Globalstar CEO urges investors to hold on

(Telephony) Mobile satellite operator Globalstar said it suspended indefinitely principal and interest payments on all of its funded debt, including its credit facility, vendor financing agreements and senior notes, as well as dividend payments on its preferred stock to keep the company funded throughout 2001.

Globalstar said it will conserve about $400 million for the year to fund its new marketing initiatives it implemented after reporting another disappointing third quarter in September. The company lost about 95% of its stock value during 2000. Globalstar CEO and Chairman Bernard Schwarz originally estimated subscribers would reach around 1 million by the end of 2000 and later revised the figure to 500,000. Third quarter reports, however, were disappointing. Globalstar reported just 21,300 subscribers, far below the 1.6 million customers analysts predicted the carrier would need to break even.

After the company released its third quarter results, Schwartz said Globalstar would begin implementing plans for direct marketing to large industries and government accounts, rather than solely relying on marketing efforts from its local service provider partners. Now it needs the cash to execute those plans throughout 2001 as well as ramp up data services.

It wasn't clear that Globalstar's partners were willing to invest any more money in the company. Five of Globalstar's partners, which include Loral Space & Communications, Qualcomm, Elsacom, Vodafone and a partnership between France Telecom and Alcatel, put up another $68 million of equity financing in mid-September to fund Globalstar until May 2001.

"At that time, we made it clear that our intention was that this was enough money to tide the company over until some time second quarter, by which time Globalstar proves its business case," said a Loral spokesman. Loral holds 40% of Globalstar.

Yet it appears Globalstar will take longer to prove its business case. Subscriber numbers were 31,200 at the end of December.

"We’re disappointed in our performance too," Schwartz said in response to one investor's negative sentiment during the company's conference call yesterday. "We believe some of the things we have done will fix that performance. The general consensus is that we will be able to demonstrate a viable business plan."

Both Loral and Qualcomm said the suspended payments would have a negative impact on their operating earnings. Globalstar did not make the $45 million interest and principal loan payments due earlier this week on its Loral credit facility arranged under vendor financing agreements with Qualcomm and Loral.

Loral intends to write down its Globalstar investment, including common and preferred equity, and debt, reducing it to an appropriate value in a one-time non-cash charge in the fourth quarter of 2000. As of December, Loral's direct and indirect investment in connection with Globalstar's activities totaled about $1.3 billion, which includes about 39 percent of Globalstar's equity and about 27% of its debt.

At the end of December, Qualcomm had about $610 million in net assets related to its business with Globalstar. Qualcomm said the negative impact on its earnings would be small in the first fiscal quarter ended Dec. 31.

"We believe current and new product offerings support an expanding market for Globalstar service, and we expect the system to continue to operate in the future," said Dr. Irwin Jacobs, chairman and CEO of Qualcomm.

Bondholders during yesterday's conference call with Schwartz indicated that three bondholders could put the company into bankruptcy if they chose to walk away. Schwartz said he hoped they would have enough confidence in Globalstar's business plan and would wait to see what type of debt restructuring the company was able to accomplish in the coming weeks. Globalstar retained The Blackstone Group as its financial adviser to assist in developing initiatives that include restructuring the company's debt, identifying funding opportunities and pursuing other strategic alternatives.

"It would be a premature action here to cause bankruptcy before Blackstone has the opportunity to discover alternatives," said Schwartz.