiFi access points, operating within the same frequencies as our C-
band Forward Link. We filed comments in opposition to these changes to the technical rules due to the substantial risk of harmful interference
that these deployments could have on our system. If the FCC permits unlimited outdoor deployment of U-NII-1 devices, our ability to provide
mobile satellite services could be negatively affected. We can provide no assurance as to the outcome of this proceeding or any other FCC
action.
Spectrum values historically have been volatile, which could cause the value of our business to fluctuate.
Our business plan includes forming strategic partnerships to maximize the use and value of our spectrum, network assets and combined
service offerings in the United States and internationally. Value that we may be able to realize from such partnerships will depend in part on the
value ascribed to our spectrum. Historically, valuations of spectrum in other frequency bands have been volatile, and we cannot predict the
future value that we may be able to realize for our spectrum and other assets. In addition, to the extent that the FCC takes action that makes
additional spectrum available or promotes the more flexible use or greater availability (e.g., via spectrum leasing or new spectrum sales) of
existing satellite or terrestrial spectrum allocations, the availability of such additional spectrum could reduce the value that we may be able to
realize for our spectrum.
Our business is subject to extensive government regulation, which mandates how we may operate our business and may increase our
cost of providing services, slow our expansion into new markets and subject our services to additional competitive pressures.
Our ownership and operation of an MSS system is subject to significant regulation in the United States by the FCC and in foreign
jurisdictions by similar authorities. Additionally, our use of our licensed spectrum globally is subject to coordination by the ITU. Our second-
generation constellation has been licensed and registered in France. The rules and regulations of the FCC or these foreign authorities may
change and may not continue to permit our operations as presently conducted or as we plan to conduct them.
Failure to provide services in accordance with the terms of our licenses or failure to operate our satellites, ground stations, or other
terrestrial facilities (including those necessary to provide ATC services) as required by our licenses and applicable government regulations
could result in the imposition of government sanctions against us, up to and including cancellation of our licenses.
Our system requires regulatory authorization in each of the markets in which we or the IGOs provide service. We and the IGOs may not be
able to obtain or retain all regulatory approvals needed for operations. For example, the company with which the original owners of our first-
generation network contracted to establish an independent gateway operation in South Africa was unable to obtain an operating license from
the Republic of South Africa and abandoned the business in 2001. Regulatory changes, such as those resulting from judicial decisions or
adoption of treaties, legislation or regulation in countries where we operate or intend to operate, may also significantly affect our business.
Because regulations in each country are different, we may not be aware if some of the IGOs and/or persons with which we or they do business
do not hold the requisite licenses and approvals.
Our current regulatory approvals could now be, or could become, insufficient in the view of foreign regulatory authorities. Furthermore, any
additional necessary approvals may not be granted on a timely basis, or at all, in all jurisdictions in which we wish to offer services, and
applicable restrictions in those jurisdictions could become unduly burdensome.
Our operations are subject to certain regulations of the United States State Department's Directorate of Defense Trade Controls (i.e., the
export of satellites and related technical data), United States Treasury Department's Office of Foreign Assets Control (i.e., financial
transactions) and the United States Commerce Department's Bureau of Industry and Security (i.e., our gateways and phones). These regulations
may limit or delay our ability to operate in a particular country. As new laws and regulations are issued, we may be required to modify our
business plans or operations. If we fail to comply with these regulations in any country, we could be subject to sanctions that could affect,
materially and adversely, our ability to operate in that country. Failure to obtain the authorizations necessary to use our assigned radio
frequency spectrum and to distribute our products in certain countries could have a material adverse effect on our ability to generate revenue
and on our overall competitive position.
The implementation of our business plan depends on increased demand for wireless communications services via satellite, both for our
existing services and products and for new services and products. If this increased demand does not occur, our revenues and
profitability may not increase as we expect.
Demand for wireless communication services via satellite may not grow, or may even shrink, either generally or in particular geographic
markets, for particular types of services or during particular time periods. A lack of demand could impair our ability to sell our services and
develop and successfully market new services, or could exert downward pressure on prices, or both. This, in turn, could decrease our revenues
and profitability and adversely affect our ability to increase our revenues and profitability over time.
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We plan to introduce additional Duplex, SPOT, and Simplex products and services. However, we cannot predict with certainty the potential
longer term demand for these products and services or the extent to which we will be able to meet demand. Our business plan assumes growing
our Duplex subscriber base beyond levels achieved in the past, rapidly growing our SPOT and Simplex subscriber base and returning the
business to profitability.
The success of our business plan will depend on a number of factors, including:
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our ability to maintain the health, capacity and control of our satellites;
our ability to maintain the health of our ground network;
our ability to influence the level of market acceptance and demand for all of our services;
our ability to introduce new products and services that meet this market demand;
our ability to retain current customers and obtain new customers;
our ability to obtain additional business using our existing spectrum resources both in the United States and internationally;
our ability to control the costs of developing an integrated network providing related products and services;
our ability to market successfully our Duplex, SPOT and Simplex products and services;
our ability to develop and deploy innovative network management techniques to permit mobile devices to transition between satellite
and terrestrial modes;
our ability to sell the equipment inventory on hand;
the cost and availability of user equipment that operates on our network;
the effectiveness of our competitors in developing and offering similar products and services and in persuading our customers to
switch service providers; and
our ability to provide attractive service offerings at competitive prices to our target markets.
We depend on IGOs to market our services in important regions around the world. If the IGOs are unable to do this successfully, we
will not be able to grow our business in those areas as rapidly as we expect.
Although we derive most of our revenue from retail sales to end users in the United States, Canada, a portion of Western Europe, Central
America and portions of South America, either directly or through agents, dealers and resellers, we depend on IGOs to purchase, install,
operate and maintain gateway equipment, to sell phones and data user terminals, and to market our services in other regions where these IGOs
hold exclusive or non-exclusive rights. Not all of the IGOs have been successful and, in some regions, they have not initiated service or sold as
much usage as originally anticipated. Some of the IGOs are not earning revenues sufficient to fund their operating costs due to the operational
issues we experienced with our first-generation satellites. Although we expect these IGOs to return to profitability with the return of Duplex
service, if they are unable to continue in business, we will lose the revenue we receive for selling equipment to them and providing services to
their customers. Although we have implemented a strategy for the acquisition of certain IGOs when circumstances permit, we may not be able
to continue to implement this strategy on favorable terms and may not be able to realize the additional efficiencies that we anticipate from this
strategy. In some regions it is impracticable to acquire the IGOs either because local regulatory requirements or business or cultural norms do
not permit an acquisition, because the expected revenue increase from an acquisition would be insufficient to justify the transaction, or because
the IGO will not sell at a price acceptable to us. In those regions, our revenue and profits may be adversely affected if those IGOs do not fulfill
their own business plans to increase substantially their sales of services and products.
We rely on a limited number of key vendors for timely supply of equipment and services. If our key vendors fail to provide equipment
and services to us, we may face difficulties in finding alternative sources and may not be able to operate our business successfully.
We also have a limited quantity of our Duplex handsets remaining in inventory and have not contracted with a manufacturer to produce
additional inventory. We have depended on Qualcomm as the exclusive manufacturer of phones using the IS 41 CDMA North American
standard, which incorporates Qualcomm proprietary technology. This contract was cancelled in March 2013 and we are working with
Qualcomm to resolve issues related to the termination. See Note 7 to our Consolidated Financial Statements for further discussion. Although
we have contracted with Hughes and Ericsson to provide new hardware and software for our ground component, there could be a substantial
period of time in which their products or services are not available and Qualcomm no longer supports our products and services.
Additionally, we depend on our product manufacturers to provide us with our inventory. If these manufacturers do not take on future orders
or fail to perform under our current contracts, we may be unable to continue to produce and sell our inventory to customers at a reasonable cost
to us or there may be delays in production and sales.
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We depend in large part on the efforts of third parties for the retail sale of our services and products. The inability of these third
parties to sell our services and products successfully may decrease our future revenue and profitability.
We derive a large portion of our revenue from products and services sold through independent agents, dealers and resellers, including,
outside the United States, IGOs. If these third parties are unable to market our products and services successfully, our future revenue and
profitability may decrease.
Lack of availability of electronic components from the electronics industry, as needed in our retail products, our gateways, and our
satellites, could delay or adversely impact our operations.
We rely upon the availability of components, materials and component parts from the electronics industry. The electronics industry is
subject to occasional shortages in parts availability depending on fluctuations in supply and demand. Industry shortages may result in delayed
shipments of materials, or increased prices, or both. As a consequence, elements of our operation which use electronic parts, such as our retail
products, our gateways and our satellites, could be subject to delays or cost increases, or both.
Product liability, product replacement, or recall costs could adversely affect our business and financial performance.
We are subject to product liability and product recall claims if any of our products and services are alleged to have resulted in injury to
persons or damage to property. If any of our products proves to be defective, we may need to recall and/or redesign them. In addition, any
claim or product recall that results in significant adverse publicity may negatively affect our business, financial condition, or results of
operations. We maintain product liability insurance, but this insurance may not adequately cover losses related to product liability claims
brought against us. We may also be a defendant in class action litigation, for which no insurance is available. Product liability insurance could
become more expensive and difficult to maintain and may not be available on commercially reasonable terms, if at all. In addition, we do not
maintain any product recall insurance, so any product recall we are required to initiate could have a significant impact on our financial position,
results of operations or cash flows. We regularly investigate potential quality issues as part of our ongoing effort to deliver quality products to
our customers.
Because consumers use SPOT products and services in isolated and, in some cases, dangerous locations, we cannot predict whether users of
the device who suffer injury or death may seek to assert claims against us alleging failure of the device to facilitate timely emergency response.
Although we will seek to limit our exposure to any such claims through appropriate disclaimers and liability insurance coverage, we cannot
assure investors that the disclaimers will be effective, claims will not arise or insurance coverage will be sufficient.
We face intense competition in all of our markets, which could result in a loss of customers and lower revenues and make it more
difficult for us to enter new markets.
Satellite-based Competitors
There are currently three other MSS operators providing services similar to ours on a global or regional basis: Iridium, Thuraya, and
Inmarsat. The provision of satellite-based products and services is subject to downward price pressure when the capacity exceeds demand or as
new competitors enter the marketplace with particular competitive pricing strategies.
Other providers of satellite-based products could introduce their own products similar to our SPOT, Simplex or Duplex products, which
may materially adversely affect our business plan. In addition, we may face competition from new competitors or new technologies. With so
many companies targeting many of the same customers, we may not be able to retain successfully our existing customers and attract new
customers and as a result may not grow our customer base and revenue.
Terrestrial Competitors
In addition to our satellite-based competitors, terrestrial wireless voice and data service providers are continuing to expand into rural and
remote areas, particularly in less developed countries, and providing the same general types of services and products that we provide through
our satellite-based system. Many of these companies have greater resources, greater name recognition and newer technologies than we do.
Industry consolidation could adversely affect us by increasing the scale or scope of our competitors and thereby making it more difficult for us
to compete. We could lose market share and revenue as a result of increasing competition from the extension of land-based communication
services.
Although satellite communications services and ground-based communications services are not perfect substitutes, the two compete in
certain markets and for certain services. Consumers generally perceive wireless voice communication products and services as cheaper and
more convenient than satellite-based products and services.
ATC Competitors
We also expect to compete with a number of other satellite companies that plan to develop terrestrial networks that utilize their MSS
spectrum. DISH Networks received FCC approval to offer terrestrial wireless services over the MSS spectrum that previously belonged to
TerreStar and ICO Global. Further, LightSquared continues its regulatory initiative to receive final FCC approval to build out a wireless
network utilizing its MSS spectrum. Any of these competitors could offer an integrated satellite and terrestrial network before we do, could
combine with terrestrial networks that provide them with greater financial or operational flexibility than we have, or could offer wireless
services, including mobile broadband services, that customers prefer over ours.
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Potential Loss of Customers
We may lose customers due to competition, consolidation, regulatory developments, disruptive technologies, business developments
affecting our customers or their customers, the degradation of our constellation or for other reasons. Our top 10 customers for the year ended
December 31, 2013 accounted for, in the aggregate, approximately 12% of our total revenues. For the year ended December 31, 2013, revenues
from our largest customer were $2.2 million or 3% of our total revenues. If we fail to maintain our relationships with our major customers, if
we lose them and fail to replace them with other similar customers, or if we experience reduced demand from our major customers, our revenue
could be significantly reduced. In addition, we may incur additional costs to the extent that amounts due from these customers become
uncollectible. More generally, our customers may fail to renew or may cancel their service contracts with us, which could negatively affect
future revenues and profitability.
We face special risks by doing business in developing markets, including currency and expropriation risks, which could increase our
costs or reduce our revenues in these areas.
Although our most economically important geographic markets currently are the United States and Canada, we have substantial markets for
our mobile satellite services in, and our business plan includes, developing countries or regions that are underserved by existing
telecommunications systems, such as rural Venezuela, Brazil and Central America. Developing countries are more likely than industrialized
countries to experience market, currency and interest rate fluctuations and may have higher inflation. In addition, these countries present risks
relating to government policy, price, wage and exchange controls, social instability, expropriation and other adverse economic, political and
diplomatic conditions.
We receive a majority of our revenues in U.S. dollars. Limited availability of U.S. currency in some local markets or governmental controls
on the export of currency may prevent an IGO from making payments in U.S. dollars or delay the availability of payment due to foreign bank
currency processing and approval. In addition, exchange rate fluctuations may affect our ability to control the prices charged for the
independent gateway operators' services.
Our operations involve transactions in a variety of currencies. Sales denominated in foreign currencies involve primarily the Canadian
dollar, the euro, and the Brazilian real. Certain of our obligations are denominated in euros. Accordingly, our operating results may be
significantly affected by fluctuations in the exchange rates for these currencies. Approximately 32% and 29% of our total sales were to retail
customers located primarily in Canada, Europe, Central America, and South America during 2013 and 2012, respectively. Our results of
operations for 2013 and 2012 included losses of $1.0 million and $2.0 million, respectively, on foreign currency transactions. We may be
unable to offset unfavorable currency movements as they adversely affect our revenue and expenses. Our inability to do so could have a
substantial negative impact on our operating results and cash flows.
Pursuing strategic transactions may cause us to incur additional risks.
We may pursue acquisitions, joint ventures or other strategic transactions on an opportunistic basis. We may face costs and risks arising
from any such transactions, including integrating a new business into our business or managing a joint venture. These may include legal,
organizational, financial and other costs and risks.
In addition, if we were to choose to engage in any major business combination or similar strategic transaction, we may require significant
external financing in connection with the transaction. Depending on market conditions, investor perceptions of us, and other factors, we may
not be able to obtain capital on acceptable terms, in acceptable amounts or at appropriate times to implement any such transaction. Our Facility
Agreement and other debt obligations contain covenants which limit our ability to engage in specified forms of capital transactions without
lender consent, which may be impossible to obtain. Any such financing, if obtained, may further dilute our existing stockholders.
Our revenues are subject to changes in global economic conditions and consumer sentiment and discretionary spending.
Financial markets continue to be uncertain and could significantly adversely impact global economic conditions. These conditions could
lead to further reduced consumer spending in the foreseeable future, especially for discretionary travel and related products. A substantial
portion of the potential addressable market for our consumer retail products and services relates to recreational users, such as mountain
climbers, campers, kayakers, sport fishermen and wilderness hikers. These potential customers may reduce their activities or their spending due
to economic conditions, which could adversely affect our business, financial condition, results of operations and liquidity.
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Changes in international trade regulations and other risks associated with foreign trade could adversely affect our sourcing .
We source our products primarily from foreign contract manufacturers, with the largest concentration being in China. The adoption of
regulations related to the importation of product, including quotas, duties, taxes and other charges or restrictions on imported goods, and
changes in U.S. customs procedures could result in an increase in the cost of our products. Delays in customs clearance of goods or the
disruption of international transportation lines used by us could result in our inability to deliver goods to customers in a timely manner or the
potential loss of sales altogether. Current or future social and environmental regulations or critical issues, such as those relating to the sourcing
of conflict minerals from the Democratic Republic of the Congo or the need to eliminate environmentally sensitive materials from our
products, could restrict the supply of components and materials used in production or increase our costs. Any delay or interruption to our
manufacturing process or in shipping our products could result in lost revenue, which would adversely affect our business, financial condition,
or results of operations.
Changes in tax rates or adverse results of tax examinations could materially increase our costs.
We operate in various U.S. and foreign tax jurisdictions. The process of determining our anticipated tax liabilities involves many
calculations and estimates which are inherently complex. We believe that we have complied in all material respects with our obligations to pay
taxes in these jurisdictions. However, our position is subject to review and possible challenge by the taxing authorities of these jurisdictions. If
the applicable taxing authorities were to challenge successfully our current tax positions, or if there were changes in the manner in which we
conduct our activities, we could become subject to material unanticipated tax liabilities. We may also become subject to additional tax
liabilities as a result of changes in tax laws, which could in certain circumstances have a retroactive effect.
In January 2012 our Canadian subsidiary was notified that its income tax returns for the years ending October 31, 2008 and 2009 have been
selected for audit. The Canada Revenue Agency is in the process of reviewing the information provided by the Canadian subsidiary.
In December 2013, the Company’s Singapore subsidiary was notified that its income tax returns for the years ended 2009 to 2012 had been
selected for audit. The Company’s Singapore subsidiary has submitted the information required by the Inland Revenue Authority of Singapore.
As a result of our acquisition of an independent gateway operator in Brazil during 2008, we are exposed to potential pre-acquisition tax
liabilities. During 2013, the seller paid approximately $0.3 million of these liabilities, but the gateway operator remains subject to an additional
$2.2 million in liabilities. We may be exposed to potential pre-acquisition liabilities for which we may not be fully indemnified by the seller, or
the seller may fail to perform its indemnification obligations.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our Facility Agreement are at a variable rate. In order to mitigate our variable rate interest risk, we entered into a ten year
interest rate cap agreement. The interest rate cap agreements reflect a variable notional amount ranging from $586.3 million to $14.8 million at
interest rates that provide coverage to us for exposure resulting from escalating interest rates over the term of the Facility Agreement. The
interest rate cap provides limits on the six-month Libor rate (“Base Rate”) used to calculate the coupon interest on outstanding amounts on the
Facility Agreement. Our interest rate is capped at 5.50% if the Base Rate does not exceed 6.5%. Should the Base Rate exceed 6.5%, our Base
Rate will be 1% less than the then six-month Libor rate. Regardless of our attempts to mitigate our exposure to interest rate fluctuations through
the interest rate cap, we still have exposure for the uncapped amounts of the facility, which remain subject to a variable interest rate. As a
result, an increase in interest rates could result in a substantial increase in interest expense, especially as the capped amount of the term loan
decreases over time.
The loss of skilled management and personnel could impair our operations.
Our performance is substantially dependent on the performance and institutional knowledge of our senior management and key scientific
and technical personnel. The loss of the services of any member of our senior management, scientific or technical staff may significantly delay
or prevent the achievement of business objectives by diverting management’s attention to retention matters, and could have a material adverse
effect on our business, operating results and financial condition.
A natural disaster could diminish our ability to provide communications service.
Natural disasters could damage or destroy our ground stations resulting in a disruption of service to our customers. In addition, the collateral
effects of such disasters such as flooding may impair the functioning of our ground equipment. If a natural disaster were to impair or destroy
any of our ground facilities, we might be unable to provide service to our customers in the affected area for a period of time. Even if our
gateways are not affected by natural disasters, our service could be disrupted if a natural disaster damages the public switch telephone network
or terrestrial wireless networks or our ability to connect to the public switch telephone network or terrestrial wireless networks. Additionally,
there are inherent dangers and risk associated with our satellite operations, including the risk of increased radiation and possibility of in-orbit
collisions with other objects. Any such failures, collisions or service disruptions could harm our business and results of operations.
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If we do not develop, acquire and maintain proprietary information and intellectual property rights, it could limit the growth of our
business and reduce our market share.
Our business depends on technical knowledge, and we believe that our future success is based, in part, on our ability to keep up with new
technological developments and incorporate them in our products and services. We own or have the right to use our patents, work products,
inventions, designs, software, systems and similar know-how. Although we have taken diligent steps to protect that information, the
information may be disclosed to others or others may independently develop similar information, systems and know-how. Protection of our
information, systems and know-how may result in litigation, the cost of which could be substantial. Third parties may assert claims that our
products or services infringe on their proprietary rights. Any such claims, if made, may prevent or limit our sales of products or services or
increase our costs of sales.
We license much of the software we require to support critical gateway operations from third parties, including Qualcomm and Space
Systems/Loral Inc. This software was developed or customized specifically for our use. We also license software to support customer service
functions, such as billing, from third parties which developed or customized it specifically for our use. If the third party licensors were to cease
to support and service the software, or the licenses were to no longer be available on commercially reasonable terms, it may be difficult,
expensive or impossible to obtain such services from alternative vendors. Replacing such software could be difficult, time consuming and
expensive, and might require us to obtain substitute technology with lower quality or performance standards or at a greater cost.
If we are unable to remediate the material weakness in our internal controls, our ability to report our financial results on a timely and
accurate basis and to comply with disclosure and other requirements may be adversely affected.
Our internal control processes, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute,
assurance that their objectives will be met. Therefore, we cannot assure you that in the future additional material weaknesses will not recur,
exist or otherwise be identified. We will continue to monitor the effectiveness of these and other processes, procedures and controls and will
make any further changes management determines appropriate. Effective internal controls are necessary for us to produce reliable financial
reports. If we cannot produce reliable financial reports, our business and operating results may be adversely affected, investors may lose
confidence in our reported financial information, there may be a negative effect on our stock price, and we may be subject to civil or criminal
investigations and penalties.
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Risks Related to Our Common Stock
Our common stock has been delisted from the NASDAQ Stock Market, which may impair our ability to raise capital.
As of December 31, 2013, our voting common stock was listed on the over the counter stock market (“OTCQB”) under the symbol
“GSAT”. In December 2012 we were removed from the NASDAQ Stock Market for not meeting the $1.00 per share minimum bid
requirement. Broker-dealers may be less willing or able to sell and/or make a market in our common stock as a result of this delisting, which
may make it more difficult for shareholders to dispose of, or to obtain accurate quotations for the price of, our common stock. Removal of our
common stock from listing on the NASDAQ Stock Market may also make it more difficult for us to raise capital through the sale of our
securities.
If our common stock is not listed on a U.S. national stock exchange or approved for quotation and trading on a national automated dealer
quotation system or established automated over-the-counter trading market, holders of our 8.00% Notes Issued in 2013 and 8.00% Notes Issued
in 2009 will have the option to require us to repurchase the Notes, which we may not have sufficient financial resources to do.
As our common stock is no longer listed on the NASDAQ Stock Market, we are no longer subject to any of the NASDAQ governance
requirements, and our stockholders do not have the protection of these requirements.
Restrictive covenants in our Facility Agreement do not allow us to pay dividends on our common stock in the foreseeable future.
We do not expect to pay cash dividends on our common stock. Our Facility Agreement currently prohibits the payment of cash dividends.
Any future dividend payments are within the discretion of our board of directors and will depend on, among other things, our results of
operations, working capital requirements, capital expenditure requirements, financial condition, contractual restrictions, business opportunities,
anticipated cash needs, provisions of applicable law and other factors that our board of directors may deem relevant. We may not generate
sufficient cash from operations in the future to pay dividends on our common stock.
The market price of our common stock is volatile and there is a limited market for our shares.
The trading price of our common stock is subject to wide fluctuations. Factors affecting the trading price of our common stock may include:
•
•
•
•
•
•
•
•
actual or anticipated variations in our operating results;
failure in the performance of our current or future satellites;
changes in financial estimates by research analysts, or any failure by us to meet or exceed any such estimates, or changes in the
recommendations of any research analysts that elect to follow our common stock or the common stock of our competitors;
actual or anticipated changes in economic, political or market conditions, such as recessions or international currency fluctuations;
actual or anticipated changes in the regulatory environment affecting our industry, including final rulemaking by the FCC related our
proceeding;
actual or anticipated sales of common stock by our controlling stockholder or others;
changes in the market valuations of our industry peers; and
announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic
initiatives.
The trading price of our common stock may also decline in reaction to events that affect other companies in our industry even if these
events do not directly affect us. Our stockholders may be unable to resell their shares of our common stock at or above the initial purchase
price. Additionally, because we are a controlled company there is a limited market for our common stock and we cannot assure our
stockholders that a trading market will develop further or be maintained.
Trading volume for our common stock historically has been low; however, trading volume has recently increased significantly. Sales of
significant amounts of shares of our common stock in the public market could lower the market price of our stock.
23
The future issuance of additional shares of our common stock could cause dilution of ownership interests and adversely affect our
stock price.
We may issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of our current
stockholders. We are authorized to issue 1.7 billion shares of common stock (400.0 million are designated as nonvoting), of which
approximately 535.9 million shares of voting common stock and 309.0 million shares of nonvoting common stock were issued and outstanding
as of December 31, 2013 and 855.1 million shares were available for future issuance (of which approximately 620.0 million shares are reserved
for issuances of shares upon exercise of warrants or options or conversion of notes). The potential issuance of such additional shares of
common stock, whether directly or pursuant to any conversion right of any convertible securities, may create downward pressure on the trading
price of our common stock. We may also issue additional shares of our common stock or other securities that are convertible into or exercisable
for common stock for capital raising or other business purposes. Future sales of substantial amounts of common stock, or the perception that
sales could occur, could have a material adverse effect on the price of our common stock.
We have issued and may issue shares of preferred stock or debt securities with greater rights than our common stock.
Our certificate of incorporation authorizes our board of directors to issue one or more series of preferred stock and set the terms of the
preferred stock without seeking any further approval from holders of our common stock. Currently, there are 100 million shares of preferred
stock authorized; one share of Series A Convertible Preferred Stock was issued and subsequently converted to shares of voting and nonvoting
common stock during 2009. Any preferred stock that is issued may rank ahead of our common stock in terms of dividends, priority and
liquidation premiums and may have greater voting rights than holders of our common stock.
If persons engage in short sales of our common stock, the price of our common stock may decline.
Selling short is a technique used by a stockholder to take advantage of an anticipated decline in the price of a security. A significant number
of short sales or a large volume of other sales within a relatively short period of time can create downward pressure on the market price of a
security. Further sales of common stock could cause even greater declines in the price of our common stock due to the number of additional
shares available in the market, which could encourage short sales that could further undermine the value of our common stock. Holders of our
securities could, therefore, experience a decline in the value of their investment as a result of short sales of our common stock.
Provisions in our charter documents and credit agreement and provisions of Delaware law may discourage takeovers, which could
affect the rights of holders of our common stock.
Provisions of Delaware law and our amended and restated certificate of incorporation, amended and restated bylaws and our Facility
Agreement and indenture could hamper a third party's acquisition of us or discourage a third party from attempting to acquire control of us.
These provisions include:
•
•
•
•
•
•
•
•
•
•
the absence of cumulative voting in the election of our directors, which means that the holders of a majority of our common stock may
elect all of the directors standing for election;
the ability of our board of directors to issue preferred stock with voting rights or with rights senior to those of the common stock
without any further vote or action by the holders of our common stock;
the division of our board of directors into three separate classes serving staggered three-year terms;
the ability of our stockholders, at such time when Thermo does not own a majority of our outstanding capital stock entitled to vote in
the election of directors, to remove our directors only for cause and only by the vote of at least 66 2/3% of the outstanding shares of
capital stock entitled to vote in the election of directors;
prohibitions, at such time when Thermo does not own a majority of our outstanding capital stock entitled to vote in the election of
directors, on our stockholders acting by written consent;
prohibitions on our stockholders calling special meetings of stockholders or filling vacancies on our board of directors;
the requirement, at such time when Thermo does not own a majority of our outstanding capital stock entitled to vote in the election of
directors, that our stockholders must obtain a super-majority vote to amend or repeal our amended and restated certificate of
incorporation or bylaws;
change of control provisions in our Facility Agreement, which provide that a change of control will constitute an event of default and,
unless waived by the lenders, will result in the acceleration of the maturity of all indebtedness under the credit agreement;
change of control provisions relating to our 8.00% Notes Issued in 2009 and 8.00% Notes Issued in 2013, which provide that a change
of control will permit holders of the Notes to demand immediate repayment; and
change of control provisions in our 2006 Equity Incentive Plan, which provide that a change of control may accelerate the vesting of
all outstanding stock options, stock appreciation rights and restricted stock.
We also are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits us from
engaging in any business combination with any interested stockholder, as defined in that section, for a period of three years following the date
on which that stockholder became an interested stockholder. This provision does not apply to Thermo, which became our principal stockholder
prior to our initial public offering.
These provisions also could make it more difficult for you and our other stockholders to elect directors and take other corporate actions, and
could limit the price that investors might be willing to pay in the future for shares of our common stock.
24
We are controlled by Thermo, whose interests may conflict with yours.
As of December 31, 2013, Thermo owned approximately 52% of our outstanding voting common stock and approximately 70% of all
outstanding common stock. Additionally, Thermo owns warrants and 8.00% Notes Issued in 2009 that may be converted into or exercised for
additional shares of common stock. Thermo is able to control the election of all of the members of our board of directors and the vote on
substantially all other matters, including significant corporate transactions such as the approval of a merger or other transaction involving our
sale.
We have depended substantially on Thermo to provide capital to finance our business. In 2006 and 2007, Thermo purchased an aggregate of
$200 million of common stock at prices substantially above market. On December 17, 2007, Thermo assumed all of the obligations and was
assigned all of the rights (other than indemnification rights) of the administrative agent and the lenders under our amended and restated credit
agreement. To fulfill the conditions precedent to our Facility Agreement, in 2009, Thermo converted the loans outstanding under the credit
agreement into equity and terminated the credit agreement. In addition, Thermo and its affiliates deposited $60.0 million in a contingent equity
account to fulfill a condition precedent for borrowing under the Facility Agreement, purchased $20.0 million of our 5.0% Notes, which were
subsequently converted into shares of common stock in 2013, purchased $11.4 million of our 8.00% Notes Issued in 2013, and loaned us $37.5
million to fund our debt service reserve account under the Facility Agreement. On May 20, 2013, we issued 8.00% Notes Issued in 2013 in
exchange for 5.75% Notes. In connection with this exchange, we entered into the Consent Agreement, the Common Stock Purchase
Agreement, and the Common Stock Purchase and Option Agreement. During 2013, Thermo and its affiliates funded a total of $65.0 million to
us pursuant to the terms of these agreements.
Thermo is controlled by James Monroe III, our Chairman and CEO. Through Thermo, Mr. Monroe holds equity interests in, and serves as
an executive officer or director of, a diverse group of privately-owned businesses not otherwise related to us. We reimburse Thermo and Mr.
Monroe for certain third party, documented, out of pocket expenses they incur in connection with our business.
The interests of Thermo may conflict with the interests of our other stockholders. Thermo may take actions it believes will benefit its equity
investment in us or loans to us even though such actions might not be in your best interests as a holder of our common stock.
Item 1B. Unresolved Staff Comments
Not Applicable
Item 2. Properties
Our principal headquarters are located in Covington, Louisiana, where we currently lease approximately 27,000 square feet of office space.
We own or lease the facilities described in the following table (in approximate square feet):
Location
Milpitas, California
Covington, Louisiana
Mississauga, Ontario
Managua
Clifton, Texas
Los Velasquez, Edo Miranda
Sebring, Florida
Aussaguel
Smith Falls, Ontario
High River, Alberta
Barrio of Las Palmas, Cabo Rojo
Wasilla, Alaska
Seletar Satellite Earth Station
Petrolina
Manaus
El Dorado Hills, California
Rio de Janeiro
Presidente Prudente
Dublin
Panama City
Country
USA
USA
Canada
Nicaragua
USA
Venezuela
USA
France
Canada
Canada
Puerto Rico
USA
Singapore
Brazil
Brazil
USA
Brazil
Brazil
Ireland
Panama
Square Feet
31,690
27,000
13,600
10,900
10,000
9,700
9,000
7,500
6,500
6,500
6,000
5,000
4,500
2,500
1,900
1,586
1,313
1,300
1,280
1,100
Facility Use
Satellite and Ground Control Center
Corporate Office
Canada Office
Gateway
Gateway
Gateway
Gateway
Satellite Control Center and Gateway
Gateway
Gateway
Gateway
Gateway
Gateway
Gateway
Gateway
Satellite and Ground Control Center
Brazil Office
Gateway
Europe Office
GAT Office
Owned/Leased
Leased
Leased
Leased
Owned
Owned
Owned
Leased
Leased
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Leased
Leased
Owned
Leased
Leased
25
Our owned properties in Clifton, Texas and Wasilla, Alaska are encumbered by liens in favor of the administrative agent under our Facility
Agreement for the benefit of the lenders thereunder. See "Management's Discussion and Analysis - Contractual Obligations and
Commitments."
Item 3. Legal Proceedings
For a description of our material pending legal and regulatory proceedings and settlements, see Note 8 to our Consolidated Financial
Statements.
Item 4. Mine Safety Disclosures
Not applicable.
26
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Common Stock Information
Our common stock trades on the OTCQB under the symbol "GSAT." The following table sets forth the high and low closing prices for our
common stock as reported for each fiscal quarter during the periods indicated.
Quarter Ended:
March 31, 2012
June 30, 2012
September 30, 2012
December 31, 2012
March 31, 2013
June 30, 2013
September 30, 2013
December 31, 2013
High
$
$
$
$
$
$
$
$
Low
0.85 $
0.75 $
0.53 $
0.48 $
0.58 $
0.62 $
1.09 $
1.99 $
0.53
0.25
0.25
0.26
0.30
0.27
0.58
1.15
As of February 28, 2014, there were 543,718,177 shares of our voting common stock outstanding, which were held by 121 holders of
record.
Dividend Information
We have never declared or paid any cash dividends on our common stock. Our Facility Agreement prohibits us from paying dividends. We
currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.
Item 6. Selected Financial Data
The following table presents our selected consolidated financial data for the periods indicated. We derived the historical data from our
audited Consolidated Financial Statements.
You should read the data set forth below together with our Consolidated Financial Statements and the related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Annual Report on Form 10-K. The
financial data is in thousands.
Statement of Operations Data (year ended):
Revenues
Operating loss
Other income (expense)
Loss before income taxes
Net loss
Balance Sheet Data (end of period):
Cash and cash equivalents
Property and equipment, net
Total assets
Current maturities of long-term debt
Long-term debt, less current maturities
Stockholders’ equity
2013
2012
2011
2010
2009
December 31,
$
82,711 $
(87,396)
(502,582)
(589,978)
(591,116)
76,318 $
(94,993)
(16,792)
(111,785)
(112,198)
72,827 $
(73,235 )
18,202
(55,033 )
(54,924 )
67,941 $
(59,769)
(37,302)
(97,071)
(97,467)
64,279
(53,791)
(21,148)
(74,939)
(74,923)
17,408
1,169,785
1,372,608
4,046
665,236
116,755
11,792
1,215,156
1,403,775
655,874
95,155
494,544
9,951
1,217,718
1,420,405
-
723,888
533,795
33,017
1,150,470
1,386,808
-
664,543
535,418
67,881
964,921
1,266,640
2,259
463,551
595,792
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and applicable notes to our
Consolidated Financial Statements and other information included elsewhere in this Annual Report on Form 10-K, including risk factors
disclosed in Part I, Item IA. The following information contains forward-looking statements, which are subject to risks and uncertainties.
Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-
looking statements. See “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.
27
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and assumptions that affect the amounts reported in our Consolidated Financial Statements and
accompanying notes. Note 1 to our Consolidated Financial Statements contains a description of the accounting policies used in the preparation
of our financial statements as well as the consideration of recently issued accounting standards and the estimated impact these standards will
have on our financial statements. We evaluate our estimates on an ongoing basis, including those related to revenue recognition; property and
equipment; income taxes; derivative instruments; inventory; allowance for doubtful accounts; pension plan; stock-based compensation; long-
lived assets; and litigation, commitments and contingencies. We base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances. Actual amounts could differ significantly from these estimates under different
assumptions and conditions.
We define a critical accounting policy or estimate as one that is both important to our financial condition and results of operations and
requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. We believe that the following are
the critical accounting policies and estimates used in the preparation of our Consolidated Financial Statements. In addition, there are other
items within our Consolidated Financial Statements that require estimates but are not deemed critical as defined in this paragraph.
Revenue Recognition
Our primary types of revenue include (i) service revenue from two-way voice communication and data transmissions and one-way data
transmissions between a mobile or fixed device and (ii) subscriber equipment revenue from the sale of Duplex two-way transmission products,
SPOT consumer retail products, and Simplex one-way transmission products. Additionally, we generate revenue by providing engineering and
support services to certain customers. We provide Duplex, SPOT and Simplex services directly to customers and indirectly through resellers
and IGOs.
Duplex Service Revenue
For our Duplex customers and resellers, we recognize revenue for monthly access fees in the period we render services. Access fees
represent the minimum monthly charge for each line of service based on its associated rate plan. We also recognize revenue for airtime minutes
in excess of the monthly access fees in the period such minutes are used. Under certain annual plans where customers prepay for a
predetermined amount of minutes, we defer revenue until the minutes are used or the prepaid time period expires. Unused minutes accumulate
until they expire, at which point we recognize revenue for any remaining unused minutes. For annual access fees charged for certain annual
plans, we recognize revenue on a straight-line basis over the term of the plan.
We expense or charge credits granted to customers against revenue or deferred revenue upon issuance.
We expense certain subscriber acquisition costs, including such items as dealer commissions and internal sales commissions at the time of
the related sale.
SPOT and Simplex Service Revenue
We sell SPOT and Simplex services as annual or multi-year plans and recognize revenue ratably over the service term or as service is used,
beginning when the service is activated by the customer. We record amounts received in advance as deferred revenue.
IGO Service Revenue
We earn a portion of our revenues through the sale of airtime minutes or data packages on a wholesale basis to IGOs. We recognize revenue
from services provided to IGOs based upon airtime minutes or data packages used by their customers and in accordance with contractual fee
arrangements. If collection is uncertain, we recognize revenue when cash payment is received.
Equipment Revenue
Subscriber equipment revenue represents the sale of fixed and mobile user terminals, accessories and our SPOT and Simplex products. We
recognize revenue upon shipment provided title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, the
fee is fixed and determinable, and collection is probable.
28
Other Service Revenue
We also provide certain engineering services to assist customers in developing new technologies related to our system. We recognize the
revenues associated with these services when the services are rendered, and we recognize the expenses when incurred. We recognize revenues
and costs associated with long-term engineering contracts on the percentage-of-completion basis of accounting.
Property and Equipment
We capitalize costs associated with the design, manufacture, test and launch of our low earth orbit satellites. We track capitalized costs
associated with our satellites by fixed asset category and allocate them to each asset as it comes into service. For assets that are sold or retired,
including satellites that are de-orbited and no longer providing services, we remove the estimated cost and accumulated depreciation. We
recognize a loss from an in-orbit failure of a satellite as an expense in the period it is determined that the satellite is not recoverable.
We depreciate satellites over their estimated useful lives, beginning on the date each satellite is placed into service. We evaluate the
appropriateness of estimated useful lives assigned to our property and equipment and revise such lives to the extent warranted by changing
facts and circumstances.
We capitalize costs associated with the design, manufacture and test of our ground stations and other capital assets. We track capitalized
costs associated with our ground stations and other capital assets by fixed asset category and allocate them to each asset as it comes into
service.
We review the carrying value of our assets for impairment whenever events or changes in circumstances indicate that the recorded value
may not be recoverable. We look to current and future undiscounted cash flows, excluding financing costs, as primary indicators of
recoverability. If we determine that impairment exists, we calculate any related impairment loss based on fair value.
Income Taxes
We use the asset and liability method of accounting for income taxes. This method takes into account the differences between financial
statement treatment and tax treatment of certain transactions. We recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We
measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Our deferred tax calculation requires us to make certain estimates about our future
operations. Changes in state, federal and foreign tax laws, as well as changes in our financial condition or the carrying value of existing assets
and liabilities, could affect these estimates. We recognize the effect of a change in tax rates as income or expense in the period that the rate is
enacted.
We assess whether it is more likely than not that we will be able to realize some or all of our deferred tax assets. If we cannot determine that
deferred tax assets are more likely than not recoverable, we are required to provide a valuation allowance against those assets. This assessment
takes into account factors including: (a) the nature, frequency, and severity of current and cumulative financial reporting losses; (b) sources of
estimated future taxable income; and (c) tax planning strategies.
Derivative Instruments
We recognize all derivative instruments as either assets or liabilities on the balance sheet at their respective fair values. We record
recognized gains or losses on derivative instruments in the consolidated statements of operations.
We estimate the fair values of our derivative financial instruments using various techniques that are considered to be consistent with the
objective of measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the
market risks that embody it and the expected means of settlement. We determine the fair value of our interest rate cap using pricing models
developed based on the LIBOR rate and other observable market data. We adjust the value to reflect nonperformance risk of both the
counterparty and us. There are various features embedded in our debt instruments that require bifurcation from the debt host. For the
conversion options and the contingent put features in the Amended and Restated Thermo Loan, the 8.00% Notes Issued in 2009 and the 8.00%
Notes Issued in 2013, we use the Monte Carlo valuation technique to determine fair value. For warrants issued with the 8.00% Notes Issued in
2009, we use the Monte Carlo valuation technique to determine fair value. Valuations derived from these models are subject to ongoing
internal and external verification and review. Estimating fair values of derivative financial instruments requires the development of significant
and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external
market factors. Our financial position and results of operations may vary materially from quarter-to-quarter based on conditions other than our
operating revenues and expenses.
29
Inventory
Inventory consists of purchased products and accessories. We compute cost using the first-in, first-out (FIFO) method and state inventory
transactions at the lower of cost or market. We measure inventory write-downs as the difference between the cost of inventory and market,
record them as a cost of subscriber equipment sales - reduction in the value of inventory. At the point of any inventory write-downs to market,
we establish a new, lower cost basis for that inventory, and any subsequent changes in facts and circumstances do not result in the restoration of
the former cost basis or increase in that newly established cost basis.
We review product sales and returns from the previous 12 months and future demand forecasts and write off any excess or obsolete
inventory. We also assess inventory for obsolescence by testing finished goods to ensure they have been properly stored and maintained so that
they will perform according to specifications. In addition, we assess the market for competing products to determine that the existing inventory
will be competitive in the marketplace. We also record a liability for firm, noncancelable, and unconditional purchase commitments with
contract manufacturers and suppliers for quantities in excess of our future demand forecasts consistent with the valuation of our excess and
obsolete inventory.
If there were to be a sudden and significant decrease in future demand for our products, or if there were a higher incidence of inventory
obsolescence because of rapidly changing technology and customer requirements, we could be required to write down our inventory, and our
liability for purchase commitments with contract manufacturers and suppliers, and accordingly gross margin could be adversely affected.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of some of our customers to make required
payments. We review these estimated allowances on a case by case basis, analyzing the customer's payment history and information regarding
the customer's creditworthiness known to us. In addition, we record a reserve based on the size and age of all receivable balances against those
balances that do not have specific reserves. If the financial condition of our customers deteriorates, resulting in their inability to make
payments, we would record additional allowances.
Pension Plan
We calculate our pension benefit obligation and expense using actuarial models. Critical assumptions and estimates we use in the actuarial
calculations include discount rate, expected rate of return on plan assets and other participant data, such as demographic factors, mortality, and
termination.
We determine discount rates annually based on our calculated average of rates of return of long-term corporate bonds. We based discount
rates on Prudential’s yield curve index as of December 31, 2013. We based discount rates on Moody’s and Citigroup’s annualized yield curve
index as of December 31, 2012. The discount rate used at the measurement date increased to 4.8% from 3.75% in 2012. A 100 basis point
increase in our discount rate would reduce our benefit obligation by $1.8 million.
We determine expected long-term rates of return on plan assets based on an evaluation of our plan assets, historical trends and experience,
taking into account current and expected market conditions. Plan assets are comprised primarily of equity and debt securities. The rate of return
on plan assets remained consistent at 7.12% in 2013 and 2012. To determine the rates of return, we consider historical experience and expected
future performance of plan assets.
Stock-Based Compensation
To measure compensation expense, we use valuation models which require estimates such as, forfeitures, vesting terms (calculated based on
market conditions associated with a certain award), volatility, and risk free interest rates. Additionally we recognize stock-based compensation
expense over the requisite service periods of the awards on a straight-line basis, which is generally commensurate with the vesting term.
Long-Lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of any asset
may not be recoverable. In the event of impairment, we write the asset down to its fair market value.
Litigation, Commitments and Contingencies
We are subject to various claims and lawsuits that arise in the ordinary course of business. Estimating liabilities and costs associated with
these matters requires judgment and assessment based on professional knowledge and experience of our management and legal counsel. The
ultimate resolution of any such exposure may vary from earlier estimates as further facts and circumstances become known.
30
Performance Indicators
Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality of and
potential variability of our earnings and cash flows. These key performance indicators include:
•
•
•
•
•
total revenue, which is an indicator of our overall business growth;
subscriber growth and churn rate, which are both indicators of the satisfaction of our customers;
average monthly revenue per user, or ARPU, which is an indicator of our pricing and ability to obtain effectively long-term, high-
value customers. We calculate ARPU separately for each type of our Duplex, Simplex, SPOT and IGO revenue;
operating income and adjusted EBITDA, which are both indicators of our financial performance; and
capital expenditures, which are an indicator of future revenue growth potential and cash requirements.
Comparison of the Results of Operations for the years ended December 31, 2013 and 2012
Revenue :
Total revenue increased $6.4 million, or 8%, to $82.7 million during 2013 from $76.3 million in 2012. This increase was due primarily to a
$7.2 million increase in service revenue offset by a $0.8 million decrease in revenue from subscriber equipment sales. The primary driver for
the increase in service revenue was Duplex service revenue as we continue to see increases in new subscriber activations as a result of
equipment sales over the past 12 months and subscribers moving to higher rate plans. Demand for our Duplex products and services has
increased as we successfully completed the restoration of our second-generation constellation in August 2013 by placing our last second-
generation satellite into commercial service. We also experienced increases in our SPOT and Simplex service lines due primarily to growth in
both of the related subscriber bases. The decrease in equipment sales revenue was due primarily to higher demand for our Simplex and SPOT
products in 2012 compared to 2013, offset partially by increased demand for our Duplex products in 2013.
The following table sets forth amounts and percentages of our revenue by type of service for 2013 and 2012 (dollars in thousands):
Year Ended
December 31, 2013
Year Ended
December 31, 2012
Revenue
% of Total
Revenue
Revenue
% of Total
Revenue
Service Revenues:
Duplex
SPOT
Simplex
IGO
Other
Total Service Revenues
$
$
22,788
27,902
7,619
1,029
5,306
64,644
28% $
34
9
1
6
78% $
18,438
25,227
6,146
804
6,853
57,468
The following table sets forth amounts and percentages of our revenue from equipment sales for 2013 and 2012 (dollars in thousands).
Equipment Revenues:
Duplex
SPOT
Simplex
IGO
Other
Total Equipment Revenues
Year Ended
December 31, 2013
Year Ended
December 31, 2012
Revenue
% of Total
Revenue
Revenue
% of Total
Revenue
$
$
6,565
4,546
5,927
841
188
18,067
31
8% $
6
7
1
-
22% $
3,447
5,196
9,081
990
136
18,850
24%
33
8
1
9
75%
5%
7
12
1
-
25%
The following table sets forth our average number of subscribers, ARPU, and ending number of subscribers by type of revenue for 2013 and
2012. The following numbers are subject to immaterial rounding inherent in calculating averages.
Average number of subscribers for the period (year ended):
Duplex
SPOT
Simplex
IGO
ARPU (monthly):
Duplex
SPOT
Simplex
IGO
Number of subscribers (end of period):
Duplex
SPOT
Simplex
IGO
Other
Total
$
December 31,
2013
2012
84,247
231,488
209,756
40,249
88,189
221,911
164,459
42,252
22.54 $
10.04
3.03
2.13
84,163
221,895
231,353
39,351
6,364
583,126
17.42
9.47
3.11
1.59
84,330
241,081
188,158
41,146
7,239
561,954
Other service revenue includes revenue generated from engineering services and third party sources, which is not subscriber
driven. Accordingly, we do not present average subscribers or ARPU for other revenue in the above charts.
Service Revenue
Duplex service revenue increased 24% in 2013 from 2012. During 2012, we began a process to convert certain of our Duplex customers to
higher rate plans commensurate with our improved service levels. This process resulted in churn among lower rate paying subscribers.
However, this churn was offset by the transition of subscribers to higher rate plans and the addition of new subscribers at higher rate plans,
resulting in increases to service revenue and ARPU. We have also experienced an increase in Duplex equipment units sold over the past 12
months, which has further contributed to the increase in Duplex service revenue as more customers are activating units on our network. We
have worked over the past several years to improve our coverage, which was impacted by Duplex limitations in our first-generation satellites.
However, as we completed our second-generation constellation in August 2013, Duplex service levels have improved. New pricing plans,
which were introduced in March 2013, are driving increases in Duplex revenue even though some subscribers deactivate when we discontinue
lower priced legacy plans.
SPOT service revenue increased 11% in 2013 from 2012. As previously stated, during the first quarter of 2013, we deactivated
approximately 36,000 suspended subscribers. Suspended subscribers are subscribers who have activated their devices, have access to our
network, but from which we recognize no service revenue while we are in the process of collecting payment of their fees. Ending SPOT
subscribers decreased 8% from December 31, 2012 to December 31, 2013. Excluding the suspended subscribers we deactivated in the first
quarter of 2013 from our December 31, 2012 subscriber count, total SPOT subscribers increased 8% from December 31, 2012 to December 31,
2013. The total decrease in SPOT subscribers in 2013 due to these deactivations was offset by growth in our non-suspended SPOT subscriber
base, which generated the increase in SPOT service revenue during 2013. Total suspended accounts included in our subscriber count were 7%
and 19% as of December 31, 2013 and 2012, respectively.
Simplex service revenue increased 24% in 2013 from 2012 due to a 23% increase in our Simplex subscribers during 2013. Throughout
2012, we experienced high demand for our Simplex products, resulting in increased subscriber activations in 2012 and 2013, thus generating
additional Simplex service revenue recognized in 2013. Revenue growth for our Simplex customers is not necessarily commensurate with
subscriber growth due to the various competitive pricing plans we offer.
32
Other service revenue decreased $1.5 million, or 23%, in 2013 from 2012. This decrease was due primarily to decreases in our engineering
service revenue and third party revenue. $0.7 million, or 43%, of this total decrease in other service revenue was due to the timing and lower
amount of engineering service revenue recognized in 2012 compared to 2013, which was driven by the contracts in place during the respective
periods. The decrease in other service revenue was also driven by a decrease in third party revenue. While we were manufacturing and
deploying our second-generation constellation, we purchased service from other satellite providers which we re-sold to certain of our loyal
subscribers. This revenue is recorded in other service revenue as third party revenue. As our coverage is now fully restored, we have begun to
transition these subscribers to our network, which has contributed to the increase in our Duplex service revenue. As third party revenue
decreases, other service revenue will also decrease and Duplex revenue will increase. The decrease in third party revenue represented
approximately $0.7 million, or 44%, of the total decrease in other service revenue.
Equipment Revenue
Revenue from Duplex equipment sales increased over 90% in 2013 from 2012. As a result of launching and placing into service our
second-generation satellites, we are experiencing increased demand for our Duplex two-way voice and data products. As previously discussed,
we introduced SPOT Global Phone in the second quarter of 2013; this product contributed approximately 57% of the total increase in
equipment units sold during 2013.
Revenue from SPOT equipment sales decreased 13% in 2013 from 2012. As previously discussed, we experienced higher demand for our
SPOT2 in 2012 due to a few large volume sales to certain customers throughout 2012 and particularly in the second quarter of 2012; this
demand did not recur at the same levels in 2013 as sales of our SPOT2 slowed in our reseller channel due to the anticipation of the release of
SPOT Gen3. This decrease was offset in part by the introduction of SPOT Gen3 in the third quarter of 2013. The decrease in SPOT equipment
sales was also reduced by the introduction of SPOT Trace in the fourth quarter of 2013.
Revenue from Simplex equipment sales decreased 35% in 2013 from 2012. We continue to experience demand for our commercial
applications for M2M asset monitoring and tracking, however, revenue related to these products decreased in 2013 from 2012 due to the mix of
products sold during 2013 as well as higher demand for products in 2012.
Operating Expenses :
Total operating expenses decreased $1.2 million, or less than 1%, to $170.1 million in 2013 from $171.3 million in 2012. The fluctuation
in operating expenses year over year is due to various one-time items in 2012. During 2012, we recognized a $22.0 million termination charge
related to the settlement with Thales regarding the construction of Phase 3 satellites, as well as the recognition of a loss of approximately $7.1
million related to an adjustment made to the carrying value of our first-generation constellation. These items did not recur in 2013. Excluding
these one-time items, operating expenses increased $27.9 million, or 20%, in 2013 from 2012, due primarily to an increase in depreciation
expense of $20.8 million.
The increase in operating expenses, excluding one-time items discussed above, during 2013 from 2012 was driven primarily by the $20.8
million increase in non-cash depreciation expense as a result of additional second-generation satellites coming into service throughout the
fourth quarter of 2012 and the first eight months of 2013 with our final second-generation satellite was placed into service in August 2013. This
increase was also due to higher expense recorded related to the reduction in the value of equipment, discussed further below.
Cost of Services
Cost of services increased $0.1 million, or less than 1%, to $30.2 million in 2013 from $30.1 million in 2012. Cost of services comprises
primarily network operating costs, which are generally fixed in nature. The slight increase in cost of services was due primarily to higher
salaries and other expense categories as we expand and repair our gateway infrastructure as well as timing of costs incurred related to our
engineering service contracts in the current and prior year. We also experienced an increase in research and development costs in 2013 as we
continue to develop and launch new products to support our growing commercial and retail channels. These increases were offset slightly by
additional cost savings experienced as a result of our increased focus on monitoring telecommunication service expenses.
Cost of Subscriber Equipment Sales
Cost of subscriber equipment sales increased $0.3 million, or 3%, to $13.6 million in 2013 from $13.3 million in 2012. The fluctuations in
cost of subscriber equipment sales are due primarily to the mix and volume of products sold during the respective years.
Cost of Subscriber Equipment Sales - Reduction in the Value of Inventory
Cost of subscriber equipment sales - reduction in the value of inventory was $5.8 million in 2013 compared to $1.4 million in 2012. During
2013, we recorded an inventory reserve of $5.8 million related primarily to certain Duplex accessories, including car kit bases. We recognized
these charges after assessing our inventory quantities, forecasted equipment sales and prices, and attachment rates for our accessories. This
evaluation showed that there was an excess of certain Duplex accessories included in inventory on hand. During 2012, we recorded an
inventory reserve of $1.0 million related to component parts that will not be utilized in the manufacturing or production of current or future
products.
33
Marketing, general and administrative
Marketing, general and administrative expenses increased $2.4 million, or 9%, to $29.9 million in 2013 from $27.5 million in 2012. As
disclosed in Note 14 to our Consolidated Financial Statements, we incurred additional compensation cost of approximately $0.8 million, $0.6
million of this $0.8 million was additional compensation cost resulting from the modification and subsequent vesting of our market based stock
options during the third quarter of 2013. This additional compensation cost represented approximately 34% of the total increase in marketing,
general and administrative expenses in 2013. The remaining increase was due to strategic investments made for our sales and marketing
initiatives and higher bad debt expense as our accounts receivable balance increased. These increases were offset partially by higher legal fees
incurred in 2012 related to the 2012 Thales arbitration as well as the write off of deferred financing costs in the third quarter of 2012; these
items did not recur in 2013.
Reduction in the Value of Long-Lived Assets
We did not reduce the value of long-lived assets in 2013 compared to a $7.2 million reduction in 2012. During the second quarter of 2012,
we recorded a loss of $7.1 million related to an adjustment made to the carrying value of our first-generation constellation. See Note 7 to our
Consolidated Financial Statements for further discussion. This did not recur in 2013.
Contract Termination Charge
During the second quarter of 2012, we recorded a contract termination charge of €17.5 million. This charge resulted from the agreement
between us and Thales regarding the termination charge related to the construction of Phase 3 second-generation satellites. See Note 8 to our
Consolidated Financial Statements for further discussion. This charge did not recur in 2013.
Depreciation, Amortization and Accretion
Depreciation, amortization, and accretion expense increased $20.8 million, or 30%, to $90.6 million in 2013 compared to $69.8 million in
2012. This increase relates primarily to additional depreciation expense for the second-generation satellites placed into service during the fourth
quarter of 2012 and the first eight months of 2013 with our last second-generation satellite placed into service in August 2013.
Other Income (Expense):
Loss on Extinguishment of Debt
In May 2013 we entered into the Exchange Agreement (as defined later) with the holders of approximately 91.5% of our outstanding 5.75%
Notes. The Exchanging Note Holders (as defined later) received a combination of cash, shares of our common stock and 8.00% Notes Issued in
2013. We redeemed the remaining 5.75% Notes for cash in an amount equal to their outstanding principal amount. As a result of the exchange
and redemption, we recorded a loss on extinguishment of debt of approximately $47.2 million in the second quarter of 2013, representing the
difference between the net carrying amount of the old 5.75% Notes and the fair value of consideration given in the exchange (including the new
8.00% Notes Issued in 2013, cash payments to both Exchanging and non-Exchanging Note Holders, equity issued to the Exchanging Note
Holders and fees incurred in connection with the exchange). Approximately 12.9% of the outstanding principal amount of 8.00% Notes Issued
in 2013 was converted into shares of our common stock on July 19, 2013. As a result of this conversion, we recorded a gain on extinguishment
of debt of approximately $2.5 million in the third quarter of 2013, which represented the difference between the reacquisition price and net
carrying amount of the debt related to this conversion. In the fourth quarter of 2013, additional 8.00% Notes Issued in 2013 were converted,
resulting in our recognizing an additional gain on extinguishment of debt of approximately $1.7 million.
In July 2013, we entered into an amended and restated Loan Agreement with Thermo. As a result of the amendment and restatement, we
recorded a loss on extinguishment of debt of $66.1 million in the third quarter of 2013, representing the difference between the fair value of the
indebtedness under the Loan Agreement, as amended and restated, and its carrying value just prior to amendment and restatement.
Loss on Equity Issuance
In May 2013, we entered into a Common Stock Purchase Agreement with Thermo. As a result of issuing stock under the Common Stock
Purchase agreement with Thermo, we recognized a loss on the sale of shares of $14.0 million during the second quarter of 2013, representing
the difference between the sale price of our common stock sold to Thermo and its fair value on the date of each sale (measured as the closing
stock price on the date of each sale).
34
In October 2013, we entered into a Common Stock Purchase and Option Agreement with Thermo. As a result of issuing stock under the
Common Stock Purchase and Option Agreement, we recognized a loss on the sale of these shares to Thermo of approximately $2.4 million
during the third quarter of 2013, representing the difference between the sale price and the fair value of our common stock (measured as the
closing stock price on the date of each sale).
In July 2013, a holder of our 5.0% Warrants exercised warrants in a net share exercise. The fair value of the common stock issued with
respect to this exercise was recorded as a loss on shares issued of $0.3 million, representing the fair value of the stock on the date the warrant
was exercised.
Interest Income and Expense
Interest income and expense, net, increased by $46.3 million to $67.8 million in 2013 from $21.5 million in 2012. During 2013 all of our
5.0% Notes were converted into shares of our common stock. The total expense recorded in 2013 as a result of these conversions was $29.3
million. We recorded a beneficial conversion feature in connection with the issuance of the 5.0% Notes; when an instrument with a beneficial
conversion feature is converted prior to the full accretion of the debt discounts, the unamortized discounts are recorded as interest expense. See
Note 3 to our Consolidated Financial Statements for further discussion. Similar charges did not occur in 2012.
The increase in interest expense was due also to a reduction in our capitalized interest due to the decline in our construction in progress
balance. As we place satellites into service, our construction in progress balance related to our second-generation satellites decreases, which
reduces the amount of interest we can capitalize under GAAP. As a result of this decrease in our construction in progress balance, we recorded
approximately $28.2 million in interest expense during 2013 compared to $17.1 million in 2012.
Derivative Gain (Loss)
Derivative losses increased by $313.0 million to a loss of $306.0 million in 2013 compared to a gain of $7.0 million in 2012. We recognize
gains or losses due to the change in the value of certain embedded features within our debt instruments that require standalone derivative
accounting. These fluctuations are due primarily to changes in our stock price as well as other inputs used in our valuation models. Our stock
price increased over 400% from December 31, 2012 to December 31, 2013; this increase in stock price is one of the most significant drivers for
the change in value of these derivative instruments.
Other
Other income (expense) fluctuated by $0.7 million to an expense of $3.0 million in 2013 from an expense of $2.3 million in 2012. Changes
in other income (expense) are due primarily to foreign currency gains and losses recognized during the respective periods. In February 2013,
the Venezuelan government devalued its currency. As a result of this devaluation, we recorded a foreign currency gain of approximately $0.8
million during the first quarter of 2013. This devaluation did not have a material impact on our operations. This gain was offset by a $1.0
million loss recorded as a result of issuing stock to Hughes in the fourth quarter of 2013 (see Note 7 to the Consolidated Financial Statements
for further discussion); a $0.6 million loss related to an equity method investment; and other foreign currency losses recognized during 2013.
Comparison of the Results of Operations for the years ended December 31, 2012 and 2011
Revenue :
Total revenue increased by $3.5 million, or approximately 5%, to $76.3 million for 2012 from $72.8 million in 2011. During the first
quarter of 2011, we recognized $2.0 million in nonrecurring revenue as a result of the termination of our Open Range partnership. Excluding
this revenue recognized, total revenue increased $5.5 million, or approximately 8%. We attribute this increase to higher sales of Simplex
equipment and increased service revenue as a result of growth in our SPOT and Simplex subscriber base. These increases were offset primarily
by decreases in sales of SPOT equipment due to the introduction of new product offerings in early 2011. The majority of the subscribers we
gained as a result of higher SPOT equipment sales in 2011 is in our current subscriber base and continues to generate service revenue.
35
The following table sets forth amounts and percentages of our revenue by type of service for 2012 and 2011 (dollars in thousands):
Year Ended
December 31, 2012
Year Ended
December 31, 2011
Revenue
% of Total
Revenue
Revenue
% of Total
Revenue
Service Revenues:
Duplex
SPOT
Simplex
IGO
Other
Total Service Revenues
$
$
18,438
25,227
6,146
804
6,853
57,468
24% $
33
8
1
9
75% $
19,778
19,753
5,495
1,533
8,838
55,397
The following table sets forth amounts and percentages of our revenue for equipment sales for 2012 and 2011 (dollars in thousands).
Year Ended
December 31, 2012
Year Ended
December 31, 2011
Revenue
% of Total
Revenue
Revenue
% of Total
Revenue
Equipment Revenues:
Duplex
SPOT
Simplex
IGO
Other
Total Equipment Revenues
$
$
3,447
5,196
9,081
990
136
18,850
5% $
7
12
1
-
25% $
2,607
7,968
6,431
1,128
(704 )
17,430
27%
27
8
2
12
76%
3%
11
9
1
-
24%
The following table sets forth our average number of subscribers, ARPU, and ending number of subscribers by type of revenue for 2012 and
2011. The following numbers are subject to immaterial rounding inherent in calculating averages.
Average number of subscribers for the period (year ended):
Duplex
SPOT
Simplex
IGO
ARPU (monthly):
Duplex
SPOT
Simplex
IGO
Number of subscribers (end of period):
Duplex
SPOT
Simplex
IGO
Other
Total
$
December 31,
2012
2011
88,189
221,911
164,459
42,252
93,963
177,247
136,037
47,920
17.42 $
9.47
3.11
1.59
84,330
241,081
188,158
41,146
7,239
561,954
17.54
9.29
3.37
2.67
92,047
202,741
140,760
43,357
7,548
486,453
Other service revenue includes revenue generated from engineering services, third party sources and our former Open Range partnership,
which is not subscriber driven. Accordingly, we do not present average subscribers or ARPU for other revenue in the above charts.
Service Revenue
Duplex revenue decreased approximately 7% in 2012 from 2011. Our two-way communication issues continue to affect our Duplex
revenue. Despite our efforts to maintain our Duplex subscriber base by lowering prices for our Duplex equipment, our subscriber base
decreased by approximately 8% during 2012. During 2012, we began a process to convert certain Duplex customers to higher rate plans
commensurate with our improved service levels. As a result, we have experienced some additional churn in our subscriber base. As a result of
launching and placing into service our second-generation satellites, we are experiencing increases in demand for our Duplex two-way voice and
data products. As these units are activated, we expect to see increases in the related Duplex service in the future.
36
SPOT revenue increased approximately 28% in 2012. We generated increased service revenue from SPOT and added additional service
revenue from the release of other SPOT consumer retail products sold during 2011, which are reflected in our 2012 subscriber base. Our SPOT
subscriber base increased by approximately 19% during 2012. Our subscriber count includes suspended subscribers, who are subscribers who
have activated their devices, have access, but no service revenue is being recognized for their fees while we are in the process of collecting
payment. These suspended accounts represented 19% and 20% of our total SPOT subscribers as of December 31, 2012 and 2011, respectively.
Beginning in 2013, we initiated a process to deactivate these suspended accounts.
Simplex revenue increased approximately 12% in 2012 from 2011. We generated increased service revenue due to a 34% increase in our
Simplex subscribers during 2012. Revenue growth for our Simplex customers is not necessarily commensurate with subscriber growth due to
the various competitive pricing plans we offer and product mix.
Other revenue decreased approximately 22% in 2012. This decrease related to the nonrecurrence in 2012 of revenue recognized as a result
of the termination of our Open Range contract in the first quarter of 2011. Excluding the recognition of Open Range revenue of approximately
$2.0 million, other revenue remained consistent, which was due primarily to higher engineering services revenue and higher activation fees
recognized during 2012 compared to 2011. These increases were offset by decreases in service revenue recognized from third party sources.
Equipment Revenue
Duplex equipment sales increased by approximately 32% in 2012. As a result of launching and placing into service our second-generation
satellites, we are experiencing increased demand for our Duplex two-way voice and data products. As these units are activated, we expect to
see increases in the related Duplex service in the future. As we place into service the remaining second-generation satellites that we launched in
February 2013, our two-way communication reliability will continue to improve, and we expect Duplex equipment revenue to increase.
Our inventory and advances for inventory balances were $42.2 million and $9.2 million, respectively, as of December 31, 2012, compared
with subscriber equipment sales of $18.9 million for 2012. A significant portion of our inventory consists of Duplex products which are
designed to operate with both our first-generation and our second-generation satellites. Our advances for inventory relate to our commitment
with Qualcomm to purchase additional Duplex products. In May 2008, we entered into an agreement with Hughes under which Hughes will
design, supply and implement (a) RAN ground network equipment and software upgrades for installation at a number of our satellite gateway
ground stations and (b) satellite interface chips to be used in various next-generation Globalstar devices.
We sold a limited number of Duplex products in 2012 and 2011, compared to the high level of inventory on hand. However, we have
several initiatives underway intended to increase future sales of Duplex products, which depend upon successfully completing the deployment
of our second-generation constellation. With the improvement of both coverage and quality for our Duplex services resulting from the
deployment of our second-generation constellation, we expect an increase in the sale of Duplex products which would result in a reduction in
the inventory currently on hand.
SPOT equipment sales decreased approximately 35% in 2012. The decrease relates primarily to higher sales of certain new SPOT consumer
retail products which were released in early 2011 which did not recur in 2012. We anticipate introducing additional SPOT products during
2013 that we expect will further drive sales, subscriber and revenue growth.
Simplex equipment sales increased approximately 41% in 2012. The increase is due primarily to continued success of our commercial
applications for M2M asset monitoring and tracking.
Operating Expenses :
Total operating expenses increased $25.2 million, or approximately 17%, to $171.3 million from $146.1 million in 2011. This increase is
primarily due to the $22.0 million agreed termination charge related to the settlement with Thales regarding the construction of Phase 3
satellites, as well as the recognition of a loss of approximately $7.1 million related to an adjustment made to the carrying value of our first-
generation constellation. Excluding these one-time items, total operating expenses decreased $3.9 million, or 3%, during 2012 due to decreases
in various components of operating expenses, partially offset by higher depreciation expense of $19.8 million as a result of additional second-
generation satellites coming into service throughout 2011 and 2012.
Cost of Services
Cost of services decreased $7.8 million, or approximately 21%, to $30.1 million from $37.9 million in 2011. Cost of services is comprised
primarily of network operating costs, which are generally fixed in nature. The decrease during the year was due primarily to implementation of
our plans to lower costs by monitoring operating expenses and streamlining operations.
37
Cost of Subscriber Equipment Sales
Cost of subscriber equipment sales increased $1.4 million, or approximately 11%, to $13.3 million from $11.9 million in 2011. These
increases were due primarily to increases in equipment revenue of 8% for 2012 from 2011. These increases were offset slightly by lower
manufacturing costs for our SPOT and Simplex products.
Marketing, general and administrative
Marketing, general and administrative expenses decreased $6.3 million, or approximately 19%, to $27.5 million from $33.8 million in 2011.
This decrease was due primarily to higher legal fees incurred during 2011 related to the arbitration with Thales, and our recording a provision
for contingent payroll reimbursements as a result of our relocation agreement with the State of Louisiana during 2011. We also experienced
decreases across all expense categories due to improvements in our cost structure from monitoring operating costs and streamlining operations.
Contract Termination Charge
During the second quarter of 2012, we recorded a contract termination charge of €17.5 million. This charge related to the agreement
between us and Thales regarding construction of additional second-generation satellites. See Note 8 to our Consolidated Financial Statements
for further discussion.
Reduction in the Value of Inventory
Cost of subscriber equipment sales - reduction in the value of inventory was $1.4 million compared to $8.8 million in 2011. During 2012,
we recorded an inventory reserve of $1.0 million related to component parts that will not be utilized in the manufacturing or production of
current or future products. In 2011, we recorded impairment charges on our phones and related inventory that use our two-way communication
services. These charges were recognized after assessment of our inventory quantities and our forecasted equipment sales and prices given the
current and expected market conditions for this type of equipment. During 2011, we also recorded impairment charges of $1.0 million as a
result of discontinuing the sale of certain products resulting from our strategic decision to focus on our core products and curtail substantially
all on-going product development activities.
Reduction in the Value of Long-Lived Assets
Reduction in the value of long-lived assets was $7.2 million during 2012 and $3.6 million during 2011. During the second quarter of 2012,
we recorded a loss of $7.1 million related to an adjustment made to the carrying value of our first-generation constellation. See Note 7 to our
Consolidated Financial Statements for further discussion. During 2011, we recorded an impairment charge of $3.0 million related to intangible
assets, equipment, and capitalized software costs as a result of discontinuing the sale of certain products resulting from our strategic decision to
focus on our core products and curtail substantially all on-going product development activities.
Depreciation, Amortization and Accretion
Depreciation, amortization, and accretion expense increased $19.8 million, or approximately 39%, to $69.8 million from $50.0 million in
2011. The increase relates primarily to additional depreciation expense for our second-generation satellites placed into service throughout 2011
and 2012.
Other Income (Expense):
Interest Income and Expense
Interest income and expense, net, increased by $16.7 million to a net expense of $21.5 million for 2012 from $4.8 million in 2011. This
increase was due primarily to a reduction in our capitalized interest due to the status of our construction in progress. As we place satellites into
service, our construction in progress balance related to our second-generation satellites decreases, which reduces the amount of interest we can
capitalize under Generally Accepted Accounting Principles (“GAAP”). As a result of this decrease in our construction in progress balance, we
recorded approximately $17.1 million of interest expense during 2012 and $0 in 2011.
38
Derivative Gain (Loss)
Derivative gain (loss) decreased by $16.9 million to a gain of $6.9 million for 2012 from a gain of $23.8 million in 2011, due primarily to
changes in our stock price.
Other
Other income (expense) increased by $1.5 million to expense of $2.3 million for 2012 from expense of $0.8 million in 2011. Changes in
other income (expense) are due primarily to foreign currency gains and losses recognized during the respective periods.
Liquidity and Capital Resources
Our principal liquidity requirements include paying remaining amounts outstanding related to the deployment of our second-generation
constellation, making improvements to our ground infrastructure, repaying our debt and funding our operating costs. Our principal sources of
liquidity include cash on hand, cash flows from operations and funds available under the equity line agreement with Terrapin. We also have
funds available under the Consent Agreement and the Common Stock Purchase and Option Agreement with Thermo. See below for further
discussion. Additionally, we have approximately $37.9 million in restricted cash which must be maintained through the term of the Facility
Agreement and may be used to pay the final principal and interest payments under the Facility Agreement.
Cash Flows for the years ended December 31, 2013, 2012 and 2011
The following table shows our cash flows from operating, investing and financing activities for 2013, 2012 and 2011 (in thousands):
Statements of Cash Flows
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash Flows Used in Operating Activities
2013
Year Ended December 31,
2012
2011
$
$
(6,462) $
(37,119)
48,972
225
5,616 $
6,874 $
(58,010)
52,386
591
1,841 $
(5,503)
(99,419)
82,638
(782)
(23,066)
Net cash used in operating activities during 2013 was $6.5 million compared to net cash provided by operating activities during
2012 of $6.9 million. During 2013, we used cash from operating activities to decrease certain accounts payable and accrued
liabilities. Compared to the same period in 2012, net cash provided by (used in) operating activities fluctuated by $13.3 million,
which was due primarily to a $6.0 million refund received in the third quarter of 2012 related to the termination of a contingent
agreement with a potential vendor for services related to our second-generation constellation.
Net cash provided by operating activities during 2012 was $6.9 million compared to net cash used of $5.5 million in 2011.
During the third quarter of 2012, we received a $6.0 million refund related to the termination of an agreement with a vendor for
services related to our second-generation constellation. We also experienced favorable changes in operating assets and liabilities
during 2012, which resulted in positive cash flows from operations for 2012.
Cash Flows Used in Investing Activities
Cash used in investing activities was $37.1 million during 2013 compared to $58.0 million during 2012. The decrease in cash
used in investing activities of $20.9 million was due primarily to a fluctuation in our restricted cash balance as well as a decrease
in costs related to our second-generation constellation and ground upgrades. During 2013, we drew $8.8 million of excess funds
held in our debt service reserve account to pay launch related expenses. The decrease in cash used in investing activities was also
due to decreased payments related to the construction of our second-generation satellites as they were deployed fully by August
2013. We expect to continue to incur capital expenditures throughout 2014 and in future years relating to capital expenditures to
upgrade our gateways and other ground facilities.
Cash used in investing activities was $58.0 million during 2012 compared to $99.4 million during 2011. The decrease in cash
used during 2012 when compared to 2011 resulted primarily from decreased payments related to the construction of our second-
generation constellation as the second-generation satellites neared completion and the deferral of payments to contactors working
on the construction of our next-generation ground upgrades.
39
Cash Flows Provided by Financing Activities
Net cash provided by financing activities was $49.0 million in 2013 compared to $52.4 million in 2012. The fluctuation in cash
provided by financing activities during 2013 was due primarily to transactions related to our debt instruments and equity
commitments. In May 2013, we exchanged our 5.75% Notes for new 8.00% Notes Issued in 2013. In connection with this
exchange, we paid $20.0 million in cash as a reduction of principal outstanding. We also received $65.0 million in equity from
Thermo pursuant to the Consent Agreement and the Common Stock Purchase and Option Agreement. We also made payments for
financing costs associated with this exchange and the amendment and restatement of our Facility Agreement in August 2013. See
Note 3 to our Consolidated Financial Statements for further discussion.
During the third quarter of 2013, we drew the remaining amount under our Facility Agreement and the interest earned from
amounts held in our contingent equity account. The total drawn from these accounts totaled $1.7 million whereas we drew $53.2
million from these accounts during 2012.
We also received cash for the issuance of shares through warrants exercised, funds received from shares issued to Terrapin and
the cancellation of our 2008 Share Lending Agreement. As a result of these transactions, we received $21.4 million.
Net cash provided by financing activities in 2012 decreased by $30.2 million to $52.4 million from $82.6 million in 2011. The
decrease from 2011 to 2012 was attributable primarily to the issuance of $38.0 million of our 5% Notes during June 2011, which
did not recur in 2012. We funded 2012 activities by borrowing under our Facility Agreement and drawing from our contingent
equity account. We continue to seek additional financing to fund capital expenditures.
Cash Position and Indebtedness
As of December 31, 2013, we held cash and cash equivalents of $17.4 million, and $24.0 million was available under the equity line
agreement with Terrapin. We also have funds available under the Consent Agreement and the Common Stock Purchase and Option Agreement.
Thermo’s remaining commitment under the Consent Agreement is $5.0 million. This commitment will be reduced to the extent that we
exercise our option to require Thermo to purchase up to $11.5 million of our common stock under the Common Stock Purchase and Option
Agreement. Additionally, we have approximately $37.9 million in restricted cash which must be maintained through the term of the Facility
Agreement and may be used to pay the final principal and interest payments under the Facility Agreement.
As of December 31, 2012, cash and cash equivalents were $11.8 million; cash available under our Facility Agreement was $0.7 million;
interest earned on funds previously held in our contingent equity account was $1.1 million, and excess funds held in our debt service reserve
account was $8.9 million.
The carrying amount of our current and long-term debt outstanding was $4.0 million and $665.2 million, respectively, at December 31,
2013, compared to $655.9 million and $95.1 million, respectively, at December 31, 2012. The fluctuations in our debt balances from December
31, 2012 to December 31, 2013 are due primarily to the restructuring of our Facility Agreement in August 2013, which cured all of the then
existing events of default. As a result of certain events of default then existing under our Facility Agreement, GAAP required us to show the
amounts outstanding as current on our December 31, 2012 balance sheet. The fluctuations in our debt balances from December 31, 2012 to
December 31, 2013 are also due to the exchange and redemption of our 5.75% Notes in May 2013. As the first put date of the 5.75% Notes was
April 1, 2013, we classified these notes as current debt on our December 31, 2012 consolidated balance sheet. As a result of our exchanging
these Notes for 8.00% Notes Issued in 2013, cash and common stock, we have classified the new notes as noncurrent on our December 31,
2013 consolidated balance sheet. The current portion of long-term debt outstanding at December 31, 2013 represents the first principal payment
under our Facility Agreement, currently scheduled for December 2014. See Note 3 to the Consolidated Financial Statements for further
discussion.
Facility Agreement
We have a $586.3 million senior secured credit facility agreement (the “Facility Agreement”) that, as described below, was amended and
restated effective in August 2013 and is scheduled to mature in December 2022. Semi-annual principal repayments are scheduled to begin in
December 2014. The facility bears interest at a floating LIBOR rate plus a margin of 2.75% through June 2017, increasing by an additional
0.5% each year to a maximum rate of LIBOR plus 5.75%. Ninety-five percent of our obligations under the Facility Agreement are guaranteed
by COFACE, the French export credit agency. Our obligations under the Facility Agreement are guaranteed on a senior secured basis by all of
our domestic subsidiaries and are secured by a first priority lien on substantially all of the assets of us and our domestic subsidiaries (other than
their FCC licenses), including patents and trademarks, 100% of the equity of our domestic subsidiaries and 65% of the equity of certain foreign
subsidiaries. The Facility Agreement contains customary events of default and requires that we satisfy various financial and nonfinancial
covenants. We were in compliance with all covenants as of December 31, 2013.
40
The Facility Agreement requires the Company to maintain a total of $37.9 million in a debt service reserve account. The use of the funds in
this account is restricted to making principal and interest payments under the Facility Agreement. As of December 31, 2013, the balance in the
debt service reserve account was $37.9 million and classified as restricted cash.
Former Terms of Facility Agreement
On June 5, 2009, we entered into the Facility Agreement with a syndicate of bank lenders, including BNP Paribas, Natixis, Société
Générale, Caylon, Crédit Industriel et Commercial as arrangers and BNP Paribas as the security agent and the agent for the lenders under our
Facility Agreement. COFACE, the French export credit agency, has provided a 95% guarantee to the lending syndicate of our obligations under
the Facility Agreement. Prior to its amendment and restatement in August 2013, the Facility Agreement was scheduled to mature 84 months
after the first repayment date, as amended. Semi-annual principal repayments were scheduled to begin in June 2013, as amended. The facility
bore interest at a floating LIBOR rate, plus a margin of 2.25% through December 2017 and 2.40% thereafter. Interest payments were due on a
semi-annual basis.
Pursuant to the terms of the Facility Agreement, in June 2009 we were required to maintain a total of $46.8 million in a debt service reserve
account. The required amount was to be funded until the date that was six months prior to the first principal repayment date, scheduled for June
2013. The minimum required balance fluctuated over time based on the timing of principal and interest payment dates. In December 2012, the
amount required to be funded into the debt service reserve account was reduced by approximately $8.9 million due to the timing of the first
principal repayment date. The agent for our Facility Agreement permitted us to withdraw this amount to pay certain capital expenditure costs
associated with the fourth launch of our second-generation satellites in February 2013.
As a result of the Thales arbitration ruling and the settlement agreements reached with Thales in 2012 related to the arbitration ruling, the
lenders concluded that events of default occurred under the Facility Agreement. We were also in default of certain other financial and
nonfinancial covenants, including, but not limited to, lack of payment of principal in June 2013 in accordance with the terms of the Facility
Agreement, required minimum funding of our debt service account and in-orbit acceptance of all of our second-generation satellites by April
2013. At June 30, 2013, the borrowings were shown as current on our consolidated balance sheet in accordance with applicable accounting
rules.
The Facility Agreement, as previously amended, required that:
•
•
following December 31, 2014, we maintain a minimum liquidity of $5.0 million;
we achieve for each period the following minimum adjusted consolidated EBITDA (as defined in the Facility Agreement):
Period
7/1/12-6/30/13
1/1/13-12/31/13
Minimum Amount
$
$
65.0 million
78.0 million
•
•
beginning in June 2013, we maintain a minimum debt service coverage ratio of 1.00:1.00, gradually increasing to a ratio of
1.50:1.00 through 2019; and
beginning in June 2013, we maintain a maximum net debt to adjusted consolidated EBITDA ratio of 7.25:1.00 on a last twelve
months basis, gradually decreasing to 2.50:1.00 through 2019.
Due to delays in launching our second-generation constellation, we projected that we might not be in compliance with certain financial and
nonfinancial covenants specified in the Facility Agreement during the next 12 months. Projected noncompliance with covenants included, but
was not limited to, minimum consolidated adjusted EBITDA, minimum debt service coverage ratio and minimum net debt to adjusted
consolidated EBITDA. If we could not obtain either a waiver or an amendment, any of these failures to comply would have represented an
additional event of default. An event of default under the Facility Agreement would have permitted the lenders to accelerate the indebtedness
under the Facility Agreement. That acceleration would have permitted acceleration of our obligations under other indebtedness that contains
cross-acceleration provisions. These events of default were waived or cured in connection with the amendment and restatement of the Facility
Agreement.
Amended and Restated Facility Agreement
On July 31, 2013, we entered into the GARA with Thermo, our domestic subsidiaries (the “Subsidiary Guarantors”), the Lenders and BNP
Paribas as the security agent and COFACE Agent, providing for the amendment and restatement of our Facility Agreement and certain related
credit documents. The GARA became effective on August 22, 2013 and, among other things, waived all of our existing defaults under the
Facility Agreement and restructured the financial covenants.
41
The Facility Agreement requires that:
•
•
•
For the period July 1, 2013 through December 31, 2013, we will not exceed maximum capital expenditures of $34.4 million, $42.3
million for the full year 2014, $18.8 million for the full year 2015, $13.2 million for the full year 2016 and $15.0 million for each
year thereafter. Pursuant to the terms of the Facility Agreement, if, in any relevant period, the capital expenditures are less than the
permitted amount for that relevant period, a permitted excess amount may be added to the maximum amount of capital
expenditures in the next period;
We maintain at all times a minimum liquidity balance of $4.0 million;
We achieve for each period the following minimum adjusted consolidated EBITDA (as defined in the Facility Agreement):
Period
7/1/13-12/31/13
1/1/14-6/30/14
7/1/14-12/31/14
1/1/15-6/30/15
7/1/15-12/31/15
Minimum Amount
$
$
$
$
$
5.5 million
9.9 million
14.1 million
17.0 million
23.5 million
•
•
Beginning in July 2013, we maintain a minimum debt service coverage ratio of 1.00:1; and
Beginning with the twelve month period ended December 31, 2013, we maintain a maximum net debt to adjusted consolidated
EBITDA ratio of 62.00:1, gradually decreasing to 2.50:1 through 2022.
See Note 3 to our Consolidated Financial Statements for further discussion of the Facility Agreement and other debt.
The Consent Agreement and the Common Stock Purchase (and Option) Agreement
The Consent Agreement
On May 20, 2013, we entered into the Consent Agreement with Thermo. Pursuant to the Consent Agreement, Thermo agreed that it would
make, or arrange for third parties to make, cash contributions to us in exchange for equity, subordinated convertible debt or other equity-linked
securities as follows:
• At the closing of the exchange transaction and thereafter each week until the earlier of the restructuring of the Facility Agreement and July
31, 2013, an amount sufficient to enable us to maintain a consolidated unrestricted cash balance of at least $4.0 million;
• At the closing of the exchange transaction, $25.0 million to satisfy all cash requirements associated with the exchange transaction,
including agreed principal and interest payments to the holders of the 5.75% Notes as contemplated by the Exchange Agreement, with any
remaining portion being retained by us for working capital and general corporate purposes;
• Contemporaneously with, and as a condition to the closing of, any restructuring of the Facility Agreement, $20.0 million (less any amount
contributed pursuant to the commitment described above with respect to our minimum cash balance);
• Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 26, 2013, $20.0 million; and
• Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 31, 2014, $20.0 million, less the amount by
which the aggregate amount of cash received by us under the first, third and fourth commitments described above exceeds $40 million.
The parties agreed that the lenders could terminate the Consent Agreement if, among other things:
• The restructuring of the Facility Agreement was not consummated on or before June 28, 2013 (later extended to August 16, 2013); or
• Globalstar or Thermo materially breached any representations, warranties or covenants under the Consent Agreement, which breach was
not cured (if curable) within 15 days of receipt of notice by us or Thermo, as the case may be.
In accordance with the terms of the Common Stock Purchase Agreement and the Common Stock Purchase and Option Agreement
discussed below, as of December 31, 2013, Thermo has contributed a total of $65.0 million to us in exchange for 171.9 million shares of our
nonvoting common stock. As of December 31, 2013, an additional $15.0 million had been contributed to us through warrant exercises and
other equity issuances, reducing Thermos’s remaining commitment to $5.0 million.
42
The Common Stock Purchase Agreement
On May 20, 2013, we entered into a Common Stock Purchase Agreement with Thermo to price certain equity purchases made by Thermo
pursuant to the Consent Agreement. Pursuant to the Consent Agreement, Thermo purchased 78,125,000 shares of our common stock for $25.0
million ($0.32 per share). Thermo also agreed to purchase additional shares of our common stock at $0.32 per share as and when required to
fulfill its equity commitment described above to maintain our consolidated unrestricted cash balance at not less than $4.0 million until the
earlier of July 31, 2013 and the closing of a restructuring of the Facility Agreement. In furtherance thereof, at the closing of the exchange
transaction, Thermo purchased an additional 15,625,000 shares of our common stock for an aggregate purchase price of $5.0 million. In June
2013, Thermo purchased an additional 28,125,000 shares of our common stock for an aggregate purchase price of $9.0 million. In total, during
the second quarter of 2013, Thermo purchased in total approximately 121.9 million shares of our common stock pursuant to the Common Stock
Purchase Agreement for an aggregate $39.0 million.
The terms of the Common Stock Purchase Agreement were approved by a special committee of our board of directors consisting solely of
our unaffiliated directors. The committee, which was represented by independent legal counsel, determined that the terms of the Common
Stock Purchase Agreement were fair and in the best interests of us and our shareholders.
The Common Stock Purchase and Option Agreement
On October 14, 2013, we entered into a Common Stock Purchase and Option Agreement with Thermo to price certain previously made and
anticipated equity purchases made by Thermo pursuant to the Consent Agreement. Pursuant to the terms of the Common Stock Purchase and
Option Agreement, Thermo agreed to purchase 11,538,461 shares of our non-voting common stock at a purchase price of $0.52 per share in
exchange for the $6.0 million invested in July and an additional 12,500,000 shares of our common stock in exchange for the $6.5 million
funded in August 2013. During the third quarter of 2013, Thermo purchased approximately 24.0 million shares of our common stock pursuant
to the terms of the Common Stock Purchase and Option Agreement for an aggregate purchase price of $12.5 million.
The Common Stock Purchase and Option Agreement also granted us a First Option and a Second Option, as defined in the agreement,
whereby we could require Thermo to purchase $13.5 million at a fixed price regardless of the Company’s underlying stock price when such
stock was purchased and an additional $11.5 million of nonvoting common stock, as and when requested to do so by the special committee
through November 28, 2013 and December 31, 2013, respectively. The First Option provided we could sell up to $13.5 million in shares to
Thermo at a purchase price of $0.52 per share. The Second Option provided we could sell up to $11.5 million in shares to Thermo at a price
equal to 85% of the average closing price of our voting common stock during the ten trading days immediately preceding the date of the special
committee’s notice of exercise of the option. In November 2013, the special committee and Thermo amended the Common Stock Purchase and
Option Agreement to defer the expiration date of the Second Option to March 31, 2014.
In November 2013, we exercised the First Option, pursuant to which on December 27, 2013 we sold Thermo 26.0 million shares of our
common stock for a total purchase price of $13.5 million.
The terms of the Common Stock Purchase and Option Agreement were approved by a special committee of our board of directors
consisting solely of our unaffiliated directors. The Committee, which was represented by independent legal counsel, determined that the terms
of the Common Stock Purchase and Option Agreement were fair to and in the best interests of us and our shareholders.
See Note 3 to our Consolidated Financial Statements for further discussion of the Consent Agreement and the Common Stock Purchase and
Option Agreement.
Terrapin Common Stock Purchase Agreement
On December 28, 2012 we entered into a Common Stock Purchase Agreement with Terrapin pursuant to which we may, subject to certain
conditions, require Terrapin to purchase up to $30.0 million of shares of our voting common stock over the 24-month term following the
effective date of a resale registration statement, which became effective on August 2, 2013. This type of arrangement is sometimes referred to
as a committed equity line financing facility. From time to time over the 24-month term, and in our sole discretion, we may present Terrapin
with up to 36 draw down notices requiring Terrapin to purchase a specified dollar amount of shares of our voting common stock. We will not
sell Terrapin a number of shares of voting common stock which, when aggregated with all other shares of voting common stock then
beneficially owned by Terrapin and its affiliates, would result in the beneficial ownership by Terrapin or any of its affiliates of more than 9.9%
of our then issued and outstanding shares of voting common stock.
Since entering into this agreement, Terrapin has purchased a total of 6.1 million shares of voting common stock at a purchase price of $6.0
million.
43
See Note 3 to our Consolidated Financial Statements for further discussion of the Terrapin agreement.
Capital Expenditures
We have entered into various contractual agreements related to the procurement and deployment of our second-generation network, as
summarized below. The discussion below is based on our current contractual obligations to these contractors.
Second-Generation Satellites
We have a contract with Thales for the construction of the second-generation low-earth orbit satellites and related services. We successfully
completed the launches of our second-generation satellites. We have also incurred additional costs for certain related services, of which a
portion are still owed to Thales. Discussions between us and Thales are ongoing regarding the remaining amounts owed by both parties under
the contracts. These amounts are included in “Other Capital Expenditures and Capitalized Labor” in the table below.
We have a contract with Arianespace for the launch of these second-generation satellites and certain pre and post-launch services. We have
also incurred additional obligations to Arianespace for launch delays. These amounts are included in “Other Capital Expenditures and
Capitalized Labor” in the table below.
The amount of capital expenditures incurred as of December 31, 2013 and estimated future capital expenditures (excluding capitalized
interest) related to the construction and deployment of the satellites for our second-generation constellation and the launch services contract is
presented in the table below (in thousands):
Capital Expenditures
Thales Second-Generation Satellites
Arianespace Launch Services
Launch Insurance
Other Capital Expenditures and Capitalized
Labor
Total
$
$
Payments through
December 31,
2013
2014
622,690
216,000
39,903
2015
Estimated Future Payments
Thereafter
- $
-
-
- $
-
-
53,533
932,126 $
6,936
6,936 $
-
- $
Total
622,690
216,000
39,903
- $
-
-
-
- $
60,469
939,062
As of December 31, 2013, we had recorded $6.9 million of these capital expenditures in accounts payable.
Next-Generation Gateways and Other Ground Facilities
In May 2008, we entered into an agreement with Hughes to design, supply and implement (a) RAN ground network equipment and software
upgrades for installation at a number of our satellite gateway ground stations and (b) satellite interface chips to be used in various next-
generation Globalstar devices. The parties have subsequently amended this agreement to revise certain payment milestones and add features.
In October 2008, we signed an agreement with Ericsson, a leading global provider of technology and services to telecom operators.
According to the contract, including subsequent additions, Ericsson will work with us to develop, implement and maintain a ground interface,
or core network, system that will be installed at our satellite gateway ground stations.
The following table presents the amount of actual and contractual capital expenditures (excluding capitalized interest) related to the
construction of the ground component and related costs (in thousands):
Capital Expenditures
Hughes second-generation ground component
(including research and development expense) $
Ericsson ground network
Other Capital Expenditures
Total
$
Payments through
December 31,
2013
2014
Estimated Future Payments
Thereafter
2015
Total
82,400 $
6,049
1,181
89,630 $
8,377 $
9,211
402
17,990 $
10,598 $
13,431
-
24,029 $
- $
-
-
- $
101,375
28,691
1,583
131,649
As of December 31, 2013, we had recorded $0.7 million of these capital expenditures in accounts payable.
44
In August 2013, we entered into an agreement with Hughes which specified a payment schedule for approximately $15.8 million of
deferred amounts outstanding at the time of the agreement. Under the terms of the agreement, we were also required to pay interest of
approximately $4.9 million in January 2014 for amounts accrued at a rate of 10% on previously deferred balances. Upon our payment of all
previously deferred amounts, interest and an advance payment of $4.3 million for the next milestone pursuant to the terms of the contract,
Hughes will restart work. Under the terms of the agreement, Hughes had the option to receive all or any portion of the deferred payments and
accrued interest in our common stock. If Hughes chose to receive any payment in stock, shares would be provided at a 7% discount based upon
a trailing volume weighted average price calculation. Since August 2013, we have paid Hughes approximately $10.8 million in cash, and
Hughes has elected to receive payment in the form of shares of our common stock for approximately $14.4 million of certain milestone
payments and accrued interest. In valuing our obligation to issue discounted shares to Hughes, we recorded a loss of approximately $1.0
million in our statement of operations for the year ended December 31, 2013.
In December 2013, we amended our contract with Hughes to extend the schedule of the program and to revise the remaining payment
milestones and program milestones to reflect the revised program timeline. This amendment extended certain payments previously due in 2013
to 2014 and beyond.
In September 2013, we entered into an agreement with Ericsson which deferred to November 2013 approximately $2.3 million in milestone
payments scheduled under the core contract, provided we made one payment of $1.6 million, which offsets the total deferred amount, in
September 2013. We made this $1.6 million payment. The remaining milestone payments previously due under the contract were deferred to
2014 and beyond. The deferred payments continue to incur interest at a rate of 6.5% per annum. As of December 31, 2013, we had recorded
$0.7 million in accounts payable, excluding interest, related to these required payments and had incurred and capitalized $6.8 million of costs
related to this contract. We record the costs as an asset in property and equipment. We are currently negotiating a revised milestone schedule
which will include the remaining $0.7 million outstanding as of December 31, 2013. If we are unable to agree on revised technical
requirements and pricing for certain contract deliverables with Ericsson, the contract may be terminated without liability to either party upon
our payment of the outstanding $0.7 million deferred amount plus associated interest. We may, however, be required to record an impairment
charge. If the contract is terminated for convenience, we must make a final payment of $10.0 million in either cash or shares of our common
stock at our election. If we elect to make payment in shares of our common stock, Ericsson will have the option either to accept the shares of
common stock or instruct us to complete a block sale of the common stock and deliver the proceeds to Ericsson. If Ericsson chooses to accept
common stock, the number of shares it will receive will be calculated based on the final payment amount plus 5%.
Contractual Obligations and Commitments
Contractual obligations at December 31, 2013 are as follows (in thousands):
Contractual Obligations:
Debt obligations (1)
Interest on long-term debt (2)
Purchase obligations (3), (4), (5)
Contract termination charge (6)
Operating lease obligations
Pension obligations
Liability for contingent consideration
(7)
Total
2014
2016
2015
4,046 $
$
21,381 21,264
24,926 24,029
24,133
-
1,216
1,157
981
967
2017
6,450 $ 32,835 $ 75,755 $ 129,935 $
19,026
-
-
1,030
955
21,160
-
-
1,097
946
20,914
-
-
1,104
956
688,948 $
42,654
-
-
650
4,961
Total
937,969
146,399
48,955
24,133
6,254
9,766
2018
Thereafter
1,626
-
$ 78,309 $ 53,867 $ 55,809 $ 98,958 $ 150,946 $
-
-
-
-
737,213 $
1,626
1,175,102
(1) Amounts include payment in kind interest (“PIK”), which is shown as due in the year the underlying debt is due.
The maturity date of the 8.00% Convertible Senior Notes Issued in 2013 (the “8.00% Notes Issued in 2013”) is April 1, 2028; however the
holders of these Notes can require us to purchase any or all of the Notes at par in cash on April 1, 2018. For purposes of this schedule, these
Notes are shown as due in 2018 as a result of this put option. Pursuant to the terms of the Indenture for the 8.00% Notes issued in 2013, a
holder may elect to convert up to 15% of the Notes on March 20, 2014. If a holder elects to convert on that date it will receive, at our
option, either cash equal to the par value of the Notes being converted plus accrued interest (provided that, under the Facility Agreement,
we may pay cash only with the consent of the Majority Lenders) or shares of our common stock equal to the principal amount of Notes
being converted plus accrued interest divided by the lower of the average price of our common stock in a specified period and $0.50. The
table above does not consider potential conversion as we cannot predict the amount, if any, of the notes that may be converted.
45
See Note 3 to our Consolidated Financial Statements for further discussion.
(2) Amounts include projected interest payments to be made in cash. Approximately $586.3 million of our debt bears interest at a floating rate
and, accordingly, we estimated our interest costs in future periods. Amounts also include projected cash interest to be paid on the 8.00%
Notes Issued in 2013 through the first put date of April 1, 2018.
(3) We have purchase commitments with Thales, Arianespace, Ericsson, Hughes and other vendors related to the procurement and
deployment of our second-generation network. Amounts in the table above exclude estimated accrued interest of approximately $0.4
million at December 31, 2013 on amounts owed to Ericsson on amounts previously due under the agreement.
See Note 7 to our Consolidated Financial Statements for further discussion of our contractual obligations.
(4) We have converted the remaining purchase obligations for our second-generation satellites and other launch costs to U.S. dollars using the
exchange rate in effect at December 31, 2013.
(5) Amounts based on when cash payment is scheduled to be made.
(6) In June 2012, we settled our prior commercial disputes with Thales, including those disputes that were the subject of an arbitration award,
for €17,530,000. This amount represented one-third of the termination charges awarded to Thales in the arbitration. The payment is due on
the later of the effective date of the new contract for the purchase of additional second-generation satellites and the occurrence of the
effective date of the financing for the purchase of these satellites and the first draw from the financing. We included this amount in 2014
above, although the timing of any payment is indefinite and undeterminable. For purposes of the table above, we converted the termination
charge to U.S. dollars using the exchange rate in effect at December 31, 2013. See Note 8 to our Consolidated Financial Statements for
further discussion.
(7) In connection with our acquisition of Axonn in 2009, we are obligated to pay contingent consideration in stock for earnouts based on sales
of existing and new products over a five-year earnout period ending December 31, 2014. Amounts above are an estimate of the future
liability based on projected 2014 sales of certain products.
Liquidity
We have developed a plan to improve operations, maintain our second-generation constellation, and continue to upgrade our next-
generation ground infrastructure. We must execute our business plan, which assumes the funding of the financial arrangements with Thermo
and Terrapin. Uncertainties remain related to the impact and timing of these items. If the resolution of these uncertainties materially and
negatively impacts cash and liquidity, our ability to continue to execute our business plans will be adversely affected. Completion of the
foregoing actions is not solely within our control and we may be unable to successfully complete one or all of these actions.
Satisfying our principal long-term liquidity needs depends upon maintaining service coverage levels and continuing to make improvements
to our ground infrastructure, funding our working capital and cash operating needs, including any growth in our business, and funding
repayment of our indebtedness, both principal and interest, when due. We expect sources of long-term liquidity to include the exercise of
warrants and other additional debt and equity financings which have not yet been arranged. We cannot assure you that we can obtain sufficient
additional financing on acceptable terms, if at all. We also expect cash flows from operations to be a source of long-term liquidity now that we
have fully deployed our second-generation satellite constellation. Additionally, we have approximately $37.9 million in restricted cash which
must be maintained through the term of the Facility Agreement and can be used to pay the final principal and interest payments under the
Facility Agreement. We are not in a position to estimate when, or if, these longer-term plans will be completed and the effect this will have on
our performance and liquidity.
Off-Balance Sheet Transactions
We have no material off-balance sheet transactions.
Recently Issued Accounting Pronouncements
For a discussion of recent accounting guidance and the expected impact that the guidance could have on our Consolidated Financial
Statements, see Note 1 to our Consolidated Financial Statements - Summary of Significant Accounting Policies.
46
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our services and products are sold, distributed or available in over 120 countries. Our international sales are made primarily in U.S. dollars,
Canadian dollars, Brazilian Reais and Euros. In some cases, insufficient supplies of U.S. currency may require us to accept payment in other
foreign currencies. We reduce our currency exchange risk from revenues in currencies other than the U.S. dollar by requiring payment in U.S.
dollars whenever possible and purchasing foreign currencies on the spot market when rates are favorable. We currently do not purchase
hedging instruments to hedge foreign currencies. We are obligated to enter into currency hedges with the original lenders no later than 90 days
after any fiscal quarter during which more than 25% of revenues is denominated in a single currency other than U.S. or Canadian dollars.
Otherwise, we cannot enter into hedging agreements other than interest rate cap agreements or other hedges described above without the
consent of the agent for the Facility Agreement, and with that consent the counterparties may only be the original lenders.
As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Contractual Obligations and Commitments," we have entered into a contract with Thales for the construction of low earth orbit
satellites for our second-generation satellite constellation and related launch and support services. A substantial majority of the payments under
the Thales agreements are denominated in Euros.
Our interest rate risk arises from our variable rate debt under our Facility Agreement, under which loans bear interest at a floating rate based
on the LIBOR. In order to minimize the interest rate risk, we completed an arrangement with the lenders under the Facility Agreement to limit
the interest to which we are exposed. The interest rate cap provides limits on the 6-month Libor rate (Base Rate) used to calculate the coupon
interest on outstanding amounts on the Facility Agreement to be capped at 5.50% should the Base Rate not exceed 6.5%. Should the Base Rate
exceed 6.5%, our Base Rate will be 1% less than the then 6-month Libor rate. Assuming that we borrowed the entire $586.3 million under the
Facility Agreement, a 1.0% change in interest rates would result in a change to interest expense of approximately $5.9 million annually.
47
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements of Globalstar, Inc.
Report of Crowe Horwath LLP, independent registered public accounting firm
Consolidated balance sheets at December 31, 2013 and 2012
Consolidated statements of operations for the years ended December 31, 2013, 2012 and 2011
Consolidated statements of comprehensive loss for the years ended December 31, 2013, 2012 and 2011
Consolidated statements of stockholders’ equity for the years ended December 31, 2013, 2012 and 2011
Consolidated statements of cash flows for the years ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
48
Page
48
49
50
51
52
53
54
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Globalstar, Inc.
We have audited the accompanying consolidated balance sheets of Globalstar, Inc. (“Globalstar”) as of December 31, 2013 and 2012, and the
related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2013. We also have audited Globalstar’s internal control over financial reporting as of December 31, 2013, based
on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Globalstar’s management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on
these consolidated financial statements and an opinion on the company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits
of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely
basis. The following material weakness has been identified and included in management's report. Globalstar’s internal controls over the
valuation of non-cash derivative liabilities did not operate with sufficient precision to prevent or detect a material misstatement in the models
prepared by a third-party valuation service organization. One out of the four derivative valuations had a computational error that was not
detected. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2013
consolidated financial statements and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does
not affect our opinion on those consolidated financial statements.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Globalstar
as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, because
of the material weakness described above, Globalstar has not maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Oak Brook, Illinois
March 10, 2014
Crowe Horwath LLP
49
GLOBALSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share data)
Current assets:
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance of $7,419 and $6,667, respectively
Inventory
Advances for inventory
Deferred financing costs
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Restricted cash
Deferred financing costs
Advances for inventory
Intangible and other assets, net
Total assets
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current portion of long-term debt
Accounts payable, including contractor payables of $7,665 and $27,747, respectively
Accrued contract termination charge
Accrued expenses
Payables to affiliates
Derivative liabilities
Deferred revenue
Total current liabilities
Long-term debt, less current portion
Employee benefit obligations
Derivative liabilities
Deferred revenue
Debt restructuring fees
Other non-current liabilities
Total non-current liabilities
Commitments and contingent liabilities (Notes 7 and 8)
Stockholders’ equity:
$
$
$
December 31,
2013
2012
17,408 $
-
15,723
31,817
9,359
-
7,059
81,366
1,169,785
37,918
76,436
-
7,103
1,372,608 $
4,046 $
14,627
24,133
22,700
202
57,048
17,284
140,040
665,236
3,529
405,478
7,079
20,795
13,696
1,115,813
11,792
46,777
13,944
42,181
-
34,622
5,233
154,549
1,215,156
-
16,883
9,158
8,029
1,403,775
655,874
35,685
23,166
28,164
230
-
18,041
761,160
95,155
7,221
25,175
4,640
-
15,880
148,071
Preferred Stock of $0.0001 par value; 100,000,000 shares authorized and none issued and
outstanding at December 31, 2013 and 2012:
Series A Preferred Convertible Stock of $0.0001 par value; one share authorized and none
issued and outstanding at December 31, 2013 and 2012
Voting Common Stock of $0.0001 par value; 1,200,000,000 and 865,000,000 shares authorized;
535,883,461 and 354,085,753 shares issued and outstanding at December 31, 2013 and 2012,
respectively
Nonvoting Common Stock of $0.0001 par value; 400,000,000 and 135,000,000 shares
authorized; 309,008,656 and 135,000,000 shares issued and outstanding at December 31, 2013
and 2012, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
See accompanying notes to Consolidated Financial Statements.
50
-
54
-
35
31
1,074,837
871
(959,038)
116,755
1,372,608 $
14
864,175
(1,758)
(367,922)
494,544
1,403,775
GLOBALSTAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
2013
Year Ended December 31,
2012
2011
Revenue:
Service revenues
Subscriber equipment sales
Total revenue
Operating expenses:
$
64,644 $
18,067
82,711
57,468 $
18,850
76,318
Cost of services (exclusive of depreciation, amortization and accretion
shown separately below)
Cost of subscriber equipment sales
Cost of subscriber equipment sales - reduction in the value of inventory
Marketing, general and administrative
Reduction in the value of long-lived assets
Contract termination charge
Depreciation, amortization and accretion
Total operating expenses
Loss from operations
Other income (expense):
Loss on extinguishment of debt
Loss on equity issuance
Interest income and expense, net of amounts capitalized
Derivative gain (loss)
Other
Total other income (expense)
Loss before income taxes
Income tax expense (benefit)
Net loss
Loss per common share:
Basic
Diluted
Weighted-average shares outstanding:
Basic
Diluted
$
$
30,210
13,623
5,794
29,888
-
-
90,592
170,107
(87,396)
(109,092)
(16,701)
(67,828)
(305,999)
(2,962)
(502,582)
(589,978)
1,138
(591,116) $
30,071
13,280
1,397
27,496
7,218
22,048
69,801
171,311
(94,993)
-
-
(21,486)
6,974
(2,280)
(16,792)
(111,785)
413
(112,198) $
(0.96) $
(0.96)
(0.29) $
(0.29)
614,959
614,959
388,453
388,453
55,397
17,430
72,827
37,863
11,927
8,826
33,819
3,578
-
50,049
146,062
(73,235)
-
-
(4,809)
23,839
(828)
18,202
(55,033)
(109)
(54,924)
(0.18)
(0.18)
299,144
299,144
See accompanying notes to Consolidated Financial Statements.
51
GLOBALSTAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Net loss
Other comprehensive income (loss):
Defined benefit pension plan liability adjustment
Net foreign currency translation adjustment
Total comprehensive loss
2013
Year Ended December 31,
2012
2011
$
(591,116) $
(112,198) $
(54,924)
3,485
(856)
(588,487) $
78
1,264
(110,856) $
(3,190)
358
(57,756)
$
See accompanying notes to Consolidated Financial Statements.
52
GLOBALSTAR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Balances - December 31, 2010
31 $
736,455 $
(268 ) $
Common
Shares
309,959 $
Common
Stock
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Net issuance of restricted stock awards and
recognition of stock-based compensation
Contribution of services
Warrants issued associated with Contingent
Equity Agreement
Common stock issued in connection with
conversions of 8.00% Notes Issued in 2009
Warrants exercised associated with the
8.00% Notes Issued in 2009
Issuance of stock in connection with
interest payments for 8.00% Notes Issued
in 2009
Issuance of stock in connection with
contingent consideration
Issuance of warrants and beneficial
conversion feature associated with 5.0%
Notes
Issuance of stock for legal settlements and
other transactions
Issuance of stock to Thermo for contingent
equity draws
Issuance of stock through employee stock
purchase plan
Other comprehensive loss
Net loss
Balances - December 31, 2011
Net issuance of restricted stock awards and
recognition of stock-based compensation
Contribution of services
Warrants issued associated with Contingent
Equity Agreement
Common stock issued in connection with
conversions of 8.00% Notes Issued in 2009
Warrants exercised associated with the
8.00% Notes Issued in 2009
Issuance of stock in connection with
interest payments for 8.00% Notes Issued
in 2009
Issuance of stock in connection with
contingent consideration
Issuance of stock for legal and consulting
services
Issuance of stock to Thermo for contingent
equity draws
Issuance of stock through employee stock
purchase plan
Other comprehensive income
Net loss
Balances - December 31, 2012
Net issuance of restricted stock awards and
994
-
-
773
575
1,300
1,857
-
-
-
-
-
-
-
2,017
319
5,955
942
1,064
572
1,827
-
-
24,868
566
-
644
36,606
4
17,746
428
-
-
353,058
711
-
-
1,903
191
-
-
-
35
-
-
-
-
-
175
-
-
792,584
706
529
8,079
1,338
420
2,737
1
911
5,232
1
2,208
-
-
24
124,310
944
-
-
489,086
1,213
12
57,238
-
-
-
49
-
138
-
-
864,175
1,823
Retained
Deficit
(200,800) $
Total
535,418
-
-
-
-
-
-
-
-
-
-
-
-
2,017
319
-
5,955
-
942
-
1,064
-
572
-
1,827
-
24,868
-
644
-
17,750
-
(2,832 )
-
(3,100 )
-
-
(54,924)
(255,724)
175
(2,832)
(54,924)
533,795
-
-
-
-
-
-
-
-
-
-
-
706
529
-
8,079
-
1,338
-
420
-
912
-
2,209
-
24
-
57,250
-
1,342
-
(1,758 )
-
-
-
(112,198)
(367,922)
-
138
1,342
(112,198)
494,544
1,823
recognition of stock-based compensation
Contribution of services
Issuance of stock in connection with interest
payments for 8.00% Notes Issued in 2009
Issuance of stock to Exchanging Note
Holders
Common stock issued in connection with
conversions of 5.0% Notes
Warrants exercised associated with the
5.0% Notes
Common stock issued in connection with
conversions of 8.00% Notes Issued in 2013
Warrants exercised associated with the
8.00% Notes Issued in 2009
Issuance of stock to Thermo in connection
with the Consent Agreement, Common
Stock Purchase Agreement, and Common
Stock Purchase and Option Agreement
Purchase of stock in connection with the
termination of Share Lending Arrangement
Return of stock in connection with the
termination of Share Lending Arrangement
Issuance of stock to Terrapin
Issuance of stock to vendor
Issuance of stock for employee stock option
exercises
Issuance of stock through employee stock
purchase plan
Issuance of stock in connection with
contingent consideration
Other issuances of stock and equity
transactions
Other comprehensive income
Net loss
Balances – December 31, 2013
-
1,279
-
-
548
644
30,319
3
12,124
93,006
10
48,194
6,707
1
2,312
14,863
2
10,226
21,353
2
22,216
174,009
17
82,709
-
-
4,429
(10,185)
6,131
9,501
2,621
952
3,939
(1)
1
1
-
-
-
-
5,999
15,412
1,874
207
1,844
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
548
644
-
12,127
-
48,204
-
2,313
-
10,228
-
22,218
-
82,726
-
4,429
-
-
-
(1)
6,000
15,413
-
1,874
-
207
-
1,844
98
-
-
844,892 $
-
-
-
85 $
101
-
-
1,074,837 $
-
2,629
-
871 $
-
-
(591,116)
(959,038) $
101
2,629
(591,116)
116,755
See accompanying notes to Consolidated Financial Statements.
53
GLOBALSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2013
Year Ended December 31,
2012
2011
$
(591,116) $
(112,198) $
(54,924)
Cash flows provided by (used in) operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, amortization, and accretion
Change in fair value of derivative assets and liabilities
Stock-based compensation expense
Amortization of deferred financing costs
Reduction in the value of long-lived assets and inventory
Provision for bad debts
Noncash interest and accretion expense
Contract termination charge
Loss on extinguishment of debt
Loss on equity issuance
Discount on shares issued to vendor
Unrealized foreign currency loss
Other, net
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other current assets
Other assets
Accounts payable and accrued expenses
Payables to affiliates
Other non-current liabilities
Deferred revenue
Net cash provided by (used in) operating activities
Cash flows used in investing activities:
Second-generation satellites, ground and related launch costs (including
interest)
Property and equipment additions
Investment in businesses
Restricted cash
Net cash used in investing activities
Cash flows provided by financing activities:
Borrowings from Facility Agreement
Proceeds from contingent equity account
Proceeds from the issuance of 5.0% convertible notes
Borrowings from Thermo Loan Agreement
Payments to reduce principal amount of exchanged 5.75% Notes
Payments for 5.75% Notes not exchanged
Payments to lenders and other fees associated with exchange
Proceeds from equity issuance to related party
Proceeds from issuance of stock to Terrapin
Payment of deferred financing costs
Proceeds from issuance of common stock and exercise of warrants
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
90,592
305,155
2,127
8,792
5,794
2,321
44,488
-
109,092
16,701
1,008
1,013
1,370
(4,321)
3,124
(727)
(89)
(2,595)
(29)
(1,079)
1,917
(6,462)
(43,693)
(1,651)
(634)
8,859
(37,119)
672
1,071
-
-
(13,544)
(6,250)
(2,482)
65,000
6,000
(16,909)
15,414
48,972
225
5,616
11,792
17,408 $
69,801
(6,974)
793
7,907
8,615
1,097
6,525
22,048
-
-
-
1,456
1,574
(2,875)
(1,018)
855
5,427
3,431
(148)
(224)
782
6,874
(56,679)
(781)
(550)
-
(58,010)
7,375
45,800
-
-
-
-
-
-
-
(1,033)
244
52,386
591
1,841
9,951
11,792 $
50,049
(23,839)
1,995
3,673
12,404
1,995
-
-
-
-
-
1,001
2,937
(978)
4,252
354
(1,485)
(1,291)
(332)
(173)
(1,141)
(5,503)
(85,589)
(2,594)
(800)
(10,436)
(99,419)
18,659
14,200
38,000
12,500
-
-
-
-
-
(1,246)
525
82,638
(782)
(23,066)
33,017
9,951
Supplemental disclosure of cash flow information:
Cash paid for:
Interest
Income taxes
$
21,413 $
116
27,383 $
223
Supplemental disclosure of non-cash financing and investing activities:
Reduction in accrued second-generation satellites and ground costs
Increase in non-cash capitalized accrued interest for second-generation
satellites and ground costs
Capitalization of the accretion of debt discount and amortization of prepaid
financing costs
Capitalized accrued interest and other payments made in convertible notes
and common stock
Conversion of debt into common stock
Extinguishment of principal amount of 5.75% Notes
Issuance of principal amount of 8.00% Notes Issued in 2013
Issuance of common stock to exchanging note holders at fair value
Reduction in carrying amount of Thermo Loan Agreement due to
amendment
Issuance of common stock to vendor for payment of invoices
Conversion of contingent equity account derivative liability to equity
Value of warrants issued in connection with the contingent equity account
loan fee
Recognition of a beneficial conversion feature and contingent put feature
on long-term debt
Value of warrants issued in connection with raising capital and debt
19,357
97
4,798
1,529
19,005
10,214
4,291
2,752
5,600
15,680
24,200
12,056
49,757
(71,804)
54,611
12,127
(35,026)
9,227
-
-
-
-
7,948
2,000
-
-
-
-
-
5,853
2,226
-
-
6,892
1,000
-
-
-
-
-
5,955
8,318
18,603
8,081
See accompanying notes to Consolidated Financial Statements.
54
GLOBALSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Globalstar, Inc. (“Globalstar” or the “Company”) was formed as a Delaware limited liability company in November 2003 and was
converted into a Delaware corporation on March 17, 2006.
Globalstar is a leading provider of Mobile Satellite Services (“MSS”) including voice and data communications services globally via
satellite. Globalstar’s first-generation network, originally owned by Globalstar, L.P. (“Old Globalstar”), was designed, built and launched in the
late 1990s by a technology partnership led by Loral Space and Communications (“Loral”) and Qualcomm Incorporated (“Qualcomm”). On
February 15, 2002, Old Globalstar and three of its subsidiaries filed voluntary petitions under Chapter 11 of the United States Bankruptcy
Code. In 2004, Thermo Capital Partners LLC (“Thermo”) became Globalstar’s principal owner, and Globalstar completed the acquisition of the
business and assets of Old Globalstar. Thermo remains Globalstar’s largest stockholder. Globalstar’s Executive Chairman and CEO controls
Thermo and its affiliates. Two other members of Globalstar’s Board of Directors are also directors, officers or minority equity owners of
various Thermo entities.
The Company’s satellite communications business, by providing critical mobile communications to subscribers, serves principally the
following markets: recreation and personal; government; public safety and disaster relief; oil and gas; maritime and fishing; natural resources,
mining and forestry; construction; utilities; and transportation.
Globalstar currently provides the following communications services via satellite which are available only with equipment designed to work
on the Globalstar network:
•
• one-way data transmissions using a mobile or fixed device that transmits its location and other information to a central monitoring station,
two-way voice communication and data transmissions (“Duplex”) using mobile or fixed devices; and
which includes certain SPOT and Simplex products.
Globalstar provides Duplex, SPOT and Simplex products and services to customers directly and through a variety of independent agents,
dealers and resellers, and independent gateway operators (“IGOs”).
Use of Estimates in Preparation of Financial Statements
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from estimates. Certain reclassifications have been made to prior year Consolidated Financial Statements to
conform to current year presentation. The Company evaluates estimates on an ongoing basis. Significant estimates include the value of
derivative instruments, the allowance for doubtful accounts, the net realizable value of inventory, the useful life and value of property and
equipment, the value of stock-based compensation, the reserve for product warranties, and income taxes.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Globalstar and all its subsidiaries. All significant inter-company transactions
and balances have been eliminated in the consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less.
Restricted Cash
Restricted cash is comprised of funds held in escrow by the agent for the Company’s senior secured facility agreement (the “Facility
Agreement”) to secure the Company’s principal and interest payment obligations under certain circumstances related to its Facility Agreement.
The Company classifies restricted cash for certain debt instruments consistent with the classification of the related debt outstanding at the end
of the reporting period.
55
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash
equivalents and restricted cash. Cash and cash equivalents and restricted cash consist primarily of highly liquid short-term investments
deposited with financial institutions that are of high credit quality.
Accounts Receivable
Accounts receivable are uncollateralized, without interest and consist primarily of service revenue and equipment receivables. The
Company performs ongoing credit evaluations of its customers and records specific allowances for bad debts based on factors such as current
trends, the length of time the receivables are past due and historical collection experience. Accounts receivable are considered past due in
accordance with the contractual terms of the arrangements. Accounts receivable balances that are determined likely to be uncollectible are
included in the allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the
allowance.
The following is a summary of the activity in the allowance for doubtful accounts (in thousands):
Balance at beginning of period
Provision, net of recoveries
Write-offs and other adjustments
Balance at end of period
Year Ended December 31,
2012
2013
2011
$
$
6,667 $
2,321
(1,569)
7,419 $
7,296 $
1,097
(1,726)
6,667 $
5,971
1,995
(670)
7,296
Inventory
Inventory consists primarily of purchased products. Inventory is stated at the lower of cost or market value. Cost is computed using the first-
in, first-out (FIFO) method. Inventory write downs are measured as the difference between the cost of inventory and the market value, and are
recorded as a cost of subscriber equipment sales - reduction in the value of inventory in the Company’s Consolidated Financial Statements. At
the point of any inventory write downs to market, a new, lower cost basis for that inventory is established, and any subsequent changes in facts
and circumstances do not result in the restoration of the former cost basis or increase in that newly established cost basis. Product sales and
returns from the previous 12 months and future demand forecasts are reviewed and excess and obsolete inventory is written off. A liability is
recorded for firm, noncancelable, and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess
of future demand forecasts consistent with the valuation of excess and obsolete inventory. The Company wrote down the value of inventory by
$5.8 million, $1.4 million and $8.8 million in the years ended December 31, 2013, 2012, and 2011, respectively.
Property and Equipment
The Globalstar System includes costs for the design, manufacture, test, and launch of a constellation of low earth orbit satellites (the “Space
Component”), and primary and backup control centers and gateways (the “Ground Component”). Property and equipment is stated at cost, net
of accumulated depreciation.
Costs associated with the design, manufacture, test and launch of the Company’s Space and Ground Components are capitalized.
Capitalized costs associated with the Company’s Space Component, Ground Component, and other assets are tracked by fixed asset category
and are allocated to each asset as it comes into service. When a second-generation satellite was incorporated into the second-generation
constellation, the Company began depreciation on the date the satellite was placed into service, which was the point that the satellite reached its
orbital altitude, over its estimated useful life.
The Company capitalizes interest costs associated with the costs of assets in progress, including primarily the construction of its Space and
Ground Components. Capitalized interest is added to the cost of the underlying asset and is amortized over the useful life of the asset after it is
placed into service. As the status of the Company’s construction in progress decreases, specifically due to the Company placing second-
generation satellites into service, the Company records interest expense under GAAP.
Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, as follows:
Globalstar System:
Space component
Ground component
Furniture, fixtures & equipment
Leasehold improvements
Buildings
6.5 years from commencement of service for the first-generation satellites launched in 2007
15 years from the commencement of service for the second-generation satellites
Up to periods of 15 years from commencement of service
3 to 10 years
Shorter of lease term or the estimated useful lives of the improvements
18 years
56
The Company evaluates the appropriateness of estimated useful lives assigned to property and equipment and revises such lives to the
extent warranted by changing facts and circumstances. When adjustments are made to the estimated useful lives, the remaining carrying
amount of these satellites is depreciated prospectively over the remaining useful lives.
For assets that are sold or retired, including satellites that are de-orbited and no longer providing services, the estimated cost and
accumulated depreciation is removed from property and equipment.
The Company assesses the impairment of long-lived assets when indicators of impairment are present. Recoverability of assets is measured
by comparing the carrying amounts of the assets to the future undiscounted cash flows, excluding financing costs. If impairment is determined
to exist, any related impairment loss is calculated based on fair value. The Company records losses from the in-orbit failure of a satellite in the
period it is determined that the satellite is not recoverable.
Derivative Instruments
The Company enters into financing arrangements that are hybrid instruments that contain embedded derivative features. Derivative
instruments are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair value with gains or losses
recognized in earnings. The Company determines the fair value of derivative instruments based on available market data using appropriate
valuation models.
Deferred Financing Costs
Deferred financing costs are those incurred in obtaining long-term debt. These costs are amortized as additional interest expense over the
term of the corresponding debt, or the first put option date for the Company’s 8.00% Convertible Senior Notes Issued in 2013 (“8.00% Notes
Issued in 2013”). As of December 31, 2013 and 2012, the Company had net deferred financing costs of $76.4 million and $51.5 million,
respectively. The Company classifies deferred financing costs consistent with the classification of the related debt outstanding at the end of the
reporting period.
Fair Value of Financial Instruments
The carrying amount of accounts receivable and accounts payable is equal to or approximates fair value.
The Company believes it is not practicable to determine the fair value of certain of its long-term debt instruments, including the Facility
Agreement and the Company’s 8.00% Convertible Senior Notes Issued in 2009 (“8.00% Notes Issued in 2009”). Unlike typical long-term debt,
interest rates and other terms for long-term debt are not readily available and generally involve a variety of factors, including due diligence by
the debt holders. As such, it is not practicable to determine the fair value of long-term debt without incurring significant additional costs.
For the Company’s Amended and Restated Loan Agreement with Thermo (the “Loan Agreement”) and the 8.00% Notes Issued in 2013, the
Company was required to record these instruments at fair value at inception. This Loan Agreement was amended and restated in 2013 and
qualified for extinguishment accounting under applicable accounting rules. In May 2013, the Company issued 8.00% Notes Issued in 2013 and
other consideration in exchange for a portion of the Company’s 5.75% Convertible Senior Notes (the “5.75% Notes”). This transaction
qualified for extinguishment accounting. See Note 3 for further discussion.
Gain/Loss on Extinguishment of Debt
Gain or loss on extinguishment of debt is generally recorded upon an extinguishment of a debt instrument or the conversion of certain of the
Company’s convertible notes. Gain or loss on extinguishment of debt is calculated as the difference between the reacquisition price and net
carrying amount of the debt. Differences are recorded as an extinguishment gain or loss in the Company’s consolidated statement of operations.
Revenue Recognition and Deferred Revenue
Duplex Service Revenue
For Duplex customers and resellers, the Company recognizes revenue for monthly access fees in the period services are rendered. Access
fees represent the minimum monthly charge for each line of service based on its associated rate plan. The Company also recognizes revenue
for airtime minutes in excess of the monthly access fees in the period such minutes are used. Under certain annual plans where customers
prepay for minutes, revenue is deferred until the minutes are used or the prepaid time period expires. Unused minutes are accumulated until
they expire, usually one year after activation. In addition, the Company offers other annual plans whereby the customer is charged an annual
fee to access the Company’s system. These fees are recognized on a straight-line basis over the term of the plan. In some cases, the Company
charges a per minute rate whereby it recognizes the revenue when each minute is used.
57
Credits granted to customers are expensed or charged against revenue or deferred revenue upon issuance.
Certain subscriber acquisition costs, including such items as dealer commissions and internal sales commissions, are expensed at the time of
the related sale, except when related to a multi-element contract as discussed below.
SPOT and Simplex Service Revenue
The Company sells SPOT and Simplex services as annual plans or multi-year plans and defers and recognizes revenue ratably over the
service term or as service is used, beginning when the service is activated by the customer. Royalty payments are deferred and recognized as
expense over the contract term.
IGO Service Revenue
The Company owns and operates its satellite constellation and earns a portion of its revenues through the sale of airtime minutes or data on
a wholesale basis to IGOs. Revenue from services provided to IGOs is recognized based upon airtime minutes used by customers of the IGOs
and contractual fee arrangements. Where collection is uncertain, revenue is recognized when cash payment is received.
Equipment Revenue
Subscriber equipment revenue represents the sale of fixed and mobile user terminals, accessories and SPOT and Simplex products. The
Company recognizes revenue upon shipment provided title and risk of loss have passed to the customer, persuasive evidence of an arrangement
exists, the fee is fixed and determinable and collection is probable.
Other Service Revenue
At times, the Company will sell subscriber equipment through multi-element contracts with services. When the Company sells subscriber
equipment and services in bundled arrangements and determines that it has separate units of accounting, the Company will allocate the bundled
contract price among the various contract deliverables based on each deliverable’s relative fair value. The Company will determine vendor
specific objective evidence of fair value by assessing sales prices of subscriber equipment and services when they are sold to customers on a
stand-alone basis. Initial direct costs incurred related to these contracts will be deferred to the extent they exceed the profit margin recognized
at the time of sale.
The Company does not record sales taxes collected from customers in revenue.
The Company provides certain engineering services to assist customers in developing new applications related to its system. The revenues
associated with these services are recorded when the services are rendered, and the expenses are recorded when incurred. The Company records
revenues and costs associated with long term engineering contracts on the percentage-of-completion method of accounting.
Stock-Based Compensation
The Company recognizes compensation expense in the financial statements for both employee and non-employee share-based awards based
on the grant date fair value of those awards. Additionally, stock-based compensation expense includes an estimate for pre-vesting forfeitures
and is recognized over the requisite service periods of the awards on a straight-line basis, which is generally commensurate with the vesting
term.
Foreign Currency
The functional currency of the Company’s foreign consolidated subsidiaries is their local currency. Assets and liabilities of its foreign
subsidiaries are translated into United States dollars based on exchange rates at the end of the reporting period. Income and expense items are
translated at the average exchange rates prevailing during the reporting period. For 2013, 2012 and 2011, the foreign currency translation
adjustments recorded were $0.9 million of loss, $1.3 million of income and $0.4 million of income, respectively. These adjustments are
classified in the consolidated statements of comprehensive loss.
Foreign currency transaction losses were $1.0 million, $2.0 million and $0.5 million for 2013, 2012, and 2011, respectively. These were
classified as other income (expense) on the statement of operations.
58
In February 2013, the Venezuelan government devalued its currency. This devaluation did not have a material impact on the Company’s
operations or financial performance.
Asset Retirement Obligation
Liabilities arising from legal obligations associated with the retirement of long-lived assets are measured at fair value and recorded as a
liability. Upon initial recognition of a liability for retirement obligations, the Company records an asset, which is depreciated over the life of
the asset to be retired.
The Company capitalizes, as part of the carrying amount, the estimated costs associated with the eventual retirement of gateways owned by
the Company. As of December 31, 2013 and 2012, the Company had accrued approximately $1.1 million and $1.0 million, respectively, for
asset retirement obligations. The Company believes this estimate will be sufficient to satisfy the Company’s obligation under leases to remove
the gateway equipment and restore the sites to their original condition.
Warranty Expense
Warranty terms extend from 90 days on equipment accessories to one year for fixed and mobile user terminals. An accrual is made when it
is estimable and probable that a loss has been incurred based on historical experience. Warranty costs are based on historical trends in warranty
charges as a percentage of gross product shipments. A provision for estimated future warranty costs is recorded as cost of sales when products
are shipped. The resulting accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates.
Research and Development Expenses
Research and development costs were $0.6 million, $0.3 million and $1.9 million for 2013, 2012 and 2011, respectively. These costs are
expensed as incurred as cost of services and primarily include the cost of new product development, chip set design, software development and
engineering.
Advertising Expenses
Advertising costs were $2.9 million, $1.9 million and $2.0 million for 2013, 2012, and 2011, respectively. These costs are expensed as
incurred as marketing, general, and administrative expenses.
Income Taxes
Until January 1, 2006, the Company and its U.S. operating subsidiaries were treated as partnerships for U.S. tax purposes. Generally,
taxable income or loss, deductions and credits of the partnerships were passed through to the partners. Effective January 1, 2006, the Company
elected to be taxed as a C corporation for U.S. tax purposes, and the Company and its U.S. operating subsidiaries began accounting for income
taxes as a corporation.
The Company recognizes deferred tax assets and liabilities for future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis, operating losses and tax credit carry-forwards. The
Company measures deferred tax assets and liabilities using tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company recognizes the effect on deferred tax assets and liabilities of a change in tax
rates in income in the period that includes the enactment date.
The Company also recognizes valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In
assessing the likelihood of realization, management considers: (i) future reversals of existing taxable temporary differences; (ii) future taxable
income exclusive of reversing temporary differences and carry-forwards; (iii) taxable income in prior carry-back year(s) if carry-back is
permitted under applicable tax law; and (iv) tax planning strategies.
Comprehensive Income (Loss)
All components of comprehensive income (loss), including the minimum pension liability adjustment and foreign currency translation
adjustment, are reported in the financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the
change in equity during a period from transactions and other events and circumstances from non-owner sources.
59
Loss Per Share
The Company is required to present basic and diluted earnings per share. Basic loss per share is computed by dividing loss available to
common stockholders by the weighted average number of common shares outstanding during the period. For 2013, 2012, and 2011, diluted net
loss per share of common stock was the same as basic net loss per share of common stock, because the effects of potentially dilutive securities
are anti-dilutive.
As of December 31, 2012 and 2011, 17.3 million Borrowed Shares, as defined, related to the Company’s Share Lending Agreement were
outstanding. The Company did not consider the Borrowed Shares to be outstanding for the purposes of computing and reporting its earnings
per share. Effective in July 2013, the Company and the Borrower, as defined, terminated the Share Lending Agreement resulting in the
Borrower returning 10.2 million Borrowed Shares to Globalstar and agreeing to pay a cash settlement for the remaining 7.1 million Borrowed
Shares at an average of the volume weighted stock prices over a 20-day trading period ending in August 2013.
Recently Issued Accounting Pronouncements
There are no recently issued accounting standards that the Company believes will have a material impact on its financial position, results of
operations or cash flow.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
Globalstar System:
Space component
Second-generation satellites in service
Prepaid long-lead items
Second-generation satellite, on-ground spare
Ground component
Construction in progress:
Space component
Ground component
Other
Total Globalstar System
Internally developed and purchased software
Equipment
Land and buildings
Leasehold improvements
Total property and equipment
Accumulated depreciation
Total property and equipment, net
December 31,
December 31,
2013
2012
$
$
1,212,099 $
17,040
32,365
48,378
-
116,377
1,115
1,427,374
14,931
12,385
3,768
1,644
1,460,102
(290,317)
1,169,785 $
934,900
17,040
-
49,089
299,209
84,423
880
1,385,541
14,414
12,800
4,003
1,512
1,418,270
(203,114)
1,215,156
Amounts in the above table consist primarily of costs incurred related to the construction of the Company’s second-generation constellation
and ground upgrades. Amounts included in the Company’s second-generation satellite, on-ground spare balance as of December 31, 2013
consist primarily of costs related to a spare second-generation satellite that is capable of being included in a future launch of satellites.
Capitalized Interest and Depreciation Expense
The following table summarizes capitalized interest for the periods indicated below (in thousands):
Interest cost eligible to be capitalized
Interest cost recorded in interest expense, net
Net interest capitalized
Year Ended December 31,
2012
2013
2011
$
$
45,308 $
(28,211 )
57,249 $
(17,133)
54,139
-
17,097 $
40,116 $
54,139
60
The following table summarizes depreciation expense for the periods indicated below (in thousands):
Depreciation Expense
$
89,828 $
67,289 $
46,952
Year Ended December 31,
2012
2013
2011
61
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
Facility Agreement
Thermo Loan Agreement
5.75% Convertible Senior Unsecured Notes
8.00% Convertible Senior Notes Issued in 2013
5.0% Convertible Senior Unsecured Notes
8.00% Convertible Senior Unsecured Notes Issued in 2009
Total Debt
Less: Current Portion
Long-Term Debt
December 31, 2013
December 31, 2012
Principal
Amount
Carrying
Value
Principal
Amount
Carrying
Value
$
$
586,342 $
60,383
-
46,971
-
51,652
745,348
4,046
741,302 $
586,342 $
22,854
-
26,291
-
33,795
669,282
4,046
665,236 $
585,670 $
53,499
71,804
-
40,920
48,228
800,121
657,474
142,647 $
585,670
49,822
70,204
-
16,701
28,632
751,029
655,874
95,155
The table above represents the principal amount and carrying value of long-term debt at December 31, 2013 and 2012. The principal
amounts shown above include payment of in kind interest, if any. The carrying value is net of any discounts to the loan amounts at issuance,
including accretion, as further described below. The amount included in the table above as the current portion of long-term debt represents the
first scheduled principal repayment under the Facility Agreement, due in December 2014.
Facility Agreement
The Company’s Facility Agreement, as described below, was amended and restated in August 2013 and is scheduled to mature in December
2022. Semi-annual principal repayments are scheduled to begin in December 2014. The facility bears interest at a floating LIBOR rate plus a
margin of 2.75% through June 2017, increasing by an additional 0.5% each year to a maximum rate of LIBOR plus 5.75%. Ninety-five percent
of the Company’s obligations under the Facility Agreement are guaranteed by COFACE, the French export credit agency. The Company’s
obligations under the Facility Agreement are guaranteed on a senior secured basis by all of its domestic subsidiaries and are secured by a first
priority lien on substantially all of the assets of the Company and its domestic subsidiaries (other than their FCC licenses), including patents
and trademarks, 100% of the equity of the Company’s domestic subsidiaries and 65% of the equity of certain foreign subsidiaries.
The Facility Agreement contains customary events of default and requires that the Company satisfy various financial and nonfinancial
covenants. If the Company violates any of these covenants and is unable to obtain waivers, the Company would be in default under the
agreement and payment of the indebtedness could be accelerated. The acceleration of the Company’s indebtedness under one agreement may
permit acceleration of indebtedness under other agreements that contain cross-acceleration provisions. The Company was in compliance with
all covenants as of December 31, 2013. See Part II – Item 5 – Liquidity and Capital Resources - to this Report for further discussion on the
Company’s debt covenants.
The Facility Agreement requires the Company to maintain a total of $37.9 million in a debt service reserve account. The use of the funds in
this account is restricted to making principal and interest payments under the Facility Agreement. As of December 31, 2013, the balance in the
debt service reserve account was $37.9 million and classified as restricted cash.
Former Terms of Facility Agreement
In 2009, the Company entered into the Facility Agreement with a syndicate of bank lenders, including BNP Paribas, Natixis, Société
Générale, Caylon, Crédit Industriel et Commercial as arrangers and BNP Paribas as the security agent and agent for the Company’s Facility
Agreement. Prior to its amendment and restatement in 2013, the Facility Agreement had a maturity date of 84 months after the first principal
repayment date, as amended. Semi-annual principal repayments were scheduled to begin on June 30, 2013, as amended. The Facility
Agreement bore interest at a floating LIBOR rate, plus a margin of 2.25% through December 2017, increasing to 2.40% thereafter.
The Facility Agreement required the Company to maintain a total of $46.8 million in a debt service reserve account. The use of the funds in
this account was restricted to making principal and interest payments under the Facility Agreement. The minimum required balance, not to
exceed $46.8 million, fluctuated over time based on the timing of principal and interest payment dates. In December 2012, the amount required
to be funded into the debt service reserve account was reduced by approximately $8.9 million due to the timing of the first principal repayment
date scheduled for June 2013. In January 2013, the agent for the Facility Agreement permitted the Company to withdraw from the debt service
reserve account $8.9 million that was in excess of the required balance to enable the Company to pay capital expenditure costs relating to the
fourth launch of its second-generation satellites.
62
The Facility Agreement contained customary events of default and required that the Company satisfy various financial and nonfinancial
covenants. As a result of the Thales arbitration ruling and the subsequent settlement agreements reached with Thales related to the arbitration
ruling in 2012, the lenders concluded that events of default had occurred under the Facility Agreement. The Company was also in default of
certain other financial and nonfinancial covenants, including, but not limited to, lack of payment of principal in June 2013 in accordance with
the terms of the Facility Agreement, failure to maintain minimum required funding for the Company’s debt service account, and failure to
achieve in-orbit acceptance of all of its second-generation satellites by April 2013. Prior to the Facility Agreement’s amendment and
restatement in August 2013, the borrowings were shown as current on the Company’s consolidated balance sheet in accordance with applicable
accounting rules. The Company also projected that it would not be in compliance with certain future financial and nonfinancial covenants
specified under the Facility Agreement. These events of default were waived or cured by the amendment and restatement of the Facility
Agreement.
Amended and Restated Facility Agreement
As previously disclosed, on July 31, 2013, the Company entered into the Global Deed of Amendment and Restatement (the “GARA”) with
Thermo, the Company’s domestic subsidiaries (the “Subsidiary Guarantors”), a syndicate of bank lenders, including BNP Paribas, Société
Générale, Natixis, Credit Agricole Corporate and Investment Bank and Credit Industrial et Commercial as arrangers and BNP Paribas as the
security agent and COFACE Agent, providing for the amendment and restatement of the Facility Agreement and certain related credit
documents. The GARA became effective on August 22, 2013 and, among other things, waived all of the Company’s defaults under the Facility
Agreement and restructured the financial covenants.
Pursuant to the GARA,
• In August 2013, Globalstar paid the lenders a restructuring fee plus an additional underwriting fee to COFACE in the aggregate amount of
approximately $13.9 million, representing 40% of the total restructuring and underwriting fee, the balance of $20.8 million is due no later
than December 31, 2017. This remaining amount is included in noncurrent liabilities on the December 31, 2013 consolidated balance sheet.
Globalstar also paid all outstanding incurred transaction expenses for the Lenders.
• In August 2013, Globalstar drew the remaining approximately $0.7 million not previously borrowed under the Facility Agreement for
certain milestone payments due to Thales for the construction of the second-generation satellites.
• In August 2013, all amounts remaining under the Thermo Contingent Equity Account (approximately $1.1 million) and approximately $0.2
million in the Debt Service Reserve Account were paid to the Company’s launch services provider for the account of Globalstar to pay
certain costs for the launch of the Company’s second-generation satellites.
• Thermo confirmed its obligations under the Equity Commitment, Restructuring and Consent Agreement dated as of May 20, 2013 to make,
or arrange for third parties to make, cash contributions to the Company, in exchange for equity, subordinated convertible debt or other
equity-linked securities, of $20.0 million on or prior to December 26, 2013, and an additional amount of up to $20 million on or prior to
December 31, 2014. See further discussion below on the details of the Consent Agreement and subsequent cash contributions to Globalstar.
• The Lenders waived all existing defaults or events of default under the Facility Agreement.
The GARA made the following changes to the terms of the Facility Agreement:
• The initial principal payment date, formerly June 30, 2013, was postponed to December 31, 2014, and the final maturity date was extended
from June 30, 2020 to December 31, 2022.
• The remaining principal payments, with the final payment due December 31, 2022, were also restructured, resulting in an aggregate
postponement of $235.3 million in principal payments through 2019.
• The annual interest rate increased by 0.5% to LIBOR plus 2.75% through July 1, 2017, and increases by an additional 0.5% each year
thereafter to a maximum rate of LIBOR plus 5.75%.
• Mandatory prepayments were expanded in specified circumstances and amounts, including if the Company generates excess cash flow,
monetizes its spectrum rights, receives the proceeds of certain asset dispositions or receives more than $145.0 million from the sale of
additional debt or equity securities (excluding the Thermo commitments described above and up to $19.5 million under the Company’s
equity line with Terrapin).
63
• The financial covenants were modified, including changing the amount of permitted capital expenditures, reducing the required minimum
liquidity amount from $5.0 million to $4.0 million, restructuring the other existing financial covenants to correspond to the Company’s
revised business plan reflecting the delays in delivery of the Company’s second-generation satellites, and adding a new covenant with
respect to the Company’s interest coverage ratio.
• The definition of Change of Control was amended to require a mandatory prepayment of the entire facility if Thermo and certain of its
affiliates own less than 51% of the Company’s common stock.
• The required balance of the Debt Service Reserve Account was fixed at the current amount of approximately $37.9 million for the length of
the Facility Agreement.
• Any new subordinated indebtedness of the Company may not mature or pay cash interest prior to the final maturity date of the Facility
Agreement.
• The Company, while the Facility Agreement is outstanding, is prohibited from paying any cash dividends or repaying any principal or
interest with respect to its indebtedness to Thermo under the Thermo Loan Agreement.
• The Company is prohibited from amending its material agreements without the lenders’ prior consent.
• An event of default was added if any litigation against the Company results in a final judgment that imposes a material liability that was not
anticipated by the Company’s business plan.
The Company evaluated the GARA under applicable accounting guidance and determined that the amendment and restatement of the
Company’s Facility Agreement was a modification of the former indebtedness. As a result of the modification of the Facility Agreement, all
financing costs paid to the Company’s legal and other advisors, a total of $0.3 million, was recorded in other income and expense in the
Company’s consolidated statements of operations during the third quarter of 2013. Financing costs paid to the lenders were capitalized as a
deferred asset on the Company’s consolidated balance sheet during the third quarter of 2013 and will be amortized using the effective interest
rate method to interest expense through the maturity of the Facility Agreement.
Contingent Equity Agreement
In June 2009, the Company entered into a Contingent Equity Agreement with Thermo whereby Thermo agreed to deposit $60.0 million into
a contingent equity account to fulfill a condition precedent for borrowing under the Facility Agreement. Under the terms of the Facility
Agreement, the Company had the right to make draws from this account if and to the extent it had an actual or projected deficiency in its ability
to meet obligations due within a forward-looking 90-day period. Thermo pledged the contingent equity account to secure the Company’s
obligations under the Facility Agreement.
The Contingent Equity Agreement provided that the Company would pay Thermo an availability fee of 10% per year for maintaining funds
in the contingent equity account. This annual fee was payable solely in warrants to purchase common stock at $0.01 per share with a five-year
exercise period from issuance. The number of shares issuable under the warrants was calculated by taking the outstanding funds available in the
contingent equity account multiplied by 10% divided by the lower of the Company’s common stock price on the issuance date or $1.37, but not
to be lower than $0.20. Prior to June 19, 2012, the common stock price was subject to a reset provision on certain valuation dates whereby the
warrant price used in the calculation would be the lower of the warrant price on the issuance date or the Company’s common stock price on the
valuation date. The warrants issued to Thermo are no longer subject to any reset provisions. The Company determined that the warrants issued
in conjunction with the availability fee were derivatives and recorded the value of the derivatives as a component of other non-current
liabilities, at issuance. The offset was recorded in other assets and was amortized over the one year availability period. The warrants issued on
June 19, 2012 were not subject to a reset provision subsequent to issuance and are therefore not considered a derivative instrument. The value
of the warrants issued was recorded as equity, and the offset was recorded in other assets and was amortized over the one-year availability
period.
When the Company made draws on the contingent equity account, it issued Thermo shares of common stock calculated using a price per
share equal to 80% of the average closing price of the common stock for the 15 trading days immediately preceding the draw. The 20%
discount on the value of the shares issued to Thermo is treated as a deferred financing cost and is amortized over the remaining term of the
Facility Agreement. The Company has drawn the entire $60.0 million from this account as well as interest earned from the funds previously
held in this account of approximately $1.1 million.
Since the origination of the Contingent Equity Agreement, the Company has issued to Thermo warrants to purchase 41,467,980 shares of
common stock for the annual availability fee and subsequent resets due to provisions in the Contingent Equity Agreement and 160,916,223
shares of common stock resulting from the Company’s draws on the contingent equity account pursuant to the terms of the Contingent Equity
Agreement. The Company has also issued to Thermo 2,133,656 shares of common stock resulting from draw of the interest earned from the
funds previously held in this account.
On June 19, 2010, the warrants issued on June 19, 2009 and on December 31, 2009 were no longer variable, and the related $11.9 million
liability was reclassified to equity. On June 19, 2011, the warrants issued on June 19, 2010 were no longer variable, and the related $6.0
million liability was reclassified to equity. On June 19, 2012, the warrants issued on June 19, 2011 were no longer variable, and the related $5.9
million liability was reclassified to equity.
64
As of December 31, 2012, no warrants issued in connection with the Contingent Equity Agreement had been exercised.
No voting common stock is issuable if it would cause Thermo and its affiliates to own more than 70% of the Company’s outstanding voting
stock. The Company may issue nonvoting common stock in lieu of common stock to the extent issuing common stock would cause Thermo
and its affiliates to exceed this 70% ownership level.
Thermo Loan Agreement
The Company has an Amended and Restated Loan Agreement (the “Loan Agreement”) with Thermo whereby Thermo agreed to lend the
Company $25.0 million for the purpose of funding the debt service reserve account required under the Facility Agreement. In 2011, this loan
was increased to $37.5 million. This loan is subordinated to, and the debt service reserve account is pledged to secure, all of the Company’s
obligations under the Facility Agreement. Amounts deposited in the debt service reserve account are restricted to payments due under the
Facility Agreement, unless otherwise authorized by the lenders.
The loan accrues interest at 12% per annum, which is capitalized and added to the outstanding principal in lieu of cash payments. The
Company will make payments to Thermo only when permitted under the Facility Agreement. The loan becomes due and payable six months
after the obligations under the Facility Agreement have been paid in full, the Company has a change in control or any acceleration of the
maturity of the loans under the Facility Agreement occurs. As of December 31, 2013, $22.9 million of interest was outstanding; this amount is
included in long-term debt on the Company’s consolidated balance sheet.
As additional consideration for the loan, the Company issued Thermo a warrant to purchase 4,205,608 shares of common stock at $0.01 per
share with a five-year exercise period. No voting common stock is issuable upon such exercise if such issuance would cause Thermo and its
affiliates to own more than 70% of the Company’s outstanding voting stock. The Company may issue nonvoting common stock in lieu of
common stock to the extent issuing common stock would cause Thermo and its affiliates to exceed this 70% ownership level. The Company
determined that the warrant was an equity instrument and recorded it as a part of stockholders’ equity with a corresponding debt discount of
$5.2 million, which is netted against the principal amount of the loan. The Company accreted this debt discount associated with the warrant
using an effective interest method to interest expense over the term of the loan agreement prior to the amendment and restatement as further
discussed below.
As previously disclosed, in connection with the amendment and restatement of the Company’s Facility Agreement, the Company also
amended and restated the Loan Agreement in July 2013. The Amended and Restated Loan Agreement made the following changes:
• Provided that the indebtedness would be represented by a promissory note.
• Provided that if a Fundamental Change (as defined in the Fourth Supplemental Indenture with respect to the 8.00% Notes issued in 2013)
occurs prior to the repayment of the indebtedness, the Company would pay Thermo an amount equal to the Fundamental Make-Whole
Amount (as defined in that indenture).
• Provided that the indebtedness is convertible into common stock of Globalstar on substantially the same terms as the 8.00% Notes Issued in
2013, excluding the conversion features on special conversion dates as defined in the Indenture.
The terms of the amendment and restatement were approved by a special committee of the Company’s board of directors consisting solely
of the Company’s unaffiliated directors. The committee was represented by independent legal counsel.
Based on the Company’s evaluation of the Amended and Restated Loan Agreement, this transaction was determined to be an
extinguishment of the debt under the prior Loan Agreement. The Company recorded a loss on the extinguishment of this debt of $66.1 million
in its consolidated statement of operations during the third quarter of 2013. This loss represents the difference between the fair value of the
Loan Agreement, as amended and restated, and its carrying value just prior to amendment and restatement. See Note 5 for further discussion on
the fair value of this instrument.
The Company evaluated the various embedded derivatives within the Loan Agreement. The Company determined that the conversion
option and the contingent put feature upon a fundamental change required bifurcation from the Loan Agreement. The conversion option and the
contingent put feature were not deemed clearly and closely related to the Loan Agreement and were separately accounted for as a standalone
derivative. The Company recorded this compound embedded derivative liability as a non-current liability on its consolidated balance sheet with
a corresponding debt discount which is netted against the face value of the Loan Agreement.
The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense through the
maturity of the Loan Agreement using an effective interest rate method. The fair value of the compound embedded derivative liability will be
marked-to-market at the end of each reporting period, with any changes in value reported in the consolidated statements of operations. The
Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model.
65
The Company netted the debt discount associated with the compound embedded derivative against the fair value of the Loan Agreement to
determine the carrying amount of the Loan Agreement. The accretion of the debt discount will increase the carrying amount of the debt through
the maturity of the Loan Agreement. The Company allocated the fair value at issuance as follows (in thousands):
Loan Agreement
Compound embedded derivative liability
Fair value of Loan Agreement
5.75% Convertible Senior Unsecured Notes
$
$
18,958
101,114
120,072
In 2008, the Company issued $150.0 million aggregate principal amount of 5.75% Notes. The 5.75% Notes were senior unsecured debt
obligations of the Company. The 5.75% Notes were to mature on April 1, 2028 and bore interest at a rate of 5.75% per annum. Interest on the
5.75% Notes was payable semi-annually in arrears on April 1 and October 1 of each year.
The 5.75% Notes were subject to repurchase by the Company for cash at the option of the holders in whole or part on April 1, 2013 at a
purchase price equal to 100% of the principal amount ($71.8 million aggregate principal was outstanding at April 1, 2013) of the 5.75% Notes,
plus accrued and unpaid interest, if any.
On March 29, 2013, U.S. Bank National Association, the Trustee under the Indenture and the First Supplemental Indenture governing the
5.75% Notes, each dated as of April 15, 2008, between the Company and the Trustee (collectively, as amended and supplemented or otherwise
modified, the "Indenture"), notified the Company in writing that holders of approximately $70.7 million principal amount of 5.75% Notes had
exercised their purchase rights pursuant to the Indenture. Under the Indenture, the Company was required to deposit with the Trustee on April
1, 2013, the purchase price of approximately $70.7 million in cash to effect the repurchase of the 5.75% Notes from the exercising holders. The
Company did not have sufficient funds to pay the purchase price when due, which constituted an event of default under the Indenture.
In addition, the Indenture also required that, on April 1, 2013, the Company pay interest on the 5.75% Notes in the aggregate amount of
approximately $2.1 million for the six months ended March 31, 2013. The Company did not make this payment. Under the Indenture, failure to
pay this interest by April 30, 2013 also constituted an event of default.
As discussed below, these events of default were cured pursuant to the Exchange Agreement transactions consummated on May 20, 2013.
Exchange Agreement
On May 20, 2013, the Company entered into an Exchange Agreement with the beneficial owners and investment managers for beneficial
owners (the “Exchanging Note Holders”) of approximately 91.5% of its outstanding 5.75% Notes and completed the transactions contemplated
by the Exchange Agreement.
Pursuant to the Exchange Agreement, the Exchanging Note Holders surrendered their 5.75% Notes (the “Exchanged Notes”) to the
Company for cancellation in exchange for:
• Approximately $13.5 million in cash, with respect to a portion of the principal amount of the Exchanged Notes, plus approximately $0.5
million in cash, equal to all accrued and unpaid interest on the Exchanged Notes from April 1, 2013 to the closing;
• Approximately 30.3 million shares of voting common stock of the Company; and
• Approximately $54.6 million principal amount of the Company’s new 8.00% Convertible Senior Notes due April 1, 2028 (the “8.00%
Notes Issued in 2013”), with an initial conversion price of $0.80 per share, subject to adjustment as described below.
In the Exchange Agreement, the Company also agreed that, if the Company grants certain liens to Thermo or its affiliates in connection
with future financing transactions, the Exchanging Note Holders may participate in such transactions in an amount up to 50% of the
participation of Thermo and its affiliates.
Pursuant to the Exchange Agreement, the Company also cured outstanding defaults under the 5.75% Notes by:
• Cancelling the Exchanged Notes as described above;
• Depositing with the Trustee approximately $2.1 million, an amount equal to the interest due on all of the 5.75% Notes on April 1, 2013 and
accumulated interest thereon, for distribution to the holders of record of the 5.75% Notes as of March 15, 2013;
66
• Depositing with the Trustee approximately $6.3 million, an amount equal to the principal amount of the 5.75% Notes (other than the
Exchanged Notes) and interest thereon from April 1, 2013 to June 26, 2013 and directing the Trustee to pay such amounts to the holders of
the 5.75% Notes (other than the Exchanged Notes); and
• Redeeming the remaining 5.75% Notes.
On May 20, 2013, the Company called for redemption the remaining 5.75% Notes for cash equal to their principal amount.
Based on the Company’s evaluation of the exchange transaction, the Exchange Agreement was determined to be an extinguishment of the
5.75% Notes. As a result of this exchange, the Company recorded a loss on the extinguishment of debt of $47.2 million in its consolidated
statement of operations during the second quarter of 2013. This loss represented the difference between the carrying value of the 5.75% Notes
and the fair value of the consideration given in the exchange (including the new 8.00% Notes Issued in 2013, cash payments to both
exchanging and non-exchanging holders, equity issued to the holders and other fees incurred in the exchange). See Note 5 for further
discussion on the fair value of this instrument.
The Consent Agreement
To obtain the lenders’ consent to the transactions contemplated by the Exchange Agreement, pursuant to the Consent Agreement, Thermo
agreed that it would make, or arrange for third parties to make, cash contributions to the Company in exchange for equity, subordinated
convertible debt or other equity-linked securities as follows:
• At the closing of the exchange transaction and thereafter each week until no later than July 31, 2013, an amount sufficient to enable the
Company to maintain a consolidated unrestricted cash balance of at least $4.0 million;
• At the closing of the exchange transaction, $25.0 million to satisfy all cash requirements associated with the exchange transaction, including
agreed principal and interest payments to the holders of the 5.75% Notes as contemplated by the Exchange Agreement, with any remaining
portion being retained by the Company for working capital and general corporate purposes;
• Contemporaneously with, and as a condition to the closing of, any restructuring of the Facility Agreement, $20.0 million (less any amount
contributed pursuant to the commitment described above with respect to the Company’s minimum cash balance);
• Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 26, 2013, $20.0 million; and
• Subject to the prior closing of the Facility Agreement restructuring, on or prior to December 31, 2014, $20.0 million, less the amount by
which the aggregate amount of cash received by the Company under the first, third and fourth commitments described above exceeds $40
million.
In accordance with the terms of the Common Stock Purchase Agreement and Common Stock Purchase and Option Agreement discussed
below, as of December 31, 2013, Thermo has contributed a total of $65.0 million to the Company in exchange for 171.9 million shares of the
Company’s nonvoting common stock. As of December 31, 2013, an additional $15.0 million had been contributed to the Company through
warrant exercises and other equity issuances, reducing Thermo’s remaining commitment to $5.0 million.
The Common Stock Purchase Agreement
On May 20, 2013, the Company and Thermo entered into a Common Stock Purchase Agreement pursuant to which Thermo purchased
78,125,000 shares of the Company’s common stock for $25.0 million ($0.32 per share). Thermo also agreed to purchase additional shares of
common stock at $0.32 per share as and when required to fulfill its equity commitment described above to maintain the Company’s
consolidated unrestricted cash balance at not less than $4.0 million until the earlier of July 31, 2013 and the closing of a restructuring of the
Facility Agreement. In furtherance thereof, at the closing of the transactions contemplated by the Exchange Agreement, Thermo purchased an
additional 15,625,000 shares of common stock for an aggregate purchase price of $5.0 million. In June 2013, Thermo purchased an additional
28,125,000 shares of common stock for an aggregate purchase price of $9.0 million pursuant to the Common Stock Purchase Agreement.
Pursuant to its commitment, Thermo invested a further $6.0 million on July 29, 2013 and $6.5 million on August 19, 2013, on terms later
determined by a special committee of the Company’s board of directors consisting solely of the Company’s unaffiliated directors as described
below.
During the second quarter of 2013, Thermo purchased in total approximately 121.9 million shares of the Company’s common stock
pursuant to the Common Stock Purchase Agreement for an aggregate $39.0 million. During the second quarter of 2013, the Company
recognized a loss on the sale of these shares of approximately $14.0 million (included in other income/expense on the consolidated statement of
operations), representing the difference between the purchase price and the fair value of the Company’s common stock (measured as the
closing stock price on the date of each sale). Pursuant to the Common Stock Purchase Agreement, the shares of common stock are intended to
be shares of nonvoting common stock.
The terms of the Common Stock Purchase Agreement were approved by a special committee of the Company’s board of directors
consisting solely of the Company’s unaffiliated directors. The committee, which was represented by independent legal counsel, determined that
the terms of the Common Stock Purchase Agreement were fair and in the best interests of the Company and its shareholders.
67
The Common Stock Purchase and Option Agreement
On October 14, 2013, the Company and Thermo entered into a Common Stock Purchase and Option Agreement pursuant to which Thermo
agreed to purchase 11,538,461 shares of the Company’s non-voting common stock at a purchase price of $0.52 per share in exchange for the
$6.0 million invested in July and an additional $20 million, or 38,461,538 shares, of which $6.5 million was invested in August 2013 and the
remaining $13.5 million was invested under the First Option, described below.. The Common Stock Purchase and Option Agreement also
granted the Company a First Option and a Second Option, as defined in the agreement, to sell to Thermo up to $13.5 million and $11.5 million,
respectively, of nonvoting common stock, as and when exercised by the special committee through November 28, 2013 and December 31,
2013, respectively. The First Option to sell up to $13.5 million in shares to Thermo is at a purchase price of $0.52 per share. The Second
Option to sell up to $11.5 million in shares to Thermo is at a price equal to 85% of the average closing price of the voting common stock during
the ten trading days immediately preceding the date of the special committee’s request. In November 2013, the special committee amended the
Common Stock Purchase and Option Agreement to defer the expiration date of the Second Option to March 31, 2014.
During the third quarter of 2013, Thermo purchased approximately 24.0 million shares of the Company’s common stock pursuant to the
terms of the Common Stock Purchase and Option Agreement for an aggregate purchase price of $12.5 million. During the third quarter of
2013, the Company recognized a loss on the sale of these shares of approximately $2.4 million (included in other income/expense on the
consolidated statement of operations), representing the difference between the purchase price and the fair value of the Company’s common
stock (measured as the closing stock price on the date of each sale).
In November 2013, the Company exercised the First Option, and on December 27, 2013 Thermo purchased 26.0 million shares of common
stock at a purchase price of $0.52 per share for a total additional investment of $13.5 million.
The terms of the Common Stock Purchase and Option Agreement were approved by a special committee of the Company’s board of
directors consisting solely of the Company’s unaffiliated directors. The committee, which was represented by independent legal counsel,
determined that the terms of the Common Stock Purchase and Option Agreement were fair and in the best interests of the Company and its
shareholders.
Share Lending Agreement
Concurrently with the 2008 offering of the 5.75% Notes, the Company entered into a share lending agreement (the “Share Lending
Agreement”) with Merrill Lynch International (the “Borrower”), pursuant to which the Company agreed to lend up to 36,144,570 shares of
common stock (the “Borrowed Shares”) to the Borrower, subject to certain adjustments, for a period ending on the earliest of (i) at the
Company’s option, at any time after the entire principal amount of the 5.75% Notes ceases to be outstanding, (ii) the written agreement of the
Company and the Borrower to terminate, (iii) the occurrence of a Borrower default, at the option of Lender, and (iv) the occurrence of a Lender
default, at the option of the Borrower. Pursuant to the Share Lending Agreement, upon the termination of the share loan, the Borrower was
required to return the Borrowed Shares to the Company. Upon the conversion of 5.75% Notes (in whole or in part), a number of Borrowed
Shares proportional to the conversion rate for such notes was required to be returned to the Company. At the Company’s election, the Borrower
was permitted to deliver cash equal to the market value of the corresponding Borrowed Shares instead of returning to the Company the
Borrowed Shares otherwise required by conversions of 5.75% Notes.
Pursuant to and upon the terms of the Share Lending Agreement, the Company issued and loaned the Borrowed Shares to the Borrower as a
share loan. The Borrowing Agent also acted as an underwriter with respect to the Borrowed Shares, which were offered to the public. The
Borrowed Shares included approximately 32.0 million shares of common stock initially loaned by the Company to the Borrower on separate
occasions, delivered pursuant to the Share Lending Agreement and the Underwriting Agreement, and an additional 4.1 million shares of
common stock that, from time to time, could be borrowed from the Company by the Borrower pursuant to the Share Lending Agreement and
the Underwriting Agreement and subsequently offered and sold at prevailing market prices at the time of sale or negotiated prices. The
Borrowed Shares are free trading shares.
During July 2013, in connection with the exchange or redemption of all of the 5.75% Notes, the Company and the Borrower terminated the
Share Lending Agreement. In connection with this termination, the Borrower returned 10.2 million Borrowed Shares to Globalstar and paid
approximately $4.4 million in cash for the remaining 7.1 million Borrowed Shares. As of December 31, 2012, approximately 17.3 million
Borrowed Shares are outstanding. At December 31, 2013, the Share Lending Arrangement had been terminated, and all Borrowed Shares had
been either returned to the Company or purchased by the Borrower.
68
8.00% Convertible Senior Notes Issued in 2013
On May 20, 2013, pursuant to the Exchange Agreement, the Company issued $54.6 million aggregate principal amount of 8.00%
Convertible Senior Notes (the “8.00% Notes Issued in 2013”) to the Exchanging Note Holders. The 8.00% Notes Issued in 2013 are convertible
into shares of common stock at an initial conversion price of $0.80 per share of common stock, or 1,250 shares of the Company’s common
stock per $1,000 principal amount of the 8.00% Notes Issued in 2013, subject to adjustment as provided in the Fourth Supplemental Indenture
between the Company and U.S. Bank National Association, as Trustee (the “New Indenture”). The conversion price of the 8.00% Notes Issued
in 2013 will be adjusted in the event of certain stock splits or extraordinary share distributions, or as a reset of the base conversion and exercise
price as described below.
The 8.00% Notes Issued in 2013 are senior unsecured debt obligations of the Company and rank pari passu with the Company’s existing
8.00% Convertible Senior Unsecured Notes Issued in 2009. There is no sinking fund for the 8.00% Notes Issued in 2013. The 8.00% Notes
Issued in 2013 will mature on April 1, 2028, subject to various call and put features as described below, and bear interest at a rate of 8.00% per
annum. Interest on the 8.00% Notes Issued in 2013 is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on
October 1, 2013. Interest is paid in cash at a rate of 5.75% per annum and additional 8.00% Notes Issued in 2013 at a rate of 2.25% per annum.
Subject to certain conditions set forth in the New Indenture, including prior approval of the Majority Lenders (as defined in the Facility
Agreement), the Company could have redeemed the 8.00% Notes Issued in 2013, in whole or in part, on December 10, 2013, if the average of
the volume-weighted prices of the Company’s common stock for the 30-day period ending November 29, 2013, were less than $0.20, at a price
equal to the principal amount of the 8.00% Notes Issued in 2013 to be redeemed plus an amount equal to 32% of such principal amount minus
all interest which is paid on the 8.00% Notes Issued in 2013 prior to their redemption. The Company did not redeem any portion of these notes
on December 10, 2013. The Company may also redeem the 8.00% Notes Issued in 2013, with the prior approval of the Majority Lenders, in
whole or in part, at any time on or after April 1, 2018, at a price equal to the principal amount of the 8.00% Notes Issued in 2013 to be
redeemed plus all accrued and unpaid interest thereon.
A holder of 8.00% Notes Issued in 2013 has the right, at the Holder’s option, to require the Company to purchase some or all of the 8.00%
Notes Issued in 2013 held by it on each of April 1, 2018 and April 1, 2023 at a price equal to the principal amount of the 8.00% Notes Issued in
2013 to be purchased plus accrued and unpaid interest.
A holder of the 8.00% Notes Issued in 2013 has the right, at the holder’s option, to require the Company to purchase some or all of the
8.00% Notes Issued in 2013 held by it at any time if there is a Fundamental Change. A Fundamental Change occurs if the Company’s common
stock ceases to be traded on a stock exchange or an established over-the-counter market or if there is a change of control of the Company. If
there is a Fundamental Change, the purchase price of any 8.00% Notes Issued in 2013 purchased by the Company will be equal to its principal
amount plus accrued and unpaid interest and a Fundamental Change Make-Whole Amount calculated as provided in the New Indenture.
Subject to the procedures for conversion and other terms and conditions of the New Indenture, a holder may convert its 8.00% Notes Issued
in 2013 at its option at any time prior to the close of business on the business day immediately preceding April 1, 2028, into shares of common
stock (or, at the option of the Company, cash in lieu of all or a portion thereof, provided that, under the Facility Agreement, the Company may
pay cash only with the consent of the Majority Lenders). Upon conversion, the holder will be entitled to receive shares of common stock, cash
or a combination thereof (provided that, under the Facility Agreement, the Company may pay cash only with the consent of the Majority
Lenders), in such amounts and subject to terms and conditions set forth in the New Indenture. The Company will pay cash in lieu of fractional
shares otherwise issuable upon conversion of the 8.00% Notes Issued in 2013 as specified in the Indenture.
A holder may elect to convert up to 15% of its 8.00% Notes Issued in 2013 on each of July 19, 2013 and March 20, 2014. If a holder elects
to convert on either of those dates, it will receive, at the Company’s option, either cash equal to the par value of the 8.00% Notes Issued in
2013 plus accrued interest (provided that, under the Facility Agreement, the Company may pay cash only with the consent of the Majority
Lenders) or shares of the Company’s common stock equal to the principal amount of the 8.00% Notes Issued in 2013 to be converted plus
accrued interest divided by the lower of the average price of the common stock in a specified period and $0.50. On July 19, 2013, $7.0 million
principal amount (approximately 12.9% of the outstanding principal amount) of 8.00% Notes Issued in 2013 were converted, resulting in the
issuance of 14.3 million shares. During the fourth quarter of 2013, an additional $1.0 million principal amount of 8.00% Notes Issued in 2013
were converted, resulting in the issuance of approximately 0.6 million shares through December 31, 2013 related to these conversions.
The base conversion rate may be adjusted on each of April 1, 2014 and April 1, 2015 based on the average price of the Company’s
common stock in the 30-day period ending on that date. If the base conversion rate is adjusted on April 1, 2014, the Company also will provide
additional consideration to the holders of the 8.00% Notes Issued in 2013 in an amount equal to 25% of the principal amount of the outstanding
8.00% Notes Issued in 2013, payable in equity or cash at the Company’s election (provided, under the Facility Agreement, that the Company
may pay cash only with the consent of the Majority Lenders). That consideration will not reduce the principal amount of the 8.00% Notes
Issued in 2013 or any interest otherwise payable on the 8.00% Notes Issued in 2013.
69
The New Indenture also provides for other customary adjustments of the base conversion rate, including upon the Company’s sale of
additional equity securities at a price below the then applicable conversion price. If a 8.00% Note Issued in 2013 is converted after May 20,
2014, the holder is entitled to receive additional shares of common stock as a make-whole premium equal to the first three years of interest on
the Notes (i.e., 24% of the Notes less any interest already paid through the date of the conversion) as provided in the New Indenture. Due to
common stock issuances by the Company since May 20, 2013, the base conversion rate had been reduced to $0.73 per share of common stock
as of December 31, 2013.
The New Indenture provides that the Company and its subsidiaries may not, with specified exceptions, including the liens securing the
Facility and liens approved in writing by the Agent, create, incur, assume or suffer to exist any lien on any of their assets, provided that if the
Company or any of its subsidiaries creates, incurs or assumes any lien which is junior to the most senior lien securing the Facility Agreement
(other than a lien pursuant to a restructuring of the Facility Agreement in which Thermo and its affiliates do not participate as a secured lender),
the Company must promptly issue to the holders of the 8.00% Notes Issued in 2013 $3,590,200 (representing 5.0% of the principal amount of
the 5.75% Notes outstanding on the date of the Exchange Agreement, which was $71.8 million) of shares of the Company’s common stock. At
December 31, 2013, the Company did not expect that a lien will be created that does not meet at least one of the specified exceptions in the
New Indenture, and therefore no amount is accrued for this feature at December 31, 2013.
The New Indenture requires that on or before December 31, 2013, but subject to the conditions described below, the Company must cause
all of its subsidiaries that guaranty the obligations of the Company under the Facility Agreement or any notes of another series issued under the
Indenture dated as of April 15, 2008 (the “Base Indenture”) to execute and deliver to the Trustee a guaranty of the Company’s obligations
under the 8.00% Notes Issued in 2013 in the form attached to the New Indenture. The subsidiaries’ obligations under the guaranty will be
subordinated to their obligations under their guaranty of the Facility Agreement. The execution and delivery of the guaranty was conditioned
on the prior completion of the restructuring of the Facility Agreement, the absence of any payment default under the Facility Agreement, and
the absence of any breach by Thermo of its obligations to provide funds to the Company (the “Contribution Obligations”) as required by the
Consent Agreement (or, as applicable, the anticipated corresponding provision in the Facility Agreement. The Company’s subsidiaries issued
the guarantee required by this provision on December 27, 2013.
The New Indenture provides for customary events of default, including without limitation, failure to pay principal or premium on the
8.00% Notes Issued in 2013 when due or to distribute cash or shares of common stock when due as described above; failure by the Company to
comply with its obligations and covenants in the New Indenture; default by the Company in the payment of principal or interest on any other
indebtedness for borrowed money with a principal amount in excess of $10.0 million, if such indebtedness is accelerated and not rescinded
with 30 days; rendering of certain final judgments; failure by Thermo to fulfill the contribution obligations described above; and certain events
of insolvency or bankruptcy. If there is an event of default, the Trustee may, at the direction of the holders of 25% or more in aggregate
principal amount of the 8.00% Notes Issued in 2013, accelerate the maturity of the 8.00% Notes Issued in 2013. The Company was not in
default under the 8.00% Notes Issued in 2013 as of December 31, 2013.
The Company evaluated the various embedded derivatives within the New Indenture. The Company determined that the conversion option
and the contingent put feature within the New Indenture required bifurcation from the 8.00% Notes Issued in 2013. The conversion option and
the contingent put feature were not deemed clearly and closely related to the 8.00% Notes Issued in 2013 and were separately accounted for as
a standalone derivative. The Company recorded this compound embedded derivative liability as a non-current liability on its consolidated
balance sheet with a corresponding debt discount which is netted against the face value of the 8.00% Notes Issued in 2013.
The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense through the
first put date of the 8.00% Notes Issued in 2013 (April 1, 2018) using an effective interest rate method. The fair value of the compound
embedded derivative liability is being marked-to-market at the end of each reporting period, with any changes in value reported in the
condensed consolidated statements of operations. The Company determined the fair value of the compound embedded derivative using a Monte
Carlo simulation model.
The Company netted the debt discount associated with compound embedded derivative against the fair value of the 8.00% Notes Issued in
2013 to determine the carrying amount of the 8.00% Notes Issued in 2013. The accretion of the debt discount will increase the carrying amount
of the debt through April 1, 2018 (the first put date of the 8.00% Notes Issued in 2013). The Company allocated the fair value at issuance as
follows (in thousands):
Senior notes
Compound embedded derivative liability
Fair value of 8.00% Notes Issued in 2013
$
$
27,890
56,752
84,642
70
5.0% Convertible Senior Notes
In June 2011, the Company issued $38.0 million in aggregate principal amount of the 5.0% Convertible Senior Unsecured Notes (the “5.0%
Notes”) and warrants (the “5.0% Warrants”) to purchase 15,200,000 shares of voting common stock of the Company. The 5.0% Notes were
convertible into shares of common stock at an initial conversion price of $1.25 per share of common stock, or 800 shares of the Company’s
common stock per $1,000 principal amount of the 5.0% Notes, subject to adjustment in the manner set forth in the Indenture. The 5.0% Notes
were guaranteed on a subordinated basis by substantially all of the Company’s domestic subsidiaries, on an unconditional joint and several
basis, pursuant to a Guaranty Agreement. The 5.0% Warrants are exercisable until five years after their issuance. The 5.0% Notes and 5.0%
Warrants have anti-dilution protection in the event of certain stock splits or extraordinary share distributions, and a reset of the conversion and
exercise price on April 15, 2013 if the Company’s common stock were below the initial conversion and exercise price at that time. On April 15,
2013, the base conversion rate for the 5.0% Notes and the exercise price of the 5.0% Warrants were reset to $0.50 and $0.32, respectively.
The 5.0% Notes were senior unsecured debt obligations of the Company and ranked pari passu with the Company’s existing 8.00% Notes
Issued in 2009 and 8.00% Notes Issued in 2013 and were subordinated to the Company’s obligations pursuant to its Facility Agreement. There
was no sinking fund for the 5.0% Notes. The 5.0% Notes were scheduled to mature at the earlier to occur of (i) December 14, 2021, or (ii) six
months following the maturity date of the Facility Agreement and bore interest at a rate of 5.0% per annum. Interest on the Notes was paid in-
kind semi-annually in arrears on June 15 and December 15 of each year. Under certain circumstances, interest on the 5.0% Notes may have
been payable in cash at the election of the holder if such payments are permitted under the Facility Agreement.
Subject to certain exceptions set forth in the Indenture, the 5.0% Notes were subject to repurchase for cash at the option of the holders of all
or any portion of the 5.0% Notes upon a fundamental change at a purchase price equal to 100% of the principal amount of the 5.0% Notes, plus
a make-whole payment and accrued and unpaid interest, if any. A fundamental change would have occurred upon certain changes in the
ownership of the Company or certain events relating to the trading of the common stock.
Holders could convert their 5.0% Notes into voting common stock at their option at any time. Upon conversion of the 5.0% Notes, the
Company paid the holders of the 5.0% Notes a make-whole premium by increasing the number of shares of common stock delivered upon such
conversion. The number of additional shares constituting the make-whole premium per $1,000 principal amount of 5.0% Notes was equal to
the quotient of (i) the aggregate principal amount of the Securities so converted multiplied by 25.00%, less the aggregate interest paid on such
Securities prior to the applicable Conversion Date divided by (ii) 95% of the volume-weighted average Closing Price of the Common Stock for
the 10 trading days immediately preceding the conversion date.
Pursuant to the terms of the 5.0% Notes Indenture, if, at any time on or after June 14, 2013 and on or prior to Stated Maturity, the closing
price of the Globalstar’s common stock exceeded two hundred percent of the conversion price then in effect for at least 30 consecutive trading
days, then, at the option of the Company, all Securities then outstanding were to convert automatically into shares of common stock. The
conditions for the automatic conversion were met, and the Company elected to convert all outstanding 5.0% Notes into shares of common stock
on November 7, 2013.
Prior to November 7, 2013, approximately $17.5 million principal amount of 5.0% Notes had been converted resulting in the issuance of
41.1 million shares of Company common stock and 7.2 million 5.0% Warrants had been exercised, which resulted in the Company issuing 6.7
million shares of common stock and receiving $2.0 million. On November 7, 2013, approximately $24.2 million, representing the remaining
principal amount of 5.0% Notes plus paid in kind interest added to the principal amount of the 5.0% Notes, of 5.0% Notes were converted,
resulting in the issuance of 51.9 million shares of Globalstar common stock. Eight million 5.0% Warrants were outstanding as of December 31,
2013.
The Company evaluated the various embedded derivatives resulting from the conversion rights and features within the Indenture for
bifurcation from the 5.0% Notes. Due to the provisions and reset features in the 5.0% Warrants, the Company recorded the 5.0% Warrants as
equity with a corresponding debt discount which is netted against the face value of the 5.0% Notes. The Company accreted the debt discount
associated with the 5.0% Warrants to interest expense over the term of the 5.0% Warrants using the effective interest rate method. The
Company determined the relative fair value of the 5.0% Warrants using a Monte Carlo simulation model based upon a risk-neutral stock price
model.
The Company evaluated the embedded derivative resulting from the contingent put feature within the Indenture for bifurcation from the
5.0% Notes. The contingent put feature was not deemed clearly and closely related to the 5.0% Notes and had to be bifurcated as a standalone
derivative. The Company recorded this embedded derivative liability as a non-current liability on its consolidated balance sheet with a
corresponding debt discount which was netted against the principal amount of the 5.0% Notes.
The Company evaluated the conversion option within the convertible notes to determine whether the conversion price was beneficial to the
note holders. The Company recorded a beneficial conversion feature (“BCF”) related to the issuance of the 5.0% Notes. The BCF for the 5.0%
Notes was recognized and measured by allocating a portion of the proceeds to beneficial conversion feature, based on relative fair value, and as
a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion feature. The Company accreted
the discount recorded in connection with the BCF valuation as interest expense over the term of the 5.0% Notes, using the effective interest rate
method.
71
As the remaining amount of 5.0% Notes converted prior to full accretion of the discounts created by the BCF the Company recorded
approximately $12.9 million of the unamortized discount for the BCF and other separable instruments to interest expense during the fourth
quarter of 2013. The Company also recorded approximately $0.8 million to derivative gain for the derivative embedded in the 5.0% Notes that
is no long outstanding as a result of this conversion.
The Company netted the debt discount associated with the 5.0% Warrants, the beneficial conversion feature, and the contingent put feature
against the face value of the 5.0% Notes to determine the carrying amount of the 5.0% Notes. The accretion of debt discount will increase the
carrying amount of the debt over the term of the 5.0% Notes. The Company allocated the proceeds at issuance as follows (in thousands):
Debt
Fair value of 5.0% Warrants
Beneficial Conversion Feature
Contingent Put Feature
Face Value of 5.0% Notes
$
$
11,316
8,081
17,100
1,503
38,000
8.00% Convertible Senior Unsecured Notes Issued in 2009
In June 2009, the Company sold $55.0 million in aggregate principal amount of 8.00% Convertible Senior Unsecured Notes (the “8.00%
Notes Issued in 2009”) and Warrants (the “8.00% Warrants”) to purchase 15.3 million shares of the Company’s common stock. The 8.00%
Notes Issued in 2009 are subordinated to all of the Company’s obligations under the Facility Agreement. The 8.00% Notes Issued in 2009 are
the Company’s senior unsecured debt obligations and, except as described in the preceding sentence, rank pari passu with its existing
unsecured, unsubordinated obligations, including its 8.00% Notes Issued in 2013. The 8.00% Notes Issued in 2009 mature at the later of the
tenth anniversary of closing (June 19, 2019) or six months following the maturity date of the Facility Agreement and bear interest at a rate of
8.00% per annum. Interest on the 8.00% Notes Issued in 2009 is payable in the form of additional 8.00% Notes Issued in 2009 or, subject to
certain restrictions, in common stock at the option of the holder. Interest is payable semi-annually in arrears on June 15 and December 15 of
each year.
The 8.00% Warrants have full ratchet anti-dilution protection and the exercise price of the Warrants is subject to adjustment under certain
other circumstances. In the event of certain transactions that involve a change of control, the holders of the 8.00% Warrants have the right to
make the Company purchase the warrants for cash, subject to certain conditions. The exercise period for the 8.00% Warrants began on
December 19, 2009 and will end on June 19, 2014.
Holders may convert their 8.00% Notes Issued in 2009 at any time. If the Company issues or sells shares of its common stock at a price per
share less than the base conversion price on the trading day immediately preceding such issuance or sale subject to certain limitations, the base
conversion rate will be adjusted lower based on a formula described in the supplemental indenture governing the 8.00% Notes Issued in 2009.
However, no adjustment to the base conversion rate shall be made if it would cause the Base Conversion Price to be less than $1.00. No
adjustment to the Base Conversion Rate will be required unless the adjustment would require an increase or decrease of at least 1% of the Base
Conversion Rate. If the adjustment is not made because the adjustment does not change the Base Conversion Rate by at least 1%, then the
adjustment that is not made will be carried forward and taken into account in any future adjustment. All required calculations will be made to
the nearest cent of 1/1,000 th of a share, as the case may be. Notwithstanding the foregoing, (i) upon any conversion of 8.00% Notes Issued in
2009 (solely with respect to 8.00% Notes Issued in 2009 to be converted), (ii) on every one year anniversary from the Issue Date of the 8.00%
Notes Issued in 2009 and (iii) on the Stated Maturity for the payment of principal of the 8.00% Notes Issued in 2009, the Company will give
effect to all adjustments that have otherwise been deferred, and those adjustments will no longer be carried forward and taken into account in
any future adjustment. If at any time the closing price of the common stock exceeds 200% of the conversion price of the 8.00% Notes Issued in
2009 then in effect for 30 consecutive trading days, all of the outstanding 8.00% Notes Issued in 2009 will be automatically converted into
common stock. Upon certain automatic and optional conversions of the 8.00% Notes Issued in 2009, the Company will pay holders of the
8.00% Notes Issued in 2009 a make-whole premium by increasing the number of shares of common stock delivered upon such conversion. The
number of additional shares per $1,000 principal amount of 8.00% Notes Issued in 2009 constituting the make-whole premium shall be equal to
the quotient of (i) the aggregate principal amount of the 8.00% Notes Issued in 2009 so converted multiplied by 32.00%, less the aggregate
interest paid on such Securities prior to the applicable Conversion Date divided by (ii) 95% of the volume-weighted average Closing Price of
the common stock for the 10 trading days immediately preceding the Conversion Date.
The current exercise price of the 8.00% Warrants is $0.32 and the base conversion price of the 8.00% Notes Issued in 2009 is $1.14.
As of December 31, 2013, approximately $17.6 million 8.00% Notes Issued in 2009 had been converted resulting in the issuance of
approximately 16.1 million shares of common stock. No 8.00% Notes Issued in 2009 had been converted during 2013. For the year ended
December 31, 2013, approximately 21.8 million 8.00% Warrants were exercised, which resulted in the Company issuing 21.4 million shares of
common stock and receiving $6.7 million in cash.
72
Subject to certain exceptions set forth in the supplemental indenture, if certain changes of control of the Company or events relating to the
listing of the common stock occur (a “fundamental change”), the 8.00% Notes Issued in 2009 are subject to repurchase for cash at the option of
the holders of all or any portion of the 8.00% Notes Issued in 2009 at a purchase price equal to 100% of the principal amount of the 8.00%
Notes Issued in 2009, plus a make-whole payment and accrued and unpaid interest, if any. Holders that require the Company to repurchase
8.00% Notes Issued in 2009 upon a fundamental change may elect to receive shares of common stock in lieu of cash. Such holders will receive
a number of shares equal to (i) the number of shares they would have been entitled to receive upon conversion of the 8.00% Notes Issued in
2009, plus (ii) a make-whole premium of 12% or 15%, depending on the date of the fundamental change and the amount of the consideration,
if any, received by the Company’s stockholders in connection with the fundamental change.
The indenture governing the 8.00% Notes Issued in 2009 contains customary financial reporting requirements. The indenture also provides
that upon certain events of default, including without limitation failure to pay principal or interest, failure to deliver a notice of fundamental
change, failure to convert the 8.00% Notes Issued in 2009 when required, acceleration of other material indebtedness and failure to pay
material judgments, either the trustee or the holders of 25% in aggregate principal amount of the 8.00% Notes Issued in 2009 may declare the
principal of the 8.00% Notes Issued in 2009 and any accrued and unpaid interest through the date of such declaration immediately due and
payable. In the case of certain events of bankruptcy or insolvency relating to the Company or its significant subsidiaries, the principal amount
of the 8.00% Notes Issued in 2009 and accrued interest automatically becomes due and payable. The Company was not in default under the
8.00% Notes Issued in 2009 as of December 31, 2013.
The Company recorded the conversion rights and features and the contingent put feature embedded within the 8.00% Notes Issued in 2009
as a compound embedded derivative liability on its consolidated balance sheets with a corresponding debt discount, which is netted against the
principal amount of the 8.00% Notes Issued in 2009. Due to the cash settlement provisions and reset features in the 8.00% Warrants issued with
the 8.00% Notes Issued in 2009, the Company recorded the 8.00% Warrants as an embedded derivative liability on its consolidated balance
sheets with a corresponding debt discount, which is netted against the principal amount of the 8.00% Notes Issued in 2009.
The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense over the term of
the 8.00% Notes Issued in 2009 using an effective interest rate method. The fair value of the compound embedded derivative liability is being
marked-to-market at the end of each reporting period, with any changes in value reported in the consolidated statements of operations. The
Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model.
Due to the cash settlement provisions and reset features in the 8.00% Warrants, the Company initially recorded the 8.00% Warrants as a
component of other non-current liabilities on its consolidated balance sheet with a corresponding debt discount which is netted with the face
value of the 8.00% Notes Issued in 2009. The Company is accreting the debt discount associated with the 8.00% Warrants liability to interest
expense over the term of the 8.00% Notes Issued in 2009 using an effective interest rate method. The fair value of the 8.00% Warrants liability
is being marked-to-market at the end of each reporting period, with any changes in value reported in the consolidated statements of operations.
The Company determined the fair value of the 8.00% Warrants derivative using a Monte Carlo simulation model. As the exercise period for the
8.00% Warrants expires in June 2014, the Company has classified this derivative liability as current on its consolidated balance sheet at
December 31, 2013.
The Company allocated the proceeds received from the 8.00% Notes Issued in 2009 among the compound embedded derivative liability, the
detachable 8.00% Warrants and the remainder to the underlying debt. The Company netted the debt discount associated with the compound
embedded derivative and 8.00% Warrants against the face value of the 8.00% Notes Issued in 2009 to determine the carrying amount of the
8.00% Notes Issued in 2009. The accretion of debt discount will increase the carrying amount of the debt over the term of the 8.00% Notes
Issued in 2009. The Company allocated the proceeds at issuance as follows (in thousands):
Fair value of compound embedded derivative
Fair value of Warrants
Debt
Face Value of 8.00% Notes Issued in 2009
$
$
23,542
12,791
18,667
55,000
Warrants Outstanding
As a result of the Company’s borrowings described above, as of December 31, 2013 and 2012 there were warrants outstanding to purchase
93.5 million and 122.5 million shares, respectively, of the Company’s common stock as shown in the table below:
73
Contingent Equity Agreement (1)
Thermo Loan Agreement (2)
5.0% Notes (3)
8.00% Notes Issued in 2009 (4)
Outstanding Warrants
Strike Price
December 31,
2013
41,467,980
4,205,608
8,000,000
39,842,813
93,516,401
December 31,
2012
41,467,980 $
4,205,608
15,200,000
61,606,706
122,480,294
December 31,
2013
December 31,
2012
0.01 $
0.01
0.32
0.32
0.01
0.01
1.25
0.32
(1) Warrants issued in connection with the Contingent Equity Agreement have a five year exercise period from issuance. These warrants
were issued between June 2009 and June 2012 and the exercise periods will expire from June 2014 to June 2017.
(2) The exercise period of the warrants issued in connection with the Thermo Loan Agreement is five years from issuance, which is June
2014.
(3) On April 15, 2013, the exercise price of the 5.0% Warrants was reset to $0.32 due to the reset provision in the indenture. The 5.0%
Warrants are exercisable until five years after their issuance, which is June 2016.
(4) According to the terms of the indenture, additional 8.00% Warrants may be issued to holders if shares of common stock are issued
below the then current warrant strike price. The exercise period for the 8.00% Warrants began on December 19, 2009 and will end on
June 14, 2014.
Maturities of long-term debt
Annual maturities of long-term debt for each of the five years following December 31, 2013 and thereafter are as follows (in thousands):
2014
2015
2016
2017
2018
Thereafter
Total
$
4,046
6,450
32,835
75,755
124,837
501,425
$ 745,348
Amounts in the above table are calculated based on current amounts outstanding at December 31, 2013, and therefore exclude paid-in-kind
interest payments that will be made in future periods.
The 8.00% Notes Issued in 2013 are subject to repurchase by the Company at the option of the holders on April 1, 2018. As such, the
amounts are included in the 2018 maturities in the table above.
Terrapin Opportunity, L.P. Common Stock Purchase Agreement
On December 28, 2012 the Company entered into a Common Stock Purchase Agreement with Terrapin pursuant to which the Company
may, subject to certain conditions, require Terrapin to purchase up to $30.0 million of shares of voting common stock over the 24-month term
following the effectiveness of a resale registration statement, which became effective on August 2, 2013. This type of arrangement is
sometimes referred to as a committed equity line financing facility. From time to time over the 24-month term, and in the Company’s sole
discretion, the Company may present Terrapin with up to 36 draw down notices requiring Terrapin to purchase a specified dollar amount of
shares of voting common stock, based on the price per share per day over 10 consecutive trading days (a "Draw Down Period"). The per share
purchase price for these shares equals the daily volume weighted average price of common stock on each date during the Draw Down Period
on which shares are purchased, less a discount ranging from 3.5% to 8.0% based on a minimum price that the Company solely specifies. In
addition, in the Company’s sole discretion, but subject to certain limitations, the Company may require Terrapin to purchase a percentage of the
daily trading volume of its common stock for each trading day during the Draw Down Period. The Company has agreed not to sell to Terrapin
a number of shares of voting common stock which, when aggregated with all other shares of voting common stock then beneficially owned by
Terrapin and its affiliates, would result in the beneficial ownership by Terrapin or any of its affiliates of more than 9.9% of the then issued and
outstanding shares of voting common stock.
When the Company makes a draw under the Terrapin equity line agreement, it will issue Terrapin shares of common stock calculated using
a price per share as specified in the agreement. As of December 31, 2013, Terrapin had purchased a total of 6.1 million shares of voting
common stock at a purchase price of $6.0 million pursuant to the terms of the agreement.
74
4. DERIVATIVES
In connection with certain borrowings disclosed in Note 3, the Company was required to record derivative instruments on its consolidated
balance sheets. None of these derivative instruments are designated as a hedge. The following tables disclose the fair values and classification
of the derivative instruments on the Company’s consolidated balance sheets (in thousands):
December 31, 2013
December 31, 2012
Intangible and other assets:
Interest rate cap
Total intangible and other assets
Derivative liabilities, current:
Warrants issued with 8.00% Notes Issued in 2009
Derivative liabilities, non-current:
Compound embedded derivative with 8.00% Notes Issued in 2009
Warrants issued with 8.00% Notes Issued in 2009
Contingent put feature embedded in the 5.0% Notes
Compound embedded derivative with 8.00% Notes Issued in 2013
Compound embedded derivative with the Amended and Restated Thermo Loan
Agreement
Total derivative liabilities, non-current:
$
$
$
185 $
185 $
(57,048 )
(66,022 ) $
-
-
(109,794 )
(229,662 )
(405,478 )
Total derivative liabilities, current and non-current
$
(462,526 ) $
84
84
-
(4,163)
(18,034)
(2,978)
-
-
(25,175)
(25,175)
The following tables disclose the changes in value during the twelve months ended December 31, 2013, 2012 and 2011 recorded as
derivative gain (loss) on the Company’s consolidated statement of operations (in thousands):
Year ended December 31,
2012
2013
2011
Interest rate cap
Warrants issued with 8.00% Notes Issued in 2009
Compound embedded derivative with 8.00% Notes Issued in 2009
Warrants issued in conjunction with Contingent Equity Agreement
Contingent put feature embedded in the 5.0% Notes
Compound embedded derivative with 8.00% Notes Issued in 2013
Compound embedded derivative with the Amended and Restated Thermo Loan
Agreement
Total derivative gain (loss)
$
101 $
(54,518 )
(61,859 )
-
2,978
(64,153 )
(128,548 )
(305,999 ) $
$
(171) $
4,218
2,546
302
79
-
-
6,974 $
(745)
6,687
15,361
4,090
(1,554)
-
-
23,839
Intangible and Other Assets
Interest Rate Cap
In June 2009, in connection with entering into the Facility Agreement, which provides for interest at a variable rate, the Company
entered into five ten-year interest rate cap agreements. The interest rate cap agreements reflect a variable notional amount ranging from $586.3
million to $14.8 million at interest rates that provide coverage to the Company for exposure resulting from escalating interest rates over the
term of the Facility Agreement. The interest rate cap provides limits on the six-month Libor rate (“Base Rate”) used to calculate the coupon
interest on outstanding amounts on the Facility Agreement and is capped at 5.50% should the Base Rate not exceed 6.5%. Should the Base Rate
exceed 6.5%, the Company’s Base Rate will be 1% less than the then six-month Libor rate. The Company paid an approximately $12.4 million
upfront fee for the interest rate cap agreements. The interest rate cap did not qualify for hedge accounting treatment, and changes in the fair
value of the agreements are included in the consolidated statements of operations.
Derivative Liabilities
The Company has identified various embedded derivatives resulting from certain features in the Company’s debt instruments. These
embedded derivatives required bifurcation from the debt host agreement. All embedded derivatives that required bifurcation, excluding the
warrants issued in connection with the Company’s contingent equity agreement (see below for further discussion), are recorded as a derivative
liability on the Company’s consolidated balance sheet with a corresponding debt discount netted against the principal amount of the related
debt instrument. The Company accretes the debt discount associated with each derivative liability to interest expense over the term of the
related debt instrument using an effective interest rate method. The fair value of each embedded derivative liability is marked-to-market at the
end of each reporting period with any changes in value reported in its consolidated statements of operations. See below for further discussion
for each liability and the features embedded in the debt instrument which required the Company to account for the instrument as a derivative.
75
Compound Embedded Derivative with 8.00% Notes Issued in 2009
As a result of the conversion rights and features and the contingent put feature embedded within the 8.00% Notes Issued in 2009, the
Company recorded a compound embedded derivative liability on its consolidated balance sheet with a corresponding debt discount which is
netted against the principal amount of the 8.00% Notes Issued in 2009. The Company determined the fair value of the compound embedded
derivative using a Monte Carlo simulation model.
Warrants Issued with 8.00% Notes Issued in 2009
Due to the cash settlement provisions and reset features in the 8.00% Warrants issued with the 8.00% Notes Issued in 2009, the Company
recorded the 8.00% Warrants as an embedded derivative liability on its consolidated balance sheet with a corresponding debt discount which is
netted against the principal amount of the 8.00% Notes Issued in 2009. The Company determined the fair value of the warrant derivative using
a Monte Carlo simulation model. As the exercise period for the 8.00% Warrants expires in June 2014, the Company has classified this
derivative liability as current on its consolidated balance sheet at December 31, 2013.
Warrants Issued in Conjunction with Contingent Equity Agreement
Prior to June 19, 2012, the Company determined that the warrants issued in conjunction with the availability fee for the Contingent Equity
Agreement were a liability at issuance. The offset was recorded in other non-current assets and was amortized over the one-year availability
period. The Company determined the principal amount of the warrant derivative using a Monte Carlo simulation model.
On June 19, 2012, the Company issued additional warrants in conjunction with the availability fee for the Contingent Equity Agreement.
This tranche of warrants was not subject to a reset provision in the agreement and therefore is not marked-to-market at the end of each
reporting period. The Company determined that the warrant was an equity instrument and recorded it as equity on its consolidated balance
sheet.
Contingent Put Feature Embedded in the 5.0% Notes
As a result of the contingent put feature within the 5.0% Notes, the Company recorded a derivative liability on its consolidated balance
sheet with a corresponding debt discount which is netted against the principal amount of the 5.0% Notes. The Company determined the fair
value of the contingent put feature derivative using a Monte Carlo simulation model. On November 7, 2013, the remaining principal amount of
the 5.0% Notes was converted into common stock; therefore the derivative liability embedded in the 5.0% Notes is longer outstanding and the
balance at December 31, 2013 is $0 (see further discussion in Note 3).
Compound Embedded Derivative with 8.00% Notes Issued in 2013
As a result of the conversion option and the contingent put feature within the 8.00% Notes Issued in 2013, the Company recorded a
compound embedded derivative liability on its consolidated balance sheet with a corresponding debt discount which is netted against the face
value of the 8.00% Notes Issued in 2013. The Company determined the fair value of the compound embedded derivative liability using a
Monte Carlo simulation model.
Compound Embedded Derivative with the Amended and Restated Thermo Loan Agreement
As a result of the conversion option and the contingent put feature within the Loan Agreement with Thermo entered into in July 2013,
the Company recorded a compound embedded derivative liability on its consolidated balance sheet with a corresponding debt discount which is
netted against the face value of the Amended and Restated Loan Agreement. The Company determined the fair value of the compound
embedded derivative liability using a Monte Carlo simulation model.
5. FAIR VALUE MEASUREMENTS
The Company follows the authoritative guidance for fair value measurements relating to financial and non-financial assets and liabilities,
including presentation of required disclosures herein. This guidance establishes a fair value framework requiring the categorization of assets
and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable
measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
76
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full
term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e.,
supported by little or no market activity).
Recurring Fair Value Measurements
The following table provides a summary of the financial assets and liabilities measured at fair value on a recurring basis as of December 31,
2013 and 2012 (in thousands):
Fair Value Measurements at December 31, 2013:
$
$
$
Assets:
Interest rate cap
Total assets measured at fair value
Liabilities:
Derivative Liabilities:
Warrants issued with 8.00% Notes Issued in
2009
Compound embedded derivative with 8.00%
Notes Issued in 2009
Compound embedded derivative with 8.00%
Notes Issued in 2013
Compound embedded derivative with the
Amended and Restated Thermo Loan
Agreement
Total Derivative Liabilities
Other Liabilities:
Liability for contingent consideration
Total liabilities measured at fair value
$
$
$
$
Assets:
Interest rate cap
Total assets measured at fair value
Liabilities:
Derivative Liabilities:
Warrants issued with 8.00% Notes Issued in
2009
Compound embedded derivative with 8.00%
Notes Issued in 2009
Contingent put feature embedded in 5.0%
Notes
Total Derivative Liabilities
Other Liabilities:
Liability for contingent consideration
Total liabilities measured at fair value
$
(Level 1)
(Level 2)
(Level 3)
Total
Balance
-
-
$
$
185
185
$
$
$
-
-
-
-
-
-
-
-
-
$
$
$
$
185
185
-
-
-
-
-
-
-
(57,048)
$
(57,048)
(66,022)
(66,022)
(109,794)
(109,794)
(229,662)
(462,526)
(229,662)
(462,526)
(1,923)
(1,923)
$
(464,449)
$
(464,449)
Fair Value Measurements at December 31, 2012:
(Level 1)
(Level 2)
(Level 3)
84
84
$
$
-
-
$
$
$
Total
Balance
84
84
(18,034)
(4,163)
(2,978)
(25,175)
$
(18,034 )
(4,163 )
(2,978 )
(25,175 )
-
-
-
-
-
-
(3,916 )
(3,916)
$
(29,091 )
$
(29,091)
$
$
$
$
-
-
-
-
-
-
-
-
77
Assets
Interest Rate Cap
The fair value of the interest rate cap is determined using observable pricing inputs including benchmark yields, reported trades, and
broker/dealer quotes at the reporting date. See Note 4 for further discussion.
Liabilities
The derivative liabilities in Level 3 include the 8.00% Warrants issued with the 8.00% Notes Issued in 2009, the compound embedded
derivative in the 8.00% Notes Issued in 2009, the contingent put feature embedded in the 5.0% Notes (prior to November 7, 2013, see further
discussion below), the compound embedded derivative in the 8.00% Notes Issued in 2013 and the compound embedded derivative in the
Amended and Restated Loan Agreement with Thermo. The Company marks-to-market these liabilities at each reporting date with the changes
in fair value recognized in the Company’s consolidated statements of operations. See Note 4 for further discussion.
The significant quantitative Level 3 inputs utilized in the valuation models as of December 31, 2013 and December 31, 2012 are shown in
the tables below:
Stock Price
Volatility
65 - 100 %
100%
65 - 100 %
Compound embedded derivative
with
8.00% Notes Issued in 2009
Warrants issued with 8.00% Notes
Issued in 2009
Compound embedded derivative
with 8.00% Notes Issued in 2013
Compound embedded derivative
with the Amended and Restated
Thermo Loan Agreement
Level 3 Inputs at December 31, 2013:
Risk-Free
Interest
Rate
Note
Conversion
Price
Warrant
Exercise
Price
Market Price of
Common Stock
1.5% $
0.1% $
1.5% $
1.14 $
N/A $
0.73 $
N/A $
0.32 $
N/A $
1.75
1.75
1.75
1.75
65 - 100 %
3.0% $
0.73 $
N/A $
Level 3 Inputs at December 31, 2012:
Stock Price
Volatility
Risk-Free
Interest Rate
Note
Conversion
Price
Warrant
Exercise
Price
Market Price of
Common Stock
Compound embedded derivative
with 8.00% Notes Issued in 2009
Warrants issued with 8.00% Notes
Issued in 2009
Contingent put feature embedded in
5.0% Notes
34 -107 %
0.02 - 1.78 % $
34 -107 %
0.02 - 1.78 % $
34 -107 %
0.02 - 1.78 % $
1.59 $
N/A $
1.25 $
N/A $
0.32 $
N/A $
0.31
0.31
0.31
Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period.
The Company’s stock price increased over 400% from December 31, 2012 to December 31, 2013. As the stock price increases above the
current conversion prices or exercise prices for each of the related derivative instruments, the value to the holder of the instrument generally
increases, therefore increasing the liability on the Company’s consolidated balance sheet. Additionally, stock price volatility is one of the
significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value
of these liabilities is sensitive to changes in the Company’s expected volatility. Decreases in expected volatility would generally result in a
lower fair value measurement.
Assumptions for future issuances of the Company’s common stock are also used in the fair value measurement of the Company’s derivative
instruments. The Company is obligated to make certain equity issuances under various agreements, including primarily the equity line with
Terrapin and the Consent Agreement with Thermo. Certain provisions in the Company’s debt instruments may result in adjustments to the
current base conversion rates or warrant exercise prices if equity is issued at prices lower than the conversion or exercise prices then in effect,
with certain exclusions. As these conversion and exercise prices decrease, the value of the note or warrant to the holder of the instrument
increases, thereby increasing the fair value measurement of the derivative liability.
78
Probability of a change of control is another significant unobservable input used in the fair value measurement of the Company’s derivative
instruments, excluding the 8.00% Warrants issued with the 8.00% Notes Issued in 2009. Subject to certain restrictions in each indenture, the
Company’s debt instruments contain certain provisions whereby holders may require the Company to purchase all or any portion of the
convertible debt instrument upon a change of control. A change of control will occur upon certain changes in the ownership of the Company or
certain events relating to the trading of the Company’s common stock. The simulated fair value of the derivative liabilities above is sensitive to
changes in the assumed probabilities of a change of control. Decreases in the assumed probability of a change of control would generally result
in a lower fair value measurement.
In addition to the Level 3 inputs described above, the indentures governing the related debt instrument for each of the derivative liabilities
included in the Company’s Level 3 fair value measurements have specific features that impact the valuation of each liability at reporting
periods. These features are further described below for each of the Company’s derivative liabilities.
Compound Embedded Derivative with 8.00% Notes Issued in 2009
In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded
derivative with the 8.00% Notes Issued in 2009 includes payment in kind interest payments, make whole premiums and automatic conversions.
Pursuant to the terms of the 8.00% Notes Issued in 2009, the base conversion rate cannot reset to lower than $1.00; therefore if the Company
makes future equity issuances at prices below the then current conversion price, this conversion price may be adjusted downward to as low as
$1.00.
Warrants Issued with 8.00% Notes Issued in 2009
In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the 8.00% Warrants issued
with the 8.00% Notes Issued in 2009 includes certain reset features. Pursuant to the terms of the 8.00% Warrants, there is no floor within the
reset feature for the exercise price of the 8.00% Warrants; therefore if the Company makes future equity issuances at prices below the current
exercise price, this exercise price may be adjusted downward. If the stock price on the issuance date is less than the then current exercise price
of the outstanding 8.00% Warrants, additional warrants may be issued, which will increase the fair value of the warrant liability. As the
exercise period for the 8.00% Warrants expires in June 2014, the Company utilizes certain assumptions in the valuation models consistent with
this remaining outstanding period.
Contingent Put Feature Embedded in 5.0% Notes
In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the contingent put feature
embedded in the Company’s 5.0% Notes included payment in kind interest and other reset features in the indenture. Pursuant to the terms of
the 5% Notes Indenture, if at any time on or after June 14, 2013 and on or prior to Stated Maturity, the closing price of the Globalstar’s
common stock has exceeded 200% of the conversion price then in effect for at least 30 consecutive trading days, then, at the option of the
Company, all securities then outstanding shall automatically convert to common stock. On November 7, 2013, the remaining principal amounts
of the 5.0% Notes were converted into common stock; therefore the derivative liability embedded in the 5.0% Notes is no longer outstanding at
December 31, 2013.
Compound Embedded Derivative with 8.00% Notes Issued in 2013
In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded
derivative within the Company’s 8.00% Notes Issued in 2013 includes payment in kind interest payments, make whole premiums, and
automatic conversions. Pursuant to the terms of the 8.00% Notes Issued in 2013 Indenture, there are also special distributions and certain put
and call features within the notes which impact the valuation model. See Note 3 for further discussion on this feature.
Compound Embedded Derivative with Amended and Restated Thermo Loan Agreement
In addition to the inputs described above, the valuation model used to calculate the fair value measurement of the compound embedded
derivative within the Amended and Restated Loan Agreement with Thermo includes payment in kind interest payments, make whole
premiums, and automatic conversions.
79
Other Liabilities
Liability for Contingent Consideration
In connection with the acquisition of Axonn LLC (“Axonn”) in December 2009, the Company is obligated to pay up to an additional $10.8
million in contingent consideration for earnouts based on sales of existing and new products over a five-year earnout period beginning January
1, 2010. The Company will make earnout payments in stock not to exceed 26,684,807 shares of common stock (10% of the Company’s pre-
transaction outstanding shares of common stock), but at its option may make payments in cash after 13.0 million shares have been issued. The
Company’s initial estimate of the total earnout expected to be paid was $10.8 million. Since the earnout period started, the Company has made
revisions to this estimate, which was $9.3 million at December 31, 2013. Through December 31, 2013, the Company had made $7.1 million in
earnout payments by issuing 18,085,621 shares of voting common stock. The liability of $1.9 million recorded at December 31, 2013
represents the present value of the remaining projected earnout payments to be made under the agreement.
The fair value of the accrued contingent consideration was determined using a probability-weighted discounted cash flow approach at the
acquisition date and reporting date. The approach is based on significant inputs that are not observable in the market, which are referred to as
Level 3 inputs. The fair value is based on the Company reaching specific performance metrics through the remaining earnout period. The
change in fair value of the contingent consideration is recorded through accretion expense in the Company’s consolidated statements of
operations.
The significant unobservable inputs used in the fair value measurement of the Company’s liability for contingent consideration are
projected future sales of existing and new products as well as earnout payments made each quarter determined by actual product sales.
Decreases in forecasted sales would result in a lower fair value measurement.
The following table presents a rollforward for all liabilities measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for 2013 as follows (in thousands):
Balance at December 31, 2012
Issuance of compound embedded derivative with 8.00% Notes Issued in 2013
Issuance of compound embedded derivative with the Amended and Restated Loan Agreement with Thermo
Third party issuance costs expensed to derivative gain (loss) in connection with issuance of 8.00% Notes Issued in 2013
Derecognition of derivative liability embedded in 5.0% Notes
Earnout payments made related to liability for contingent consideration
Change in fair value of contingent consideration
Derivative adjustment related to conversions and exercises
Unrealized loss, included in derivative gain (loss)
Balance at December 31, 2013
$
$
(29,091)
(56,752)
(101,114)
(905)
845
1,844
149
25,710
(305,135)
(464,449)
Nonrecurring Fair Value Measurements
The Company follows the authoritative guidance regarding non-financial assets and non-financial liabilities that are remeasured at fair
value on a nonrecurring basis. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. During 2013, items measured on a nonrecurring basis included the 8.00% Notes Issued
in 2013, the Amended and Restated Thermo Loan Agreement with Thermo and equity issued in connection with the Exchange Agreement and
the Consent Agreement. As a result of certain transactions that have occurred with the Company’s debt instruments, the Company was required
to record these items at fair value as of the date of the respective agreements. See below for a further discussion of the fair value measurement
for each item measured on a nonrecurring basis.
8.00% Notes Issued in 2013
The Company was required to record the 8.00% Notes Issued in 2013 initially at fair value as the issuance was considered to be an
extinguishment of debt. Level 3 inputs were required to be used as there was not an active market for a substantial period of time between the
issuance date and the balance sheet date. As of the issuance date, the fair value of the Notes was $27.9 million and the fair value of the
compound embedded derivative liability was $56.7 million, for a total fair value of the 8.00% Notes Issued in 2013 of $84.6 million. As stated
above, the value of the compound embedded derivative was bifurcated from the 8.00% Notes Issued in 2013 and is marked to market on a
recurring basis. The Company recorded a loss on extinguishment of debt of $47.2 million in its consolidated statement of operations during the
second quarter of 2013. This loss was computed as the difference between the net carrying amount of the old 5.75% Notes of $71.8 million and
the fair value of consideration given in the exchange of $119.0 million (including the new 8.00% Notes Issued in 2013, cash payments to both
exchanging and non-exchanging holders, equity issued to the exchanging holders and other fees incurred for the exchange). See Notes 3 and 4
for further discussion.
80
The significant quantitative Level 3 inputs utilized in the valuation models as of the issuance date of the 8.00% Notes Issued in 2013 are
shown in the table below:
Stock Price
Volatility
Risk-Free
Interest Rate
Level 3 Inputs at May 20, 2013:
Note
Conversion
Price
Discount
Rate
Market Price of
Common Stock
Compound embedded derivative
with 8.00% Notes Issued in 2013
65 - 100 %
0.9% $
0.80
27 % $
0.40
Other inputs used in the valuation model of the 8.00% Notes Issued in 2013 include the underlying features of the compound embedded
derivative, including payment in kind interest payments, make whole premiums, automatic conversions, future equity issuances and probability
of change of control of the Company. See further discussion above in “Derivative Liabilities” for the impact these inputs have on the fair value
measurement.
Amended and Restated Loan Agreement with Thermo
The Company was required to record this Loan Agreement initially at fair value as the amendment and restatement of the Loan Agreement
was considered to be an extinguishment of debt. Level 3 inputs were required to be used as there is not an active market for this debt
instrument. As of the amendment and restatement date, the fair value of the Loan Agreement was $19.0 million and the fair value of the
compound embedded derivative liability was $101.1 million, for a total fair value of the Loan Agreement of $120.1 million. As stated above,
the value of the compound embedded derivative was bifurcated from the Loan Agreement and is marked to market on a recurring basis. The
Company recorded a loss on extinguishment of debt of $66.1 million in its consolidated statement of operations for the third quarter of 2013.
This loss was computed as the difference between the fair value of the debt, as amended and restated, and its carrying value just prior to
amendment and restatement. See Notes 3 and 4 for further discussion.
The significant quantitative Level 3 inputs utilized in the valuation models as of the amendment and restatement date of the Loan
Agreement are shown in the table below:
Stock Price
Volatility
Risk-Free
Interest Rate
Discount
Rate
Market Price of
Common Stock
Level 3 Inputs at July 31, 2013:
Note
Conversion
Price
Compound embedded derivative
with the Amended and Restated
Thermo Loan Agreement
65 - 100 %
2.6% $
0.75
26 % $
0.60
Other inputs used in the valuation model of the Amended and Restated Loan Agreement include the underlying features of the compound
embedded derivative, including payment in kind interest payments, make whole premiums, automatic conversions, future equity issuances and
probability of change of control of the Company. See further discussion above in “Derivative Liabilities” for the impact these inputs have on
the fair value measurement.
Equity issued in connection with the Exchange Agreement
The stockholders’ equity balances measured on a nonrecurring basis in Level 1 include the approximately 30.3 million shares of voting
common stock of the Company issued to Exchanging Note Holders in partial payment for exchanged 5.75% Notes in connection with the
Exchange Agreement executed on May 20, 2013. The Company was required to record this equity issuance at fair value initially as the
Exchange Agreement was considered to be an extinguishment of debt. See Note 3 for further discussion. The Company calculated the
aggregate fair value of the shares issued as approximately $12.1 million using the closing stock price on the issuance date (May 20, 2013) and
included that amount in stockholders’ equity in its consolidated balance sheet.
Equity issued in connection with the Consent Agreement
On May 20, 2013, the Company and Thermo entered into the Consent Agreement. The commitments between the Company and Thermo
pursuant to the Consent Agreement represent a written forward contract under the applicable accounting rules the equity issuances under the
Consent Agreement are therefore required to be recorded at fair value. On May 20, 2013, the Company and Thermo also entered into the
Common Stock Purchase Agreement, and subsequently on October 14, 2013, the Common Stock Purchase and Option Agreement. Those
agreements defined the pricing terms for certain equity purchases under the Consent Agreement. The following table summarizes the amount
invested in the Company pursuant to the Consent Agreement with Thermo as of December 31, 2013 (dollars in thousands, except amounts per
share):
81
Amount
Invested
Issuance
Price per Share
Closing
Price per Share
Discount Value
(4)
Total Fair Value
Shares Issued
(5)
May 20, 2013
(1)
May 20, 2013
(1)
June 28, 2013
(1)
July 29, 2013
(2)
August 19,
2013 (2)
Total (3)
$
25,000 $
5,000
9,000
6,000
6,500
51,500
$
0.32 $
0.32
0.32
0.52
0.52
0.40 $
6,250 $
31,250
78,125,000
0.40
0.55
0.62
0.62
$
1,250
6,469
1,154
1,250
16,373 $
6,250
15,625,000
15,469
28,125,000
7,154
11,538,462
7,750
67,873
12,500,000
145,913,462
(1) Amounts were invested pursuant to the terms of the Consent Agreement and the Common Stock Purchase Agreement. The fair value of
these investments of $53.0 million is recorded in additional paid-in-capital on the Company’s consolidated balance sheet.
(2) Amounts were invested pursuant to the terms of the Consent Agreement and the Common Stock Purchase and Option Agreement. . The
fair value of these investments of $14.9 million is recorded in additional paid-in-capital on the Company’s consolidated balance sheet.
(3) Pursuant to the terms of the Consent Agreement, certain equity transactions which result in cash invested into Globalstar may reduce the
amounts committed by Thermo. As of December 31, 2013, the Company had received approximately $15.0 million through warrant
exercises and other equity issuances as well as $13.5 million through the Company’s exercise of the First Option under the Common
Stock Purchase and Option Agreement (see Note 3 for further discussion). These equity transactions reduced the remaining amount
available under the Consent Agreement to $5.0 million as of December 31, 2013. Pursuant to the terms of the Common Stock Purchase
and Option Agreement, the Second Option of $11.5 million is still outstanding at December 31, 2013.
(4) The discount on shares issued is recorded on the Company’s consolidated statement of operations in loss on equity issuance. This expense
item represents the discount on shares issued to Thermo as well as certain other losses recorded on equity issued during 2013 related to
cashless exercises of warrants issued with the 5.0% Notes.
(5) All shares issued to Thermo in connection with these agreements were shares of the Company’s nonvoting common stock.
Long-Lived Assets
The following tables reflect the fair value measurements used in testing the impairment of long-lived assets at December 31, 2012 and 2011.
For the year ended December 31, 2013, there were no events or changes in circumstances indicating that the carrying amount of long-lived
assets may not be recoverable. Therefore, no impairment loss was recorded. Amounts shown below are in thousands.
Other assets:
Property and equipment, net
Total
Other assets:
Property and equipment, net
Intangible and other assets, net
Total
Fair Value Measurements at December 31, 2012:
(Level 1)
(Level 2)
(Level 3)
Total Losses
$
$
-
-
$
$
-
-
$
$
1,215,156
1,215,156
$
$
7,218
7,218
Fair Value Measurements at December 31, 2011:
(Level 1)
(Level 2)
(Level 3)
Total Losses
$
$
-
-
-
$
$
-
-
-
$
$
1,217,718
23,798
1,241,516
$
$
2,669
909
3,578
For assets that are no longer providing service, the Company removes the estimated cost and accumulated depreciation from property and
equipment. During the second quarter of 2012, the Company reduced the carrying value of its first-generation constellation by approximately
$7.1 million. This loss, which represents primarily the impairment of long-lived assets during 2012, is recorded in operating expenses for the
year ended December 31, 2012.
Capitalized costs related to the development of various retail products that were discontinued during the third quarter and capitalized costs
related to the internal development of software were written down to its implied fair value, resulting in an impairment charge of $2.7 million.
The carrying value of these costs prior to write down was $2.7 million and was included in property and equipment, net. The impairment
charge is included in the Company’s results of operations for the year ended December 31, 2011.
82
In 2011, intangible assets related to developed technology acquired from Axonn in 2009 were written down to fair value, resulting in an
impairment charge of $0.9 million. These assets had a carrying value of $6.1 million prior to the write down. The impairment charge is
included in the Company’s results of operations for the year ended December 31, 2011.
6. ACQUISITION OF AXONN
On December 18, 2009, Globalstar entered into an agreement with Axonn pursuant to which one of the Company’s wholly-owned
subsidiaries acquired certain assets and assumed certain liabilities of Axonn in exchange for $1.5 million in cash and $5.5 million in shares of
the Company’s voting common stock (6,298,058 shares). Of these amounts, $500,000 in cash was withheld and used to cover expenses related
to the voluntary replacement of first production models of the Company’s SPOT Satellite GPS Messenger devices and warranty obligations
related to other products. Prior to the acquisition, Axonn was the principal supplier of the Company’s SPOT products.
As a result of the Axonn acquisition, the Company recorded other intangible assets of $7.6 million at December 31, 2009. During 2011, the
Company wrote down the value of intangibles by $0.9 million due to the discontinuance of the sale of certain products resulting from a
strategic decision to focus on core products and curtail substantially all on-going product development activities.
Intangible assets consist of the following (in thousands):
Developed technology
Customer relationships
Trade name
Total
$
$
Gross
Amount
5,300 $
2,100
200
7,600
December 31, 2013
Write
Down
Accumulated
Amortization
Net
Balance
Gross
Amount
$
(3,643 )
(1,825 )
(200 )
$
748
275
-
$
5,300
2,100
200
(5,668 )
$
1,023
$
7,600
$
(909 ) $
-
-
(909 ) $
December 31, 2012
Write
Down
Accumulated
Amortization
Net
Balance
$
(3,156 )
(1,558 )
(200 )
(4,914 )
$
1,235
542
-
1,777
(909 ) $
-
-
(909 ) $
Developed technology, customer relationships, and trade name are amortized over the life of the related asset with weighted average lives of
10 years, 8 years, and 2 years, respectively. For the years ended December 31, 2013, 2012 and 2011 the Company recorded amortization
expense of $0.8 million, $1.2 million and $1.6 million, respectively. Amortization expense is recorded in operating expenses in the Company’s
consolidated statements of operations. Estimated annual amortization of intangible assets is approximately $0.5 million for 2014, $0.3 million
for 2015, $0.1 million for 2016, $0.1 million for 2017, less than $0.1 million thereafter, excluding the effects of any acquisitions, dispositions
or write-downs subsequent to December 31, 2013.
7. COMMITMENTS
Contractual Obligations
As of December 31, 2013, the Company had purchase commitments with Thales, Arianespace, Ericsson, Hughes Network Systems, LLC
(“Hughes”) and other vendors related to the procurement and deployment of the second-generation network. The Company is obligated to
make payments under these purchase commitments, excluding accrued interest, as shown below (in thousands):
Years Ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total purchase commitments
Second-Generation Satellites
$
$
24,926
24,029
-
-
-
-
48,955
As of December 31, 2013, the Company had a contract with Thales for the construction of the Company’s second-generation low-earth orbit
satellites and related services. The Company has successfully launched all of these second-generation satellites, excluding one on-ground spare.
The Company has also incurred additional costs for certain related services, of which a portion are still owed to Thales. Discussions between
the Company and Thales are ongoing regarding the remaining amounts owed by both parties under the contracts. These costs are included in
the table above.
83
As of December 31, 2013, the Company had a contract with Arianespace for the launch of the Company’s second-generation satellites and
certain pre and post-launch services under which Arianespace agreed to make four launches of satellites. The Company has successfully
completed all of these launches. The Company has also incurred additional costs which are owed to Arianespace for launch delays. These costs
are included in the table above.
Next-Generation Gateways and Other Ground Facilities
As of December 31, 2013, the Company had a contract with Hughes under which Hughes will design, supply and implement (a) the Radio
Access Network (RAN) ground network equipment and software upgrades for installation at a number of the Company’s satellite gateway
ground stations and (b) satellite interface chips to be used in various next-generation Globalstar devices.
In August 2013, the Company entered into an agreement with Hughes which specified a payment schedule for approximately $15.8 million
of deferred amounts outstanding at the time of the agreement. Under the terms of the agreement, the Company was also required to pay interest
of approximately $4.9 million in January 2014 for amounts accrued at a rate of 10% on previously deferred balances. Upon the Company’s
payment of all previously deferred amounts, interest and an advance payment of $4.3 million for the next milestone pursuant to the terms of the
contract, Hughes will restart work. Under the terms of the agreement, Hughes had the option to receive all or any portion of the deferred
payments and accrued interest in Globalstar common stock. If Hughes chose to receive any payment in stock, shares would be provided at a 7%
discount based upon a trailing volume weighted average price calculation. Since August 2013, the Company has paid Hughes approximately
$10.8 million in cash and Hughes has elected to receive payment in the form of stock for approximately $14.4 million for the payment of
certain milestone payments and accrued interest. In valuing the Company’s obligation to issue discounted shares to Hughes, a loss of
approximately $1.0 million was recorded in the Company’s statement of operations for the year ended December 31, 2013.
In December 2013, the Company and Hughes amended the contract to extend the schedule of the program and to revise the remaining
payment milestones and program milestones to reflect the revised program timeline. This amendment extended certain payments previously
due in 2013 to 2014 and beyond.
As of December 31, 2013, the Company had an agreement with Ericsson. Ericsson will work with the Company to develop, implement and
maintain a ground interface, or core network system that will be installed at a number of the Company’s satellite gateway ground stations.
In September 2013, the Company entered into an agreement with Ericsson which deferred to November 2013 approximately $2.3 million in
milestone payments scheduled under the core contract, provided the Company made one payment of $1.6 million, which offsets the total
deferred amount, in September 2013. The Company made this $1.6 million payment. The remaining milestone payments previously due under
the contract were deferred to 2014 and beyond. The deferred payments continue to incur interest at a rate of 6.5% per annum. As of December
31, 2013, the Company had recorded $0.7 million in accounts payable and accrued expenses, excluding interest, related to these required
payments and has incurred and capitalized $6.8 million of costs related to this contract. The costs are recorded as an asset in property and
equipment. The Company and Ericsson are currently negotiating a revised milestone schedule which will include the remaining $0.7 million
outstanding as of December 31, 2013. If the Company and Ericsson are unable to agree on revised technical requirements and pricing for
certain contract deliverables, the contract may be terminated without liability to either party upon the Company’s payment of the outstanding
$0.7 million deferred amount plus associated interest. The Company may, however, be required to record an impairment charge. If the contract
is terminated for convenience, the Company must make a final payment of $10.0 million in either cash or shares of Company common stock at
the Company’s election. If the Company elects to make payment in common stock, Ericsson will have the option either to accept the shares of
common stock or instruct the Company to complete a block sale of the common stock and deliver the proceeds to Ericsson. If Ericsson chooses
to accept common stock, the number of shares it will receive will be calculated based on the final payment amount plus 5%.
The Company issued separate purchase orders for additional phone equipment and accessories under the terms of executed commercial
agreements with Qualcomm. As of December 31, 2013 and 2012, total advances to Qualcomm for inventory were $9.2 million, respectively.
This contract was cancelled in March 2013 and the parties are seeking to resolve issues related to the contract termination. The Company does
not expect the resolution of this contract termination to have a material impact on its financial statements. The Company classified the
inventory advance as current on its December 31, 2013 consolidated balance sheet as the Company expects to receive this inventory in 2014.
Future Minimum Lease Obligations
The Company has noncancelable operating leases for facilities and equipment throughout the United States and around the world, including
Louisiana, California, Florida, Canada, Ireland, France, Brazil, Panama, and Singapore. The leases expire on various dates through 2021. The
following table presents the future minimum lease payments for leases having an initial or remaining noncancelable lease term in excess of one
year (in thousands) as of December 31, 2013, excluding possible lease payment reimbursement from the State of Louisiana pursuant to the
Cooperative Endeavor Agreement the Company entered into with the Louisiana Department of Economic Development (See Note 16:
Headquarters Relocation):
84
2014
2015
2016
2017
2018
Thereafter
Total minimum lease payments
$
$
1,216
1,157
1,104
1,097
1,030
650
6,254
Rent expense for 2013, 2012 and 2011 was approximately $2.0 million. $2.0 million and $2.2 million, respectively.
8. CONTINGENCIES
Arbitration
On June 3, 2011, Globalstar filed a demand for arbitration against Thales before the American Arbitration Association to enforce certain
rights to order additional satellites under the Amended and Restated Contract for the construction of the Globalstar Satellite for the Second
Generation Constellation dated and executed in June 2009 (“2009 Contract”). Globalstar did not include within its demand any claims that it
had against Thales for work previously performed under the contract to design, manufacture and timely deliver the first 25 second-generation
satellites. On May 10, 2012, the arbitration tribunal issued its award in which it determined that Globalstar materially breached the contract by
failing to pay to Thales termination charges in the amount of €51,330,875.00 by October 9, 2011, and that absent further agreement between
the parties, Thales has no further obligation to manufacture or deliver satellites under Phase 3 of the 2009 Contract. The award also required
Globalstar to pay Thales approximately €53 million in termination charges and interest by June 9, 2012. On May 23, 2012, Thales commenced
an action in the United States District Court for the Southern District of New York by filing a petition to confirm the arbitration award (the
“New York Proceeding”). Thales and the Company entered into a Tolling Agreement as of June 13, 2013 under which Thales dismissed the
New York Proceeding without prejudice. Thales may refile the petition at a later date and pursue the confirmation of the arbitration award,
which Globalstar will oppose. Should Thales be successful in confirming the arbitration award, this would have a material adverse effect on the
Company’s financial condition and liquidity.
On June 24, 2012, the Company and Thales agreed to settle their prior commercial disputes, including those disputes that were the subject
of the arbitration award. In order to effectuate this settlement, the Company and Thales entered into a Release Agreement, a Settlement
Agreement and a Submission Agreement. Under the terms of the Release Agreement, Thales agreed unconditionally and irrevocably to release
and forever discharge the Company from any obligation to pay €35,623,770 of the termination charges awarded in the arbitration together with
all interest on the award amount effective upon the earlier of December 31, 2012 and the effective date of the financing for the purchase of any
additional second-generation satellites. Under the terms of the Release Agreement, Globalstar agreed unconditionally and irrevocably to release
and forever discharge Thales from any and all claims related to Thales’ work under the 2009 satellite construction contract, including any
obligation to pay liquidated damages, effective upon the earlier of December 31, 2012 and the effective date of the financing for the purchase
of any additional second-generation satellites. In connection with the Release Agreement, the Company recorded a contract termination charge
of approximately €17.5 million which is recorded in the Company’s Consolidated Financial Statements for the period ended December 31,
2013. The releases became effective on December 31, 2012.
Under the terms of the Settlement Agreement, Globalstar agreed to pay €17,530,000 to Thales, representing one-third of the termination
charges awarded to Thales in the arbitration, subject to certain conditions, on the later of the effective date of the new contract for the purchase
of any additional second-generation satellites and the effective date of the financing for the purchase of these satellites. Because the effective
date of the new contract for the purchase of additional second-generation satellites did not occur on or prior to February 28, 2013, any party
may terminate the Settlement Agreement. If any party terminates the Settlement Agreement, all parties’ rights and obligations under the
Settlement Agreement shall terminate. However, the Release Agreement provides that it will survive a termination of the Settlement
Agreement. As of December 31, 2013, no party had terminated the Settlement Agreement.
Litigation
Due to the nature of the Company's business, the Company is involved, from time to time, in various litigation matters or subject to
disputes or routine claims regarding its business activities. Legal costs related to these matters are expensed as incurred. In management's
opinion, there is no pending litigation, dispute or claim, other than the arbitration award discussed above, that may have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
85
9. ACCRUED EXPENSES AND NON-CURRENT LIABILITIES
Accrued expenses consist of the following (in thousands):
Accrued interest
Accrued compensation and benefits
Accrued property and other taxes
Accrued customer liabilities and deposits
Accrued professional and other service provider fees
Accrued liability for contingent consideration
Accrued commissions
Accrued telecommunications expenses
Accrued satellite and ground costs
Other accrued expenses
Total accrued expenses
December 31,
2013
2012
$
$
1,200 $
3,927
5,744
2,663
705
1,922
1,316
649
-
4,574
22,700 $
5,620
4,076
6,329
2,961
1,006
2,585
685
713
373
3,816
28,164
Other accrued expenses primarily include outsourced logistics services, storage, inventory in transit, warranty reserve and maintenance.
The following is a summary of the activity in the warranty reserve account, which is included in other accrued expenses above (in
thousands):
Balance at beginning of period
Provision
Utilization
Balance at end of period
Year Ended December 31,
2012
2013
2011
$
$
$
235
189
(282)
$
142
179
293
(237)
235
$
$
56
361
(238)
179
Noncurrent liabilities consist of the following (in thousands):
Long-term accrued interest
Asset retirement obligation
Deferred rent
Liabilities related to the Cooperative Endeavor Agreement with the State of Louisiana
Long-term portion of liability for contingent consideration
Uncertain income tax positions
Foreign tax contingencies
Total noncurrent liabilities
10. RELATED PARTY TRANSACTIONS
December 31,
2013
2012
$
$
451 $
1,083
456
1,575
-
5,918
4,213
13,696 $
457
998
579
1,949
1,332
5,571
4,994
15,880
Payables to Thermo and other affiliates relate to normal purchase transactions and were $0.2 million at each of December 31, 2013 and
2012, respectively.
Transactions with Thermo
Thermo incurs certain expenses on behalf of the Company. The table below summarizes the total expense for the periods indicated below
(in thousands):
General and administrative expenses
Non-cash expenses
Year Ended December 31,
2012
2013
2011
$
$
268
548
$
180
529
208
319
Loss on sale of equity issuance
Loss on extinguishment of debt related to amendment and restatement of Thermo
Loan Agreement
Total
$
86
16,373
-
66,088
83,277
$
-
709
$
-
-
527
General and administrative expenses are related to expenses incurred by Thermo on the Company’s behalf which are charged to the
Company. Non-cash expenses are related to services provided by two executive officers of Thermo (who are also directors of the Company)
who receive no cash compensation from the Company which are accounted for as a contribution to capital. The Thermo expense charges are
based on actual amounts (with no mark-up) incurred or upon allocated employee time.
Since June 2009, Thermo and its affiliates have also deposited $60.0 million into a contingent equity account to fulfill a condition
precedent for borrowing under the Facility Agreement, purchased $20.0 million of the Company’s 5.0% Notes, purchased $11.4 million of the
Company's 8.00% Notes Issued in 2009, provided a $2.3 million short-term loan to the Company (which was subsequently converted into
nonvoting common stock), and loaned $37.5 million to the Company to fund the debt service reserve account.
On May 20, 2013, the Company issued 8.00% Notes Issued in 2013 in exchange for 5.75% Notes. As a result of this exchange, the
Company entered into the Consent Agreement, the Common Stock Purchase Agreement and the Common Stock Purchase and Option
Agreement (see Note 3 for further discussion). During the second quarter of 2013, Thermo and its affiliates funded $39.0 million in accordance
with the Consent Agreement and the Common Stock Purchase Agreement. During the third quarter of 2013, Thermo and its affiliates funded an
additional $12.5 million in accordance with the Consent Agreement and the Common Stock Purchase and Option Agreement. During the fourth
quarter of 2013, Thermo and its affiliates funded an additional $13.5 million in accordance with the Common Stock Purchase and Option
Agreement.
In August 2013, the Company drew the remaining $1.1 million from the interest earned on the contingent equity account and issued
2,133,656 shares of nonvoting common stock to Thermo in October 2013. The value of the 20% discount on the shares issued to Thermo was
recorded as a deferred financing cost on the Company’s condensed consolidated balance sheet as of September 30, 2013.
For the year ended December 31, 2013, the Company recognized a loss on the sale of shares of approximately $16.4 million (included in
other income/expense on the consolidated statement of operations), representing the difference between the purchase price and the fair value of
the Company’s common stock (measured as the closing stock price on the date of each sale).
In July 2013, the Company and Thermo entered into an Amended and Restated Loan Agreement. As a result of this transaction, the
Company was required to record this Loan Agreement initially at fair value as the amendment and restatement of the Loan Agreement was
considered to be an extinguishment of debt. As of the amendment and restatement date the fair value of the Loan Agreement was $120.1
million. The Company recorded a loss on extinguishment of debt of $66.1 million in its condensed consolidated statement of operations for the
third quarter of 2013. The Company computed this loss as the difference between the fair value of the debt, as amended and restated, and its
carrying value just prior to amendment and restatement.
The terms of the Amended and Restated Loan Agreement with Thermo, the Common Stock Purchase and the Common Stock Purchase
and Option Agreement were approved by a special committee of the Company’s board of directors consisting solely of the Company’s
unaffiliated directors. The committee, which was represented by independent legal counsel, determined that the terms of these agreements were
fair and in the best interests of the Company and its shareholders.
See Note 3 for further discussion of the Company’s 8.00% Notes Issued in 2013, the Amended and Restated Loan Agreement, the Consent
Agreement, the Common Stock Purchase Agreement and the Common Stock Purchase and Option Agreement.
11. PENSIONS AND OTHER EMPLOYEE BENEFITS
Defined Benefit Plan
Until June 1, 2004, substantially all Old and New Globalstar employees and retirees who participated and/or met the vesting criteria for the
plan were participants in the Retirement Plan of Space Systems/Loral (the "Loral Plan"), a defined benefit pension plan. The accrual of benefits
in the Old Globalstar segment of the Loral Plan was curtailed, or frozen, by the administrator of the Loral Plan as of October 23, 2003. Prior to
October 23, 2003, benefits for the Loral Plan were generally based upon contributions, length of service with the Company and age of the
participant. On June 1, 2004, the assets and frozen pension obligations of the Globalstar Segment of the Loral Plan were transferred into a new
Globalstar Retirement Plan (the "Globalstar Plan"). The Globalstar Plan remains frozen and participants are not currently accruing benefits
beyond those accrued as of October 23, 2003. Globalstar's funding policy is to fund the Globalstar Plan in accordance with the Internal
Revenue Code and regulations.
87
Defined Benefit Pension Obligation and Funded Status
Below is a reconciliation of projected benefit obligation, plan assets, and the funded status of the Company’s defined benefit plan (in
thousands):
Change in projected benefit obligation:
Projected benefit obligation, beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Projected benefit obligation, end of year
Change in fair value of plan assets:
Fair value of plan assets, beginning of year
Return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets, end of year
Funded status, end of year- net liability
Net Benefit Cost and Amounts Recognized
Year Ended December 31,
2012
2013
$
$
$
$
$
18,804 $
85
671
(1,796)
(1,079)
16,685 $
11,583 $
1,985
667
(1,079)
13,156 $
(3,529) $
17,812
66
712
1,133
(919)
18,804
10,405
1,366
731
(919)
11,583
(7,221)
Components of the net periodic benefit cost of the Company’s contributory defined benefit pension plan were as follows (in thousands):
2013
Year Ended December 31,
2012
2011
Net periodic benefit cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized net actuarial loss
Total net periodic benefit cost
$
$
Amounts recognized in balance sheet were as follows (in thousands):
Amounts recognized:
Funded status recognized in other non-current liabilities
Net actuarial loss recognized in accumulated other comprehensive loss
Net amount recognized in retained deficit
Assumptions
85
671
(813)
518
461
$
$
$
66
712
(739)
583
622
$
51
776
(791)
291
327
December 31,
2013
2012
$
$
(3,529) $
4,484
955 $
(7,221)
7,969
748
The weighted-average assumptions used to determine the benefit obligation and net periodic benefit cost were as follows:
Benefit obligation assumptions:
Discount rate
Rate of compensation increase
Net periodic benefit cost assumptions:
Discount rate
Expected rate of return on plan assets
Rate of compensation increase
For the Year Ended December 31,
2012
2013
2011
4.80%
N/A
3.75%
7.12%
N/A
3.75 %
N/A
4.00 %
7.12 %
N/A
4.00%
N/A
5.25%
7.50%
N/A
88
The assumptions, investment policies and strategies for the Globalstar Plan are determined by the Globalstar Plan Committee. The
Globalstar Plan Committee is responsible for ensuring the investments of the plans are managed in a prudent and effective manner. Amounts
related to the pension plan are derived from actuarial and other assumptions, including discount rates, mortality, expected rate of return,
compensation increases, participant data and termination. The Company reviews assumptions on an annual basis and make adjustments as
considered necessary.
The expected long-term rate of return on pension plan assets is selected by taking into account the expected duration of the projected benefit
obligation for the plans, the asset mix of the plan and the fact that the plan assets are actively managed to mitigate risk.
Plan Assets and Investment Policies and Strategies
The plan assets are invested in various mutual funds which have quoted prices. The plan has a target allocation. On a weighted-average
basis, target allocations for equity securities range from 50% to 60%, for debt securities 25% to 50% and for other investments 0% to 15%. The
defined benefit pension plan asset allocation as of the measurement date presented as a percentage of total plan assets were as follows:
Equity securities
Debt securities
Other investments
Total
December 31,
2013
2012
57%
29
14
100%
56%
33
11
100%
The fair values of the Company’s pension plan assets as of December 31, 2013 and 2012 by asset category were as follows (in thousands):
December 31, 2013
Quoted Prices
in Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
- $
-
-
-
- $
6,119 $
1,435
3,749
1,853
13,156 $
December 31, 2012
Quoted Prices
in Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
- $
-
-
-
- $
5,189 $
1,297
3,779
1,318
11,583 $
-
-
-
-
-
-
-
-
-
-
Total
$
6,119 $
1,435
3,749
1,853
13,156 $
$
Total
$
5,189 $
1,297
3,779
1,318
11,583 $
$
United States equity securities
International equity securities
Fixed income securities
Other
Total
United States equity securities
International equity securities
Fixed income securities
Other
Total
Accumulated Benefit Obligation
The accumulated benefit obligation of the defined benefit pension plan recognized in accumulated other comprehensive loss was $4.5
million and $7.9 million at December 31, 2013 and 2012, respectively.
89
Benefits Payments and Contributions
The benefit payments to retirees over the next ten years are expected to be paid as follows (in thousands):
2014
2015
2016
2017
2018
2019 - 2023
$
981
967
956
946
955
4,961
For 2013 and 2012, the Company contributed $0.7 million, respectively, to the Globalstar Plan.
401(k) Plan
The Company has a defined contribution employee savings plan, or “401(k),” which provides that the Company may match the
contributions of participating employees up to a designated level. Under this plan, the matching contributions were approximately $0.2 million,
$0.1 million and $0.3 million for 2013, 2012, and 2011, respectively. Due to an effort to reduce operating costs, the Company no temporarily
suspended its march of contributions for substantially all of its employees beginning in the fourth quarter of 2011. This plan was reinstated for
all participating employees during the third quarter of 2013.
12. TAXES
The components of income tax expense (benefit) were as follows (in thousands):
Current:
Federal tax (benefit)
State tax
Foreign tax
Total
Deferred:
Federal and state tax (benefit)
Foreign tax (benefit)
Total
Income tax expense (benefit)
2013
Year Ended December 31,
2012
2011
$
$
-
240
898
1,138
-
-
-
1,138
$
$
-
274
139
413
-
-
-
413
$
$
-
19
(128)
(109)
-
-
-
(109)
U.S. and foreign components of income (loss) before income taxes are presented below (in thousands):
U.S. income (loss)
Foreign income (loss)
Total income (loss) before income taxes
Year Ended December 31,
2012
2013
2011
$
$
(585,801) $
(4,177)
(589,978) $
(105,722) $
(6,063)
(111,785) $
(46,387)
(8,646)
(55,033)
As of December 31, 2013, the Company had cumulative U.S. and foreign net operating loss carry-forwards for income tax reporting
purposes of approximately $1.1 billion and $179.1 million, respectively. As of December 31, 2012, the Company had cumulative U.S. and
foreign net operating loss carry-forwards for income tax reporting purposes of approximately $777.9 million and $212.7 million, respectively.
The net operating loss carry-forwards expire on various dates beginning in 2013 and ending in 2033.
The Company has not provided United States income taxes and foreign withholding taxes on approximately $8.0 million of undistributed
earnings from certain foreign subsidiaries indefinitely invested outside the United States. Should the Company decide to repatriate these
foreign earnings, the Company would have to adjust the income tax provision in the period in which management believes the Company would
repatriate the earnings.
The components of net deferred income tax assets were as follows (in thousands):
Federal and foreign net operating loss and credit carry-forwards
Property and equipment and other long-term assets
Accruals and reserves
Deferred tax assets before valuation allowance
Valuation allowance
Net deferred income tax assets
90
December 31,
2013
2012
$
$
492,839 $
53,196
4,240
550,275
(550,275)
- $
361,132
(30,621)
13,742
344,253
(344,253)
-
The change in the valuation allowance during 2013 and 2012 was $206.0 million and $40.6 million, respectively. The change in property
and equipment and other long-term deferred tax assets was due primarily to the difference in depreciation between tax and book useful lives as
the Company placed additional second-generation satellites into service during 2013 and the difference between tax and book treatment of the
Company’s debt refinancing activity that occurred during 2013.
The actual provision for income taxes differs from the statutory U.S. federal income tax rate as follows (in thousands):
Provision at U.S. statutory rate of 35%
State income taxes, net of federal benefit
Change in valuation allowance
Effect of foreign income tax at various rates
Permanent differences
Change in unrecognized tax benefit
Recognition of pre-acquisition losses in Brazil
Other (including amounts related to prior year tax matters)
Total
Tax Audits
Year Ended December 31,
2012
2013
2011
$
$
(206,576) $
(34,923)
206,022
508
38,911
388
-
(3,192)
1,138 $
(39,125) $
(6,070)
40,641
759
(220)
381
-
4,047
413 $
(19,262)
(2,764)
121,010
929
909
(72,040)
(32,702)
3,811
(109)
The Company operates in various U.S. and foreign tax jurisdictions. The process of determining its anticipated tax liabilities involves many
calculations and estimates which are inherently complex. The Company believes that it has complied in all material respects with its
obligations to pay taxes in these jurisdictions. However, its position is subject to review and possible challenge by the taxing authorities of
these jurisdictions. If the applicable taxing authorities were to challenge successfully its current tax positions, or if there were changes in the
manner in which the Company conducts its activities, the Company could become subject to material unanticipated tax liabilities. It may also
become subject to additional tax liabilities as a result of changes in tax laws, which could in certain circumstances have a retroactive effect.
In January 2012, the Company’s Canadian subsidiary was notified that its income tax returns for the years ended October 31, 2008 and 2009
had been selected for audit. The Canada Revenue Agency is in the process of reviewing the information provided by the Canadian subsidiary.
In December 2013, the Company’s Singapore subsidiary was notified that its income tax returns for the years ended 2009 to 2012 had been
selected for audit. The Company’s Singapore subsidiary has submitted the information required by the Inland Revenue Authority of Singapore.
Except for the audits noted above, neither the Company nor any of its subsidiaries are currently under audit by the IRS or by any state
jurisdiction in the United States. The Company's corporate U.S. tax returns for 2010 and subsequent years remain subject to examination by tax
authorities. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return.
The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification
to the states.
Through a prior foreign acquisition the Company acquired a tax liability for which the Company has been indemnified by the previous
owners. As of December 31, 2013 and 2012, the Company had recorded a tax liability of $2.2 million and $2.8 million, respectively, to the
foreign tax authorities with an offsetting tax receivable from the previous owners.
In the Company's international tax jurisdictions, numerous tax years remain subject to examination by tax authorities, including tax returns
for 2004 and subsequent years in most of the Company's international tax jurisdictions.
A rollforward of the Company's unrecognized tax benefits is as follows (in thousands):
Gross unrecognized tax benefits at January 1, 2013
Gross increases based on tax positions related to current year
Gross decreases based on tax positions related to prior years
Gross unrecognized tax benefits at December 31, 2013
$
$
7,750
388
(65 )
8,073
91
Gross unrecognized tax benefits at January 1, 2012
Gross increases based on tax positions related to current year
Gross decreases based on tax positions related to prior years
Gross unrecognized tax benefits at December 31, 2012
$
$
7,350
381
19
7,750
The total unrecognized tax benefit of $8.1 million at December 31, 2013 includes $3.8 million which, if recognized, could potentially
reduce the effective income tax rate in future periods.
In connection with the FIN 48 adjustment, at December 31, 2013 and 2012, the Company recorded interest and penalties of $1.6 million and
$1.2 million, respectively.
It is anticipated that the amount of unrecognized tax benefit reflected at December 31, 2013 will not materially change in the next 12
months; any changes are not anticipated to have a significant impact on the results of operations, financial position or cash flows of the
Company.
13. GEOGRAPHIC INFORMATION
The Company attributes equipment revenue to various countries based on the location equipment is sold. Service revenue is attributed to
the various countries based on the Globalstar entity that holds the customer contract. Long-lived assets consist primarily of property and
equipment and are attributed to various countries based on the physical location of the asset at a given fiscal year-end, except for the
Company’s satellites which are included in the long-lived assets of the United States. The Company’s information by geographic area is as
follows (in thousands):
Revenues:
Service:
United States
Canada
Europe
Central and South America
Others
Total service revenue
Subscriber equipment:
United States
Canada
Europe
Central and South America
Others
Total subscriber equipment revenue
Total revenue
Long-lived assets:
United States
Canada
Europe
Central and South America
Others
Total long-lived assets
Year Ended December 31,
2012
2013
2011
$
$
44,909 $
12,436
4,085
2,678
536
64,644
11,284
3,913
1,708
1,094
68
18,067
82,711 $
41,139 $
10,505
3,132
2,287
405
57,468
12,899
3,654
1,297
798
202
18,850
76,318 $
36,701
10,684
4,493
3,183
336
55,397
11,103
3,524
1,456
1,046
301
17,430
72,827
December 31,
2013
2012
$
$
1,164,358 $
247
408
3,595
1,177
1,169,785 $
1,209,374
277
474
3,463
1,568
1,215,156
92
14. STOCK COMPENSATION
The Company’s 2006 Equity Incentive Plan (“Equity Plan”) provides long-term incentives to the Company’s key employees, including
officers, directors, consultants and advisers (“Eligible Participants”) and to align stockholder and employee interests. Under the Equity Plan,
the Company may grant incentive stock options, restricted stock awards, restricted stock units, and other stock based awards or any
combination thereof to Eligible Participants. The Compensation Committee of the Company’s Board of Directors establishes the terms and
conditions of any awards granted under the plans. As of December 31, 2013 and 2012, the number of shares of common stock that was
authorized and remained available for issuance under the Equity Plan was 15,873,930 and 13,677,972, respectively.
Stock Options
The Company has granted incentive stock options under the Equity Plan. The options generally vest in equal installments over four years
and expire in ten years. Non-vested options are generally forfeited upon termination of employment.
The Company recognizes compensation expense for stock option grants based on the fair value at the date of grant using the Black-Scholes
option pricing model. The Company uses historical data, among other factors, to estimate the expected price volatility, the expected option life
and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected life of
the option. The table below summarizes the assumptions for the indicated periods:
Risk-free interest rate
Expected term of options (years)
Volatility
Weighted average grant-date fair value per share
$
2013
Less than 1 - 2%
2 - 6
72 - 115%
0.70
Year Ended December 31,
2012
Less than 1 - 1 %
1 - 5
80 - 103 %
0.39 $
$
2011
Less than 1 - 2%
1 - 6
80 - 103%
0.44
The following table represents the Company’s stock option activity for the year ended December 31, 2013:
Outstanding at January 1, 2013
Granted
Exercised
Forfeited
Outstanding at December 31, 2013
Exercisable at December 31, 2013
Shares
8,251,530 $
2,896,300
(2,621,425 )
(289,550 )
8,236,855
5,064,241 $
Weighted Average
Exercise Price
0.86
1.07
0.72
0.72
0.98
0.75
The following table summarizes the aggregate intrinsic value of stock options exercised during the years indicated below (in thousands):
Intrinsic value of stock options exercised
2013
Year Ended December 31,
2012
2011
$
2,263
$
78
$
2
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the
option. Net cash proceeds during the year ended December 31, 2013 from the exercise of stock options were $1.9 million. The aggregate
intrinsic value of all outstanding stock options at December 31, 2013 was $7.0 million with a remaining contractual life of 6.5 years. The
aggregate intrinsic value of all vested stock options at December 31, 2013 was $4.7 million with a remaining contractual life of 6.8 years.
The following table represents the Company’s nonvested stock option activity for the year ended December 31, 2013:
Nonvested stock options at January 1, 2013
Granted
Vested
Forfeited
Nonvested stock options at December 31, 2013
93
Shares
3,194,533 $
2,896,300
(2,860,824 )
(73,250 )
3,156,759
Weighted Average
Grant Date
Fair Value
0.38
0.65
0.32
0.38
0.72
The following table presents compensation expense related to stock options for the years indicated below (in millions):
Total compensation expense, net of tax
$
0.5 $
0.7 $
1.3
Year Ended December 31,
2012
2013
2011
As of December 31, 2013, there was approximately $1.8 million of unrecognized compensation expense related to nonvested stock options
outstanding to be recognized over a weighted-average period of 1.6 years.
The Company adjusts its estimates of expected equity awards forfeitures based upon its review of recent forfeiture activity and expected
future employee turnover. The Company considers the impact of both pre-vesting forfeitures and post-vesting cancellations for purposes of
evaluating forfeiture estimates. The effect of adjusting the forfeiture rate is recognized in the period in which the forfeiture estimate is changed.
Nonstatutory Stock Options
In October 2011, the Company granted to certain Eligible Participants nonstatutory stock options for 2,710,000 shares of common stock and
273,000 restricted shares that vest and become exercisable on the earlier of (i) the first trading day after the Company's common stock shall
have traded on the then-applicable national or regional securities exchange or market system constituting the primary market for the stock, as
reported in The Wall Street Journal , or such other source as the Company deems reliable, including without limitation if then-applicable, the
NASDAQ Stock Market, for more than ten consecutive trading days at or above a per-share closing price of $2.50 or (ii) the day that a binding
written agreement is signed for the sale of the Company, as determined by the Company's board of directors in its discretion reasonably
exercised.
In July 2013, the Compensation Committee of the Company's Board of Directors modified this award to revise the vesting terms from $2.50
to $0.80. As a result of this modification, the Company's incremental compensation cost was approximately $0.6 million.
In September 2013, the Company's stock price traded for more than ten consecutive trading days above a price per-share closing price of
$0.80, which resulted in immediate vesting of these options. The Company recognized the remaining unamortized compensation cost related to
immediate vesting of these options of approximately $0.8 million in the third quarter of 2013.
Restricted Stock
Shares of restricted stock generally vest in equal annual installments over three years. Non-vested shares are generally forfeited upon the
termination of employment. Holders of restricted stock are entitled to all rights of a stockholder of the Company with respect to the restricted
stock, including the right to vote the shares and receive any dividends or other distributions. Compensation expense associated with restricted
stock is measured based on the grant date fair value of the common stock and is recognized on a straight line basis over the vesting period. The
table below summarizes the weighted average grant-date fair value of restricted stock for the indicated periods:
2013
Year Ended December 31,
2012
2011
Weighted average grant-date fair value
$
1.06
$
The following is a rollforward of the activity in restricted stock for the year ended December 31, 2013:
Nonvested at January 1, 2013
Granted
Vested
Forfeited
Nonvested at December 31, 2013
Shares
617,787 $
1,458,849
(1,437,779 )
(5,267 )
633,590 $
94
0.71
$
0.82
Weighted Average
Grant Date
Fair Value
0.72
1.06
0.64
1.14
1.68
The following table represents the compensation expense related to restricted stock for the years indicated below (in millions):
Total compensation expense, net of tax
Year Ended December 31,
2013
2012
$
- $
2011
- $
0.4
During 2013 and 2012, the Company recognized less than $0.1 million of stock award expense as the current period compensation expense
was offset primarily by the effect of forfeitures in each respective year. As of December 31, 2013, there was approximately 1.0 million of
unrecognized compensation expense related to unvested restricted stock outstanding to be recognized over a weighted-average period of 1.7
years.
Employee Stock Purchase Plan
In June 2011, the Company adopted an Employee Stock Purchase Plan (the “Plan”) which provides eligible employees of the Company and
its subsidiaries with an opportunity to acquire shares of its common stock at a discount. The maximum aggregate number of shares of common
stock that may be purchased through the Plan is 7,000,000 shares. The number of shares that may be purchased through the Plan will be subject
to proportionate adjustments to reflect stock splits, stock dividends, or other changes in the Company’s capital stock.
The Plan permits eligible employees to purchase shares of common stock during two semi-annual offering periods beginning on June 15
and December 15 (the “Offering Periods”), unless adjusted by the Board or one of its designated committees. Eligible employees may purchase
shares of up to 15% of their total compensation per pay period, but may purchase no more than the lesser of $25,000 of the fair market value of
common stock or 500,000 shares of common stock in any calendar year, as measured as of the first day of each applicable Offering Period. The
price an employee pays is 85% of the fair market value of common stock. Fair market value is equal to the lesser of the closing price of a share
of common stock on either the first or last day of the Offering Period.
For each of the years ended December 31, 2013 and 2012, the Company received $0.4 million and $0.2 million related to shares issued
under this plan, respectively. For the years ended December 31, 2013 and 2012, the Company recorded compensation expense of
approximately $0.2 million and $0.1 million, respectively, which is reflected in marketing, general and administrative expenses. Additionally,
the Company has issued approximately 2,323,025 shares through December 31, 2013 related to the Plan.
The fair value of the employees’ stock purchase rights granted under the ESPP was estimated using the Black-Scholes option pricing model
with the following assumptions for the following years:
Risk-free interest rate
Expected term of options (months)
Volatility
Weighted average grant-date fair value per share
15. ACCUMULATED OTHER COMPREHENSIVE LOSS
Year Ended December 31,
2013
2012
Less than 1%
Less than 1%
6
80 - 107%
0.21
$
6
80 -103%
0.16
$
Accumulated other comprehensive loss includes all changes in equity during a period from non-owner sources. The change in accumulated
other comprehensive loss for all periods presented resulted from foreign currency translation adjustments and minimum pension liability
adjustments.
The components of accumulated other comprehensive loss were as follows (in thousands):
Accumulated minimum pension liability adjustment
Accumulated net foreign currency translation adjustment
Total accumulated other comprehensive income (loss)
December 31,
2013
2012
$
$
(4,484) $
5,355
871 $
(7,969 )
6,211
(1,758 )
No amounts were reclassified out of accumulated other comprehensive loss for the periods shown above.
95
16. HEADQUARTERS RELOCATION
During 2010 the Company announced the relocation of its corporate headquarters to Covington, Louisiana. In addition, the Company
relocated its product development center, international customer care operations, call center and other global business functions including
finance, accounting, sales, marketing and corporate communications. The Company completed the relocation in 2011.
In connection with its relocation, the Company entered into a Cooperative Endeavor Agreement with the Louisiana Department of
Economic Development (“LED”) whereby the Company would be reimbursed for certain qualified relocation costs and lease expenses. In
accordance with the terms of the agreement, these reimbursement costs, not to exceed $8.1 million, will be reimbursed to the Company as
incurred provided the Company maintains required annual payroll levels in Louisiana through 2019.
Since announcing its relocation, the Company has incurred qualifying relocation expenses. Under the terms of the agreement, the Company
was reimbursed a total of $4.2 million for qualifying relocation and lease expenses and $1.3 million for facility improvements and replacement
equipment in connection with the relocation through December 31, 2013. LED will continue to reimburse the Company approximately
$352,000 per year through 2019 for certain qualifying lease expenses, provided the Company meets the required payroll levels set forth in the
agreement.
If the Company fails to meet the required payroll in any project year, the Company will reimburse LED for a portion of the shortfall not to
exceed the total reimbursement received from LED. Due to a plan to improve its cost structure by reducing headcount, the Company has
projected that it will not meet the required payroll levels set forth in the agreement. As of December 31, 2013, the estimated impact of the
payroll shortfall in future years is approximately $1.2 million. This liability is included in current and non-current liabilities in the Company’s
consolidated balance sheet.
96
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
In connection with the Company’s issuance of the 8.00% Notes issued in 2013 and the 5.0% Notes, certain of the Company’s 100% owned
domestic subsidiaries (the “Guarantor Subsidiaries”), fully, unconditionally, jointly, and severally guaranteed the payment obligations under
the 8.00% Notes Issued in 2013 and the 5.0% Notes. On November 7, 2013, the remaining principal amount of the 5.0% Notes was converted.
The following supplemental financial information sets forth, on a consolidating basis, the balance sheets, statements of operations and
statements of cash flows for Globalstar, Inc. (“Parent Company”), for the Guarantor Subsidiaries and for the Parent Company’s other
subsidiaries (the “Non-Guarantor Subsidiaries”).
Globalstar, Inc.
Supplemental Consolidating Balance Sheet
As of December 31, 2013
Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In thousands)
Elimination Consolidated
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable
Intercompany receivables
Inventory
Advances for inventory
Prepaid expenses and other current
assets
Total current assets
Property and equipment, net
Restricted cash
Intercompany notes receivable
Investment in subsidiaries
Deferred financing costs
Intangible and other assets, net
Total assets
LIABILITIES AND
STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued contract termination charge
Accrued expenses
Intercompany payables
Payables to affiliates
Derivative liabilities
Deferred revenue
Total current liabilities
Long-term debt, less current portion
Employee benefit obligations
Intercompany notes payable
Derivative liabilities
Deferred revenue
Debt restructuring fees
Other non-current liabilities
Total non-current liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
$
12,935 $
-
5,925
651,251
1,161
9,287
4,316
684,875
1,152,734
37,918
13,629
(209,592)
76,436
3,964
$ 1,759,964 $
$
4,046 $
9,906
24,133
6,160
435,707
202
57,048
1,843
539,045
665,236
3,529
-
405,478
6,583
20,795
2,543
1,104,164
116,755
$ 1,759,964 $
676 $
-
5,022
414,508
14,375
28
311
434,920
11,621
-
-
7,242
-
1,028
454,811 $
- $
2,041
-
8,203
521,763
-
-
13,094
545,101
-
-
-
-
496
-
297
793
(91,083)
454,811 $
97
3,797 $
-
4,602
18,280
16,281
44
2,432
45,436
6,889
-
4,285
-
-
2,125
58,735 $
- $
-
174
(1,084,039)
-
-
-
(1,083,865)
(1,459)
-
(17,914)
202,350
-
(14)
(900,902) $
- $
2,680
-
8,337
128,496
-
-
2,347
141,860
-
-
15,772
-
-
10,856
26,628
(109,753)
58,735 $
- $
-
-
-
(1,085,966)
-
-
-
(1,085,966)
-
-
(15,772)
-
-
-
(15,772)
200,836
(900,902) $
17,408
-
15,723
-
31,817
9,359
7,059
81,366
1,169,785
37,918
-
-
76,436
7,103
1,372,608
4,046
14,627
24,133
22,700
-
202
57,048
17,284
140,040
665,236
3,529
-
405,478
7,079
20,795
13,696
1,115,813
116,755
1,372,608
Globalstar, Inc.
Supplemental Consolidating Balance Sheet
As of December 31, 2012
Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
(In thousands)
Elimination Consolidated
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable
Intercompany receivables
Inventory
Deferred financing costs
Prepaid expenses and other current
assets
Total current assets
Property and equipment, net
Restricted cash
Intercompany notes receivable
Investment in subsidiaries
Deferred financing costs
Advances for inventory
Intangible and other assets, net
Total assets
LIABILITIES AND
STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued contract termination charge
Accrued expenses
Intercompany payables
Payables to affiliates
Deferred revenue
Total current liabilities
Long-term debt, less current portion
Employee benefit obligations
Intercompany notes payable
Derivative liabilities
Deferred revenue
Other non-current liabilities
Total non-current liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
$
10,220 $
46,777
3,814
613,426
262
34,622
2,177
711,298
1,095,973
-
15,783
(144,323)
16,883
9,158
3,991
$ 1,708,763 $
$
655,874 $
12,055
23,166
6,492
377,526
230
4,576
1,079,919
95,155
7,221
-
25,175
4,306
2,443
134,300
494,544
$ 1,708,763 $
251 $
-
4,875
411,764
6,966
-
388
424,244
31,382
-
-
(8,232)
-
-
1,781
449,175 $
- $
2,410
-
9,798
494,686
-
12,674
519,568
-
-
-
-
334
2,233
2,567
(72,960)
449,175 $
98
1,321 $
-
5,255
5,534
34,953
-
2,668
49,731
86,762
-
1,800
-
-
-
2,273
140,566 $
- $
21,220
-
11,874
156,166
-
791
190,051
-
-
16,683
-
-
11,204
27,887
(77,372)
140,566 $
- $
-
-
(1,030,724)
-
-
-
(1,030,724)
1,039
-
(17,583)
152,555
-
-
(16)
(894,729) $
- $
-
-
-
(1,028,378)
-
-
(1,028,378)
-
-
(16,683)
-
-
-
(16,683)
150,332
(894,729) $
11,792
46,777
13,944
-
42,181
34,622
5,233
154,549
1,215,156
-
-
-
16,883
9,158
8,029
1,403,775
655,874
35,685
23,166
28,164
-
230
18,041
761,160
95,155
7,221
-
25,175
4,640
15,880
148,071
494,544
1,403,775
Revenues:
Service revenues
Subscriber equipment sales
Total revenue
Operating expenses:
Cost of services (exclusive of
depreciation, amortization, and
accretion shown separately below)
Cost of subscriber equipment sales
Cost of subscriber equipment sales -
reduction in the value of inventory
Marketing, general and administrative
Depreciation, amortization, and
accretion
Total operating expenses
Loss from operations
Other income (expense):
Loss on extinguishment of debt
Loss on equity issuance
Interest income and expense, net of
amounts capitalized
Derivative gain (loss)
Equity in subsidiary earnings
Other
Total other income (expense)
Loss before income taxes
Income tax expense (benefit)
Net (loss) income
Globalstar, Inc.
Supplemental Consolidating Statement of Operations
Year Ended December 31, 2013
Parent
Company
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
(In thousands)
Eliminations
Consolidated
$
69,250 $
87
69,337
10,695 $
13,704
24,399
18,536 $
15,452
33,988
(33,837) $
(11,176)
(45,013)
64,644
18,067
82,711
10,498
-
-
5,929
72,456
88,883
(19,546)
(109,092)
(16,701)
(66,688)
(305,999)
(69,790)
(3,097)
(571,367)
(590,913)
203
(591,116) $
$
10,559
10,860
1,300
15,109
21,286
59,114
(34,715)
-
-
(42)
-
(7,242)
(257)
(7,541)
(42,256)
37
(42,293) $
99
9,062
16,319
4,494
13,620
24,103
67,598
(33,610)
-
-
(1,096)
-
-
209
(887)
(34,497)
898
(35,395) $
91
(13,556)
-
(4,770)
(27,253)
(45,488)
475
-
-
(2)
-
77,032
183
77,213
77,688
-
77,688 $
30,210
13,623
5,794
29,888
90,592
170,107
(87,396)
(109,092)
(16,701)
(67,828)
(305,999)
-
(2,962)
(502,582)
(589,978)
1,138
(591,116)
Revenues:
Service revenues
Subscriber equipment sales
Total revenue
Operating expenses:
Cost of services (exclusive of
depreciation, amortization, and
accretion shown separately below)
Cost of subscriber equipment sales
Cost of subscriber equipment sales -
reduction in the value of inventory
Marketing, general and administrative
Reduction in the value of long-lived
assets
Contract termination charge
Depreciation, amortization, and
accretion
Total operating expenses
Loss from operations
Other income (expense):
Interest income and expense, net of
amounts capitalized
Derivative gain (loss)
Equity in subsidiary earnings
Other
Total other income (expense)
Loss before income taxes
Income tax expense (benefit)
Net (loss) income
Globalstar, Inc.
Supplemental Consolidating Statement of Operations
Year Ended December 31, 2012
Parent
Company
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
(In thousands)
Eliminations
Consolidated
$
48,845 $
825
49,670
44,208 $
15,225
59,433
15,729 $
7,855
23,584
(51,314) $
(5,055)
(56,369)
57,468
18,850
76,318
12,061
292
-
2,874
79
22,048
49,132
86,486
(36,816)
(19,744)
6,974
(60,302)
(2,078)
(75,150)
(111,966)
232
(112,198) $
$
9,467
11,827
1,274
16,860
7,139
-
48,869
95,436
(36,003)
(10)
-
10,237
(141)
10,086
(25,917)
41
(25,958) $
100
8,762
7,560
123
12,288
-
-
17,308
46,041
(22,457)
(1,731)
-
-
16
(1,715)
(24,172)
140
(24,312) $
(219)
(6,399)
-
(4,526)
-
-
(45,508)
(56,652)
283
(1)
-
50,065
(77)
49,987
50,270
-
50,270 $
30,071
13,280
1,397
27,496
7,218
22,048
69,801
171,311
(94,993)
(21,486)
6,974
-
(2,280)
(16,792)
(111,785)
413
(112,198)
Globalstar, Inc.
Supplemental Consolidating Statement of Operations
Year Ended December 31, 2011
Parent
Company
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
(In thousands)
Eliminations
Consolidated
$
30,904 $
790
31,694
28,850 $
13,115
41,965
16,102 $
7,619
23,721
(20,459) $
(4,094)
(24,553)
55,397
17,430
72,827
Revenues:
Service revenues
Subscriber equipment sales
Total revenue
Operating expenses:
Cost of services (exclusive of
depreciation, amortization, and
accretion shown separately below)
Cost of subscriber equipment sales
Cost of subscriber equipment sales -
reduction in the value of inventory
Marketing, general and administrative
Reduction in the value of long-lived
assets
Contract termination charge
Depreciation, amortization, and accretion
Total operating expenses
Loss from operations
Other income (expense):
Interest income and expense, net of
amounts capitalized
Derivative gain (loss)
Equity in subsidiary earnings
Other
Total other income (expense)
Loss before income taxes
Income tax expense (benefit)
Net (loss) income
$
18,149
723
-
4,161
1,074
-
24,298
48,405
(16,711)
(2,713)
23,839
(59,466)
145
(38,195)
(54,906)
18
(54,924) $
13,427
5,636
7,572
9,324
51
-
14,589
50,599
(26,878)
(2,099)
-
-
(783)
(2,882)
(29,760)
(128)
(29,632) $
(3,779)
(4,345)
-
-
-
-
(16,844)
(24,968)
415
8
-
50,074
(114)
49,968
50,383
-
50,383 $
37,863
11,927
8,826
33,819
3,578
-
50,049
146,062
(73,235)
(4,809)
23,839
-
(828)
18,202
(55,033)
(109)
(54,924)
10,066
9,913
1,254
20,334
2,453
-
28,006
72,026
(30,061)
(5)
-
9,392
(76)
9,311
(20,750)
1
(20,751) $
101
Globalstar, Inc.
Supplemental Consolidating Statement of Cash Flows
Year Ended December 31, 2013
Parent
Company
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
(In thousands)
Eliminations
Consolidated
$
(10,789 ) $
1,524 $
2,803 $
- $
(6,462)
(43,693 )
-
(634 )
8,859
(35,468 )
(13,544 )
(6,250 )
(2,482 )
65,000
6,000
15,414
672
1,071
(16,909 )
48,972
-
2,715
10,220
-
(1,099)
-
-
(1,099)
-
(552)
-
-
(552)
-
-
-
-
-
-
-
-
-
425
251
-
-
-
-
-
-
-
-
225
2,476
1,321
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(43,693)
(1,651)
(634)
8,859
(37,119)
(13,544)
(6,250)
(2,482)
65,000
6,000
15,414
672
1,071
(16,909)
48,972
225
5,616
11,792
12,935 $
676 $
3,797 $
- $
17,408
102
Net cash provided by (used in) operating
activities
Cash flows from investing activities:
Second-generation satellites, ground
and related launch costs
Property and equipment additions
Investment in businesses
Restricted Cash
Net cash from investing activities
Cash flows from financing activities:
Payments to reduce principal amount
of exchanged 5.75% Notes
Payments for 5.75% Notes not
exchanged
Payments to lenders and other fees
associated with exchange
Proceeds from equity issuance to
related party
Proceeds from issuance of stock to
Terrapin
Proceeds from exercise of warrants
and stock options
Borrowings from Facility Agreement
Proceeds from contingent equity
account
Payment of deferred financing costs
Net cash provided by financing activities
Effect of exchange rate changes on cash
and cash equivalents
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents at beginning
of period
Cash and cash equivalents at end of
period
$
Globalstar, Inc.
Supplemental Consolidating Statement of Cash Flows
Year Ended December 31, 2012
Parent
Company
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
(In thousands)
Eliminations
Consolidated
Net cash provided by (used in) operating
activities
$
Cash flows from investing activities:
Second-generation satellites, ground
and related launch costs
Property and equipment additions
Investment in businesses
Net cash from investing activities
Cash flows from financing activities:
Proceeds from exercise of warrants
and stock options
Borrowings from Facility Agreement
Proceeds from Contingent Equity
Agreement
Payment of deferred financing costs
Net cash provided by financing
activities
Effect of exchange rate changes on cash
and cash equivalents
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents at beginning
of period
Cash and cash equivalents at end of
period
7,720 $
61 $
(907) $
- $
6,874
(56,679 )
-
(550 )
(57,229 )
244
7,375
45,800
(1,033 )
52,386
-
2,877
7,343
-
(397)
-
(397)
-
-
-
-
-
-
(336)
587
-
(384)
-
(384)
-
-
-
-
-
591
(700)
2,021
-
-
-
-
-
-
-
-
-
-
-
-
(56,679)
(781)
(550)
(58,010)
244
7,375
45,800
(1,033)
52,386
591
1,841
9,951
$
10,220 $
251 $
1,321 $
- $
11,792
103
Globalstar, Inc.
Supplemental Consolidating Statement of Cash Flows
Year Ended December 31, 2011
Parent
Company
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
(In thousands)
Eliminations
Consolidated
$
(10,758 ) $
3,819 $
1,445 $
(9) $
(5,503)
(85,589 )
-
(800 )
(10,436 )
(96,825 )
525
18,659
38,000
12,500
14,200
(1,246 )
82,638
-
(24,945 )
32,288
-
(2,466)
-
-
(2,466)
-
-
-
-
-
-
-
1,353
(766)
-
(137)
-
-
(137)
-
-
-
-
-
-
(782)
526
1,495
-
9
-
-
9
-
-
-
-
-
-
-
-
-
(85,589)
(2,594)
(800)
(10,436)
(99,419)
525
18,659
38,000
12,500
14,200
(1,246)
82,638
(782)
(23,066)
33,017
7,343 $
587 $
2,021 $
- $
9,951
104
Net cash provided by (used in) operating
activities
Cash flows from investing activities:
Second-generation satellites, ground
and related launch costs
Property and equipment additions
Investment in businesses
Restricted cash
Net cash from investing activities
Cash flows from financing activities:
Proceeds from exercise of warrants
and stock options
Borrowings from Facility Agreement
Proceeds from the issuance of 5.0%
convertible notes
Proceeds from the contribution to the
debt service reserve account
Proceeds from Contingent Equity
Agreement
Payment of deferred financing costs
Net cash provided by financing activities
Effect of exchange rate changes on cash
and cash equivalents
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents at beginning
of period
Cash and cash equivalents at end of
period
$
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of consolidated quarterly financial information for the years ended December 31, 2013, 2012 and 2011
(amounts in thousands, except per share data):
2013
March 31
June 30
Sept. 30
Dec. 31
Quarter Ended
Total revenue
Net loss
Basic loss per common share
Diluted loss per common share
Shares used in basic per share calculations
Shares used in diluted per share calculations
$
$
$
$
(In thousands, except per share amounts)
19,333 $
(25,078) $
(0.05) $
(0.05) $
472,187
472,187
19,835 $
(126,272) $
(0.25) $
(0.25) $
496,169
496,169
Quarter Ended
22,549 $
(204,969 ) $
(0.30 ) $
(0.30 ) $
673,546
673,546
20,994
(234,797)
(0.36)
(0.36)
779,483
779,483
2012
March 31
June 30
Sept. 30
Dec. 31
(In thousands, except per share amounts)
Total revenue
Net loss
Basic loss per common share
Diluted loss per common share
Shares used in basic per share calculations
Shares used in diluted per share calculations
$
$
$
$
Total revenue
Net loss
Basic loss per common share
Diluted loss per common share
Shares used in basic per share calculations
Shares used in diluted per share calculations
$
$
$
$
16,738 $
(24,525) $
(0.07) $
(0.07) $
357,418
357,418
19,981 $
(27,533) $
(0.07) $
(0.07) $
379,433
379,433
Quarter Ended
20,537 $
(41,188 ) $
(0.10 ) $
(0.10 ) $
392,344
392,344
19,062
(18,952)
(0.05)
(0.05)
424,180
424,180
18,999 $
(14,068) $
(0.05) $
(0.05) $
294,963
294,963
18,254 $
(6,466) $
(0.02) $
(0.02) $
293,053
293,053
105
18,187 $
(681 ) $
(0.00 ) $
(0.00 ) $
295,513
295,513
17,387
(33,709)
(0.11)
(0.11)
312,867
312,867
2011
March 31
June 30
Sept. 30
Dec. 31
(In thousands, except per share amounts)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our Principal Executive and Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 as of December 31, 2013, the end of the period
covered by this Report. This evaluation was based on the guidelines established in Internal Control - Integrated Framework issued in 1992 by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives.
Based on this evaluation, our Principal Executive and Financial Officer concluded that as of December 31, 2013 our internal control over
financial reporting was not effective, at a reasonable assurance level, due to the material weakness described below in Management’s Annual
Report on Internal Control Over Financial Reporting. This material weakness resulted from a clerical error in one of our non-cash derivative
valuation calculations, which was performed by an independent valuation firm.
In light of this issue, we performed additional analysis and procedures to ensure our financial statements were prepared in accordance with
U.S. generally accepted accounting principles. We believe that the Consolidated Financial Statements included in this Report fairly present, in
all material respects, our consolidated financial position, results of operations, and cash flows as of and for the year ended December 31, 2013.
(b) Changes in internal control over financial reporting.
As of December 31, 2013, our management, with the participation of our Principal Executive and Financial Officer, evaluated our internal
control over financial reporting. Based on that evaluation, our Principal Executive and Financial Officer concluded that no changes in our
internal control over financial reporting occurred during the quarter ended December 31, 2013 that have materially affected, or are reasonably
likely to affect materially, our internal control over financial reporting, except as noted above with respect to the non-cash derivative valuation.
Management's Annual Report on Internal Control over Financial Reporting
Management of the Company, including the Principal Executive and Financial Officer, is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended. The Company's internal controls were designed to provide reasonable assurance as to the reliability of its financial reporting and the
preparation and presentation of the Consolidated Financial Statements for external purposes in accordance with accounting principles generally
accepted in the United States and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the
Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
The Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the criteria in Internal
Control - Integrated Framework issued in 1992 by COSO. This evaluation included review of the documentation of controls, evaluation of the
design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Through this evaluation,
the Company identified a material weakness in its internal control over financial reporting as of December 31, 2013 as it relates to an
outsourced control performed by an independent valuation firm engaged to calculate the valuation of our non-cash embedded derivative
liabilities at each reporting period. A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable
possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
106
Management outsources the calculation of the value of its derivative liabilities to an independent valuation firm, including the internal
controls over the calculation and related review procedures. The fair value of the Company’s compound embedded derivative liabilities is
marked-to-market at the end of each reporting period based primarily upon the change in our stock price during each reporting period. The fair
value is determined using a Monte Carlo simulation model. During the preparation of the Company’s financial statements, management
became aware of a clerical error made by the Company’s independent valuation firm in the model used to calculate the fair value of one of the
Company’s derivative liabilities as of December 31, 2013. This error relates only to the December 31, 2013 calculation and was corrected
before the Company issued its December 31, 2013 Consolidated Financial Statements. The Company's management has assessed the effect of
the error on the Company's internal control over financial reporting and has determined that a material weakness exists with respect to the
precision of its controls around the review of the December 31, 2013 derivative valuation. The valuation of this derivative impacts Derivative
Liabilities on the Consolidated Balance Sheet and Derivative Gain (Loss) on the Consolidated Statement of Operations. This calculation has no
impact on the key performance indicators that are reviewed by management and users of the financial statements to analyze the financial
performance of the business, including but not limited to, operating income or EBITDA. The change in derivative valuation between reporting
dates represents a non-cash item in our financial statements. See Note 4 for further information related to the nature of the various embedded
derivative instruments and Note 5 for the fair value measurements of these embedded derivatives.
The Company’s internal control over financial reporting as of December 31, 2013 has been audited by Crowe Horwath LLP, an independent
registered accounting firm, as stated in their report, which appears herein.
Remediation Plan
In order to remediate the material weakness described above, the Company is undertaking the following steps. It will continue to evaluate
the effectiveness of its internal controls and procedures on an ongoing basis and will take further action as appropriate.
• Updates have been made to the valuation model to correct the identified error.
• Additional analysis and review procedures will be performed by the independent valuation firm and discussed with management.
Item 9B. Other Information
Not applicable.
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from the applicable information set forth in "Executive Officers,"
"Election of Directors," "Information about the Board of Directors and its Committees," and "Security Ownership of Directors and Executive
Officers - Section 16(a) Beneficial Ownership Reporting Requirements" which will be included in our definitive Proxy Statement for our 2014
Annual Meeting of Stockholders to be filed with the SEC, and "Item 1. Business - Additional Information" in this Report.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the applicable information set forth in "Compensation of Executive
Officers" and "Compensation of Directors" which will be included in our definitive Proxy Statement for our 2014 Annual Meeting of
Stockholders to be filed with the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the applicable information set forth in "Security Ownership of
Principal Stockholders and Management" and "Equity Compensation Plan Information" which will be included in our definitive Proxy
Statement for our 2014 Annual Meeting of Stockholders to be filed with the SEC.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the applicable information set forth in "Other Information - Related
Person Transactions" and "Information about the Board of Directors and its Committees" which will be included in our definitive Proxy
Statement for our 2014 Annual Meeting of Stockholders to be filed with the SEC.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference from the applicable information set forth in "Other Information -
Globalstar's Independent Registered Accounting Firm" which will be included in our definitive Proxy Statement for our 2014 Annual Meeting
of Stockholders to be filed with the SEC.
107
PART IV
Item 15. Exhibits, Financial Statements Schedules
(a) The following documents are filed as part of this report:
(1) Financial Statements and Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets at December 31, 2013 and 2012
Consolidated statements of operations for the years ended December 31, 2013, 2012, and 2011
Consolidated statements of comprehensive loss for the years ended December 31, 2013, 2012, and 2011
Consolidated statements of stockholders’ equity for the years ended December 31, 2013, 2012, and 2011
Consolidated statements of cash flows for the years ended December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is in the financial statements or notes thereto.
(3) Exhibits
See exhibit list.
108
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Date: March 10, 2014
POWER OF ATTORNEY
GLOBALSTAR, INC.
By:
/s/ James Monroe III
James Monroe III
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James Monroe III
and Richard S. Roberts, jointly and severally, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities indicated as of March 10, 2014.
Signature
/s/ James Monroe III
James Monroe III
/s/ Rebecca S. Clary
Rebecca S. Clary
/s/ William A. Hasler
William A. Hasler
/s/ James F. Lynch
James F. Lynch
/s/ John Kneuer
John Kneuer
/s/ J. Patrick McIntyre
J. Patrick McIntyre
/s/ Richard S. Roberts
Richard S. Roberts
Title
Chief Executive Officer and Chairman of the Board
(Principal Executive and Financial Officer)
Chief Accounting Officer and Corporate Controller
Director
Director
Director
Director
Director
109
EXHIBIT INDEX
Exhibit
Description
Number
2.1*
3.1*
3.2*
4.1*
Asset Purchase Agreement among Axonn L.L.C., Spot LLC and Globalstar, Inc. dated December 18, 2009 (Exhibit 2.2 to Form
10-K filed March 12, 2010)
Amended and Restated Certificate of Incorporation of Globalstar, Inc. (Exhibit 3.1 to Form 8-K filed September 29, 2009)
Amended and Restated Bylaws of Globalstar, Inc. (Exhibit 3.2 to Form 10-Q filed December 18, 2006)
Indenture between Globalstar, Inc. and U.S. Bank, National Association as Trustee dated as of April 15, 2008 (Exhibit 4.1 to
Form 8-K filed April 16, 2008)
4.2*
Second Supplemental Indenture between Globalstar, Inc. and U.S. Bank, National Association as Trustee dated as of June 19,
2009 (Exhibit 4.1 to Form 8-K filed June 19, 2009)
4.3*
4.4*
4.5*
Form of 8.00% Senior Unsecured Convertible Note (Exhibit 4.2 to Form 8-K filed June 17, 2009)
Form of Warrant issued June 19, 2009 (Exhibit 4.1 to Form 8-K filed June 17, 2009)
Form of Warrant for issuance to Thermo Funding Company LLC pursuant to the Contingent Equity Agreement dated as of June
19, 2009 (Exhibit 4.1 to Form 10-Q filed August 10, 2009)
4.6*
Form of Warrant for issuance to Thermo Funding Company LLC pursuant to the Loan Agreement dated as of June 25, 2009
(Exhibit 4.2 to Form 10-Q filed August 10, 2009)
4.7*
4.8*
Form of Amendment to Warrant to Purchase Common Stock (Exhibit 4.1 to Current Report on Form 8-K filed June 4, 2010)
Third Supplemental Indenture between Globalstar, Inc. and U.S. Bank, National Association as Trustee dated as of June 14,
2011 (Exhibit 4.1 to Form 8-K/A filed June 21, 2011)
4.9*
Form of 5.0% Senior Unsecured Convertible Note (Exhibit 4.2 to Form 8-K/A filed June 21, 2011)
4.10*
Guaranty Agreement dated as of June 14, 2011 by and among Globalstar, Inc. Certain Subsidiaries of Globalstar, Inc. as
Subsidiary Guarantors, in favor of U.S. Bank, National Association, as Trustee (Exhibit 4.3 to Form 8-K/A filed June 21, 2011)
4.11*
Form of Warrant issued with the 5.0% Senior Unsecured Convertible Notes (Exhibit 4.4 to Form 8-K/A filed June 21, 2011)
4.12*
Registration Rights Agreement dated as of December 28, 2012 between Globalstar, Inc. and Terrapin Opportunity, L.P. (Exhibit
4.1 to Form 8-K filed January 2, 2013)
4.13*
Fourth Supplemental Indenture between Globalstar, Inc. and U.S. Bank, National Association as Trustee dated as of May 20,
2013, including Form of Global 8% Convertible Senior Note due 2028 (Exhibit 4.1 to Form 8-K filed May 20, 2013)
10.1*†
Satellite Products Supply Agreement by and between QUALCOMM Incorporated and New Operating Globalstar LLC dated as
of April 13, 2004 (Exhibit 10.6 to Form S-1, Amendment No. 4, filed October 17, 2006)
10.2*†
Amendment No. 1 to Satellite Products Supply Agreement by and between QUALCOMM Incorporated and Globalstar LLC
dated as of May 25, 2005 (Exhibit 10.7 to Form S-1, Amendment No. 4, filed October 17, 2006)
10.3*†
Amendment No. 2 to Satellite Products Supply Agreement by and between QUALCOMM Incorporated and Globalstar LLC
dated as of May 25, 2005 (Exhibit 10.8 to Form S-1, Amendment No. 4, filed October 17, 2006)
10.4*†
Amendment No. 3 to Satellite Products Supply Agreement by and between QUALCOMM Incorporated and Globalstar LLC
dated as of September 30, 2005 (Exhibit 10.9 to Form S-1, Amendment No. 4, filed October 17, 2006)
10.5*
Amendment No. 4 to Satellite Products Supply Agreement by and between QUALCOMM Incorporated and Globalstar, Inc.
dated as of August 15, 2006 (Exhibit 10.5 to Form 10-K filed March 31, 2009)
110
10.6*†
Amendment No. 5 to Satellite Products Supply Agreement by and between QUALCOMM Incorporated and Globalstar, Inc.
dated as of November 20, 2007 (Exhibit 10.6 to Form 10-K filed March 31, 2009)
10.7*
Amendment No. 6 to Satellite Products Supply Agreement by and between QUALCOMM Incorporated, Globalstar, Inc. and
Globalstar Canada Satellite Company dated as of November 20, 2007 (Exhibit 10.7 to Form 10-K filed March 31, 2009)
10.8*†
Amendment No. 7 to Satellite Products Supply Agreement by and between QUALCOMM Incorporated, Globalstar, Inc. and
Globalstar Canada Satellite Company dated as of October 27, 2008 (Exhibit 10.8 to Form 10-K filed March 31, 2009)
10.9*†
Amendment No. 8 to Satellite Products Supply Agreement by and between QUALCOMM Incorporated, Globalstar, Inc. and
Globalstar Canada Satellite Company dated as of August 12, 2009 (Exhibit 10.4 to Form 10-Q filed May 7, 2010)
10.10*†
Amendment No. 9 to Satellite Products Supply Agreement by and between QUALCOMM Incorporated, Globalstar, Inc. and
Globalstar Canada Satellite Company dated as of February 24, 2010 (Exhibit 10.5 to Form 10-Q filed May 7, 2010)
10.11*†
Amended and Restated Satellite Construction Contract between Globalstar, Inc. and Thales Alenia Space dated June 3, 2009
(Exhibit 10.2 to Form 10-Q filed August 10, 2009)
10.12*†
Amendment No.1 to Amended and Restated Satellite Construction Contract between Globalstar, Inc. and Thales Alenia Space
France dated January 18, 2010 (Exhibit 10.10 to Form 10-K filed March 12, 2010)
10.13*†
Amendment No.2 to Amended and Restated Satellite Construction Contract between Globalstar, Inc. and Thales Alenia Space
France dated January 18, 2010 (Exhibit 10.11 to Form 10-K filed March 12, 2010)
10.14*
Amendment No.3 to Amended and Restated Satellite Construction Contract between Globalstar, Inc. and Thales Alenia Space
France dated August 23, 2010 (Exhibit 10.14 to Form 10-K filed March 31, 2011)
10.15*†
Control Network Facility Construction Contract by and between Alcatel Alenia Space France and Globalstar, Inc. dated March
22, 2007 (Exhibit 10.1 to Form 10-Q filed May 15, 2007)
10.16*†
Amended and Restated Launch Services Agreement by and between Globalstar, Inc. and Arianespace dated March 9, 2010
(Exhibit 10.1 to Form 10-Q filed May 7, 2010)
10.17*
Share Lending Agreement by and among Globalstar, Inc., Merrill Lynch International and Merrill Lynch, Pierce, Fenner &
Smith Incorporated dated as of April 10, 2008 (Exhibit 10.2 to Form 8-K filed April 16, 2008)
10.18*
Amendment No. 1 to Share Lending Agreement between Globalstar, Inc., Merrill Lynch International and Merrill Lynch,
Pierce, Fenner & Smith Incorporated dated as of April 10, 2008 (Exhibit 10.5 to Form 10-Q filed March 31, 2009)
10.19*
Share Lending Termination Agreement by and among Globalstar, Inc. and Merrill Lynch International dated as of July 3, 2013
(Exhibit 10.5 to Form 10-Q filed November 14, 2013)
10.20*
Pledge and Escrow Agreement by and among Globalstar, Inc., U.S. Bank, National Association as Trustee, and U.S. Bank,
National Association as Escrow Agent dated April 15, 2008 (Exhibit 10.1 to Form 8-K filed April 16, 2008)
10.21*†
Contract between Globalstar, Inc. and Hughes Network Systems LLC dated May 1, 2008 (Exhibit 10.1 to Form 10-Q filed
August 11, 2008)
10.22*
Amendment No.2 to Contract between Globalstar, Inc. and Hughes Network Systems LLC effective as of August 28, 2009
(Amendment No. 1 Superseded.) (Exhibit 10.2 to Form 10-Q filed November 6, 2009)
10.23*
Amendment No.3 to Contract between Globalstar, Inc. and Hughes Network Systems LLC effective as of September 21, 2009
(Exhibit 10.3 to Form 10-Q filed November 6, 2009)
10.24*†
Amendment No.4 to Contract between Globalstar, Inc. and Hughes Network Systems LLC dated as of March 24, 2010 (Exhibit
10.2 to Form 10-Q filed May 7, 2010)
10.25* †
Amendment No.5 to Contract between Globalstar, Inc. and Hughes Network Systems LLC dated as of April 5, 2011
(Exhibit 10.24 to Form 10-K filed March 13, 2012)
111
10.26* †
Amendment No.6 to Contract between Globalstar, Inc. and Hughes Network Systems LLC dated as of November 4, 2011
(Exhibit 10.25 to Form 10-K/A filed June 25, 2012)
10.27 *†
Amendment No. 7 to Contract between Globalstar and Hughes Network Systems LLC dated as of February 1, 2012
(Exhibit 10.1 to Form 10-Q filed May 10, 2012)
10.28*†
Letter Agreement dated March 30, 2012 between Globalstar, Inc. and Hughes Network Systems, LLC
(Exhibit 10.2 to Form 10-Q filed May 10, 2012)
10.29*†
Letter Agreement dated June 26, 2012 between Globalstar, Inc. and Hughes Network Systems, LLC
(Exhibit 10.1 to Form 10-Q filed August 9, 2012)
10.30*†
Letter Agreement by and between Globalstar, Inc. and Hughes Network Systems, LLC dated September 27, 2012 (Exhibit 10.2
to Form 10-Q filed November 14, 2012)
10.31*†
Letter Agreement by and between Globalstar, Inc. and Hughes Network Systems, LLC dated December 20, 2012 (Exhibit 10.30
to Form 10-K filed March 15, 2013)
10.32*†
Amendment No. 9 to Contract between Globalstar and Hughes Network Systems LLC dated as of January 18, 2013
(Exhibit 10.1 to Form 10-Q filed May 10, 2013)
10.33*†
Letter Agreement by and between Globalstar, Inc. and Hughes Network Systems, LLC dated March 26, 2013 (Exhibit 10.4 to
Form 10-Q filed May 10, 2013)
10.34*†
Letter Agreement by and between Globalstar, Inc. and Hughes Network Systems, LLC dated June 28, 2013 (Exhibit 10.2 to
Form 10-Q filed August 14, 2013)
10.35*
Letter Agreement by and between Globalstar, Inc. and Hughes Network Systems, LLC dated August 7, 2013 (Exhibit 10.8 to
Form 10-Q filed November 14, 2013)
10.36*†
Amendment No. 10 to Contract between Globalstar and Hughes Network Systems LLC dated as of August 7, 2013
(Exhibit 10.9 to Form 10-Q filed November 14, 2013)
10.37
Amendment No. 11 to Contract between Globalstar and Hughes Network Systems LLC dated as of December 17, 2013
10.38*†
Purchase Agreement by and between Globalstar, Inc. and Ericsson Inc. dated October 1, 2008 (Exhibit 10.1 to Form 10-Q filed
November 10, 2008)
10.39*†
Amendment No.1 to Purchase Agreement by and between Globalstar, Inc. and Ericsson Inc. dated as of December 1, 2008
(Exhibit 10.28 to Form 10-K filed March 12, 2010)
10.40* †
Amendment No.2 to Purchase Agreement by and between Globalstar, Inc. and Ericsson Inc. dated as of March 30, 2010
(Exhibit 10.3 to Form 10-Q filed May 7, 2010)
10.41* †
Amendment No.3 to Purchase Agreement by and between Globalstar, Inc. and Ericsson Inc. dated as of December 10, 2010
(Exhibit 10.30 to Form 10-K filed March 31, 2011)
10.42*†
Amendment No.4 to Purchase Agreement by and between Globalstar, Inc. and Ericsson Inc. dated as of October 31, 2011
(Exhibit 10.30 to Form 10-K filed March 13, 2012)
10.43*†
Amendment No.5 to Purchase Agreement by and between Globalstar, Inc. and Ericsson Inc. dated as of December 20, 2011
(Exhibit 10.31 to Form 10-K filed March 13, 2012)
10.44*†
Letter Agreement by and between Globalstar, Inc. and Ericsson, Inc. dated as of March 8, 2012 (Exhibit 10.3 to Form 10-Q filed
May 10, 2012)
10.45*†
Letter Agreement by and between Globalstar, Inc. and Ericsson, Inc. dated as of July 23, 2012 (Exhibit 10.2 to Form 10-Q filed
August 9, 2012)
112
10.46*†
Letter Agreement by and between Globalstar, Inc. and Ericsson, Inc. dated as of January 30, 2013
(Exhibit 10.3 to Form 10-Q filed May 10, 2013)
10.47*†
Letter Agreement by and between Globalstar, Inc. and Ericsson, Inc. dated as of June 20, 2013
(Exhibit 10.1 to Form 10-Q filed August 14, 2013)
10.48*†
Letter Agreement by and between Globalstar, Inc. and Ericsson, Inc. dated as of September 1, 2013
(Exhibit 10.7 to Form 10-Q filed November 14, 2013)
10.49*
Contingent Equity Agreement between Globalstar, Inc. and Thermo Funding Company LLC dated as of June 19, 2009 (Exhibit
10.4 to Form 10-Q filed August 10, 2009)
10.50*
Registration Rights Agreement dated June 14, 2011 (Exhibit 10.3 to Form 8-K/A filed June 21, 2011)
10.51*
Common Stock Purchase Agreement by and between Globalstar, Inc. and Terrapin Opportunity, L.P. dated December 28, 2012
(Exhibit 10.1 to Form 8-K filed January 2, 2013)
10.52*
Engagement Agreement dated as of December 28, 2012 between Globalstar, Inc. and Financial West group
(Exhibit 10.2 to Form 8-K filed January 2, 2013)
10.53*
Equity Commitment, Restructuring Support and Consent Agreement by and among Globalstar, Inc., Thermo Funding Company
LLC, BNP Paribas, as facility agent, security agent and Chef de File under the COFACE Facility Agreement dated as of June 5,
2009, and the Lenders who are parties to the Facility, dated as of May 20, 2013
(Exhibit 10.1 to Form 8-K filed May 20, 2013)
10.54*
Exchange Agreement by and among Globalstar, Inc. and certain exchanging note holders dated as of May 20, 2013
(Exhibit 10.2 to Form 8-K filed May 20, 2013)
10.55*
Common Stock Purchase Agreement between Globalstar, Inc. and Thermo Funding Company LLC dated as of May 20, 2013
(Exhibit 10.3 to Form 8-K filed May 20, 2013)
10.56*
Global Deed of Amendment and Restatement between Globalstar, Inc., Thermo Funding Company LLC, BNP Paribas and
Lenders party to the COFACE Facility Agreement dated as of June 5, 2009, dated as of July 31, 2013 (Exhibit 10.1 to Form 8-K
filed August 22, 2013)
10.57*
10.58*
Deed of Amendment in respect of the Global Deed of Amendment and Restatement between Globalstar, Inc., Thermo Funding
Company LLC, BNP Paribas and Lenders party to the COFACE Facility Agreement dated as of June 5, 2009, dated as of July
31, 2013, dated as of August 21, 2013 (Exhibit 10.2 to Form 8-K filed August 22, 2013)
Amended and Restated COFACE Facility Agreement between Globalstar, Inc., BNP Paribas, Société Générale, Natixis, Credit
Agricole Corporate and Investment Bank and Credit Industrial et Commercial effective August 21, 2013 (Exhibit 10.3 to Form
8-K filed August 22, 2013)
10.59*
Amended and Restated Loan Agreement between Globalstar, Inc., and Thermo Funding Company LLC dated as of July 31,
2013 (Exhibit 10.4 to Form 8-K filed August 22, 2013)
10.60
Common Stock Purchase and Option Agreement by and among Globalstar, Inc., Thermo Funding Company LLC, and Thermo
Funding II LLC dated as of October 14, 2013
Executive Compensation Plans and Agreements
10.61*
Amended and Restated Globalstar, Inc. 2006 Equity Incentive Plan (Annex A to Definitive Proxy Statement filed March 31,
2008)
10.62*
Form of Restricted Stock Units Agreement for Non-U.S. Designated Executives under the Globalstar, Inc. 2006 Equity
Incentive Plan (Exhibit 10.2 to Form 10-Q filed August 14, 2007)
10.63*
Form of Notice of Grant and Restricted Stock Agreement under the Globalstar, Inc. 2006 Equity Incentive Plan (Exhibit 10.29
to Form 10-K filed March 17, 2008)
113
10.64*
Form of Non-Qualified Stock Option Award Agreement for Members of the Board of Directors under the Globalstar, Inc. 2006
Equity Incentive Plan (Exhibit 10.1 to Form 8-K filed November 20, 2008)
10.65*
Form of Stock Option Award Agreement for use with executive officers (Exhibit 10.45 to Form 10-K filed March 31, 2011)
10.66*†
2013 Key Employee Cash Bonus Plan (Exhibit 10.3 to Form 10-Q filed August 14, 2013)
10.67*
Letter Agreement with Frank Bell dated as of September 25, 2012
(Exhibit 10.4 to Form 10-Q/A filed April 9, 2013)
12.1
21.1
23.1
24.1
31.1
32.1
Ratio of Earnings to Fixed Charges
Subsidiaries of Globalstar, Inc.
Consent of Crowe Horwath LLP
Power of Attorney (included as part of signature page)
Section 302 Certification
Section 906 Certification
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
*
Incorporated by reference.
† Portions of the exhibit have been omitted pursuant to a request for confidential treatment filed with the Commission. The omitted portions
have been filed with the Commission.
114
RATIO OF EARNINGS TO FIXED CHARGES
Computation of Ratio of Earnings to Fixed Charges
(dollars in thousands, except ratio)
2009
Year Ended December 31,
2011
2010
2012
Exhibit 12.1
2013
Earnings:
Loss from continuing operations
Fixed charges
Income tax expense (benefit)
Loss in equity investee
Less: capitalized interest
Total earnings
Fixed Charges:
$
(74,923) $
42,757
(16)
73
(35,887)
(97,467) $
52,283
396
2,829
(47,122)
(54,924 )
59,171
$
(109 )
420
(54,139 )
(112,198) $
61,802
413
335
(40,116)
(591,116)
85,046
1,138
634
(17,096)
$
(67,996) $
(89,081) $
(49,581 )
$
(89,764) $
(521,394)
Interest expense, net
Estimated interest component of rental expense(1)
Capitalized interest
$
6,730 $
140
35,887
5,021 $
140
47,122
$
4,824
208
54,139
21,506 $
180
40,116
67,828
122
17,096
Total fixed charges
$
42,757 $
52,283 $
59,171
$
61,802 $
85,046
Ratio of Earnings to Fixed Charges
*
*
*
*
*
* For these periods, earnings were inadequate to cover fixed charges. The excess of fixed charges over earnings for those years was as
follows: $110.8 million for the year ended December 31, 2009; $141.4 million for the year ended December 31, 2010; $108.8 million for
the year ended December 31, 2011; $151.6 million for the year ended December 31, 2012 and $606.4 million for the year ended December
31, 2013.
(1) Represents our estimate of the interest component of noncancelable operating lease rental expense.
Subsidiaries of Globalstar, Inc.
As of December 31, 2013, the material subsidiaries of Globalstar, Inc., their jurisdiction of organization and the percent of their voting
securities owned by their immediate parent entity were as follows:
Exhibit 21.1
Subsidiary
GSSI, LLC
ATSS Canada, Inc.
Globalstar Brazil Holdings, L.P.
Globalstar do Brasil Holdings Ltda.
Globalstar do Brazil, S.A.
Globalstar Satellite Services Pte., Ltd
Globalstar Satellite Services Pty., Ltd
Globalstar C, LLC
Mobile Satellite Services B.V.
Globalstar Europe, S.A.R.L.
Globalstar Europe Satellite Services, Ltd.
Globalstar Leasing LLC
Globalstar Licensee LLC
Globalstar Security Services, LLC
Globalstar USA, LLC
GUSA Licensee LLC
Globalstar Canada Satellite Co.
Globalstar de Venezuela, C.A.
Globalstar Colombia, Ltda.
Globalstar Caribbean Ltd.
Globalstar Republica Dominicana, S.A. (Dormant)
GCL Licensee LLC
Globalstar Americas Acquisitions, Ltd.
Globalstar Americas Holding Ltd.
Globalstar Gateway Company S.A.
Globalstar Americas Telecommunications Ltd.
Globalstar Honduras S.A.
Globalstar Nicaragua S.A.
Globalstar de El Salvador, SA de CV
Globalstar Panama, Corp.
Globalstar Guatemala S.A.
Globalstar Belize Ltd.
Astral Technologies Investment Ltd.
Astral Technologies Nicaragua S.A.
SPOT LLC
Organized Under Laws of
% of Voting
Securities
Owned by
Immediate
Parent
Delaware
Delaware
Delaware
Brazil
Brazil
Singapore
South Africa
Delaware
Netherlands
France
Ireland
Delaware
Delaware
Delaware
Delaware
Delaware
Nova Scotia, Canada
Venezuela
Colombia
Cayman Islands
Dominican Republic
Delaware
British Virgin Islands
British Virgin Islands
Nicaragua
British Virgin Islands
Honduras
Nicaragua
El Salvador
Panama
Guatemala
Belize
British Virgin Islands
British Virgin Islands
Colorado
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the registration statements on Form S-8 (No. 333-188538, 333-180178, 333-176281,
333-173218, 333-165444, 333-161510, 333-156884, 333-150871, 333-149747 333-145283, and 333-138590) of Globalstar, Inc. of our report
dated March 10, 2014, with respect to the consolidated financial statements and effectiveness of internal control over financial reporting of
Globalstar, Inc., which report appears in this Annual Report on Form 10-K of Globalstar, Inc. for the year ended December 31, 2013.
Exhibit 23.1
Oak Brook, Illinois
March 10, 2014
/s/ Crowe Horwath LLP
Exhibit 31.1
Certification of Chief Executive Officer
I, James Monroe III, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Globalstar, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
me by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusion about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 10, 2014
By:
/s/ James Monroe III
James Monroe III
Chief Executive Officer (Principal Executive and Financial Officer)
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
States Code), the undersigned officer of Globalstar, Inc. (the “Company”), does hereby certify that:
This annual report on Form 10-K for the year ended December 31, 2013 of the Company fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: March 10, 2014
By:
/s/ James Monroe III
James Monroe III
Chief Executive Officer
Performance Graph
The following graph shows a comparison from December 31, 2008 through December 31, 2012 of cumulative total
return for our Common Stock, the NASDAQ Telecommunications Index and the NASDAQ Composite Index,
assuming $100 had been invested in each on December 31, 2008. Such returns are based on historical results and are
not intended to suggest future performance. The calculation of cumulative total return is based on the change in
stock price and assumes reinvestment of dividends for the NASDAQ Telecommunications Index and the NASDAQ
Composite Index. We have never paid dividends on our Common Stock and have no present plans to do so.
$1,000.00
$900.00
$800.00
$700.00
$600.00
$500.00
$400.00
$300.00
$200.00
$100.00
$-
Globalstar, Inc. Common Stock Performance Graph
Globalstar, Inc.
Nasdaq Telecommunications
Index
S&P 500 Stock Index
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1
Board of Directors
James Monroe III
Chairman of the Board and
Chief Executive Officer
William A. Hasler
Director, Aviat Network and
Rubicon Ltd.
John R. M. Kneuer
President of JKC Consulting
LLC. and Senior Partner,
Fairfax Media Partners
(Private Equity Investment)
James F. Lynch
Managing Partner
Thermo Capital Partners,
(Private Equity Investment)
J. Patrick McIntyre
Chairman and Chief
Operating Officer
ET Water
(Commercial Irrigation)
Richard S. Roberts
VP & General Counsel
Thermo Development, Inc.
(Management Firm)
Executive Officers
James Monroe III
Chairman of the Board and
Chief Executive Officer
Anthony J. Navarra
President, Global Operations
L. Barbee Ponder IV
General Counsel and Vice
President, Regulatory Affairs
Richard S. Roberts
Corporate Secretary
Common Stock
As of April 21, 2014, the
Company’s voting common
stock is traded on the NYSE
MKT ) under the symbol
“GSAT.” Previously, the
voting common stock was
traded on the over-the-counter
market. As of April 11, 2014,
the company had
approximately 650,175,920
voting shares outstanding and
127 holders of record.
Executive Office
Globalstar, Inc.
300 Holiday Square Blvd.
Covington, LA 70433
USA
(985) 335-1500
Company Home Page
www.globalstar.com
Stockholder Information
For further information about
the company, additional hard
copies of this report, SEC
filings, and other published
corporate information please
visit the Company website
noted above or call
(985) 335-1500.
Transfer Agent
Computershare Trust
Company, N.A.
250 Royall Street
Canton, MA 02021
1-800-962-4284
www.computershare.com
Independent Auditors
Crowe Horwath LLP
Oak Brook, IL
Legal Counsel
Taft Stettinius & Hollister LLP
Cincinnati, OH
Investor & Media Relations
InvestorRelations@Globalstar.com
(985) 335-1538
300 Holiday Square Blvd.
Covington, LA 70433
USA 1.985.335.1500
Globalstar.com