**Tableof Contents**

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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

** **
| **(Mark  One)**                                        |
|--------------------------------------------------------|
| ** **                                             | ** ** |
| **x**                                                  | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                             | ** ** |
| **For the quarterly period ended June 30,  2009** |
| ** **                                             |
| **OR**                                                 |
| ** **                                             |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom                to                **

 

**Commission file number 001-33117**

 

**GLOBALSTAR, INC.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Delaware**                     | ** ** | **41-2116508**                        |
|----------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of |       | (I.R.S. Employer  Identification No.) |
| Incorporation or  Organization)  |       |                                  |

 

**461 South Milpitas Blvd.**

**Milpitas, California 95035**

(Address of principal executive offices and zip code)

 

**(408) 933-4000**

Registrant’s telephone number, including area code

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer o                | ** ** | Accelerated filer x         |
|-----------------------------------------------|------------|----------------------------------|
|                                          |       |                             |
| Non-accelerated filer o                  |       | Smaller reporting company o |
| (Do not check if a smaller reporting company) |       |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of Common Stock, as of thelatest practicable date. As of August 6, 2009, 145,309,799 shares ofCommon Stock, par value $0.0001 per share, were outstanding.

 

 

 

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Table of Contents

 

TABLE OF CONTENTS

 
| ** **                               | ** **             | ** **                                                                                                         | **Page** |
|------------------------------------------|------------------------|--------------------------------------------------------------------------------------------------------------------|----------|
|                                     |                   |                                                                                                               |     |
| **PART I  - Financial Information** | 3                      |
|                                     |                   |                                                                                                               |     |
|                                     | Item 1.                | Financial Statements                                                                                               | 3        |
|                                     |                   |                                                                                                               |     |
|                                     |                   | Consolidated  Statements of Operations for the three and six months ended June 30,  2009 and 2008 (unaudited) | 3        |
|                                     |                   |                                                                                                               |     |
|                                     |                   | Consolidated  Balance Sheets as of June 30, 2009 and December 31, 2008  (unaudited)                      | 4        |
|                                     |                   |                                                                                                               |     |
|                                     |                   | Consolidated  Statements of Cash Flows for the six months ended June 30, 2009 and 2008  (unaudited)           | 5        |
|                                     |                   |                                                                                                               |     |
|                                     |                   | Notes to Unaudited Interim Consolidated Financial  Statements                                                      | 6        |
|                                     |                   |                                                                                                               |     |
|                                     | Item 2.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 23       |
|                                     |                   |                                                                                                               |     |
|                                     | Item 3.                | Quantitative  and Qualitative Disclosures about Market Risk                                                        | 48       |
|                                     |                   |                                                                                                               |     |
|                                     | Item 4.           | Controls and  Procedures                                                                                           | 49       |
|                                     |                   |                                                                                                               |     |
| **PART II  - Other Information**    | 49                     |
|                                     |                   |                                                                                                               |     |
|                                     | Item 1.                | Legal Proceedings                                                                                                  | 49       |
|                                     |                   |                                                                                                               |     |
|                                     | Item  1A. Risk Factors | 49                                                                                                                 |
|                                     |                   |                                                                                                               |     |
|                                     | Item 4.                | Submission  of Matters to a Vote of Security Holders                                                               | 64       |
|                                     |                   |                                                                                                               |     |
|                                     | Item 6.                | Exhibits                                                                                                           | 65       |
|                                     |                   |                                                                                                               |     |
|                                     | Signatures             | 66                                                                                                                 |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**GLOBALSTAR, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per share data)**

**(Unaudited)**

** **
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**                | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                            | ** ** | **June 30,  2009**          | ** ** | **June 30,  2008**                       | ** ** | **June 30,   2009** | ** ** | **June 30,   2008** | ** ** |
| ** **                                                                            | ** ** | ** **                       | ** ** | **As Adjusted –  Note 1** | ** ** | ** ** | ** ** | **As Adjusted –  Note 1** | ** ** |
| ** **                                                                            | ** ** | ** **                       | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                                                                              |       |                             |       |                                          |       |   |   |   |   |
| Service revenue                                                                       |       | $                                | 12,562     |                                          | $          | 16,673 |   | $ | 23,693 |   | $ | 32,683 |   |
| Subscriber equipment sales                                                            |       | 3,154                            |       | 6,326                                         |       | 7,186 |   | 12,450 |   |
| Total revenue                                                                         |       | 15,716                           |       | 22,999                                        |       | 30,879 |   | 45,133 |   |
| Operating expenses:                                                                   |       |                             |       |                                          |       |   |   |   |   |
| Cost of services (exclusive of depreciation and  amortization shown separately below) |       | 7,961                            |       | 8,607                                         |       | 18,369 |   | 16,082 |   |
| Cost of subscriber equipment sales:                                                   |       |                             |       |                                          |       |   |   |   |   |
| Cost of subscriber equipment sales                                                    |       | 2,832                            |       | 4,118                                         |       | 5,827 |   | 9,099 |   |
| Cost of subscriber equipment sales — Impairment of  assets                       |       | 648                              |       | 349                                           |       | 648 |   | 413 |   |
| Total cost of subscriber equipment sales                                              |       | 3,480                            |       | 4,467                                         |       | 6,475 |   | 9,512 |   |
| Marketing, general, and administrative                                                |       | 11,408                           |       | 15,482                                        |       | 25,385 |   | 31,230 |   |
| Depreciation and amortization                                                         |       | 5,468                            |       | 6,521                                         |       | 10,892 |   | 11,939 |   |
| Total operating expenses                                                              |       | 28,317                           |       | 35,077                                        |       | 61,121 |   | 68,763 |   |
| Operating loss                                                                        |       | (12,601                          | )          | (12,078                                       | )          | (30,242 | ) | (23,630 | ) |
| Other income (expense):                                                               |       |                             |       |                                          |       |   |   |   |   |
| Interest income                                                                       |       | 56                               |       | 1,565                                         |       | 184 |   | 2,933 |   |
| Interest expense                                                                      |       | (3,141                           | )          | (301                                          | )          | (3,381 | ) | (1,298 | ) |
| Derivative gain (loss)                                                                |       | (797                             | )     | 3,743                                         |       | (797 | )  | 204 |   |
| Other                                                                                 |       | 2,529                            |       | (77                                           | )          | (1,446 | )  | 8,174 |   |
| Total other income (expense)                                                          |       | (1,353                           | )          | 4,930                                         |       | (5,440 | )  | 10,013 |   |
| Loss before income taxes                                                              |       | (13,954                          | )          | (7,148                                        | )          | (35,682 | ) | (13,617 | ) |
| Income tax expense (benefit)                                                          |       | (192                             | )     | 29                                            |       | (162 | )  | 195 |   |
| Net loss                                                                              |       | $                                | (13,762    | )                                             | $          | (7,177 | ) | $ | (35,520 | ) | $ | (13,812 | ) |
| Loss per common share:                                                                |       |                             |       |                                          |       |   |   |   |   |
| Basic                                                                                 |       | $                                | (0.10      | )                                             | $          | (0.09 | ) | $ | (0.27 | ) | $ | (0.17 | ) |
| Diluted                                                                               |       | (0.10                            | )          | (0.09                                         | )          | (0.27 | ) | (0.17 | ) |
| Weighted-average shares outstanding:                                                  |       |                             |       |                                          |       |   |   |   |   |
| Basic                                                                                 |       | 133,880                          |       | 84,029                                        |       | 131,259 |   | 83,243 |   |
| Diluted                                                                               |       | 133,880                          |       | 84,029                                        |       | 131,259 |   | 83,243 |   |

 

See accompanyingnotes to unaudited interim consolidated financial statements.

 

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**GLOBALSTAR, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except par value and Preferred Stock share data)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                  | ** ** | **June 30,  2009** | ** ** | **December 31,  2008**                   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | ** **              | ** ** | **As Adjusted –  Note 1** | ** ** |
| **ASSETS**                                                                                                                                                                                                  | ** ** | ** **              | ** ** | ** **                                    | ** ** |
| Current assets:                                                                                                                                                                                             |       |                    |       |                                          |       |
| Cash and cash equivalents                                                                                                                                                                                   |       | $                       | 16,037     |                                          | $          | 12,357 |   |
| Accounts receivable, net of allowance of $5,175  (2009) and $5,205 (2008)                                                                                                                                   |       | 7,910                   |       | 10,075                                        |       |
| Inventory                                                                                                                                                                                                   |       | 55,469                  |       | 55,105                                        |       |
| Advances for inventory                                                                                                                                                                                      |       | 9,182                   |       | 9,314                                         |       |
| Prepaid expenses and other current assets                                                                                                                                                                   |       | 16,071                  |       | 5,565                                         |       |
| Total current assets                                                                                                                                                                                        |       | 104,669                 |       | 92,416                                        |       |
|                                                                                                                                                                                                        |       |                    |       |                                          |       |
| Property and equipment, net                                                                                                                                                                                 |       | 748,926                 |       | 642,264                                       |       |
| Other assets:                                                                                                                                                                                               |       |                    |       |                                          |       |
| Restricted cash                                                                                                                                                                                             |       | 23,265                  |       | 57,884                                        |       |
| Other assets, net                                                                                                                                                                                           |       | 86,026                  |       | 15,670                                        |       |
| Total assets                                                                                                                                                                                                |       | $                       | 962,886    |                                          | $          | 808,234 |   |
|                                                                                                                                                                                                        |       |                    |       |                                          |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                               | ** ** | ** **              | ** ** | ** **                                    | ** ** |
| Current liabilities:                                                                                                                                                                                        |       |                    |       |                                          |       |
| Accounts payable                                                                                                                                                                                            |       | $                       | 56,525     |                                          | $          | 28,370 |   |
| Accrued expenses                                                                                                                                                                                            |       | 64,353                  |       | 29,998                                        |       |
| Payables to affiliates                                                                                                                                                                                      |       | 4,082                   |       | 3,344                                         |       |
| Deferred revenue                                                                                                                                                                                            |       | 20,106                  |       | 19,354                                        |       |
| Current portion of long term debt                                                                                                                                                                           |       | 71,438                  |       | 33,575                                        |       |
| Total current liabilities                                                                                                                                                                                   |       | 216,504                 |       | 114,641                                       |       |
|                                                                                                                                                                                                        |       |                    |       |                                          |       |
| Borrowings under revolving credit facility                                                                                                                                                                  |       | —                  |       | 66,050                                        |       |
| Long term debt                                                                                                                                                                                              |       | 79,562                  |       | 172,295                                       |       |
| Employee benefit obligations, net of current  portion                                                                                                                                                       |       | 4,782                   |       | 4,782                                         |       |
| Other non-current liabilities                                                                                                                                                                               |       | 59,419                  |       | 13,713                                        |       |
| Total non-current liabilities                                                                                                                                                                               |       | 143,763                 |       | 256,840                                       |       |
|                                                                                                                                                                                                        |       |                    |       |                                          |       |
| Stockholders’ equity:                                                                                                                                                                                  |       |                    |       |                                          |       |
| Preferred Stock, $0.0001 par value; 100,000,000  shares authorized, issued and outstanding — one at June 30, 2009; none at  December 31, 2008:                                                         |       |                    |       |                                          |       |
| Series A Preferred Convertible Stock, $0.0001  par value: 1 share authorized, 1 share issued and outstanding at June 30,  2009; none authorized, issued and outstanding at December 31, 2008 |       | —                  |       | —                                        |       |
| Common Stock, $0.0001 par value; 800,000 shares  authorized, 141,181 shares issued and outstanding at June 30, 2009; 136,606 shares issued  and outstanding at December 31, 2008                  |       | 14                      |       | 14                                            |       |
| Additional paid-in capital                                                                                                                                                                                  |       | 663,624                 |       | 463,822                                       |       |
| Accumulated other comprehensive loss                                                                                                                                                                        |       | (4,720                  | )          | (6,304                                        | )          |
| Retained deficit                                                                                                                                                                                            |       | (56,299                 | )          | (20,779                                       | )          |
| Total stockholders’ equity                                                                                                                                                                             |       | 602,619                 |       | 436,753                                       |       |
|                                                                                                                                                                                                        |       |                    |       |                                          |       |
| Total liabilities and stockholders’ equity                                                                                                                                                             |       | $                       | 962,886    |                                          | $          | 808,234 |   |

 

See accompanyingnotes to unaudited interim consolidated financial statements.

 

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**GLOBALSTAR, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

** **
| ** **                                                                                      | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                      | ** ** | **June 30, 2009**    | ** ** | **June 30, 2008** | ** ** |
| ** **                                                                                      | ** ** | ** **                     | ** ** | **As Adjusted –   Note 1** | ** ** |
| Cash flows from operating activities:                                                           |       |                           |       |   |   |
|                                                                                            |       |                           |       |   |   |
| Net loss                                                                                        |       | $                              | (35,520    | ) | $ | (13,812 | ) |
| Adjustments to reconcile net loss to net cash from  operating activities:                       |       |                           |       |   |   |
| Deferred income taxes                                                                           |       | —                         |       | (269 | ) |
| Depreciation and amortization                                                                   |       | 10,892                         |       | 11,939 |   |
| Change in fair value of derivative instruments and  derivative liabilities                      |       | 797                            |       | (204 | ) |
| Stock-based compensation expense                                                                |       | 5,432                          |       | 7,003 |   |
| Loss on disposal of fixed assets                                                                |       | 53                             |       | 80 |   |
| Provision for bad debts                                                                         |       | 334                            |       | 672 |   |
| Interest income on restricted cash                                                              |       | (115                           | )          | (2,474 | ) |
| Contribution of services                                                                        |       | 253                            |       | 225 |   |
| Cost of subscriber equipment sales - impairment of  assets                                      |       | 648                            |       | 413 |   |
| Amortization of deferred financing costs                                                        |       | 2,563                          |       | 262 |   |
| Loss on debt to equity conversion                                                               |       | 305                            |       |   |   |
| Loss in equity method investee                                                                  |       | 321                            |       |   |   |
| Changes in operating assets and liabilities, net of  acquisition:                               |       |                           |       |   |   |
| Accounts receivable                                                                             |       | 1,983                          |       | 239 |   |
| Inventory                                                                                       |       | 1,651                          |       | (10,025 | ) |
| Advances for inventory                                                                          |       | 644                            |       | (270 | ) |
| Prepaid expenses and other current assets                                                       |       | 559                            |       | (186 | ) |
| Other assets                                                                                    |       | 608                            |       | (2,167 | ) |
| Accounts payable                                                                                |       | 5,790                          |       | (2,281 | ) |
| Payables to affiliates                                                                          |       | 617                            |       | (142 | ) |
| Accrued expenses and employee benefit obligations                                               |       | 14,481                         |       | (2,734 | ) |
| Other non-current liabilities                                                                   |       | (1,686                         | )     | 1,707 |   |
| Deferred revenue                                                                                |       | 2,458                          |       | (2,429 | ) |
| Net cash from operating activities                                                              |       | 13,068                         |       | (14,453 | ) |
| Cash flows from investing activities:                                                           |       |                           |       |   |   |
| Spare and second-generation satellites and launch  costs                                        |       | (78,444                        | )          | (132,581 | ) |
| Second-generation ground                                                                        |       | (11                            | )          | (5,074 | ) |
| Property and equipment additions                                                                |       | (1,367                         | )          | (2,827 | ) |
| Proceeds from sale of property and equipment                                                    |       | —                         |       | 146 |   |
| Investment in businesses                                                                        |       | (145                           | )          | (2,000 | ) |
| Cash acquired on purchase of subsidiary                                                         |       | —                         |       | 1,839 |   |
| Restricted cash                                                                                 |       | 31,436                         |       | (43,639 | ) |
| Net cash from investing activities                                                              |       | (48,530                        | )          | (184,136 | ) |
| Cash flows from financing activities:                                                           |       |                           |       |   |   |
| Borrowings from long-term convertible senior notes                                              |       | —                         |       | 150,000 |   |
| Borrowings from long term debt                                                                  |       | —                         |       | 100,000 |   |
| Borrowings from revolving credit loan                                                           |       | 7,750                          |       | — |   |
| Borrowings from $55M Senior Convertible Notes                                                   |       | 55,000                         |       | — |   |
| Borrowings under subordinated loan agreement                                                    |       | 5,000                          |       | — |   |
| Borrowings under short term loan                                                                |       | 2,260                          |       | — |   |
| Proceeds from equity contributions                                                              |       | 1,000                          |       | — |   |
| Repayment of revolving credit loan                                                              |       | —                         |       | (50,000 | ) |
| Proceeds from irrevocable standby stock purchase  agreement                                     |       | —                         |       | — |   |
| Deferred financing cost payments                                                                |       | (21,166                        | )          | (4,854 | ) |
| Payments for the interest rate cap instrument                                                   |       | (12,425                        | )          | — |   |
| Reduction in derivative margin account balance  requirements                                    |       | —                         |       | 335 |   |
| Net cash from financing activities                                                              |       | 37,419                         |       | 195,481 |   |
| Effect of exchange rate changes on cash                                                         |       | 1,723                          |       | (8,850 | ) |
| Net increase (decrease) in cash and cash  equivalents                                           |       | 3,680                          |       | (11,958 | ) |
| Cash and cash equivalents, beginning of period                                                  |       | 12,357                         |       | 37,554 |   |
| Cash and cash equivalents, end of period                                                        |       | $                              | 16,037     |   | $ | 25,596 |   |
| Supplemental disclosure of cash flow information:                                               |       |                           |       |   |   |
| Cash paid for:                                                                                  |       |                           |       |   |   |
| Interest                                                                                        |       | $                              | 6,228      |   | $ | 4,613 |   |
| Income taxes                                                                                    |       | $                              | 45         |   | $ | 157 |   |
| Supplemental disclosure of non-cash financing and  investing activities:                        |       |                           |       |   |   |
| Conversion of debt to Series A Convertible  Preferred Stock                                |       | $                              | 180,177    |   | $ | — |   |
| Accrued launch costs and second-generation  satellites costs                                    |       | $                              | 21,900     |   | $ | 8,308 |   |
| Capitalization of accrued interest for spare and  second-generation satellites and launch costs |       | $                              | 9,582      |   | $ | 4,389 |   |
| Vendor financing of second-generation satellites                                                |       | $                              | 11,977     |   | 16,408 |   |
| Subordinated loan                                                                               |       | $                              | 10,000     |   | $ | — |   |
| Conversion of debt to Common Stock                                                              |       | $                              | 7,500      |   | $ | — |   |
| Accretion of debt discount                                                                      |       | $                              | 2,450      |   | $ | 1,831 |   |
| Accrued deferred financing costs                                                                |       | $                              | 42,522     |   | $ | 39 |   |
| Fair value of assets acquired on purchase of  subsidiary                                        |       | $                              | —     |   | $ | 19,928 |   |
| Fair value of liabilities assumed on purchase of  subsidiary                                    |       | $                              | —     |   | $ | 13,211 |   |

 

See accompanyingnotes to unaudited interim consolidated financial statements.

 

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**GLOBALSTAR, INC.**

 

**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1: The Company and Summary ofSignificant Accounting Policies**

 

***Nature of Operations***

 

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 leadingprovider of mobile voice and data communications services via satellite.Globalstar’s network, originally owned by Globalstar, L.P. (“Old Globalstar”),was designed, built and launched in the late 1990s by a technology partnershipled by Loral Space and Communications (“Loral”) and QUALCOMM Incorporated (“QUALCOMM”).On February 15, 2002, Old Globalstar and three of its subsidiaries filedvoluntary petitions under Chapter 11 of the United States Bankruptcy Code. In2004, Thermo Capital Partners L.L.C., together with its affiliates (“Thermo”),became Globalstar’s principal owner, and Globalstar completed the acquisitionof the business and assets of Old Globalstar. Thermo remains Globalstar’slargest stockholder.  Globalstar’sChairman controls Thermo and its affiliates. Two other members of Globalstar’sBoard of Directors are also directors, officers or minority equity owners ofvarious Thermo entities.

 

Globalstar offerssatellite services to commercial and recreational users in more than 120countries around the world. The Company’s voice and data products includemobile and fixed satellite telephones, Simplex and duplex satellite data modemsand flexible service packages. Many land based and maritime industries benefitfrom Globalstar with increased productivity from remote areas beyond cellular andlandline service. Globalstar’s customers include those in the followingindustries: oil and gas, government, mining, forestry, commercial fishing,utilities, military, transportation, heavy construction, emergencypreparedness, and business continuity, as well as individual recreationalusers.

 

***Basis of Presentation***

 

The accompanyingunaudited interim consolidated financial statements have been prepared inaccordance with generally accepted accounting principles in the United Statesof America (“GAAP”) for interim financial information. These unaudited interimconsolidated financial statements include the accounts of Globalstar and itsmajority owned or otherwise controlled subsidiaries. All significantintercompany transactions and balances have been eliminated in theconsolidation. In the opinion of management, such information includes alladjustments, consisting of normal recurring adjustments, that are necessary fora fair presentation of the Company’s consolidated financial position, resultsof operations, and cash flows for the periods presented. The results ofoperations for the three and six months ended June 30, 2009 are notnecessarily indicative of the results that may be expected for the full year orany future period. 

 

The preparation of consolidatedfinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. The Company evaluates its estimates on an ongoingbasis, including those related to revenue recognition, allowance for doubtfulaccounts, inventory valuation, deferred tax assets, property and equipment,interest rate cap, warrants and embedded conversion option classified as aliability, warranty obligations and contingencies and litigation. Actualresults could differ from these estimates.

 

These unaudited interimconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and related notes included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2008. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with GAAP have been condensed oromitted. Certain reclassifications have been made to prior year consolidatedfinancial statements to conform to current year presentation.

 

Globalstar operates inone segment, providing voice and data communication services via satellite. Asa result, all segment-related financial information required by Statement ofFinancial Accounting Standards (“SFAS”) No. 131, “Disclosures AboutSegments of an Enterprise and Related Information,” or SFAS 131, is included inthe consolidated financial statements.

 

Other income (expense)includes foreign exchange transaction gains (losses) of $4.6 and $0.7 millionfor the three and six months ended June 30, 2009, respectively, and $(0.1)million and $8.1 million for the three and six months ended June 30, 2008,respectively.

 

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***RecentAccounting Pronouncements***

 

In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 initially was to be effective for the Company on January 1, 2008. However, on February 12, 2008, the FASB approved FASB Staff Position (“FSP”) FAS 157-2, which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP partially defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for items within the scope of this FSP. On January 1, 2009, the Company adopted the provisions of SFAS No. 157. This adoption did not have a material impact on the Company’s financial position, results of operations, or cash flows.

 

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires companies to provide enhanced disclosures regarding derivative instruments and hedging activities. It requires a company to convey better the purpose of derivative use in terms of the risks that it is intending to manage. Disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows are required. SFAS No. 161 retains the same scope as SFAS No. 133 and is effective for fiscal years and interim periods beginning after November 15, 2008. On January 1, 2009, the Company adopted SFAS No. 161. See Note 11 for the Company’s disclosures about its derivative instruments.

 

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP (the GAAP hierarchy). SFAS No. 162 supersedes the existing hierarchy contained in the U.S. auditing standards. The existing hierarchy was carried over to SFAS No. 162 essentially unchanged. The Statement becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to the auditing literature. The new hierarchy is not expected to change current accounting practice in any area.

 

InMay 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt InstrumentsThat May Be Settled in Cash upon Conversion (Including Partial CashSettlement)” (“FSP APB 14-1”). FSP APB 14-1 clarifies that convertibledebt instruments that may be settled in cash upon either mandatory or optionalconversion (including partial cash settlement) are not addressed by paragraph12 of APB Opinion No. 14, *Accountingfor Convertible Debt and Debt issued with Stock Purchase Warrants*.Additionally, FSP APB 14-1 specifies that issuers of such instruments shouldseparately account for the liability and equity components in a manner thatwill reflect the entity’s nonconvertible debt borrowing rate when interest costis recognized in subsequent periods. FSP APB 14-1 is effective retroactivelyfor financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years, and is applied to both newand previously issued convertible debt instruments. The Company adopted FSP APB14-1 on January 1, 2009. The adoption of FSP APB 14-1 changed the Company’sfull-year 2008 Consolidated Statements of Operations because the gainsassociated with conversions and exchanges of 5.75% Convertible Senior Notes(the “5.75% Notes”) in 2008 were recorded in stockholders’ equity prior toadoption of this standard. The adoption of FSP APB 14-1 also changed theCompany’s Consolidated Statement of Operations for the three and six monthsended June 30, 2008 because the Company issued the 5.75% Notes in April 2008.The Company capitalized the interest associated with the accretion of debt discountrecorded in connection with the adoption of FSP APB 14-1, which resulted in anincrease to property and equipment. The following tables present the effect ofthe adoption of FSP APB 14-1 on the Company’s affected Balance Sheet items asof June 30, 2008 and December 31, 2008:

 
| ** **                    | ** ** | **As of June 30, 2008** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **As Originally**                      | ** ** | **Effect of** | ** ** | **As** | ** ** |
| ** **                    | ** ** | **Reported**                                | ** ** | **Change** | ** ** | **Adjusted** | ** ** |
| ** **                    | ** ** | **(in thousands)**                     | ** ** |
| Balance Sheet:                |       |                                        |       |   |   |   |   |
| Property and equipment, net   |       | $                                           | 451,811    |   | $ | 1,830 |   | $ | 453,641 |   |
| Other assets                  |       | 16,436                                      |       | (1,591 | ) | 14,845 |   |
| Long-term debt                |       | 250,000                                     |       | (52,844 | ) | 197,156 |   |
| Other non-current liabilities |       | 33,920                                      |       | 22,416 |   | 56,336 |   |
| Additional paid-in capital    |       | 421,063                                     |       | 30,496 |   | 451,559 |   |
| Retained deficit              |       | $                                           | (19,601    | ) | $ | 171 |   | $ | (19,430 | ) |

 
| ** **                  | ** ** | **As of December 31, 2008** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **As Originally**                          | ** ** | **Effect of** | ** ** | **As** | ** ** |
| ** **                  | ** ** | **Reported**                                    | ** ** | **Change** | ** ** | **Adjusted** | ** ** |
| ** **                  | ** ** | **(in thousands)**                         | ** ** |
| Balance Sheet:              |       |                                            |       |   |   |   |   |
| Property and equipment, net |       | $                                               | 636,362    |   | $ | 5,902 |   | $ | 642,264 |   |
| Other assets                |       | 16,376                                          |       | (706 | ) | 15,670 |   |
| Long-term debt              |       | 195,429                                         |       | (23,134 | ) | 172,295 |   |
| Additional paid-in capital  |       | 488,343                                         |       | (24,521 | ) | 463,822 |   |
| Retained deficit            |       | $                                               | (73,630    | ) | $ | 52,851 |   | $ | (20,779 | ) |

 

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OnApril 9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “InterimDisclosures about Fair Value of Financial Instruments,” relating to fair valuedisclosures for any financial instruments that are not currently reflected onthe balance sheet at fair value. Prior to the issuance of this FSP, fair valuesfor these assets and liabilities were disclosed only once a year. The FSP nowrequires these disclosures on a quarterly basis, providing qualitative andquantitative information about fair value estimates for all financial instrumentsnot measured on the balance sheet at fair value. The FSP is effective forinterim reporting periods ending after June 15, 2009, with early adoptionpermitted for periods ending after March 31, 2009. The Company adopted theprovisions of this FSP on April 1, 2009, and the adoption did not have amaterial effect on its results of operations or financial position.

 

In April 2009, the FASBissued FSP No. 115-2 and No. 124-2, *Recognitionand Presentation of Other-Than-Temporary Impairments,*which amendexisting guidance for determining whether impairment is other-than-temporaryfor debt securities. The FSPs require an entity to assess whether it intends tosell, or it is more likely than not that it will be required to sell a securityin an unrealized loss position before recovery of its amortized cost basis. Ifeither of these criteria is met, the entire difference between amortized costand fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amountof impairment recognized in earnings is limited to the amount related to creditlosses, while impairment related to other factors is recognized in othercomprehensive income. Additionally, the FSPs expand and increase the frequencyof existing disclosures about other-than-temporary impairments for debt andequity securities.  These FSPs areeffective for interim and annual reporting periods ending after June 15,2009, with early adoption permitted for periods ending after March 15,2009.  The Company adopted the provisions of this FSP on April 1,2009, and the adoption did not have a material effect on its results ofoperations or financial position.

 

In April 2009, the FASBissued Staff Position (FSP) No. 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset and Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*.  This FSP emphasizes that even if there hasbeen a significant decrease in the volume and level of activity, the objectiveof a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction (that is, not a forcedliquidation or distressed sale) between market participants.  The FSP provides a number of factors toconsider when evaluating whether there has been a significant decrease in thevolume and level of activity for an asset or liability in relation to normalmarket activity.   In addition, when transactionsor quoted prices are not considered orderly, adjustments to those prices basedon the weight of available information may be needed to determine theappropriate fair value.  The FSP alsorequires increased disclosures.  This FSPis effective for interim and annual reporting periods ending after June 15,2009, and must be applied prospectively. Early adoption is permitted for periods ending after March 15,2009.  The Company adopted the provisions of this FSP on April 1,2009, and the adoption did not have a material effect on its results ofoperations or financial position.

 

In May 2009,the FASB issued Statement of Financial Accounting Standards No. 165, “SubsequentEvents” (“SFAS No. 165”), to establish general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued. Inparticular, SFAS No. 165 sets forth: (a) the period after thebalance sheet date during which management of a reporting entity shall evaluateevents or transactions that may occur for potential recognition or disclosurein the financial statements, (b) the circumstances under which an entityshall recognize events or transactions occurring after the balance sheet datein its financial statements and (c) the disclosures that an entity shallmake about events or transactions that occurred after the balance sheet date.The provisions of SFAS No. 165 are effective for interim or annualfinancial periods ending after June 15, 2009. The Company adopted theprovisions of SFAS No. 165 effective as of June 30, 2009, andthe adoption did not have a material impact on its results of operations orfinancial position.

 

In June 2009, theFASB issued Statement of Financial Accounting Standards No. 168, “The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles, a replacement of FASB Statement No. 162” (“SFAS No. 168”),which establishes the FASB Accounting Standards Codification as the source ofauthoritative accounting principles recognized by the FASB to be applied in thepreparation of financial statements in conformity with GAAP. SFAS No. 168explicitly recognizes rules and interpretive releases of the SEC underfederal securities laws as authoritative GAAP for SEC registrants. Theprovisions of SFAS No. 168 are effective for interim or annual financialperiod ending after September 15, 2009. The Company does not expect theadoption of SFAS No.168 to have a material impact on its results of operationsor financial position.

 

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**Note 2: Basic and Diluted Loss Per Share**

 

The Company applies theprovisions of Statement of Financial Accounting Standard No. 128, “EarningsPer Share” (“SFAS 128”), which requires companies to present basic and dilutedearnings per share. The Company computes basic earnings per share based on theweighted-average number of shares of Common Stock outstanding during the period.The Company includes Common Stock equivalents in the calculation of dilutedearnings per share only when the effect of their inclusion would be dilutive.

 

The following table setsforth the computations of basic and diluted loss per share (in thousands,except per share data):

 
| ** **                                    | ** ** | **Three Months Ended June 30, 2009** | ** ** | **Six Months Ended June 30, 2009**                     | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Income   (Numerator)**                                 | ** ** | **Weighted   Average Shares   Outstanding   (Denominator)** | ** ** | **Per-Share   Amount** | ** ** | **Income   (Numerator)** | ** ** | **Weighted   Average Shares   Outstanding   (Denominator)** | ** ** | **Per-Share   Amount** | ** ** |
| **Basic and Dilutive loss per  common share** | ** ** | ** **                                                    | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                      |       | $                                                             | (13,762    | )                                                                               | 133,880    |   | $ | (0.10 | ) | $ | (35,520 | ) | 131,259 |   | $ | (0.27 | ) |
|                                               |            |                                                               |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                    | ** ** | **Three Months Ended June 30, 2008  (As Adjusted – Note 1)** | ** ** | **Six Months Ended June 30, 2008  (As Adjusted – Note 1)** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Income   (Numerator)**                                                              | ** ** | **Weighted   Average Shares   Outstanding   (Denominator)**          | ** ** | **Per-Share   Amount** | ** ** | **Income   (Numerator)** | ** ** | **Weighted   Average Shares   Outstanding   (Denominator)** | ** ** | **Per-Share   Amount** | ** ** |
| **Basic and Dilutive loss per  common share** | ** ** | ** **                                                                                 | ** ** | ** **                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                      |       | $                                                                                          | (7,177     | )                                                                                        | 84,029     |   | $ | (0.09 | ) | $ | (13,812 | ) | 83,243 |   | $ | (0.17 | ) |
|                                               |            |                                                                                            |            |                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

For the three andsix month periods ended June 30, 2009 and 2008, diluted net loss per shareof Common Stock is the same as basic net loss per share of Common Stock,because the effects of potentially dilutive securities are anti-dilutive.

 

The Companyincluded the outstanding shares issued under the Share Lending Agreement (17.3million shares outstanding at June 30, 2009) in the computation ofearnings per share (Note 12).

 

**Note 3:****Property and Equipment**

 

Propertyand equipment consist of the following (in thousands):

 
| ** **                                                     | ** ** | **June 30,  2009** | ** ** | **December 31,  2008**     | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | ** **              | ** ** | **As  Adjusted –  Note 1** | ** ** |
| Globalstar System:                                             |       |                    |       |                            |       |
| Space component                                                |       | $                       | 132,982    |                            | $          | 132,982 |   |
| Ground component                                               |       | 27,057                  |       | 26,154                          |       |
| Construction in progress:                                      |       |                    |       |                            |       |
| Second-generation satellites, ground and related  launch costs |       | 631,780                 |       | 516,530                         |       |
| Other                                                          |       | 824                     |       | 958                             |       |
| Furniture and office equipment                                 |       | 18,560                  |       | 16,872                          |       |
| Land and buildings                                             |       | 4,104                   |       | 3,810                           |       |
| Leasehold improvements                                         |       | 778                     |       | 687                             |       |
|                                                           |       | 816,085                 |       | 697,993                         |       |
| Accumulated depreciation                                       |       | (67,159                 | )          | (55,729                         | )          |
|                                                           |       | $                       | 748,926    |                            | $          | 642,264 |   |

 

Property and equipment consists of an in-orbit satellite constellation(including eight spare satellites launched in 2007), ground equipment, second-generationsatellites under construction and related launch costs, second-generationground component and support equipment located in various countries around theworld.

 

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OnJune 3, 2009, Globalstar and Thales Alenia Space entered into an amendedand restated contract for the construction of 48 low-earth orbit second-generationsatellites to incorporate prior amendments, acceleration requests and makeother non-material changes to the contract entered into in November 2006. The total contract price, including subsequent additions, is approximately €678.9million (approximately $936.6 million at a weighted average conversionrate of €1.00 = $1.3797 at June 30, 2009) including approximately€146.8 million which was paid by the Company in U.S. dollars at a fixedconversion rate of €1.00 = $1.2940. Upon completion of the Facility Agreement(See Note 12), amounts in the escrow account became unrestricted and werereclassed to cash and cash equivalents.

 

In March 2007, the Company and Thales AleniaSpace entered into an agreement for the construction of the SatelliteOperations Control Centers, Telemetry Command Units and In Orbit Test Equipment(collectively, the “Control Network Facility”) for the Company’ssecond-generation satellite constellation. The total contract price for theconstruction and associated services is €9.2 million (approximately $13.2million at a weighted average conversion rate of €1.00 = $1.4336) consisting of€4.1 million for the Satellite Operations Control Centers, €3.1 million for theTelemetry Command Units and €2.0 million for the In Orbit Test Equipment, withpayments to be made on a quarterly basis through completion of the ControlNetwork Facility in the first quarter of 2010.

 

In September2007, the Company and Arianespace (the “Launch Provider”) entered into anagreement for the launch of the Company’s second-generation satellites andcertain pre and post-launch services. Pursuant to the agreement, the LaunchProvider agreed to make four launches of six satellites each, and the Companyhad the option to require the Launch Provider to make four additional launchesof six satellites each. The total contract price for the first four launches isapproximately $216.1 million. In July2008, the Company amended its agreement with the Launch Provider for thelaunch of the Company’s second-generation satellites and certain pre andpost-launch services. Under the amended terms, the Company could defer paymenton up to 75% of certain amounts due to the Launch Provider. The deferredpayments incurred annual interest at 8.5% to 12% and become payable one monthfrom the corresponding launch date. In June 2009, the Company and theLaunch Provider again amended their agreement reducing the number of optionallaunches from four to one and modifying the agreement in certain other respectsincluding terminating the deferred payment provisions. Notwithstanding the oneoptional launch, the Company is free to contract separately with the LaunchProvider or another provider of launch services after the Launch Provider’sfirm launch commitments are fulfilled

 

InMay 2008, the Company and Hughes Network Systems, LLC (“Hughes”) entered intoan agreement under which Hughes will design, supply and implement the RadioAccess Network (“RAN”) ground network equipment and software upgrades forinstallation at a number of the Company’s satellite gateway ground stations andsatellite interface chips to be a part of the User Terminal Subsystem (UTS) invarious next-generation Globalstar devices. The total contract purchase priceof approximately $100.8 million is payable in various increments over a periodof 40 months. The Company has the option to purchase additional RANs andother software and hardware improvements at pre-negotiated prices. Future costsassociated with certain projects under this contract will be capitalized oncethe Company has determined that technological feasibility has been achieved onthese projects. As of June 30, 2009, the Company had made payments of $5.9million under this contract and expensed $1.8 million of these payments andcapitalized $4.1 million under second-generation ground component.

 

In October 2008, the Company signed an agreement with Ericsson FederalInc., a leading global provider of technology and services to telecomoperators. According to the $22.7 million contract, Ericsson will work with theCompany to develop, implement and maintain a ground interface, or core network,system that will be installed at the Company’s satellite gateway groundstations.

 

As of June 30, 2009 and December 31, 2008, capitalizedinterest recorded was $50.2 million and $37.4 million, respectively.Interest capitalized during the three and six months ended June 30, 2009was $6.5 million and $12.8 million, respectively, and $7.3 million and $10.1million for the three and six months ended June 30, 2008, respectively.Depreciation expense for the three and six months ended June 30, 2009 was$5.5 million and $10.9 million, respectively, and $6.5 million and $11.8million for the three and six months ended June 30, 2008, respectively.

 

**Note 4:Payables to Affiliates**

 

Payablesto affiliates relate to normal purchase transactions, excluding interest, andare comprised of the following (in thousands):

 
| ** ** | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------|------------|-------------------------|------------|-----------------------------|------------|
| ** ** | ** ** | ** **              | ** ** | ** **                  | ** ** |
| QUALCOMM   |       | $                       | 2,972      |                        | $          | 2,498 |   |
| Others     |       | 1,110                   |       | 846                         |       |
|       |       | $                       | 4,082      |                        | $          | 3,344 |   |

 

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Thermo incurs certain general and administrative expenses on behalf ofthe Company, which are charged to the Company. For the three and six monthperiods ended June 30, 2009, total expenses were approximately $44,000 and$87,000, respectively, and $82,000 and $110,000 for the three and six monthperiods ended June 30, 2008.

 

For the three and six month periods ended June 30, 2009, theCompany also recorded approximately $126,000 and $253,000, respectively, ofnon-cash expenses related to services provided by two executive officers ofThermo and the Company who receive no compensation from the Company, which wereaccounted for as a contribution to capital. The Company recorded $112,000 and$225,000 for the three and six month periods ended June 30, 2008,respectively, in similar charges. The Thermo expense charges are based onactual amounts incurred or upon allocated employee time. Management believesthe allocations are reasonable.

 

**Note 5:Other Related Party Transactions**

 

Since 2005,Globalstar has issued separate purchase orders for additional phone equipmentand accessories under the terms of previously executed commercial agreementswith QUALCOMM. Within the terms of the commercial agreements, the Company paidQUALCOMM approximately 7.5% to 25% of the total order as advances forinventory.  As of June 30, 2009 and December 31,2008, total advances to QUALCOMM for inventory were $9.2 million and $9.2million, respectively. As of June 30, 2009 and December 31, 2008, theCompany had outstanding commitment balances of approximately $49.4 million. On October 28,2008, the Company amended its agreement with QUALCOMM to extend the term for 12months and defer delivery of mobile phones and related equipment until April 2010through July 2011.

 

On August 16, 2006, theCompany entered into an amended and restated credit agreement with WachoviaInvestment Holdings, LLC, as administrative agent and swingline lender,and Wachovia Bank, National Association, as issuing lender, which wassubsequently amended on September 29 and October 26, 2006. On December 17,2007, Thermo Funding was assigned all the rights (except indemnificationrights) and assumed all the obligations of the administrative agent and thelenders under the amended and restated credit agreement and the creditagreement was again amended and restated. In connection with fulfilling theconditions precedent to funding under the Company’s Facility Agreement, in June 2009,Thermo converted the loans outstanding under the credit agreement into equityand terminated the credit agreement. In addition, Thermo and its affiliatesdeposited $60.0 million in a contingent equity account to fulfill a conditionprecedent for borrowing under the Facility Agreement, purchased $11.4 millionof the Company’s 8% convertible senior unsecured notes, provided a $2.2 millionshort-term loan to Company, and loaned $25.0 million to the Company to fund itsdebt service reserve account. See Note 12.

 

During the three and sixmonth periods ended June 30, 2009, the Company purchased approximately$0.7 million and $2.2 million of services and equipment from a company whosenon-executive chairman serves as a member of the Company’s board of directors.Corresponding purchases made during the three month and six month periods endedJune 30, 2008 were $1.7 million and $4.1 million, respectively.

 

***Purchases andother transactions with Affiliates***

 

Total purchasesand other transactions from affiliates, excluding interest and capitaltransactions, are as follows (in thousands):

 
| ** **       | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **       | ** ** | **2009**                                        | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|             |       |                                            |       |                                                |       |   |   |   |   |
| QUALCOMM         |       | $                                               | 607        |                                                | $          | 3,023 |   | $ | 1,216 |   | $ | 5,904 |   |
| Other affiliates |       | 837                                             |       | 1,844                                               |       | 2,315 |   | 4,252 |   |
| Total            |       | $                                               | 1,444      |                                                | $          | 4,867 |   | $ | 3,531 |   | $ | 10,156 |   |

 

**Note 6:Income Taxes**

 

On January 1,2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48“Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes arecognition threshold that a tax position is required to meet before beingrecognized in the financial statements and provides guidance on derecognition,measurement, classification, interest and penalties, accounting in interimperiods, disclosure and transition issues.

 

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On January 1, 2009, the Company adopted FSP APB14-1, which was effective retrospectively. Prior to the adoption of FSP APB14-1, the Company had recorded the net tax effect of the conversions andexchanges of the Company’s 5.75% Convertible Senior Notes due 2028 (the “Notes”)(See Note 12) during the fourth quarter of 2008 againstadditional-paid-in-capital and reduced its deferred tax assets at December 31,2008. The adoption of FSP APB 14-1 resulted in the Company recording a gainfrom the exchanges and conversions of the Notes and reversing the charge takento additional-paid-in-capital and deferred tax assets. The Company establisheda valuation allowance to reduce the deferred tax assets to an amount that ismore likely than not to be realized. As of December 31, 2008, the Companyhad established valuation allowances of approximately $125.5 million.Accordingly, at June 30, 2009 and December 31, 2008, net deferred taxassets were $0.

 

TheCompany has been notified that one of its subsidiaries and its predecessor,Globalstar L.P., are currently under audit for the 2004 and 2005 tax years.During the audit period, the Company and its subsidiaries were taxed aspartnerships. Neither the Company nor any of its subsidiaries, except for theone noted above, are currently under audit by the Internal Revenue Service (“IRS”)or by any state jurisdiction in the United States with respect to income taxes.The Company’s corporate U.S. tax returns for 2006 and 2007 and U.S. partnershiptax returns filed for years before 2006 remain subject to examination by taxauthorities. In theCompany’s international tax jurisdictions, numerous tax years remain subject toexamination by tax authorities, including tax returns for 2001 and subsequentyears in most of the Company’s major international tax jurisdictions.

 

**Note 7:Comprehensive Loss**

 

SFAS No. 130,“Reporting Comprehensive Income,” establishes standards for reporting anddisplaying comprehensive income and its components in stockholders’ equity. Comprehensive income(loss) includes all changes in equity during a period from non-owner sources.The change in accumulated other comprehensive income for all periods presentedresulted from foreign currency translation adjustments.

 

Thefollowing are the components of comprehensive loss (in thousands):

 
| ** **                               | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                              | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net loss                                 |       | $                                                     | (13,762    | )                                                   | $          | (7,177 | ) | $ | (35,520 | ) | $ | (13,812 | ) |
| Other comprehensive income (loss):       |       |                                                  |       |                                                |       |   |   |   |   |
| Foreign currency translation adjustments |       | 1,490                                                 |       | (409                                                | )     | 1,584 |   | (1,456 | ) |
|                                     |       |                                                  |       |                                                |       |   |   |   |   |
| Total comprehensive loss                 |       | $                                                     | (12,272    | )                                                   | $          | (7,586 | ) | $ | (33,936 | ) | $ | (15,268 | ) |

 

**Note 8: Equity Incentive Plan**

 

TheCompany’s 2006 Equity Incentive Plan (the “Equity Plan”) is a broad based,long-term retention program intended to attract and retain talented employeesand align stockholder and employee interests. Less than 0.1 million restrictedstock awards and restricted stock units (including grants to both employees andexecutives) were granted during the six month period ended June 30, 2009.No grants were made during the three month period ended June 30, 2009.Approximately 1.2 million and 1.9 million restricted stock awards andrestricted stock units (including grants to both employees and executives) weregranted during the three and six months ended June 30, 2008, respectively.In January 2009, 2.7 million shares of the Company’s Common Stockwere added to the shares available for issuance under the Equity Plan. Underthe various management incentive plans, the Company expects to issue additionalshares of its Common Stock equivalent to approximately $8.2 million toemployees and executives during the third quarter of 2009.

 

**Note 9: Litigation and OtherContingencies**

 

From time to time, the Company is involved in various litigationmatters involving ordinary and routine claims incidental to our business.Management currently believes that the outcome of these proceedings, eitherindividually or in the aggregate, will not have a material adverse effect onthe Company’s business, results of operations or financial condition. TheCompany is involved in certain litigation matters as discussed below.

 

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*IPO Securities Litigation.*  On February 9, 2007, the first of threepurported class action lawsuits was filed against the Company, its CEO and CFOin the Southern District of New York alleging that the Company’s registrationstatement related to its initial public offering in November 2006contained material misstatements and omissions. The Court consolidated thethree cases as Ladmen Partners, Inc. v. Globalstar, Inc., et al.,Case No. 1:07-CV-0976 (LAP), and appointed Connecticut Laborers’ PensionFund as lead plaintiff. On September 30, 2008, the court granted theCompany’s motion to dismiss the plaintffs’ Second Amended Complaint withprejudice. Plaintiffs filed a notice of appeal to the U.S. Second Circuit Courtof Appeals. The parties and the Company’s insurer have agreed in principle to asettlement of the litigation. Plaintiffs have filed a motion withdrawing theappeal by consent without prejudice to reinstatement until December 31,2009 in anticipation of concluding the settlement.

 

*Walsh and Kesler v. Globalstar, Inc. (formerlyStickrath v. Globalstar, Inc.)*  On April 7, 2007, Kenneth Stickrath andSharan Stickrath filed a purported class action complaint against the Companyin the U.S. District Court for the Northern District of California, Case No. 07-cv-01941.The complaint is based on alleged violations of California Business &Professions Code § 17200 and California Civil Code § 1750, et seq.,the Consumers’ Legal Remedies Act. In July 2008 the Company filed a motionto deny class certification and a motion for summary judgment. The courtdeferred action on the class certification issue but granted the motion forsummary judgment on December 22, 2008. The court did not, however, dismissthe case with prejudice but rather allowed counsel for plaintiffs to amend thecomplaint and substitute one or more new class representatives. On January 16,2009, counsel for the plaintiffs filed a Third Amended Class ActionComplaint substituting Messrs. Walsh and Kesler as the named plaintiffs.The Company filed its answer on February 2, 2009. A hearing on the motionto deny class certification is expected to be held in September 2009.

 

*Appeal of FCC S-Band Sharing Decision.*  This case is Sprint Nextel Corporation’spetition in the U.S. Court of Appeals for the District of Columbia Circuit forreview of, among others, the FCC’s April 27, 2006, decision regardingsharing of the 2495-2500 MHz portion of the Company’s radiofrequency spectrum.This is known as “The S-band Sharing Proceeding.” The Court of Appeals hasgranted the FCC’s motion to hold the case in abeyance while the FCC considersthe petitions for reconsideration pending before it. The Court has also grantedthe Company’s motion to intervene as a party in the case. The Company cannotdetermine when the FCC might act on the petitions for reconsideration.

 

*Appeal of FCC L-Band Decision.*  On November 9, 2007, the FCC released aSecond Order on Reconsideration, Second Report and Order and Notice of ProposedRulemaking. In the Report and Order (“R&O”) portion of the decision, theFCC effectively decreased the L-band spectrum available to the Company whileincreasing the L-band spectrum available to Iridium Satellite by 2.625 MHz. On February 5,2008, the Company filed a notice of appeal of the FCC’s decision in the U.S.Court of Appeals for the D.C. Circuit. Briefs were filed and oral argument washeld on February 17, 2009. On May 1, 2009, the court issued adecision denying the Company’s appeal and affirming the FCC’s decision.

 

*Appeal of FCC ATC Decision.*  On October 31, 2008, the FCC issued anOrder granting the Company modified Ancillary Terrestrial Component (“ATC”)authority. The modified authority allows the Company and Open RangeCommunications, Inc. to implement their plan to roll out ATC service inrural areas of the United States. On December 1, 2008, Iridium Satellitefiled a petition with the U.S. Court of Appeals for the District of ColumbiaCircuit for review of the FCC’s Order. On the same day, CTIA-The WirelessAssociation petitioned the FCC to reconsider its Order. The court has grantedthe FCC’s motion to hold the appeal in abeyance pending the FCC’s decision onreconsideration.

 

*Patent Infringement.*  On July 2, 2008, the Company’ssubsidiary, Spot LLC, received a notice of patent infringement fromSorensen Research and Development. Sorensen asserts that the process used tomanufacture the Spot Satellite Personal Tracker violates a U.S. patent held bySorensen. The manufacturer, Axonn LLC, has assumed responsibility for managingthe case under an indemnity agreement with the Company and Spot LLC. Axonnwas unable to negotiate a mutually acceptable settlement with Sorensen, and on January 14,2009, Sorensen filed a complaint against Axonn, Spot LLC and the Companyin the U.S. District Court for the Southern District of California. The Companyand Axonn filed an answer and counterclaim and a motion to stay the proceedingpending completion of the re-examination of the subject patent. The courtgranted the motion for stay on July 29, 2009.

 

*YMaxCommunications Corp. v. Globalstar, Inc. and Spot LLC.*  On May 6, 2009, YMaxCommunications Corp. filed a patent infringement complaint against the Companyand its subsidiary, Spot LLC, in the Delaware U.S. District Court (Civ. Action No. 09-329)alleging that the SPOT Satellite GPS Messenger service infringes a patent forwhich YMax is the exclusive licensee. The complaint follows on the heels of anexchange of correspondence between the Company and YMax in which the Companyendeavored to explain why the SPOT service does not infringe the YMaxpatent. Globalstar filed its answer to the complaint on June 26,2009. The Company does not believe that the complaint has merit and intends todefend itself vigorously.

 

*Sales and Use Tax.*  The Company is under a sales and use taxexamination by the California Board of Equalization for tax years ended 2005,2006 and 2007. The Company believes that the amount accrued on its booksrelated to sales and use tax contingency is adequate.

 

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**Note10: Geographic Information**

 

Revenue by geographic location, presented net of eliminations forintercompany sales, was as follows for the three and six month periods ended June 30,2009 and 2008 (in thousands):

 
| ** **                         | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2009**                                              | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service:                           |       |                                                  |       |                                                |       |   |   |   |   |
| United States                      |       | $                                                     | 7,414      |                                                | $          | 8,345 |   | $ | 13,896 |   | $ | 16,675 |   |
| Canada                             |       | 3,119                                                 |       | 5,351                                               |       | 5,956 |   | 11,122 |   |
| Europe                             |       | 656                                                   |       | 1,027                                               |       | 1,246 |   | 2,072 |   |
| Central and South America          |       | 1,288                                                 |       | 1,761                                               |       | 2,435 |   | 2,418 |   |
| Others                             |       | 85                                                    |       | 189                                                 |       | 160 |   | 396 |   |
| Total service revenue              |       | 12,562                                                |       | 16,673                                              |       | 23,693 |   | 32,683 |   |
| Subscriber equipment:              |       |                                                  |       |                                                |       |   |   |   |   |
| United States                      |       | 1,405                                                 |       | 3,443                                               |       | 2,928 |   | 5,988 |   |
| Canada                             |       | 725                                                   |       | 1,684                                               |       | 2,102 |   | 4,012 |   |
| Europe                             |       | 247                                                   |       | 588                                                 |       | 468 |   | 1,419 |   |
| Central and South America          |       | 653                                                   |       | 607                                                 |       | 977 |   | 992 |   |
| Others                             |       | 124                                                   |       | 4                                                   |       | 711 |   | 39 |   |
| Total subscriber equipment revenue |       | 3,154                                                 |       | 6,326                                               |       | 7,186 |   | 12,450 |   |
|                               |       |                                                  |       |                                                |       |   |   |   |   |
| Total revenue                      |       | $                                                     | 15,716     |                                                | $          | 22,999 |   | $ | 30,879 |   | $ | 45,133 |   |

 

**Note 11: Derivative Instruments**

 

In March 2008,the FASB issued SFAS 161, “Disclosures about Derivative Instruments andHedging Activities.” SFAS 161 provides companies with requirements forenhanced disclosures about derivative instruments and hedging activities toenable investors to better understand their effects on a company’s financialposition, financial performance, and cash flows. In accordance with theeffective date of SFAS 161, the Company adopted the disclosure provisionsof SFAS 161 during the quarter ended March 31, 2009.

 

In July 2006,in connection with entering into its credit agreement with Wachovia, whichprovided for interest at a variable rate (Note 12), the Company entered into afive-year interest rate swap agreement. The interest rate swap agreementreflected a $100.0 million notional amount at a fixed interest rate of 5.64%.The interest rate swap agreement did not qualify for hedge accounting underFASB’s Statement of Financial Standards No.133, “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS No. 133”). The decline in fairvalue for the three and six months ended June 30, 2008 was charged to “Derivativegain (loss)” in the accompanying Consolidated Statements of Operations. Theinterest rate swap agreement was terminated on December 10, 2008 by theCompany making a payment of approximately $9.2 million.

 

In June 2009,in connection with entering into the Facility Agreement (See Note 12), whichprovides for interest at a variable rate, the Company entered into a ten-yearinterest rate cap agreement. The interest rate cap agreement reflected a variablenotional amount ranging from $586.3 million to $14.8 million at interest ratesthat provide coverage to the Company for exposure resulting from escalatinginterest rates over the term of the Facility Agreement. The interest rate capprovides limits on the 6 month Libor rate (“Base Rate”) used to calculate thecoupon interest on outstanding amounts on the Facility Agreement of 4.00% fromthe date of issuance through December 2012. Thereafter, the Base Rate is cappedat 5.50% should the Base Rate not exceed 6.5%. Should the Base Rate exceed6.5%, the Company’s Base rate will be 1% less then the then 6 month Libor rate.The Company paid an approximately $12.4 million upfront fee for the interestrate cap agreement. The interest rate cap does not qualify for hedge accountingtreatment under SFAS 133. The decline in the fair value of the interest ratecap derivative instrument for the three month period ended June 30, 2009,of approximately $4.1 million, was charged to “Derivative gain (loss)” in theaccompanying Consolidated Statement of Operations.

 

The Company recorded the conversion rights andfeatures embedded within the 8.00% Convertible Senior Unsecured Notes (“8.00%Notes”) as a compound embedded derivative liability within Other Long TermLiabilities on its Consolidated Balance Sheet with a corresponding debtdiscount which is netted against the face value of the 8.00% Notes (Note 12).The Company will amortize the debt discount associated with the compoundembedded derivative liability to interest expense over the term of the 8.00% Notesusing an effective interest rate method. The fair value of the compoundembedded derivative liability will be marked-to-market at the end of eachreporting period, with any changes in value reported as “Derivative gain (loss)”in the consolidated statements of operations. The Company determined the fairvalue of the compound embedded derivative using a Monte Carlo simulation modelbased upon a risk-neutral stock price model. 

 

Due to the cash settlement provisions in the warrantsissued with the 8.00% Notes (Note 12) , the Company recorded the warrants as OtherLong Term Liabilities on its Consolidated Balance Sheet with a correspondingdebt discount which is netted against the face value of the 8.00% Notes. TheCompany will amortize the debt discount associated with the warrant liability tointerest expense over the term of the warrants using an effective interest ratemethod. The fair value of the warrant liability will be marked-to-market at theend of each reporting period, with any changes in value reported as Derivativegain (loss) in the Consolidated Statements of Operations. The Companydetermined the fair value of the Warrant derivative was determined using aMonte Carlo simulation model based upon a risk-neutral stock price model. 

 

The Company determined that the warrants issued in conjunction with theavailability fee for the Contingent Equity Agreement (Note 12), were a liability and recorded it as a component of Other Long Term Liabilities, at issuance. The corresponding benefit is recorded in prepaid and othercurrent assets and is being amortized over the one-year availability period.

 

None of thederivative instruments described above was designated as a hedge. The following tables disclose the fairvalue of the derivative instruments as of June 30, 2009 and December 31,2008, and their impact on the Company’s unaudited interim consolidatedstatement of operations for the three and six month periods ended June 30,2009 and 2008 (in thousands):

 

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| ** **                                       | ** ** | **June 30, 2009**      | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **Balance Sheet  Location** | ** ** | **Fair Value**             | ** ** | **Balance Sheet  Location** | ** ** | **Fair Value** | ** ** |
| Interest rate cap derivative                     |       | Other  assets, net               |       | $                               | 8,331      |   | N/A |   | N/A |   |
| Compound embedded conversion option              |       | Other  non-current liabilities   |       | (21,272                         | )          | N/A |   | N/A |   |
| Warrants issued with 8.00% Notes                 |       | Other  non-current liabilities   |       | (11,764                         | )          | N/A |   | N/A |   |
| Warrants issued with contingent equity agreement |       | Other  non-current liabilities   |       | (6,000                          | )          | N/A |   | N/A |   |
| Total                                            |       |                             |       | $                               | (30,705    | ) |   |   | $ |    |   |
|                                                  |            |                                  |            |                                 |            |  |  |  |  |  |  |

 
| ** **                                       | ** ** | **Three  months ended June 30,**                                  | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                                               | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **Location  of Gain  (loss) recognized   in Statement of  Operations** | ** ** | **Amount  of Gain  (loss) recognized  on Statement of  Operations** | ** ** | **Location  of Gain  (loss) recognized in  Statement of  Operations** | ** ** | **Amount  of Gain   (loss) recognized   on Statement of  Operations** | ** ** |
| Interest rate swap derivative                    |       | N/A                                                                    |       | N/A |   | Derivative gain (loss) |   | $ | 3,743 |   |
| Interest rate cap derivative                     |       | Derivative  gain (loss)                                                |       | (4,094 | ) | N/A |   | N/A |   |
| Compound embedded conversion option              |       | Derivative  gain (loss)                                                |       | 2,270 |   | N/A |   | N/A |   |
| Warrants issued with 8.00% Notes                 |       | Derivative  gain (loss)                                                |       | 1,027 |   | N/A |   | N/A |   |
| Warrants issued with contingent equity agreement |       | Derivative  gain (loss)                                                |       | — |   | N/A |   | N/A |   |
| Total                                            |       |                                                                   |       | $ | (797 | ) |   |   | $ | 3,743 |   |
|                                                  |            |                                                                        |            |  |  |  |  |  |  |  |  |

 
| ** **                                       | ** ** | **Six months ended June 30,**                                   | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                                             | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **Location of Gain  (loss) recognized  in Statement of  Operations** | ** ** | **Amount of Gain   (loss) recognized   on Statement of  Operations** | ** ** | **Location of Gain  (loss) recognized in  Statement of  Operations** | ** ** | **Amount of Gain   (loss) recognized   on Statement of  Operations** | ** ** |
| Interest rate swap derivative                    |       | N/A                                                                  |       | N/A |   | Derivative gain (loss) |   | $ |  204 |   |
| Interest rate cap derivative                     |       | Derivative  gain (loss)                                              |       | (4,094 | ) | N/A |   | N/A |   |
| Compound embedded conversion option              |       | Derivative gain (loss)                                               |       | 2,270 |   | N/A |   | N/A |   |
| Warrants issued with 8.00% Notes                 |       | Derivative gain (loss)                                               |       | 1,027 |   | N/A |   | N/A |   |
| Warrants issued with contingent equity agreement |       | Derivative gain (loss)                                               |       | — |   | N/A |   | N/A |   |
| Total                                            |       |                                                                 |       | $ | (797 | ) |   |   | $ |  204 |   |
|                                                  |            |                                                                      |            |  |  |  |  |  |  |  |  |

 

**Note 12:Borrowings**

 

***Currentportion of long term debt***

 

Current portion of long term debt consists of $69.2million and $33.6 million due to the Company’s vendors under vendor financingagreements at June 30, 2009 and December 31, 2008, respectively.Details of vendor financing agreements are described later in this Note.Additionally, in June 2009 Thermo Funding loaned the Company $2.2 millionas a short term loan payable within one year at an annual interest rate of 12%.

 

***Long Term Debt:***

 

Long term debt consists of the following (inthousands):

 
| ** **                                                    | ** ** | **June 30,  2009** | ** ** | **December 31,  2008  As Adjusted –  Note 1** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|------------------------------------------------------------------------|------------|
| Amended and Restated Credit Agreement:                        |       |                    |       |                                                                   |       |
| Term Loan                                                     |       | $                       | —     |                                                                   | $          | 100,000 |   |
| Revolving credit loans                                        |       | —                  |       | 66,050                                                                 |       |
| Total Borrowings under Amended and Restated Credit  Agreement |       | —                  |       | 166,050                                                                |       |
|                                                          |       |                    |       |                                                                   |       |
| 5.75% Convertible Senior Notes due 2028                       |       | 50,957                  |       | 48,670                                                                 |       |
| 8.00% Convertible Senior Unsecured Notes                      |       | 18,817                  |       | —                                                                 |       |
| Vendor Financing (long term portion)                          |       | —                  |       | 23,625                                                                 |       |
| Subordinated loan                                             |       | 9,788                   |       | —                                                                 |       |
| Total long term debt                                          |       | $                       | 79,562     |                                                                   | $          | 238,345 |   |

 

***Borrowings under FacilityAgreement***

 

         On June 5, 2009, theCompany entered into a $586.3 million senior secured facility agreement (the “FacilityAgreement”) with a syndicate of bank lenders, including BNP Paribas, Natixis,Société Générale, Caylon, Crédit Industriel et Commercial as arrangers and BNPParibas as the security agent and COFACE agent. Ninety-five percent of theCompany’s obligations under the agreement are guaranteed by COFACE, the Frenchexport credit agency.  The initial funding process of the FacilityAgreement began on June 29, 2009 and was completed on July 1, 2009.The new facility is comprised of:

 

·                  a $563.3million tranche for future payments and to reimburse the Company for amounts itpreviously paid to Thales Alenia Space for construction of itssecond-generation satellites. Such reimbursed amounts will be used by theCompany (a) to make payments to Arianespace for launch services, HughesNetworks Systems LLC for ground network equipment, software and satelliteinterface chips and Ericsson Federal Inc. for ground system upgrades, (b) toprovide up to $150 million for the Company’s working capital and generalcorporate purposes and (c) to pay a portion of the insurance premium toCOFACE; and

 

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·                  a $23 milliontranche that will be used to make payments to Arianespace for launch servicesand to pay a portion of the insurance premium to COFACE.

 

Thefacility will mature 96 months after the first repayment date.  Scheduledsemi-annual principal repayments will begin the earlier of eight months afterthe launch of the first 24 satellites from the second generation constellationor December 15, 2011. The facility will bear interest at a floatingLIBOR rate, plus a margin of 2.07% through December 2012, increasing to2.25% through December 2017 and 2.40% thereafter.  Interest paymentswill be due on a semi-annual basis beginning December 31, 2009.

 

TheCompany’s obligations under the facility are guaranteed on a senior securedbasis by all of its domestic subsidiaries and are secured by a first prioritylien on substantially all of the assets of Globalstar and its domesticsubsidiaries (other than their FCC licenses), including patents and trademarks,100% of the equity of the Company’s domestic subsidiaries and 65% of the equityof certain foreign subsidiaries.

 

TheCompany may prepay the borrowings without penalty on the last day of eachinterest period after the full facility has been borrowed or the earlier ofseven months after the launch of the second generation constellation or November 15,2011, but amounts repaid may not be reborrowed. The Company must repay theloans (a) in full upon a change in control or (b) partially (i) ifthere are excess cash flows on certain dates, (ii) upon certain insuranceand condemnation events and (iii) upon certain asset dispositions. The FacilityAgreement includes covenants that (a) require the Company to maintain aminimum liquidity amount after the second repayment date, a minimum adjustedconsolidated EBITDA, a minimum debt service coverage ratio and a maximum netdebt to adjusted consolidated EBITDA ratio, (b) place limitations on theability of the Company and its subsidiaries to incur debt, create liens,dispose of assets, carry out mergers and acquisitions, make loans, investments,distributions or other transfers and capital expenditures or enter into certaintransactions with affiliates and (c) limit capital expenditures incurred by theCompany not to exceed $391.0 million in 2009 and $234.0 million in 2010. The Company is permitted to make cash payments under the terms of its 5.75%Convertible Senior Notes due 2028.

 

***SubordinatedLoan Agreement***

 

On June 25,2009, the Company entered into a Loan Agreement with Thermo Funding wherebyThermo Funding agreed to lend the Company $25 million for the purpose offunding the debt service reserve account required under the Facility Agreement.This loan is subordinated to, and the debt service reserve account is pledgedto secure, all of the Company’s obligations under the Facility Agreement. Theloan accrues interest at 12% per annum, which will be capitalized and added tothe outstanding principal in lieu of cash payments. The Company will makepayments to Thermo Funding only when permitted under the Facility Agreement.The loan becomes due and payable six months after the obligations under theFacility Agreement have been paid in full, the Company has a change in controlor any acceleration of the maturity of the loans under the Facility Agreementoccurs. As additional consideration for the loan, the Company issued ThermoFunding a warrant to purchase 4,205,608 shares of Common Stock at $0.01 pershare with a five-year exercise period. No Common Stock is issuable upon such exercise if such issuance wouldcause Thermo Funding and its affiliates to own more than 70% of the Company’s outstandingvoting stock.

 

Thermo Funding borrowed$20 million of the $25 million loaned to the Company under the Loan Agreementfrom two Company vendors and also agreed to reimburse another Company vendor ifits guarantee of a portion of the debt service reserve account were called.  The Company agreed to grant one of thesevendors a one-time option to convert its debt into equity of the Company on thesame terms as Thermo Funding at the first call (if any) by the Company forfunds under the Contingent Equity Agreement (described below).

 

The Companydetermined that the warrant was an equity instrument and recorded it as a partof its stockholders’ equity with a corresponding debt discount of $5.2 million,which is netted against the face value of the loan. The Company will amortize the debt discount associated with thewarrant to interest expense over the term of the loan agreement using aneffective interest rate method. At issuance, the Company allocated the proceedsunder the subordinated loan agreement to the underlying debt and the warrantsbased upon their relative fair values.

 

***Contingent Equity Agreement***

 

On June 19, 2009, the Company enteredinto a Contingent Equity Agreement with Thermo Funding whereby Thermo Fundingagreed to deposit $60 million into a contingent equity account to fulfilla condition precedent for borrowing under the Facility Agreement. Under theterms of the Facility Agreement, the Company will be required to make drawingsfrom this account if and to the extent it has an actual or projected deficiencyin our ability to meet indebtedness obligations due within a forward-looking90 day period. Thermo Funding has pledged the contingent equity account tosecure the Company’s obligations under the Facility Agreement. If the Companymakes any drawings from the contingent equity account, it will issue ThermoFunding shares of Common Stock calculated using a price per share equal to 80%of the volume-weighted average closing price of the Common Stock for the 15trading days immediately preceding the draw. Thermo Funding may withdrawundrawn amounts in the account after the Company has made the second scheduledrepayment under the Facility Agreement, which it currently expects to be nolater than June 15, 2012.

 

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The Contingent Equity Agreement alsoprovides that the Company will pay Thermo Funding an availability fee of 10%per year for maintaining funds in the contingent equity account. This fee ispayable solely in warrants to purchase Common Stock at $0.01 per share with afive-year exercise period from issuance, with respect to a number of sharesequal to the available balance in the contingent equity account divided by$1.37, subject to an annual retroactive adjustment at December 31, 2009,subject to certain conditions limiting the maximum number of shares issuable.The Company issued Thermo Funding a warrant to purchase 4,379,562 shares ofCommon Stock for this fee at origination of the loan. No Common Stock isissuable if it would cause Thermo Funding and its affiliates to own more than70% of the Company’s outstanding voting stock. If the Company’s Board ofDirectors and stockholders approve the creation of a class of nonvoting commonstock in the future, the Company may issue nonvoting common stock in lieu ofCommon Stock to the extent issuing Common Stock would cause Thermo Funding andits affiliates to exceed this 70% ownership level.

 

The Company determined that the warrantsissued in conjunction with the availability fee were a liability and recordedit as a component of Other Long Term Liabilities, at issuance. The correspondingbenefit is recorded in prepaid and other current assets and will be amortizedover the one year of the availability period.

 

***8.00% Convertible Senior Notes***

 

On June 19,2009, the Company sold $55 million in aggregate principal amount of 8.00%Convertible Senior Unsecured Notes (“8.00% Notes”) and warrants (“Warrants”) topurchase 15,277,771 shares of the Company’s Common Stock at an initial exerciseprice of $1.80 per share to selected institutional investors (including anaffiliate of Thermo Funding) in a direct offering registered under theSecurities Act of 1933. The 8.00% Notes are convertible into shares of CommonStock at an initial conversion price of $1.80 per share of Common Stock,subject to adjustment in the manner set forth in the supplemental indenturegoverning the 8.00% Notes.

 

The Warrants have fullratchet anti-dilution protection, and the exercise price of the Warrants issubject to adjustment under certain other circumstances.  In addition, if the closing price of theCommon Stock on September 19, 2010 is less than the exercise price of theWarrants then in effect, the exercise price of the Warrants will be reset toequal the volume-weighted average closing price of the Common Stock for theprevious 15 trading days.  In the eventof certain transactions that involve a change of control (“FundamentalTransactions”), the holders of the Warrants have the right to make the Companypurchase the Warrants for cash, subject to certain conditions. The exerciseperiod for the Warrants will begin on December 19, 2009 and end on June 19,2014.

 

The8.00% Notes are subordinated to all of the Company’s obligations under theFacility Agreement. The 8.00% Notes are the Company’s senior unsecured debtobligations and, except as described in the preceding sentence, rank pari passuwith its existing unsecured, unsubordinated obligations, including its 5.75%Convertible Senior Notes due 2028. The 8.00% Notes mature at the later of thetenth anniversary of closing or six months following the maturity date of theFacility Agreement and bear interest at a rate of 8.00% per annum. Interest onthe 8.00% Notes is payable in the form of additional Notes or, subject tocertain restrictions, in Common Stock at the option of the holder. Interest ispayable semi-annually in arrears on June 15 and December 15 of eachyear, commencing December 15, 2009. 

 

Holdersmay convert their 8.00% Notes at any time. The initial base conversion pricefor the 8.00% Notes is $1.80 per share or 555.6 shares of the Company’s CommonStock per $1,000 principal amount of the 8.00% Notes, subject to certainadjustments and limitations. In addition, if the volume-weighted averageclosing price for one share of the Company’s Common Stock for the 15 tradingdays immediately preceding September 19, 2010 (“reset day price”) is lessthan the base conversion price then in effect, the base conversion rate shallbe adjusted to equal the reset day price. If the Company issues or sells sharesof its Common Stock at a price per share less than the base conversion price onthe trading day immediately preceding such issuance or sale subject to certainlimitations, the base conversion rate will be adjusted lower based on a formuladescribed in the supplemental indenture governing the 8.00% Notes. However, noadjustment to the base conversion rate shall be made if it would cause the BaseConversion Price to be less than $1.00. If at any time the closing price of theCommon Stock exceeds 200% of the conversion price of the 8.00% Notes then ineffect for 30 consecutive trading days, all of the outstanding 8.00% Notes willbe automatically converted into Common Stock. Upon certain automatic andoptional conversions of the 8.00% Notes, the Company will pay holders of the8.00% Notes a make-whole premium by increasing the number of shares of CommonStock delivered upon such conversion. The number of additional shares per$1,000 principal amount of 8.00% Notes constituting the make-whole premiumshall be equal to the quotient of (i) the aggregate principal amount ofthe 8.00% Notes so converted multiplied by 32.00%, less the aggregateinterest paid on such Securities prior to the applicable Conversion Date dividedby (ii) 95% of the volume-weighted average Closing Price of theCommon Stock for the 10 trading days immediately preceding the Conversion Date.

 

Subjectto certain exceptions set forth in the supplemental indenture, if certainchanges of control of the Company or events relating to the listing of theCommon Stock occur (a “fundamental change”), the 8.00% Notes are subject torepurchase for cash at the option of the holders of all or any portion of the 8.00%Notes at a purchase price equal to 100% of the principal amount of the 8.00% Notes,plus a make-whole payment and accrued and unpaid interest, if any. Holders thatrequire the Company to repurchase 8.00% Notes upon a fundamental change mayelect to receive shares of Common Stock in lieu of cash.  Such holders will receive a number of sharesequal to (i) the number of shares they would have been entitled to receive uponconversion of the 8.00% Notes, plus (ii) a make-whole premium of 12% or 15%,depending on the date of the fundamental change and the amount of theconsideration, if any, received by the Company’s shareholders in connectionwith the fundamental change.

 

Theindenture governing the 8.00% Notes contains customary financial reportingrequirements.  The indenture alsoprovides that upon certain events of default, including without limitationfailure to pay principal or interest, failure to deliver a notice offundamental change, failure to convert the 8.00% Notes 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 the8.00% Notes may declare the principal of the 8.00% Notes and any accrued andunpaid interest through the date of such declaration immediately due andpayable. In the case of certain events of bankruptcy or insolvency relating tothe Company or its significant subsidiaries, the principal amount of the 8.00%Notes and accrued interest automatically becomes due and payable.

 

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The Companyevaluated the various embedded derivatives resulting from the conversion rightsand features within the Indenture for bifurcation from the 8.00% Notes underthe provisions of SFAS No. 133, Emerging Issues Task Force Issue No. 07-5,“Determining Whether an Instrument (or Embedded Feature) Is Indexed to anEntity’s Stock” (“EITF 07-5”) and Emerging Issues Task Force Issue No. 00-19,“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock” (“EITF 00-19”). Based upon its detailedassessment, the Company concluded that the conversion rights and features couldnot be either excluded from bifurcation as a result of being clearly andclosely related to the 8.00% Notes or were not indexed to the Company’s CommonStock and could not be classified in stockholders’ equity if freestanding. TheCompany recorded this compound embedded derivative liability as a component ofOther Long Term Liabilities on its Consolidated Balance Sheet with acorresponding debt discount which is netted with the face value of the 8.00%Notes. The Company will amortize the debt discount associated with the compoundembedded derivative liability to interest expense over the term of the 8.00% Notesusing an effective interest rate method. The fair value of the compoundembedded derivative liability will be marked-to-market at the end of eachreporting period, with any changes in value reported as “Derivative gain (loss)”in the consolidated statements of operations. The Company determined the fairvalue of the compound embedded derivative using a Monte Carlo simulation modelbased upon a risk-neutral stock price model.

 

Due to the cashsettlement provisions in the warrants, the Company recorded the warrants as a componentof Other Long Term Liabilities on its Consolidated Balance Sheet with acorresponding debt discount which is netted with the face value of the 8.00%Notes. The Company will amortize the debt discount associated with the warrantsliability to interest expense over the term of the warrants using an effectiveinterest rate method. The fair value of the warrants liability will bemarked-to-market at the end of each reporting period, with any changes in valuereported as “Derivative gain (loss)” in the consolidated statements of operations.The Company determined the fair value of the warrants derivative using a MonteCarlo simulation model based upon a risk-neutral stock price model.

 

The Companyallocated the proceeds received from the 8.00% Notes among the conversionrights and features, the detachable Warrants and the remainder to theunderlying debt. The Company netted the debt discount associated with theconversion rights and features and Warrants against the face value of the 8.00%Notes to determine the carrying amount of the 8.00% Notes. The accretion ofdebt discount will increase the carrying amount of the debt over the term ofthe 8.00% Notes. The Company allocated the proceeds at issuance as follows (inthousands):

 
| Fair  value of compound embedded derivative |   | $      | 23,542 |   |
|---------------------------------------------|--------|--------|--------|--------|
| Fair  value of warrants                     |   | 12,791 |   |
| Debt                                        |   | 18,667 |   |
| Face  Value of 8.00% Notes                  |   | $      | 55,000 |   |

 

***Amended and restated creditagreement***

 

On August 16, 2006,the Company entered into an amended and restated credit agreement with WachoviaInvestment Holdings, LLC, as administrative agent and swingline lender,and Wachovia Bank, National Association, as issuing lender, which wassubsequently amended on September 29 and October 26, 2006. On December 17,2007, Thermo Funding was assigned all the rights (except indemnificationrights) and assumed all the obligations of the administrative agent and thelenders under the amended and restated credit agreement and the credit agreementwas again amended and restated. On December 18, 2008, the Company enteredinto a First Amendment to Second Amended and Restated Credit Agreement withThermo Funding, as lender and administrative agent, to increase the amountavailable to Globalstar under the revolving credit facility from $50.0 millionto $100.0 million. In May 2009, $7.5 million outstanding under the$200 million credit agreement was converted into 10 million shares of theCompany’s Common Stock.  As of December 31, 2008, the Companyhad drawn $66.1 million of the revolving credit facility and the entire $100.0million delayed draw term loan facility was outstanding.

 

The delayed drawterm loan facility bore an annual commitment fee of 2.0% until drawn orterminated. Commitment fees related to the loans, incurred during the three andsix months ended June 30, 2009 were less than $0.1 million and $0.2million, respectively. Commitment fees for the same periods in 2008 were $0.1million and $0.2 million, respectively. To hedge a portion of the interest raterisk with respect to the delayed draw term loan, the Company entered into afive-year interest rate swap agreement. The Company terminated this interestrate swap agreement on December 10, 2008 (see Note 11).

 

OnJune 19, 2009, Thermo Funding exchanged all of the outstanding secured debt (includingaccrued interest) owed to it by the Company under the credit agreement, whichtotaled approximately $180.2 million, for one share of Series AConvertible Preferred Stock (the “Series A Preferred”), and the creditagreement was terminated.  The Series APreferred includes the following terms:

 

*Liquidation**Preference*.The Series A Preferred has a $0.01 liquidation preference upon anyvoluntary or involuntary liquidation, dissolution or winding up of the company.

 

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*Dividend Preference*.  TheSeries A Preferred has no dividend preference to the Common Stock.

 

*Voting Rights*. Subject to the conversion limitation setforth below, Thermo Funding may vote its share of Series A Preferred withholders of the Company’s Common Stock, voting as a single class, on anas-converted basis.

 

*Conversion**Rightsand Limitations*.  The Series APreferred is convertible into 126,174,034 shares of Common Stock or any classof nonvoting common stock which the Company may be authorized to issue in thefuture.  Thermo Funding may not convertthe preferred stock into Common Stock until August 6, 2009.  In addition, no Common Stock is issuable uponsuch conversion if such issuance would cause Thermo Funding and its affiliatesto own more than 70% of the Company’s outstanding voting stock. If the Company’sBoard of Directors and stockholders approve the creation of a class ofnonvoting common stock in the future, the Company may issue nonvoting commonstock in lieu of common stock to the extent issuing Common Stock would causeThermo Funding and its affiliates to exceed this 70% ownership level.

 

*Additional Issuances*.  TheCompany may not issue additional shares of Series A Preferred or createany other class or series of capital stock that ranks senior to or on paritywith the Series A Preferred without the consent of Thermo Funding.

 

The Companydetermined that the exchange of debt for Series A Preferred was a capitaltransaction and did not record any gain as a result of this exchange.

 

***5.75%Convertible Senior Notes due 2028***

 

The Company has issued$150.0 million aggregate principal amount of 5.75% Notes due 2028 pursuant to aBase Indenture and a Supplemental Indenture each dated as of April 15,2008 (“5.75% Notes”).

 

The Company placedapproximately $25.5 million of the proceeds of the offering of the 5.75% Notesin an escrow account that is being used to make the first six scheduledsemi-annual interest payments on the 5.75% Notes. The Company pledged itsinterest in this escrow account to the Trustee as security for these interestpayments. At June 30, 2009, the balance in the escrow account was $8.3million.

 

Except for the pledge ofthe escrow account, the 5.75% Notes are senior unsecured debt obligations ofthe Company. The 5.75% Notes mature on April 1, 2028 and bear interest ata rate of 5.75% per annum. Interest on the Notes is payable semi-annually inarrears on April 1 and October 1 of each year.

 

Subject to certainexceptions set forth in the Indenture, the Notes are subject to repurchase forcash at the option of the holders of all or any portion of the 5.75% Notes (i) oneach of April 1, 2013, April 1, 2018 and April 1, 2023 or (ii) upona fundamental change, both at a purchase price equal to 100% of the principalamount of the 5.75% Notes, plus accrued and unpaid interest, if any. Afundamental change will occur upon certain changes in the ownership of theCompany, or certain events relating to the trading of the Company’s CommonStock.

 

Holders may convert their5.75% Notes into shares of Common Stock at their option at any time prior tomaturity, subject to the Company’s option to deliver cash in lieu of all or aportion of the share. The 5.75% Notes are convertible at an initial conversionrate of 166.1820 shares of Common Stock per $1,000 principal amount of 5.75%Notes, subject to adjustment. In addition to receiving the applicable amount ofshares of Common Stock or cash in lieu of all or a portion of the shares,holders of 5.75% Notes who convert them prior to April 1, 2011 willreceive the cash proceeds from the sale by the Escrow Agent of the portion ofthe government securities in the escrow account that are remaining with respectto any of the first six interest payments that have not been made on the 5.75%Notes being converted.

 

Holders who convert their5.75% Notes in connection with a fundamental change occurring on or prior to April 1,2013 will be entitled to an increase in the conversion rate as specified in theindenture governing the 5.75% Notes.

 

Exceptas described above with respect to holders of 5.75% Notes who convert their5.75% Notes prior to April 1, 2011, there is no circumstance in whichholders could receive cash in addition to the maximum number of shares ofcommon stock issuable upon conversion of the 5.75% Notes.

 

If the Company makes atleast 10 scheduled semi-annual interest payments, the 5.75% Notes are subjectto redemption at the Company’s option at any time on or after April 1,2013, at a price equal to 100% of the principal amount of the 5.75% Notes to beredeemed, plus accrued and unpaid interest, if any.

 

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Theindenture governing the 5.75% Notes contains customary financial reportingrequirements and also contains restrictions on mergers and asset sales. Theindenture also provides that upon certain events of default, including withoutlimitation failure to pay principal or interest, failure to deliver a notice offundamental change, failure to convert the 5.75% Notes when required,acceleration of other material indebtedness and failure to pay materialjudgments, either the trustee or the holders of 25% in aggregate principalamount of the 5.75% Notes may declare the principal of the 5.75% Notes and anyaccrued and unpaid interest through the date of such declaration immediatelydue and payable. In the case of certain events of bankruptcy or insolvencyrelating to the Company or its significant subsidiaries, the principal amountof the 5.75% Notes and accrued interest automatically becomes due and payable.

 

*Conversionof 5.75% Notes*

 

In2008, $36.0 million aggregate principal amount of 5.75% Notes, or 24% of the 5.75%Notes originally issued, were converted into Common Stock. The Company alsoexchanged an additional $42.2 million aggregate principal amount of 5.75% Notes,or 28% of the 5.75% Notes originally issued for a combination of Common Stockand cash. The Company has issued approximately 23.6 million shares of itsCommon Stock and paid a nominal amount of cash for fractional shares inconnection with the conversions and exchanges. In addition, the holders whose5.75% Notes were converted or exchanged received an early conversion make wholeamount of approximately $9.3 million representing the next five semi-annualinterest payments that would have become due on the converted 5.75% Notes,which was paid from funds in an escrow account maintained for the benefit ofthe holders of 5.75% Notes. In the exchanges, Note holders received additionalconsideration in the form of cash payments or additional shares of the Company’sCommon Stock in the amount of approximately $1.1 million to induce exchanges.After these transactions, approximately $71.8 million aggregate principalamount of 5.75% Notes remained outstanding at June 30, 2009.

 

*Common Stock Offering and ShareLending Agreement*

 

Concurrentlywith the offering of the Notes, the Company entered into a share lendingagreement (the “Share Lending Agreement”) with Merrill Lynch International (the“Borrower”), pursuant to which the Company agreed to lend up to 36,144,570 sharesof Common Stock (the “Borrowed Shares”) to the Borrower, subject to certainadjustments, for a period ending on the earliest of (i) at the Company’soption, at any time after the entire principal amount of the 5.75% Notes ceasesto be outstanding, (ii) the written agreement of the Company and theBorrower to terminate, (iii) the occurrence of a Borrower default, at theoption of Lender, and (iv) the occurrence of a Lender default, at theoption of the Borrower. Pursuant to the Share Lending Agreement, upon thetermination of the share loan, the Borrower must return the Borrowed Shares tothe Company. Upon the conversion of 5.75% Notes (in whole or in part), a numberof Borrowed Shares proportional to the conversion rate for such notes must bereturned to the Company. At the Company’s election, the Borrower may delivercash equal to the market value of the corresponding Borrowed Shares instead ofreturning to the Company the Borrowed Shares otherwise required by conversionsof 5.75% Notes.

 

Pursuantto and upon the terms of the Share Lending Agreement, the Company will issueand lend the Borrowed Shares to the Borrower as a share loan. The BorrowingAgent also is acting as an underwriter (the “Equity Underwriter”) with respectto the Borrowed Shares, which are being offered to the public. The BorrowedShares included approximately 32.0 million shares of Common Stock initiallyloaned by the Company to the Borrower on separate occasions, delivered pursuantto the Share Lending Agreement and the Underwriting Agreement, and anadditional 4.1 million shares of Common Stock that, from time to time, may beborrowed from the Company by the Borrower pursuant to the Share LendingAgreement and the Underwriting Agreement and subsequently offered and sold atprevailing market prices at the time of sale or negotiated prices. The BorrowedShares are free trading shares. At June 30, 2009, approximately 17.3million Borrowed Shares remained outstanding.

 

The Company did notreceive any proceeds from the sale of the Borrowed Shares pursuant to the ShareLending Agreement, and it will not reserve any proceeds from any future sale.The Borrower has received all of the proceeds from the sale of Borrowed Sharespursuant to the Share Lending Agreement and will receive all of the proceedsfrom any future sale. At the Company’s election, the Borrower may remit cashequal to the market value of the corresponding Borrowed Shares instead ofreturning the Borrowed Shares due back to the Company as a result ofconversions by 5.75% Note holders. See below.

 

The Borrowed Shares aretreated as issued and outstanding for corporate law purposes, and accordingly,the holders of the Borrowed Shares will have all of the rights of a holder ofthe Company’s outstanding shares, including the right to vote the shares on allmatters submitted to a vote of the Company’s stockholders and the right toreceive any dividends or other distributions that the Company may pay or makeson its outstanding shares of Common Stock. However, under the Share Lending Agreement,the Borrower has agreed:

 

·                  To pay, within one business day after the relevant payment date, to theCompany an amount equal to any cash dividends that the Company pays on theBorrowed Shares; and

 

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·                  To pay or deliver to the Company, upon termination of the loan ofBorrowed Shares, any other distribution, in liquidation or otherwise, that theCompany makes on the Borrowed Shares.

 

To the extent the Borrowed Shares the Companyinitially lent under the share lending agreement and offered in the CommonStock offering have not been sold or returned to it, the Borrower has agreedthat it will not vote any such Borrowed Shares. The Borrower has also agreedunder the share lending agreement that it will not transfer or dispose of anyBorrowed Shares, other than to its affiliates, unless the transfer ordisposition is pursuant to a registration statement that is effective under theSecurities Act. However, investors that purchase the shares from the Borrower(and any subsequent transferees of such purchasers) will be entitled to thesame voting rights with respect to those shares as any other holder of the Company’sCommon Stock.

 

On December 18,2008, the Company entered into Amendment No. 1 to Share Lending Agreementwith the Borrower and the Borrowing Agent. Pursuant to Amendment No.1, theCompany has the option to request the Borrower to deliver cash instead ofreturning Borrowed Shares upon any termination of loans at the Borrower’soption, at the termination date of the Share Lending Agreement or when theoutstanding loaned shares exceed the maximum number of shares permitted underthe Share Lending Agreement.  The consent of the Borrower is required forany cash settlement, which consent may not be unreasonably withheld, subject tothe Borrower’s determination of applicable legal, regulatory or self-regulatoryrequirements or other internal policies. Any loans settled in shares ofCompany Common Stock will be subject to a return fee based on the stock priceas agreed by the Company and the Borrower.  The return fee will not beless than $0.005 per share or exceed $0.05 per share.

 

As aresult of this amendment, the Company believes that, under generally acceptedaccounting principles in the United States as currently in effect, theapproximately 17.3 million Borrowed Shares outstanding at June 30, 2009under the Share Lending Agreement will be considered outstanding for thepurpose of computing and reporting its earnings per share. Prior to thisamendment, the Company did not consider the Borrowed Shares outstanding for thepurpose of computing and reporting its earnings per share due to thesubstantial elimination of the economic dilution due to contractual provisionsthat otherwise would have resulted from the issuance of the Borrowed Shares.

 

TheCompany evaluated the various embedded derivatives within the Indenture forbifurcation from the Notes under the provisions of FASB’s Statement ofFinancial Standards No.133, “Accounting for Derivative Instruments and HedgingActivities” (“SFAS No. 133”), Emerging Issues Task Force Issue No. 01-6,“The Meaning of Indexed to a Company’s Own Stock” (“EITF 01-6”) and EmergingIssues Task Force Issue No. 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF00-19”). Based upon its detailed assessment, the Company concluded that theseembedded derivatives were either (i) excluded from bifurcation as a resultof being clearly and closely related to the 5.75% Notes or are indexed to theCompany’s Common Stock and would be classified in stockholders’ equity iffreestanding or (ii) the fair value of the embedded derivatives wasestimated to be immaterial.

 

TheCompany adopted FSP APB 14-1 on January 1, 2009, and it is applied on aretrospective basis. FSP APB 14-1 calls for a separation of the liability andequity components of the convertible debt instrument. The carryingamount of the liability component is computed by measuring the fair value of asimilar liability (including any embedded features other than the conversionoption) that does not have an associated equity component. The carrying amountof the equity component is represented by the embedded conversion option bydeducting the fair value of the liability component from the initial proceedsascribed to the convertible debt instrument as a whole. The excess of theprincipal amount of the liability component over its carrying amount isrecorded as debt discount and is amortized to interest cost using the interestmethod over a period of five years. The adoption of FSP APB 14-1 resulted in a decrease inthe Company’s long-term debt of approximately $23.1 million; an increase in itsstockholders’ equity of approximately $28.3 million; and an increase in its netproperty, plant and equipment of approximately $5.9 million as of December 31,2008.The adoption of FSP APB 14-1 changed the Company’s full year 2008Consolidated Statement of Operations, because the gains associated withconversions and exchanges of 5.75% Notes in 2008 were recorded in stockholders’equity prior to adoption of this standard. The adoption of FSP APB 14-1impacted the Company’s Consolidated Statement of Operations for the three andsix month periods ended June 30, 2008 by reducing the net loss byapproximately $0.2 million. At June 30, 2009 and December 31,2008, the remaining term for amortization associated with debt discount was approximately45 and 51 months, respectively. The annual effective interest rate utilized forthe amortization of debt discount during the three and six month periods ended June 30,2009 was 9.14. The interest cost associated with the coupon rate on the 5.75% Notesplus the corresponding debt discount amortized during the three and six monthperiods ended June 30, 2009, was $2.2 million and $4.4 million,respectively, all of which was capitalized. The carrying amount of the equity and liabilitycomponent, as of June 30, 2009 and December 31, 2008, is presentedbelow (in thousands):

 

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| ** **                       | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                             |       |                        |       |                            |       |
| Equity                           |       | $                           | 54,675     |                            | $          | 54,675 |   |
| Liability:                       |       |                        |       |                            |       |
| Principal                        |       | 71,804                      |       | 71,804                          |       |
| Unamortized debt discount        |       | (20,847                     | )          | (23,134                         | )          |
| Net carrying amount of liability |       | $                           | 50,957     |                            | $          | 48,670 |   |

 

***VendorFinancing***

 

In July 2008 the Company amended the agreement with theLaunch Provider for the launch of the Company’s second-generationsatellites and certain pre and post-launch services. Under the amended terms,the Company could defer payment on up to 75% of certain amounts due to theLaunch Provider. The deferred payments incurred annual interest at 8.5% to 12%.In June 2009, the Company and the Launch Provider again amended theiragreement modifying the agreement in certain respects including cancelling thedeferred payment provisions. The Company paid all deferred amounts to thevendor in July 2009.

 

In September 2008the Company amended its agreement with Hughes for the construction of its RANground network equipment and software upgrades for installation at a number ofthe Company’s satellite gateway ground stations and satellite interface chipsto be a part of the UTS in various next-generation Globalstar devices. Underthe amended terms, the Company deferred certain payments due under the contractin 2008 and 2009 to December 2009. The deferred payments incurred annualinterest at 10%. In June 2009, the Company and Hughes further amendedtheir agreement modifying the agreement in certain respects includingcancelling the deferred payment provisions. The Company paid all deferredamounts to the vendor in July 2009.

 

**Note 13:Fair Value of Financial Instruments**

 

The Company adopted SFAS No. 157effective January 1, 2008 for financial assets and liabilities measured ona recurring basis. SFAS No. 157 applies to all financial assets andfinancial liabilities that are being measured and reported on a fair valuebasis. The adoption of SFAS No. 157 did not impact the consolidatedfinancial statements. SFAS No. 157 requires disclosure that establishes aframework for measuring fair value and expands disclosure about fair valuemeasurements. The statement requires fair value measurement be classified anddisclosed in one of the following three categories:

 

*Level1:*Unadjustedquoted prices in active markets that are accessible at the measurement date foridentical, unrestricted assets or liabilities;

 

*Level2:*Quoted pricesin markets that are not active or inputs which are observable, either directlyor indirectly, for substantially the full term of the asset or liability;

 

The Company usesobservable pricing inputs including benchmark yields, reported trades, andbroker/dealer quotes. The financial assets in Level 2 include the interest ratecap derivative instrument.

 

*Level3:*Prices orvaluation techniques that require inputs that are both significant to the fairvalue measurement and unobservable (i.e., supported by little or no marketactivity).

 

The financial liabilitiesin Level 3 include the compound embedded conversion option in the 8.00% Notesand warrants issued with the 8.00% Notes and contingent equity agreement thatare classified as liabilities under SFAS 133. The Company marks-to-market theseliabilities at each reporting date with the changes in fair value recognized inthe Company’s results of operations.

 

The following tablepresents the financial instruments that are carried at fair value by the aboveSFAS No. 157 pricing levels as of June 30, 2009:

 
| ** **                                            | ** ** | ** **                  | ** ** | **Fair  Value Measurements at June 30, 2009 using** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|----------------------------------------------------------|------------|
| ** **                                            | ** ** | ** **                  | ** ** | **Quoted  Prices**                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **                  | ** ** | **in  Active**                                           | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **                  | ** ** | **Markets  for**                                         | ** ** | **Other** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **                  | ** ** | **Identical**                                            | ** ** | **Observable** | ** ** | **Unobservable** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **                  | ** ** | **Instruments**                                          | ** ** | **Inputs** | ** ** | **Inputs** | ** ** | ** ** | ** ** |
| **(In Thousands)**                                    | ** ** | **December 31,  2008** | ** ** | **(Level  1)**                                           | ** ** | **(Level  2)** | ** ** | **(Level  3)** | ** ** | **Total  Balance** | ** ** |
| Other  assets:                                        |       |                        |       |                                                     |       |   |   |   |   |   |   |
|                                                  |       |                        |       |                                                     |       |   |   |   |   |   |   |
| Interest rate cap derivative                          |       | $                           | N/A        |                                                     | $          | — |   | $ | 8,331 |   | $ | — |   | $ | 8,331 |   |
|                                                  |       |                        |       |                                                     |       |   |   |   |   |   |   |
| Total other assets measured at fair value        |       | N/A                         |       | —                                                   |       | $ | 8,331 |   | — |   | 8,331 |   |
|                                                  |       |                        |       |                                                     |       |   |   |   |   |   |   |
| Other non-current liabilities:                        |       |                        |       |                                                     |       |   |   |   |   |   |   |
|                                                  |       |                        |       |                                                     |       |   |   |   |   |   |   |
| Compound embedded conversion option                   |       | N/A                         |       | —                                                   |       | — |   | (21,272 | ) | (21,272 | ) |
|                                                  |       |                        |       |                                                     |       |   |   |   |   |   |   |
| Warrants issued with 8.00% Notes                      |       | N/A                         |       | —                                                   |       | — |   | (11,764 | ) | (11,764 | ) |
|                                                  |       |                        |       |                                                     |       |   |   |   |   |   |   |
| Warrants issued with contingent equity agreements     |       | N/A                         |       | —                                                   |       | — |   | (6,000 | ) | (6,000 | ) |
|                                                  |       |                        |       |                                                     |       |   |   |   |   |   |   |
| Total non-current liabilities measured at fair  value |       | $                           | —     |                                                     | $          | — |   | $ | — |   | $ | (39,036 | ) | $ | (39,036 | ) |

 

The following table presents a reconciliation for allassets and liabilities measured at fair value on a recurring basis, excludingaccrued interest components, using significant unobservable inputs (Level 3)for the year ended March 31, 2009 as follows (amounts in thousands):

 
| ** **                                                                | ** ** | **Three Months   Ended June 30,   2009** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------|------------|
|                                                                      |       |                                     |       |
| Balance at March  31, 2009                                                |       | $                                        | —     |   |
| Issuance of  compound embedded conversion option and warrants liabilities |       | (42,333                                  | )          |
| Unrealized gain,  included in derivative loss                             |       | 3,297                                    |       |
| Balance at June  30, 2009                                                 |       | $                                        | (39,036    | ) |

 

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**Note 14:Subsequent Events**

 

Since June 30, 2009, the Company borrowedapproximately $371.2 million of the funds available to it under the FacilityAgreement.

 

Since June 30,2009, holders of $2.8 million aggregate principal amount of 8% Notes, or lessthan 5% of the 8% Notes originally issued, have submitted notices of conversionto the trustee in order to convert their 8.00% Notes into shares of CommonStock.

 

TheCompany has evaluated subsequent events for potential recognition or disclosurethrough the issuance of these the consolidated financial statements, whichoccurred on August 10, 2009.

 

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

**Forward-Looking Statements**

 

Certain statements contained in or incorporated by reference into thisReport, other than purely historical information, including, but not limitedto, estimates, projections, statements relating to our business plans,objectives and expected operating results, and the assumptions upon which thosestatements are based, are forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. These forward-lookingstatements 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 similarexpressions, although not all forward-looking statements contain theseidentifying words. These forward-looking statements are based on currentexpectations and assumptions that are subject to risks and uncertainties whichmay cause actual results to differ materially from the forward-lookingstatements. Forward-looking statements, such as the statements regarding ourability to develop and expand our business, our ability to manage costs, ourability to exploit and respond to technological innovation, the effects of lawsand regulations (including tax laws and regulations) and legal and regulatorychanges, the opportunities for strategic business combinations and the effectsof consolidation in our industry on us and our competitors, our anticipatedfuture revenues, our anticipated capital spending (including for futuresatellite procurements and launches), our anticipated financial resources, ourexpectations about the future operational performance of our satellites (includingtheir projected operational lives), the expected strength of and growthprospects for our existing customers and the markets that we serve, and ourability to obtain additional financing, if needed and other statementscontained in this Report regarding matters that are not historical facts,involve predictions. Risks and uncertainties that could cause or contribute tosuch differences include, without limitation, those in Part II. Item 1A.Risk Factors in this Report or incorporated by reference into this Report,including those described in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2008.

 

Althoughwe believe that the forward-looking statements contained or incorporated byreference in this Report are based upon reasonable assumptions, theforward-looking events and circumstances discussed in this Report may notoccur, and actual results could differ materially from those anticipated orimplied in the forward-looking statements.

 

Newrisk factors emerge from time to time, and it is not possible for us to predictall risk factors, nor can we assess the impact of all factors on our businessor the extent to which any factor, or combination of factors, may cause actualresults to differ materially from those contained in any forward-lookingstatements. We undertake no obligation to update publicly or revise anyforward-looking statements. You should not rely upon forward-looking statementsas predictions of future events or performance. We cannot assure you that theevents and circumstances reflected in the forward-looking statements will beachieved or occur. These cautionary statements qualify all forward-lookingstatements attributable to us or persons acting on our behalf.

 

This “Management’sDiscussion and Analysis of Financial Condition” should be read in conjunctionwith the “Management’s Discussion and Analysis of Financial Condition” andinformation included in our Annual Report on Form 10-K for the year ended December 31,2008.

 

**Overview**

 

We are a provider of mobile voice and data communication services viasatellite. Our communications platform extends telecommunications beyond theboundaries of terrestrial wireline and wireless telecommunications networks toserve our customer’s desire for connectivity. Using in-orbit satellites andground stations, which we call gateways, we offer voice and data communicationsservices to government agencies, businesses and other customers in over 120countries.

 

*Material Trends and Uncertainties.*  Our satellite communications business, byproviding critical mobile communications to our subscribers, serves principallythe following markets: government, public safety and disaster relief;recreation and personal; oil and gas; maritime and fishing; natural resources,mining and forestry; construction; utilities; and transportation. Our industryhas been growing as a result of:

 

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·                  favorable market reaction tonew pricing plans with lower service charges;

 

·                  awareness of the need forremote communication services;

 

·                  increased demand forcommunication services by disaster and relief agencies and emergency firstresponders;

 

·                  improved voice and datatransmission quality;

 

·                  a general reduction inprices of user equipment; and

 

·                  innovative data products andservices.

 

Nonetheless, as further described under Part II. Item 1A “Risk Factors,”we face a number of challenges and uncertainties, including:

 

·                  *Constellationlife and health. *Our currentsatellite constellation is aging. We successfully launched our eight sparesatellites in 2007. All of our satellites launched prior to 2007 haveexperienced various anomalies over time, one of which is a degradation in theperformance of the solid-state power amplifiers of the S-band communicationsantenna subsystem (our “two-way communication issues”). The S-band antennaprovides the downlink from the satellite to a subscriber’s phone or dataterminal. Degraded performance of the S-band antenna amplifiers reduces theavailability of two-way voice and data communication between the affectedsatellites and the subscriber and may reduce the duration of a call. When theS-band antenna on a satellite ceases to be functional, two-way communication isimpossible over that satellite, but not necessarily over the constellation as awhole. We continue to provide two-way subscriber service because some of oursatellites are fully functional but at certain times in any given location itmay take longer to establish calls and the average duration of calls may bereduced. There are periods of time each day during which no two-way voice anddata service is available at any particular location. The root cause of ourtwo-way communication issues is unknown, although we believe it may result fromirradiation of the satellites in orbit caused by the space environment at thealtitude that our satellites operate.

 

The decline in the quality of two-way communication does not affectadversely our one-way Simplex data transmission services, including our SPOTsatellite GPS messenger products and services, which utilize only the L-banduplink from a subscriber’s Simplex terminal to the satellites. The signal istransmitted back down from the satellites on our C-band feeder links, which arefunctioning normally, not on our S-band service downlinks.

 

We continue to work on plans, including new products and services andpricing programs to mitigate the effects of reduced service availability uponour customers and operations until our second-generation satellites aredeployed. See “Part II, Item 1A. Risk Factors—Our satellites have alimited life and some have failed, which causes our network to be compromisedand which materially and adversely affects our business, prospects andprofitability”.

 

·                  *Theeconomy. *The current recession andits effects on credit markets and consumer spending is adversely affectingsales of our products and services.

 

·                  *Competitionand pricing pressures. *We faceincreased competition from both the expansion of terrestrial-based cellularphone systems and from other mobile satellite service providers. For example,Inmarsat plans to commence offering satellite services to handheld devices inthe United States in 2010, and several competitors, such as ICO Global andTerreStar, are constructing or have launched geostationary satellites thatprovide mobile satellite service. Increased numbers of competitors, and theintroduction of new services and products by competitors, increases competitionfor subscribers and pressures all providers, including us, to reduce prices.Increased competition may result in loss of subscribers, decreased revenue,decreased gross margins, higher churn rates, and, ultimately, decreasedprofitability and cash.

 

·                  *Technologicalchanges. *It is difficult for us torespond promptly to major technological innovations by our competitors becausesubstantially modifying or replacing our basic technology, satellites orgateways is time-consuming and very expensive. Approximately 77% of our totalassets at June 30, 2009 represented fixed assets. Although we plan toprocure and deploy our second-generation satellite constellation and upgradeour gateways and other ground facilities, we may nevertheless become vulnerableto the successful introduction of superior technology by our competitors.

 

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*Capitalexpenditures. *We haveincurred significant capital expenditures during 2007 through June 30,2009 and we expect to incur additional significant expenditures through 2013under the following commitments:

 

·                  We estimate that thecapitalized expenditures related to procuring and deploying oursecond-generation satellite constellation and upgrading our gateways and otherground facilities will cost approximately $1.29 billion (at a weightedaverage conversion rate of €1.00=$1.3460 including total contract values forThales, the Launch Provider, Hughes and Ericsson and excluding launch costs forthe second 24 satellites, internal costs and capitalized interest), which weexpect will be reflected in capital expenditures through 2013. The followingobligations are included in this amount:

 

·                  In June 2009, we and ThalesAlenia Space France entered into an amended and restated contract for theconstruction of our second-generation satellites to incorporate prioramendments, acceleration requests and make other non-material changes to thecontract entered into in November 2006.  The total contract price,including subsequent additions, will be approximately €678.9 million(approximately $936.6 million at a weighted average conversion rate of€1.00 = $1.3797 at June 30, 2009, including approximately€146.8 million which was paid by us in U.S. dollars at a fixed conversionrate of €1.00 = $1.2940). We have made payments in the amount ofapproximately €298.9 million (approximately $400.5 million) through June 30,2009 under this contract. 

 

·                  In March 2007, weentered into a €9.2 million (approximately $13.2 million at aweighted average conversion rate of €1.00 = $1.4336) agreement with ThalesAlenia Space for the construction of the Satellite Operations Control Centers,Telemetry Command Units and In Orbit Test Equipment (collectively, the “ControlNetwork Facility”) for our second-generation satellite constellation. We havemade aggregate payments under this contract of approximately €8.2 million(approximately $11.8 million) through June 30, 2009.

 

·                  In September 2007, weentered into a contract with our Launch Provider for the launch of oursecond-generation satellites and certain pre and post-launch services. Pursuantto the contract, as amended, our Launch Provider will make four firm launchesof six satellites each and up to two replacement launches and one optionallaunch of six satellites each, not to exceed a total of six launches. The totalcontract price for the first four launches is $216.1 million. In July2008, we amended our agreement with our Launch Provider for the launch of oursecond-generation satellites and certain pre and post-launch services. Underthe amended terms, we could defer payment on up to 75% of certain amounts dueto the Launch Provider. The deferred payments incurred annual interest at 8.5%to 12% and become payable one month before the corresponding launch date. In June 2009, we and the LaunchProvider again amended the agreement in certain respects including cancellingthe deferred payment provisions. We paid all deferred amounts to the vendor in July 2009.

 

·                  In May 2008, we entered intoa contract with Hughes under which Hughes will design, supply and implement theRadio Access Network (“RAN”) ground network equipment and software upgrades forinstallation at a number of our satellite gateway ground stations and satelliteinterface chips to be a part of the User Terminal Subsystem (UTS) in ourvarious next-generation devices. The total contract purchase price ofapproximately $100.8 million is payable in various increments over aperiod of 40 months. We have the option to purchase additional RANs andother software and hardware improvements at pre-negotiated prices. We have madeaggregate payments under this contract of approximately $5.9 millionthrough June 30, 2009. We expensed $1.8 million of these payments andcapitalized $4.1 million as second-generation ground component.

 

·                  In October 2008, we signedan agreement with Ericsson Federal Inc., a leading global provider oftechnology and services to telecom operators. According to the $22.7 millioncontract, Ericsson will work with us to develop, implement and maintain aground interface, or core network, system that will be installed at oursatellite gateway ground stations. The all Internet protocol (IP) based corenetwork system is wireless 3G/4G compatible and will link our radio accessnetwork to the public-switched telephone network (PSTN) and/or Internet. Designof the new core network system is now underway.

 

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See “Liquidity and Capital Resources” for a discussion of ourrequirements and resources for funding these capital expenditures.

 

During the first quarter of 2009, we adopted various cost cuttingmeasures, including reducing worldwide labor and non-labor costs. We willcontinue to assess our operations and may continue to reduce costs byeliminating additional labor costs that we deem necessary to reduce further ourcash outflow in the short term. 

 

·                  *Introductionof new products. *We workcontinuously with the manufacturers of the products we sell to offer ourcustomers innovative and improved products. Virtually all engineering, researchand development costs of these new products are paid by the manufacturers.However, to the extent the costs are reflected in increased inventory costs tous, and we are unable to raise our prices to our subscribers correspondingly,our margins and profitability would be reduced.

 

*Simplex Products (Personal Tracking Services andEmergency Messaging).*  Inearly November 2007, we introduced the SPOT satellite GPS messenger, aimedat attracting both the recreational and commercial markets that requirepersonal tracking, emergency location and messaging solutions for users thatrequire these services beyond the range of traditional terrestrial and wirelesscommunications. Using the Globalstar Simplex network and web-based mappingsoftware, this device provides consumers with the capability to trace or mapthe location of the user on Google MapsTM. The product enables users to transmitmessages to specific preprogrammed email addresses, phone or data devices, andto request assistance in the event of an emergency. On July 21, 2009, weintroduced our SPOT 2.0 with new features and improvied functionality.  We are continuing to work on additionalSPOT-like applications.

 

·                  SPOT Satellite GPS MessengerAddressable Market

 

We believe the addressable market for our SPOT satellite GPS messengerproducts and services in North America alone is approximately 50 millionunits consisting primarily of outdoor enthusiasts. Our objective is to capture2-3% of that market in the next few years. The reach of our Simplex System, onwhich our SPOT satellite GPS messenger products and services rely, coversapproximately 60% of the world population. We intend to market our SPOT satelliteGPS messenger products and services aggressively in our overseas marketsincluding South and Central America, Western Europe, and through independentgateway operators in their respective territories.

 

·                  SPOT Satellite GPS MessengerPricing

 

We intend the pricing for SPOT satellite GPS messenger products andservices and equipment to be very attractive in the consumer marketplace.Annual service fees, depending whether they are for domestic or internationalservice, currently range from $99.99 to approximately $117.00 for our basiclevel plan, and $149.98 to approximately $168.00 with additional trackingcapability. The equipment is sold to end users at $149.99 to approximately$333.00 per unit (subject to foreign currency rates). Our distributors settheir own retail prices for SPOT satellite GPS messenger equipment and service.

 

·                  SPOT Satellite GPS MessengerDistribution

 

We are distributing and selling our SPOT satellite GPS messengerthrough a variety of existing and new distribution channels. We have signeddistribution agreements with a number of “Big Box” retailers and other similardistribution channels including Amazon.com, Bass Pro Shops, Best Buy, Pep Boys,Big 5 Sporting Goods, Big Rock Sports, Cabela’s, Campmor, London Drug, GanderMountain, REI, Sportsman’s Warehouse, Wal-Mart.com, West Marine, DBLDistribution, D.H. Distributions, and CWR Electronics. We currently sell SPOTsatellite GPS messenger products through approximately 9,000 distributionpoints and expect to reach 10,000 in 2009. We also sell directly using ourexisting sales force into key vertical markets and through our directe-commerce website (*www.findmespot.com*).

 

SPOT satellite GPS messenger products and services have been on themarket for only twenty months in North America and their commercialintroduction and their commercial success globally cannot be assured.

 

·                  *Fluctuationsin currency rates. *A substantialportion of our revenue (33% and 35% for the three and six month periods ended June 30,2009, respectively) is denominated in foreign currencies. In addition, asubstantial majority of our obligations under the contracts for oursecond-generation constellation and related control network facility aredenominated in Euros. Any decline in the relative value of the U.S. dollar mayadversely affect our revenues and increase our capital expenditures. See “Item 3.Quantitative and Qualitative Disclosures about Market Risk” for additionalinformation.

 

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·                  *AncillaryTerrestrial Component (ATC). *ATC is theintegration of a satellite-based service with a terrestrial wireless serviceresulting in a hybrid mobile satellite service. The ATC network would extendour services to urban areas and inside buildings in both urban and rural areaswhere satellite services currently are impractical. We believe we are at theforefront of ATC development and expect to be the first market entrant throughour contract with Open Range described below. In addition, we are considering arange of options for rollout of our ATC services. We are exploring selectiveopportunities with a variety of media and communication companies to capturethe full potential of our spectrum and U.S. ATC license.

 

On October 31, 2007, we entered into an agreement with Open RangeCommunications, Inc. that permits Open Range to deploy service in certainrural geographic markets in the United States under our ATC authority. OpenRange will use our spectrum to offer dual mode mobile satellite based andterrestrial wireless WiMAX services to over 500 rural American communities. On December 2,2008, we amended our agreement with Open Range. The amended agreement reducedour preferred equity commitment to Open Range from $5 million to$3 million (which investment was made in the form of bridge loans thatconverted into preferred equity at the closing of Open Range’s equityfinancing). Under the agreement as amended, Open Range will have the right touse a portion of our spectrum within the United States and, if Open Range soelects, it can use the balance of our spectrum authorized for ATC services, toprovide these services. Open Range has options to expand this relationship overthe next six years, some of which are conditional upon Open Range electing touse all of the licensed spectrum covered by the agreement. Commercialavailability is expected to begin in selected markets in 2009. The initial termof the agreement of up to 30 years is co-extensive with our ATC authorityand is subject to renewal options exercisable by Open Range. Either party mayterminate the agreement before the end of the term upon the occurrence ofcertain events, and Open Range may terminate it at any time upon payment of atermination fee that is based upon a percentage of the remaining leasepayments. Based on Open Range’s business plan used in support of its$267 million loan under a federally authorized loan program, the fixed andvariable payments to be made by Open Range over the initial term of30 years indicate a value for this agreement between $0.30—$0.40/MHz/POP.Open Range satisfied the conditions to implementation of the agreement on January 12,2009 when it completed its equity and debt financing, consisting of a$267 million broadband loan from the Department of Agriculture RuralUtilities Program and equity financing of $100 million. Open Range hasremitted to us its initial down payment of $2 million. Open Range’s annualpayments in the first six years of the agreement will range from approximately$0.6 million to up to $10.3 million, assuming it elects to use all of thelicensed spectrum covered by the agreement. The amount of the payments that wewill receive from Open Range will depend on a number of factors, including theeventual geographic coverage of and the number of customers on the Open Rangesystem.

 

In addition to our agreement with Open Range, we hope to exploitadditional ATC monetization strategies and opportunities in urban markets or insuburban areas that are not the subject of our agreement with Open Range. Oursystem is flexible enough to allow us to use different technologies and networkarchitectures in different geographic areas.

 

*Service and Subscriber Equipment Sales Revenues.*  The table below sets forth amounts andpercentages of our revenue by type of service and equipment sales for the threeand six month periods ended June 30, 2009 and 2008 (dollars in thousands).

 
| ** **                            | ** ** | **Three months ended  June 30, 2009** | ** ** | **Three months ended  June 30, 2008** | ** ** | **Six months ended  June 30, 2009** | ** ** | **Six months ended  June 30, 2008** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **Revenue**                                               | ** ** | **% of Total  Revenue**                         | ** ** | **Revenue**                                             | ** ** | **% of Total  Revenue**                       | ** ** | **Revenue** | ** ** | **% of Total  Revenue** | ** ** | **Revenue** | ** ** | **% of Total  Revenue** | ** ** |
|                                  |       |                                                      |       |                                                      |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Service Revenue:**                  | ** ** | ** **                                                | ** ** | ** **                                                | ** ** | ** **                                              | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mobile                                |       | $                                                         | 6,780      |                                                      | 43         | %                                                       | $          | 12,020                                                  |       | 52 | % | $ | 13,286 |   | 43 | % | $ | 23,223 |   | 51 | % |
| Fixed                                 |       | 636                                                       |       | 4                                                         |       | 946                                                     |       | 4                                                       |       | 1,250 |   | 4 |   | 1,897 |   | 4 |   |
| Data                                  |       | 144                                                       |       | 1                                                         |       | 171                                                     |       | 1                                                       |       | 290 |   | 1 |   | 426 |   | 1 |   |
| Simplex                               |       | 2,998                                                     |       | 19                                                        |       | 1,522                                                   |       | 7                                                       |       | 5,562 |   | 18 |   | 2,401 |   | 5 |   |
| IGO                                   |       | 469                                                       |       | 3                                                         |       | 868                                                     |       | 4                                                       |       | 836 |   | 3 |   | 1,728 |   | 4 |   |
| Other(1)                              |       | 1,535                                                     |       | 10                                                        |       | 1,146                                                   |       | 4                                                       |       | 2,469 |   | 8 |   | 3,008 |   | 7 |   |
| **Total Service Revenue**             |       | 12,562                                                    |       | 80                                                        |       | 16,673                                                  |       | 72                                                      |       | 23,693 |   | 77 |   | 32,683 |   | 72 |   |
|                                  |       |                                                      |       |                                                      |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Subscriber Equipment Sales:**       |       |                                                      |       |                                                      |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Mobile                                |       | 606                                                       |       | 4                                                         |       | 1,816                                                   |       | 8                                                       |       | 1,619 |   | 5 |   | 4,340 |   | 10 |   |
| Fixed                                 |       | 36                                                        |       | —                                                    |       | 422                                                     |       | 2                                                       |       | 113 |   | — |   | 891 |   | 2 |   |
| Data and Simplex                      |       | 2,445                                                     |       | 16                                                        |       | 2,328                                                   |       | 10                                                      |       | 4,296 |   | 14 |   | 4,535 |   | 10 |   |
| Accessories                           |       | 67                                                        |       | —                                                    |       | 1,760                                                   |       | 8                                                       |       | 1,158 |   | 4 |   | 2,684 |   | 6 |   |
| **Total Subscriber Equipment  Sales** |       | 3,154                                                     |       | 20                                                        |       | 6,326                                                   |       | 28                                                      |       | 7,186 |   | 23 |   | 12,450 |   | 28 |   |
|                                  |       |                                                      |       |                                                      |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Total Revenue**                     | ** ** | $                                                         | 15,716     |                                                      | 100        | %                                                       | $          | 22,999                                                  |       | 100 | % | $ | 30,879 |   | 100 | % | $ | 45,133 |   | 100 | % |

 

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(1)             Includes engineeringservices and activation fees

 

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*OperatingLoss.* We realized an operating loss of$30.2 million for the six month period ended June 30, 2009, compared to anoperating loss of $23.6 million for the same period in 2008. We attributethe increase in operating loss principally to lower service revenue.

 

*Subscribers and ARPU for thethree and six months ended June 30, 2009 and 2008.*The following table set forth our averagenumber of subscribers and ARPU for retail, IGO and Simplex customers for thethree and six months ended June 30, 2009 and 2008. The following numbersare subject to immaterial rounding inherent in calculating averages.

 
| ** **                                         | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **% Net  Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **% Net  Change** | ** ** |
| **Average number of subscribers  for the period:** |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
|                                               |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Retail                                             |       | 112,922                                         |       | 120,729                                       |       | (6 | )% | 113,693 |   | 118,855 |   | (4) |   |
| IGO                                                |       | 71,378                                          |       | 78,730                                        |       | (9 | ) | 72,381 |   | 82,640 |   | (12 | ) |
| Simplex                                            |       | 179,877                                         |       | 105,127                                       |       | 71 |   | 171,393 |   | 96,480 |   | 78 |   |
|                                               |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| **ARPU (monthly):**                                |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
|                                               |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Retail                                             |       | $                                               | 25.80      |                                          | $          | 38.57 |   | (33 | ) | $ | 24.44 |   | $ | 38.36 |   | (36 | ) |
| IGO                                                |       | $                                               | 2.19       |                                          | $          | 3.68 |   | (40 | ) | $ | 1.93 |   | $ | 3.49 |   | (45 | ) |
| Simplex                                            |       | $                                               | 5.53       |                                          | $          | 4.78 |   | 16 |   | $ | 5.40 |   | $ | 4.12 |   | 31 |   |

 
| ** **                        | ** ** | **June 30, 2009** | ** ** | **June 30, 2008** | ** ** | **% Net Change** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **Ending number of subscribers:** |       |                        |       |                        |       |                       |       |
|                              |       |                        |       |                        |       |                       |       |
| Retail                            |       | 112,113                     |       | 119,641                     |       | (6                         | )%         |
| IGO                               |       | 69,491                      |       | 77,929                      |       | (11                        | )          |
| Simplex                           |       | 189,879                     |       | 118,341                     |       | 60                         |       |
| Total                             |       | 371,483                     |       | 315,911                     |       | 18                         | %          |

 

The total numberof net subscribers increased from approximately 316,000 at June 30, 2008to approximately 371,000 at June 30, 2009. Although we experienced a netincrease in our total customer base of 18% from June 30, 2008 to June 30,2009, our total service revenue decreased for the same period. This is dueprimarily to reduction of our prices in response to our two-way communicationissues in addition to the change in our product mix.

 

**Independent Gateway AcquisitionStrategy**

 

Currently, 13 of the 26 gateways in our network are owned and operatedby unaffiliated companies, which we call independent gateway operators, some ofwhom operate more than one gateway. We have no financial interest in theseindependent gateway operators other than arms’ length contracts for wholesaleminutes of service. Some of these independent gateway operators have beenunable to grow their businesses adequately due in part to limited resources.Old Globalstar initially developed the independent gateway operator acquisitionstrategy to establish operations in multiple territories with reduced demandson its capital. In addition, there are territories in which for political orother reasons, it is impractical for us to operate directly. We sell servicesto the independent gateway operators on a wholesale basis and they resell themto their customers on a retail basis.

 

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We have acquired, and intend to continue to pursue the acquisition of,independent gateway operators when we believe we can do so on favorable terms andthe current independent operator has expressed a desire to sell its assets tous, subject to capital availability. We believe that these acquisitions canenhance our results of operations in three respects. First, we believe that,with our greater financial and technical resources, we can grow our subscriberbase and revenue faster than some of the independent gateway operators. Second,we realize greater margin on retail sales to individual subscribers than we doon wholesale sales to independent gateway operators. Third, we believeexpanding the territory we serve directly will better position us to market ourservices directly to multinational customers who require a globalcommunications provider.

 

However, acquisitions of independent gateway operators do require us tocommit capital for acquisition of their assets, as well as management resourcesand working capital to support the gateway operations, and therefore increaseour risk in operating in these territories directly rather than through the independentgateway operators. In addition, operating the acquired gateways increases ourmarketing, general and administrative expenses. Our Facility Agreement limitsto $25.0 million the aggregate amount of cash we may invest in foreignacquisitions without the consent of our lenders and requires us to satisfycertain conditions in connection with any acquisition.

 

In March 2008, we acquired an independent gateway operator thatowns three satellite gateway ground stations in Brazil for $6.5 million,paid in shares of our Common Stock. We also incurred transaction costs of$0.3 million related to this acquisition. We are unable to predict thetiming or cost of further acquisitions because independent gateway operationsvary in size and value.  On June 24,2009, we entered into a business transfer agreement with LG Dacom, theindependent gateway operator in Korea, to acquire its gateway and otherGlobalstar assets for approximately $1 million in cash.

 

**PerformanceIndicators**

 

Our management reviews and analyzes several key performance indicatorsin order to manage our business and assess the quality of and potentialvariability of our earnings and cash flows. These key performance indicatorsinclude:

 

·                  total revenue, which is anindicator of our overall business growth;

 

·                  subscriber growth and churnrate, which are both indicators of the satisfaction of our customers;

 

·                  average monthly revenue perunit, or ARPU, which is an indicator of our pricing and ability to obtaineffectively long-term, high-value customers. We calculate ARPU separately foreach of our retail, IGO and Simplex businesses;

 

·                  operating income, which isan indication of our performance;

 

·                  EBITDA, which is anindicator of our financial performance; and

 

·                  capital expenditures, whichare an indicator of future revenue growth potential and cash requirements.

 

**Critical Accounting Policies andEstimates**

 

The preparation of our consolidated financial statements requires us tomake estimates and judgments that affect our revenues and expenses for theperiods reported and the reported amounts of our assets and liabilities,including contingent assets and liabilities, as of the date of the financialstatements. We evaluate our estimates and judgments, including those related torevenue recognition, inventory, long-lived assets, income taxes, pensionobligations, derivative instruments and stock-based compensation, on anon-going basis. We base our estimates and judgments on historical experienceand on various other assumptions that are believed to be reasonable under thecircumstances. Actual results may differ from our estimates under differentassumptions or conditions. We believe the following accounting policies aremost important to understanding our financial results and condition and requirecomplex or subjective judgments and estimates.

 

***Revenue Recognition***

 

We defer customer activation fees and recognize them over four to fiveyear periods, which approximates the estimated average life of the customerrelationship. We periodically evaluate the estimated customer relationshiplife. Historically, changes in the estimated life have not been material to ourfinancial statements.

 

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We bill monthly access fees to retail customers and resellers,representing the minimum monthly charge for each line of service based on itsassociated rate plan, on the first day of each monthly bill cycle. We billairtime minute fees in excess of the monthly access fees in arrears on thefirst day of each monthly billing cycle. To the extent that billing cycles fallduring the course of a given month and a portion of the monthly services hasnot been delivered at month end, we prorate fees and defer fees associated withthe undelivered portion of a given month. Under certain annual plans, wherecustomers prepay for minutes, we defer revenue until the minutes are used orthe prepaid time period expires. Unused minutes accumulate until they expire,usually one year after activation. In addition, we offer other annual plansunder which the customer is charged an annual fee to access our system. Werecognize these fees on a straight-line basis over the term of the plan. Insome cases, we charge a per minute rate whereby we recognize the revenue wheneach minute is used.

 

Occasionally we have granted to customers credits which are expensed orcharged against deferred revenue when granted.

 

Subscriber acquisition costs include items such as dealer commissions,internal sales commissions and equipment subsidies and are expensed at the timeof the related sale.

 

We also provide certain engineering services to assist customers indeveloping new technologies related to our system. We record the revenuesassociated with these services when the services are rendered, and we recordthe expenses when incurred. We record revenues and costs associated with longterm engineering contracts on the percentage-of-completion basis of accounting.

 

We own and operate our satellite constellation and earn a portion ofour revenues through the sale of airtime minutes on a wholesale basis toindependent gateway operators. We recognize revenue from services provided toindependent gateway operators based upon airtime minutes used by theircustomers and contractual fee arrangements. If collection is uncertain, werecognize revenue when cash payment is received.

 

Our annual plans (sometimes called Liberty plans) require users topre-pay usage charges for the entire plan period, generally 12 months,which results in the deferral of certain of our revenues. Under our revenuerecognition policy for these annual plans, we defer revenue until the earlierof when the minutes are used or when these minutes expire. We recognize anyunused minutes as revenue at the expiration of a plan. Most of our customershave not used all the minutes that are available to them or have not used themat the pace anticipated, which has caused us to defer a portion of our servicerevenue.

 

During the second quarter of 2007, we first introduced an unlimitedairtime usage service plan (called the Unlimited Loyalty plan) which allowedexisting and new customers to use unlimited satellite voice minutes for anytimecalls for a fixed monthly or annual fee. Since the second quarter of 2007, wehave introduced a number of similarly structured plans that incorporated adeclining price schedule that reduced the fixed monthly fee at the completionof each calendar year through the duration of the customer agreement, whichends on June 30, 2010 (with an option to extend for one additional year).We record revenue for these plans on a monthly basis based on a straight lineaverage derived by computing the total fees charged over the term of thecustomer agreement and dividing it by the number of the months. If a customercancels prior to the ending date of the customer agreement, we recognize thebalance in deferred revenue. The Unlimited Loyalty Plan is no longer offered tonew customers.

 

We sell SPOT satellite GPS messenger services as 1 or 2 year annualplans and bill them to the customer at the time the customer activates theservice. We defer revenue on such annual service plans upon activation andrecognize it ratably over the service term.

 

At June 30, 2009 and December 31, 2008, our deferred revenueaggregated approximately $23.2 million (with $3.1 million included innon-current liabilities) and $20.6 million (with $1.3 millionincluded in non-current liabilities), respectively.

 

Subscriber equipment revenue represents the sale of fixed and mobileuser terminals, accessories and SPOT satellite GPS messenger product. Werecognize revenue upon shipment provided title and risk of loss have passed tothe customer, persuasive evidence of an arrangement exists, the fee is fixedand determinable and collection is probable.

 

In December 2002, the Emerging Issues Task Force (“EITF”) reacheda consensus on EITF Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables.” EITF Issue No. 00-21 addresses certain aspects of theaccounting by a vendor for arrangements under which it will perform multiplerevenue-generating activities. In some arrangements, the different revenue-generating activities (deliveries) are sufficiently separable and there existssufficient evidence of their fair values to account separately for some or allof the deliveries (that is, there are separate units of accounting). In otherarrangements, some or all of the deliveries are not independently functional,or there is not sufficient evidence of their fair values to account for themseparately. EITF Issue No. 00-21 addresses when and, if so, how anarrangement involving multiple deliverables should be divided into separateunits of accounting. EITF Issue No. 00-21 does not change otherwiseapplicable revenue recognition criteria.

 

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***Inventory***

 

Inventory consists of purchased products, including fixed and mobileuser terminals, accessories and gateway spare parts. We state inventorytransactions at the lower of cost or market. At the end of each quarter, wereview product sales and returns from the previous twelve months and write offany excess and obsolete inventory. Cost is computed using the first-in,first-out (FIFO) method. We record inventory allowances for inventories with alower market value or that are slow moving in the period of determination.

 

***Globalstar System, Property andEquipment***

 

Our Globalstar System assets include costs for the design, manufacture,test and launch of a constellation of low earth orbit satellites, includingeight satellites previously held as ground spares which we launched in May andOctober 2007, which we refer to as the space component, and primary andbackup terrestrial control centers and gateways, which we refer to as theground component. We recognize loss from an in-orbit failure of a satellite asan expense in the period it is determined that the satellite is notrecoverable. We regard these recently launched satellites as part of thesecond-generation constellation which will be supplemented by the 48second-generation satellites on order. We estimate these 48 second-generationsatellites will have an in-orbit life of 15 years.

 

We review the carrying value of the Globalstar System for impairmentwhenever events or changes in circumstances indicate that the recorded value ofthe space component and ground component may not be recoverable. We look tocurrent and future undiscounted cash flows, excluding financing costs, asprimary indicators of recoverability. If we determine an impairment exists, wecalculate any related impairment loss based on fair value. We believe ourtwo-way telecommunications services, or Duplex services, after the launch ofour second- generation constellation, and Simplex services will generatesufficient undiscounted cash flow after our second-generation system becomesfully operational to justify our carrying value for our second-generationcosts.  We expect to begin providingservices from our second-generation system in 2010.

 

We began depreciating the satellites previously recorded as sparesatellites and subsequently incorporated into the Globalstar System on the dateeach satellite was placed into service (the “In-Service Date”) over anestimated life of eight years.

 

***Income Taxes***

 

Until January 1, 2006, we were taxed as a partnership for U.S. taxpurposes. Generally, our taxable income or loss, deductions and credits werepassed through to our members. Effective January 1, 2006, we elected to betaxed as a corporation, and thus subject to the provisions as prescribed underSubchapter C of the Internal Revenue Code. We also began accounting forincome taxes under Statement of Financial Accounting Standards (“SFAS”) No. 109“*Accounting for Income Taxes*” (February 1997).

 

SFAS No. 109 also requires that when an enterprise changes its taxstatus from non-taxable to taxable, the effect of recognizing deferred taxassets and liabilities is included in income from continuing operations in theperiod of change. As a result of our election to be taxed as a corporationeffective January 1, 2006, we recognized gross deferred tax assets andgross deferred tax liabilities of approximately $204.2 million and$0.1 million, respectively.

 

On January 1, 2009, we adopted FSP APB 14-1, which was effectiveretrospectively. Prior to the adoption of FSP APB 14-1, we had recorded the nettax effect of the conversions and exchanges of our 5.75% Convertible SeniorNotes due 2028 (“5.75% Notes”) during the fourth quarter of 2008 againstadditional-paid-in-capital and reduced our deferred tax asset at December 31,2008. The adoption of FSP APB 14-1 resulted in our recording a gain from theexchanges and conversions of the Notes.

 

At December 31, 2008, we recognized gross deferred tax assets ofapproximately $125.5 million. We also established a valuation allowance toreduce the deferred tax assets to an amount that is more likely than not to berealized. As of December 31, 2008, we had established valuation allowancesof approximately $125.5 million. Accordingly, at June 30, 2009 and December 31,2008, net deferred tax assets were $0.

 

***Second-Generation Satellites andLaunch Costs and Ground Component***

 

In November, 2006, we entered into a contract with Thales Alenia Spaceto construct 48 low-earth orbit satellites. We entered into an additionalagreement with Thales Alenia Space in March 2007 for the construction ofthe Satellite Operations Control Centers, Telemetry Command Units and In OrbitTest Equipment (collectively, the “Control Network Facility”) for oursecond-generation satellite constellation.

 

In September 2007, we and our Launch Provider entered into anagreement for the launch of our second-generation satellites and certain preand post-launch services. Pursuant to the agreement as amended, our LaunchProvider will make four launches of six satellites each, and we have the optionto require our Launch Provider to make one additional launch of six satellites.

 

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In May 2008, we entered into a contract with Hughes under which Hugheswill design, supply and implement the Radio Access Network (“RAN”) groundnetwork equipment and software upgrades for installation at a number of oursatellite gateway ground stations and satellite interface chips to be a part ofthe User Terminal Subsystem (UTS) in our various next-generation Globalstardevices. The total contract purchase price of approximately $100.8 millionis payable in various increments over a period of 40 months. We have theoption to purchase additional RANs and other software and hardware improvementsat pre-negotiated prices. A portion of the payments made under this contract isrecognized as an expense.

 

In October 2008, we signed an agreement with Ericsson, a leading globalprovider of technology and services to telecom operators. According to the$22.7 million contract, Ericsson will work with us to develop, implementand maintain a ground interface, or core network, system that will be installedat our satellite gateway ground stations. The all Internet protocol (IP) basedcore network system is wireless 3G/4G compatible and will link our radio accessnetwork to the public-switched telephone network (PSTN) and/or Internet. Designof the new core network system is now underway.

 

We will begin to depreciate these assets once they are completed andplaced into service.

 

***Pension Obligations***

 

We have a company-sponsored retirement plan covering certain currentand past U.S.-based employees. Until June 1, 2004, substantially all ofOld Globalstar’s and our employees and retirees who participated and/or met thevesting criteria for the plan were participants in the Retirement Plan of SpaceSystems/Loral, Inc. (the “Loral Plan”), a defined benefit pension plan.The accrual of benefits in the Old Globalstar segment of the Loral Plan wascurtailed, or frozen, by the administrator of the Loral Plan as of October 23,2003. Prior to October 23, 2003, benefits for the Loral Plan weregenerally based upon compensation, length of service with the company and ageof the participant. On June 1, 2004, the assets and frozen pension obligationsof the segment attributable to our employees were transferred into a newGlobalstar Retirement Plan (the “Globalstar Plan”). The Globalstar Plan remainsfrozen and participants are not currently accruing benefits beyond thoseaccrued as of October 23, 2003. Our funding policy is to fund theGlobalstar Plan in accordance with the Internal Revenue Code and regulations.

 

We account for our defined benefit pension and life insurance benefitplans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,”(“SFAS 87”), SFAS No. 106, “Employer’s Accounting for PostretirementBenefits Other than Pensions,” (“SFAS 106”) and SFAS No. 158, “Employers’Accounting Defined Benefit Pension and Other Postretirement Plans,” (“SFAS 158”)which require that amounts recognized in financial statements be determined onan actuarial basis. We adopted the recognition and disclosure provisions ofSFAS No. 158 on December 31, 2006, and this adoption did not have anyimpact on our results of operation. Pension benefits associated with theseplans are generally based on each participant’s years of service, compensation,and age at retirement or termination. Two critical assumptions, the discountrate and the expected return on plan assets, are important elements of expenseand liability measurement.

 

We determine the discount rate used to measure plan liabilities as ofthe December 31 measurement date for the U.S. pension plan. The discountrate reflects the current rate at which the associated liabilities could be effectivelysettled at the end of the year. In estimating this rate, we look at rates ofreturn on fixed-income investments of similar duration to the liabilities inthe plan that receive high, investment grade ratings by recognized ratingsagencies. Using these methodologies, we determined a discount rate of 5.75% tobe appropriate as of December 31, 2008, which is a decrease of0.25 percentage points from the rate used as of December 31, 2007. Anincrease of 1.0% in the discount rate would have decreased our plan liabilitiesas of December 31, 2008 by $1.5 million and a decrease of 1.0% couldhave increased our plan liabilities by $1.8 million.

 

A significant element in determining our pension expense in accordancewith SFAS No. 158 is the expected return on plan assets, which is based onhistorical results for similar allocations among asset classes. For the U.S.pension plan, our assumption for the expected return on plan assets was 7.5%for 2008.

 

We defer the difference between the expected return and the actualreturn on plan assets and, under certain circumstances, amortize it over futureyears of service. Therefore, the net deferral of past asset gains (losses)ultimately affects future pension expense. This is also true of changes toactuarial assumptions. As of December 31, 2008, we had net unrecognizedpension actuarial losses of $5.2 million. These amounts representpotential future pension and postretirement expenses that would be amortizedover average future service periods.

 

***Derivative Instruments***

 

Prior to December 10, 2008, we utilized a derivative instrument inthe form of an interest rate swap agreement and a forward contract forpurchasing foreign currency to minimize our risk from interest ratefluctuations related to our variable rate credit agreement and minimize ourrisk from fluctuations related to the foreign currency exchange rates,respectively. We used the interest rate swap agreement and the forward contractfor purchasing foreign currency to manage risk and not for trading or otherspeculative

 

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purposes.At the end of each accounting period, we recorded the derivative instrument onour balance sheet as either an asset or a liability measured at fair value. Theinterest rate swap agreement and the forward contract for purchasing foreigncurrency did not qualify for hedge accounting treatment. Changes in the fairvalue of the interest rate swap agreement and the forward contract forpurchasing foreign currency were recognized as “Derivative gain (loss) “ and “OtherIncome” over the life of the agreements, respectively. We terminated theinterest swap agreement on December 10, 2008 by making a payment ofapproximately $9.2 million.

 

In June 2009,in connection with entering into the Facility Agreement (See Note 12 in Item 1Notes to Unaudited Interim Consolidated Financial Statements in Part I —Financial Information), which provides for interest at a variable rate, weentered into a ten-year interest rate cap agreement. The interest rate capagreement reflected a $586.3 million notional amount at interest rates thatprovide coverage to us for any exposures resulting from escalating interestrates over the term of the Facility Agreement. We paid approximately $12.4million fee for the interest rate cap agreement upfront and recorded it in “OtherAssets” on our consolidated balance sheet. The interest rate cap did notqualify for hedge accounting treatment under SFAS 133. We will recognize thechanges in the fair value of the interest rate cap derivative as “Derivativegain (loss)” in the accompanying Consolidated Statement of Operations over thelife of the agreement.

 

We recorded the conversionrights and features embedded within the 8.00% Convertible Senior UnsecuredNotes (“8.00% Notes”) as a compound embedded derivative liability within Otherlong term liabilities on our Consolidated Balance Sheet with a correspondingdebt discount which is netted against the face value of the 8.00% Notes (See Note12 of Item 1 Notes to unaudited interim Consolidated Financial in Part I –Financial Information). We will amortize the debt discount associated with thecompound embedded derivative liability to interest expense over the term of theNotes using an effective interest rate method. The fair value of the compoundembedded derivative liability will be marked-to-market at the end of eachreporting period, with any changes in value reported as “Derivative gain(loss)” in the consolidated statements of operations. We determined the fairvalue of the compound embedded derivative using a Monte Carlo simulation modelbased upon a risk-neutral stock price model. 

 

Due to the cash settlementprovisions in the warrants issued with the 8.00% Notes (Note 12), we recordedthe warrants as Other long term liabilities on its Consolidated Balance Sheetwith a corresponding debt discount which is netted with the face value of the8.00% Notes. We will amortize the debt discount associated with the warrantliability to interest expense over the term of the Warrants using an effectiveinterest rate method. The fair value of the warrant liability will bemarked-to-market at the end of each reporting period, with any changes in valuereported as “Derivative gain (loss)” in the consolidated statements ofoperations. We determined the fair value of the warrant derivative using aMonte Carlo simulation model based upon a risk-neutral stock price model. 

 

We determined that thewarrants issued in conjunction with the availability fee for the ContingentEquity Agreement, were a liability and recorded it as a component of prepaidand other current assets, at issuance. We will amortize the warrant liabilityto interest expense over one year.

 

None of the derivativeinstruments described above was designated as a hedge.

 

***Stock-Based Compensation***

 

Effective January 1, 2006, as a result of our initial publicoffering, we adopted the provisions of Statement of Financial AccountingStandards 123(R), “Share-Based Payment” (“SFAS 123(R)”), and relatedinterpretations, or SFAS 123(R), to account for stock-based compensationusing the modified prospective transition method and therefore have notrestated our prior period results. Among other things, SFAS 123(R) requiresthat compensation expense be recognized in the financial statements for bothemployee and non-employee share-based awards based on the grant date fair valueof those awards. Additionally, stock-based compensation expense includes anestimate for pre-vesting forfeitures and is recognized over the requisiteservice periods of the awards on a straight-line basis, which is generallycommensurate with the vesting term.

 

**Resultsof Operations**

 

*Comparisonof Results of Operations for the Three Months Ended June 30, 2009 and 2008(in thousands):*

 
| ** **                                                                            | ** ** | **Three months ended  June 30,** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **                                                                            | ** ** | **2009**                                        | ** ** | **2008**   | ** ** | **% Change** | ** ** |
| **Revenue:**                                                                          | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service revenue                                                                       |       | $                                               | 12,562     |       | $          | 16,673 |   | (25 | )% |
| Subscriber equipment sales                                                            |       | 3,154                                           |       | 6,326      |       | (50 | ) |
| Total revenue                                                                         |       | 15,716                                          |       | 22,999     |       | (32 | ) |
|                                                                                  |       |                                            |       |       |       |   |   |
| **Operating expenses:**                                                               | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of services (exclusive of depreciation and  amortization shown separately below) |       | 7,961                                           |       | 8,607      |       | (8 | ) |
| Cost of subscriber equipment sales:                                                   |       |                                            |       |       |       |   |   |
| Cost of subscriber equipment sales                                                    |       | 2,832                                           |       | 4,118      |       | (31 | ) |
| Cost of subscriber equipment sales — Impairment of  assets                       |       | 648                                             |       | 349        |       | 86 |   |
| Total cost of subscriber equipment sales                                              |       | 3,480                                           |       | 4,467      |       | (22 | ) |
| Marketing, general and administrative                                                 |       | 11,408                                          |       | 15,482     |       | (26 | ) |
| Depreciation and amortization                                                         |       | 5,468                                           |       | 6,521      |       | (16 | ) |
| Total operating expenses                                                              |       | 28,317                                          |       | 35,077     |       | (19 | ) |
|                                                                                  |       |                                            |       |       |       |   |   |
| Operating loss                                                                        |       | (12,601                                         | )          | (12,078    | )          | 4 |   |
|                                                                                  |       |                                            |       |       |       |   |   |
| Other income (expense):                                                               |       |                                            |       |       |       |   |   |
| Interest income                                                                       |       | 56                                              |       | 1,565      |       | (96 | ) |
| Interest expense                                                                      |       | (3,141                                          | )          | (301       | )          | 944 |   |
| Derivative gain (loss)                                                                |       | (797                                            | )          | 3,743      |       | N/A |   |
| Other income (expense)                                                                |       | 2,529                                           |       | (77        | )          | N/A |   |
| Total other income (expense)                                                          |       | (1,353                                          | )          | 4,930      |       | N/A |   |
|                                                                                  |       |                                            |       |       |       |   |   |
| Income loss before income taxes                                                       |       | (13,954                                         | )          | (7,148     | )          | 95 |   |
| Income tax (benefit) expense                                                          |       | (192                                            | )          | 29         |       | N/A |   |
| Net loss                                                                              |       | $                                               | (13,762    | )          | $          | (7,177 | ) | 92 | % |

 

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***Revenue. ***Totalrevenue decreased by approximately $7.3 million, or 32%, to $15.7 million forthe three months ended June 30, 2009, from $23.0 million for the threemonths ended June 30, 2008. We attribute this decreaseto lower service revenues as a result of our two-way communication issues andlower subscriber equipment sales. Our service revenue decreased due primarilyto price reductions aimed at maintaining our subscriber base despite ourtwo-way communication issues. Our subscriber equipment sales decreased duringthe three months ended June 30, 2009 as compared to the same period in2008, primarily as a result of lower sales of our duplex products. Our retailARPU during the three months ended June 30, 2009, decreased by 33% to$25.80 from $38.57 for the same period in 2008. We added over 55,000 netsubscribers during the twelve-month period from June 30, 2008 to June 30,2009.

 

*ServiceRevenue.*Service revenue decreased $4.1 million, orapproximately 25%, to $12.6 million for the three months ended June 30,2009, from $16.7 million for the same period in 2008. Although oursubscriber base grew 18% during the twelve-month period ended June 30,2009, to approximately 371,000, we experienced decreased retail ARPU resultingin lower service revenue. The primary reason for this decrease in our servicerevenue was the reduction of our prices in response to our two-waycommunication issues and product mix. The decrease in duplex service revenue was partially offset by increasedservice revenue from our SPOT Satellite services as a result of additional SPOTservice subscribers and prior year SPOT service subscribers renewing theirannual subscriptions.

 

*Subscriber Equipment Sales.* Subscriber equipment salesdecreased by approximately $3.1 million, or 50%, to $3.2 million forthe three months ended June 30, 2009, from $6.3 million for the sameperiod in 2008. The decrease was due primarily to lower sales of our duplexproducts and services during the three months ended June 30, 2009.

 

***Operating Expenses.***Total operatingexpenses decreased $6.8 million, or approximately 19%, to $28.3 million for thethree months ended June 30, 2009, from $35.1 million for the same periodin 2008. This decrease was due to reductions in our headcount, lower cost ofgoods sold related to lower sales of subscriber equipment of our duplexproducts, lower marketing and advertising costs and various other operatingexpense reductions throughout the Company.

 

*Cost of Services.* Our cost of services forthe three months ended June 30, 2009 and 2008, were $8.0 million and$8.6 million, respectively. Our cost of services comprises primarily ofnetwork operating costs. The decrease was due to reductions in headcount,telecom, subcontractor and maintenance charges offset by higher research anddevelopment expenses related to our second generation ground componentdevelopment.

 

*Cost of Subscriber Equipment Sales.*Cost ofsubscriber equipment sales decreased approximately $1.0 million, or 22%,to $3.5 million for the three months ended June 30, 2009, from $4.5million for the three months ended June 30, 2008. This decrease was dueprimarily to lower sales of our duplex products.

 

*Marketing, General and Administrative.* Marketing,general and administrative expenses decreased approximately $4.1 million,or 26%, to $11.4 million for the three months ended June 30, 2009,from $15.5 million for the same period in 2008. This decrease was dueprimarily to reductions in headcount, lower marketing and advertising costs andlegal expenses.

 

*Depreciationand Amortization.* Depreciation and amortization expense decreasedapproximately $1.1 million for the three months ended June 30, 2009from the same period in 2008. The decrease in depreciation expense was dueprimarily to the first-generation satellite constellation reachingfully-depreciated status at December 31, 2008.

 

***Operating Loss.***  Operating loss increased approximately$0.5 million, to $12.6 million, for the three months ended June 30,2009, from $12.1 million for the same period in 2008. The increase was dueprimarily to the lower service and equipment revenue partially offset by loweroperating costs described above.

 

*InterestIncome.* Interest income decreased by approximately $1.5 million, to$0.1 million, for the three months ended June 30, 2009, from$1.6 million for the same period in 2008. This decrease was due to loweraverage cash and restricted cash balances on hand.

 

*InterestExpense.*Interest expense increased by $2.8 million, to $3.1million, for the three months ended June 30, 2009, from $0.3 million forthe same period in 2008. This increase was due primarily to the higher expenserelated to our deferred debt issuance costs.

 

*Derivative gain (loss)*. Derivative losses increased by $4.5million for the three months ended June 30, 2009 to a loss of $0.8million, as compared to a gain of $3.7 million during the same period in 2008.This was due primarily to the decrease in the fair value of our interest ratecap agreement as a result of a decrease in market interest rates partiallyoffset by gains in fair value of the compound embedded conversion option andwarrants issued with the 8.00% Notes and Contingent Equity Agreement.

 

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*OtherIncome (Expense).*Other income (expense) generally consists of foreignexchange transaction gains and losses. Other income increased by$2.6 million for the three months ended June 30, 2009, as compared tothe same period in 2008, due primarily to the favorable change in the exchangerate of the Canadian dollar during the three months ended June 30, 2009.

 

*IncomeTax Expense.*Income tax benefit for the three months ended June 30,2009 was $0.2 million compared to an expense of less than $0.1 millionduring the same period in 2008. The change between periods was a resultprimarily of an income tax refund we received with respect to our Canadiansubsidiary.

 

***Net Loss.***Our net loss increasedapproximately $6.6 million, to a loss of $13.8 million, for the threemonths ended June 30, 2009, from a net loss of $7.2 million for thesame period in 2008. This increase was primarily due to lower service revenueand decreases in other income as described above, offset partially by loweroperating expenses as a result of cost reductions.

 

*Comparisonof Results of Operations for the Six Months Ended June 30, 2009 and 2008(in thousands):*

 
| ** **                                                                            | ** ** | **Six months ended  June 30,** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                                                                            | ** ** | **2009**                                      | ** ** | **2008**   | ** ** | **% Change** | ** ** |
| **Revenue:**                                                                          | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service revenue                                                                       |       | $                                             | 23,693     |       | $          | 32,683 |   | (28 | )% |
| Subscriber equipment sales                                                            |       | 7,186                                         |       | 12,450     |       | (42 | ) |
| Total revenue                                                                         |       | 30,879                                        |       | 45,133     |       | (32 | ) |
|                                                                                  |       |                                          |       |       |       |   |   |
| **Operating expenses:**                                                               | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of services (exclusive of depreciation and  amortization shown separately below) |       | 18,369                                        |       | 16,082     |       | 14 |   |
| Cost of subscriber equipment sales:                                                   |       |                                          |       |       |       |   |   |
| Cost of subscriber equipment sales                                                    |       | 5,827                                         |       | 9,099      |       | (36 | ) |
| Cost of subscriber equipment sales — Impairment of  assets                       |       | 648                                           |       | 413        |       | 57 |   |
| Total cost of subscriber equipment sales                                              |       | 6,475                                         |       | 9,512      |       | (32 | ) |
| Marketing, general and administrative                                                 |       | 25,385                                        |       | 31,230     |       | (19 | ) |
| Depreciation and amortization                                                         |       | 10,892                                        |       | 11,939     |       | (9 | ) |
| Total operating expenses                                                              |       | 61,121                                        |       | 68,763     |       | (11 | ) |
|                                                                                  |       |                                          |       |       |       |   |   |
| Operating loss                                                                        |       | (30,242                                       | )          | (23,630    | )          | 28 |   |
|                                                                                  |       |                                          |       |       |       |   |   |
| Other income (expense):                                                               |       |                                          |       |       |       |   |   |
| Interest income                                                                       |       | 184                                           |       | 2,933      |       | (94 | ) |
| Interest expense                                                                      |       | (3,381                                        | )          | (1,298     | )          | 160 |   |
| Derivative gain (loss)                                                                |       | (797                                          | )          | 204        |       | N/A |   |
| Other income (expense)                                                                |       | (1,446                                        | )          | 8,174      |       | N/A |   |
| Total other income (expense)                                                          |       | (5,440                                        | )          | 10,013     |       | N/A |   |
|                                                                                  |       |                                          |       |       |       |   |   |
| Income loss before income taxes                                                       |       | (35,682                                       | )          | (13,617    | )          | 162 |   |
| Income tax expense                                                                    |       | (162                                          | )          | 195        |       | N/A |   |
| Net loss                                                                              |       | $                                             | (35,520    | )          | $          | (13,812 | ) | 157 | % |

 

***Revenue. ***Totalrevenue decreased by $14.2 million, or approximately 32%, from $45.1 millionfor the six months ended June 30, 2008 to $30.9 million for the six monthsended June 30, 2009. We attribute this decrease mainly to lower servicerevenue which we believe stems from lower price service plans introduced inorder to maintain our subscriber base despite our two-way communication issuesand from reductions in sales of our duplex equipment.  Our retail ARPU during the six months ended June 30,2009 decreased by 36% to $24.44 from $38.36 for the six months ended June 30,2008.

 

*Service Revenue.*Service revenue decreased $9.0 million, orapproximately 28%, from $32.7 million for the six months ended June 30,2008 to $23.7 million for the six months ended June 30, 2009. Although ouroverall subscriber base grew 18% to approximately 371,000 over the twelve-monthperiod from June 30, 2008 to June 30, 2009, we experienced decreasedretail ARPU. We believe that the two-way communication issues we first reportedin February 2007 and related price reductions were the primary reasons forthis decrease.

 

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*Subscriber Equipment Sales.*Subscriber equipment sales decreased by approximately$5.3 million, or approximately 42%, from $12.5 million for the six months endedJune 30, 2008 to $7.2 million for the six months ended June 30, 2009.We attribute this decrease to reduced sales of our duplex products.

 

***Operating Expenses.***Total operating expenses decreased $7.6 million, orapproximately 11%, from $68.8 million for the six months ended June 30,2008 to $61.1 million for the six months ended June 30, 2009. Thisdecrease was due to reductions in our headcount, lower cost of goods sold as aresult of lower subscriber equipment sales related to our duplex products, and lowermarketing and advertising costs and legal expenses, partially offset by higherexpenses as a result of the acquisition of our Brazilian subsidiary on March 25,2008.

 

*Cost of Services.*Our cost of services for the six months ended June 30,2009 and 2008 were $18.4 million and $16.1 million, respectively.  Our cost of services is comprised primarilyof network operating costs, which are generally fixed in nature. The increasein the cost of services during the six months ended June 30, 2009 is dueprimarily to higher costs as a result of our Brazilian subsidiary acquisitionon March 25, 2008 and higher research and development expensesrelated to our second-generation ground component development.

 

*Cost of Subscriber Equipment Sales.*Cost of subscriber equipment salesdecreased $3.0 million, or approximately 32%, from $9.5 million for the sixmonths ended June 30, 2008 to $6.5 million for the six months ended June 30,2009.  This decrease was due primarily tolower sales of our duplex products.

 

*Marketing,General and Administrative.*Marketing, general and administrative expensesdecreased $5.8 million, or approximately 19%, from $31.2 million for the sixmonths ended June 30, 2008 to $25.4 million for the six months ended June 30,2009. This decrease was due primarily to reductions in our headcount andlower marketing and advertising costs and legal expenses offset partially byhigher costs associated with the acquisition of our subsidiary in Brazil.

 

*Depreciationand Amortization.*Depreciationand amortization expense decreased approximately $1.0 million, or approximately9%, from $11.9 million for the six months ended June 30, 2008 to $10.9million for the six months ended June 30, 2009. This decrease was dueprimarily to the first-generation satellite constellationreaching fully-depreciated status at December 31, 2008.

 

***Operating Loss.***Our operating loss of $30.2 million for the six monthsended June 30, 2009 increased approximately $6.6 million from an operatingloss of $23.6 million for the six months ended June 30, 2008. The increasewas due primarily to lower revenues partially offset by lower operatingexpenses.

 

*InterestIncome.*Interestincome decreased by $2.7 million for the six months ended June 30, 2009 to$0.2 million. This decrease was due to smaller cash balances on hand ascompared to the prior year.

 

*InterestExpense.*Interestexpense increased by $2.1 million, to $3.4 million for the six months ended June 30,2009 from $1.3 million for the six months ended June 30, 2008. This increasewas due primarily to higher expense related to our deferred offering costs duringthe six months ended June 30, 2009.

 

*Derivative gain (loss)*. Derivative loss increased by $1.0million for the six months ended June 30, 2009, as compared to the sameperiod in 2008, due primarily to the unfavorable change in the fair value ofthe interest rate cap derivative instrument.

 

*OtherIncome (Expense).*Otherincome (expense) generally consists of foreign exchange transaction gains andlosses. Other income decreased by $9.6 million for the six months ended June 30,2009 as compared to the same period in 2008 primarily as a result of lessfavorable conversion rates for Euro to the U.S. Dollar and the Canadian Dollarto the U.S. Dollar resulting in fewer euro denominated payments made in the sixmonths ended June 30, 2009 and lower balances on our euro denominatedescrow account in the current year.

 

*IncomeTax Expense(benefit).*Income tax benefit for the six months ended June 30, 2009 was $0.2million compared to an expense of $0.2 million during the same period in 2008.This was primarily a result of an income tax refund we received with respect toour Canadian subsidiary.

 

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***Net Loss.***Our net loss increased approximately $21.7 million toa loss of $35.5 million for the six months ended June 30, 2009 from a netloss of $13.8 million for the six months ended June 30, 2008. Thisincrease was due primarily to lower revenues, losses on derivatives and lossesassociated with foreign exchange gains/losses offset partially by loweroperating expenses as described above.

 

**Liquidityand Capital Resources**

 

The following table showsour cash flows from operating, investing, and financing activities for the sixmonths ended June 30, 2009 and 2008:

 
| ** **                                            | ** ** | **Six Months Ended  June 30, 2009** | ** ** | **Six Months Ended  June 30, 2008** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
|                                                  |       |                                                    |       |                                                    |       |
| Net cash from (used in) operating activities          |       | $                                                       | 13,068     |                                                    | $          | (14,453 | ) |
| Net cash used in investing activities                 |       | (48,530                                                 | )          | (184,136                                                | )          |
| Net cash from financing activities                    |       | 37,419                                                  |       | 195,481                                                 |       |
| Effect of exchange rate changes on cash               |       | 1,723                                                   |       | (8,850                                                  | )          |
| Net increase (decrease) in cash and cash  equivalents |       | $                                                       | 3,680      |                                                    | $          | (11,958 | ) |

 

Currently,our principal sources of liquidity are our Facility Agreement (described below)and our existing cash.

 

AtJuly 1, 2009, our principal short-term liquidity needs were:

 

·                                          to makepayments to procure our second-generation satellite constellation, constructthe Control Network Facility and launch related costs, in a total amount notyet determined, but which will include approximately $201.3 millionpayable to Thales Alenia Space by June 2010 under the purchase contractfor our second-generation satellites and €0.9 million payable to Thales AleniaSpace by June 2010 under the contract for construction of the ControlNetwork Facility, respectively;

 

·                                          to makepayments related to our launch for the second-generation satelliteconstellation in the amount of $175.9 million payable to our Launch Provider byJune 30, 2010;

 

·                                          to makepayments related to the construction of our second-generation ground componentin the amount of $71.8 million by June 30, 2010; and

 

·                                          to fund our working capital (which was adeficit of $42.6 million at June 30, 2009 excluding vendor financing whichwill be paid as a part of the items described above).

 

During the sixmonths ended June 30, 2009 and the year ended December 31, 2008, ourprincipal sources of liquidity were:

 
| **Dollars in millions**                                     | ** ** | **Six  Months Ended  June 30, 2009** | ** ** | **Year Ended  December 31, 2008** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| Cash on-hand at beginning of period                                   |       | $                                                   | 12.4       |                                             | $          | 37.6 |   |
|                                                                  |       |                                                |       |                                             |       |   |   |
| Net proceeds from 5.75% Notes                                         |       | $                                                   | —     |                                             | $          | 145.1 |   |
|                                                                  |       |                                                |       |                                             |       |
| Net proceeds from 8.00% convertible senior  unsecured notes           |       | $                                                   | 51.3       |                                             | $          | — |   |
|                                                                  |       |                                                |       |                                             |       |
| Proceeds from Thermo equity purchases                                 |       | $                                                   | 1.0        |                                             | $          | — |   |
|                                                                  |       |                                                |       |                                             |       |   |   |
| Borrowings under Thermo Funding credit agreement  and other debt, net |       | $                                                   | 15.0       |                                             | $          | 116.1 |   |
|                                                                  |       |                                                |       |                                             |       |
| Cash generated (used) by operations                                   |       | $                                                   | 13.1       |                                             | $          | (30.6 | ) |
|                                                                       |            |                                                     |            |                                                  |            |  |  |  |  |

 

We plan to fund our short-term liquidity requirements from thefollowing sources:

 

·                  cash from our FacilityAgreement ($586.3 million was available at June 30, 2009; $215.1 availableafter draw in July 2009);

 

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·                  cash from the issuance ofour 8.00% Convertible Senior Unsecured Notes (“8.00% Notes”) providing $51.3million of net proceeds; and

 

·                  excess cash on hand at June 30,2009.

 

Our principal long-term liquidity needs are:

 

·                  to pay the costs ofprocuring and deploying our second-generation satellite constellation andupgrading our gateways and other ground facilities;

 

·                  to fund our working capital,including any growth in working capital required by growth in our business; and

 

·                  to fund the cashrequirements of our independent gateway operator acquisition strategy, in anamount not determinable at this time.

 

***Net Cash from (used in) OperatingActivities***

 

Net cash from operating activities during the six months ended June 30,2009 increased to a cash flow of $13.1 million from an outflow of$14.5 million in the same period in 2008. This increase was due primarilyto favorable changes in operating assets and liabilities offset by lowerrevenues during the six months ended June 30, 2009, as compared to thesame period in 2008.

 

***Net Cash from (used in) InvestingActivities***

 

Cash used in investing activities was $48.5 million during the sixmonths ended June 30, 2009, compared to $184.1 million during thesame period in 2008. This decrease was primarily the result of reduced paymentsrelated to the construction of our second generation constellation during thesix months ended June 30, 2009.

 

***Net Cash from Financing Activities***

 

Net cash provided by financing activities decreased by $158.1 millionto $37.4 million during the six months ended June 30, 2009, from$195.5 million during the same period in 2008. The decrease was dueprimarily to timing of cash draws on the funds available to us in the sixmonths ended June 30, 2009 as compared to the six months ended June 30,2008.  During the six months ended June 30,2008, we borrowed funds under the $150 million convertible long term debt and$100 million long term debt facilities of the Thermo Funding credit agreementas compared to borrowings of $55.0 million under the 8.00% Notes, $7.8 millionfrom our Thermo Funding revolving credit facility, and $3.3 million inadditional debt and capital contributions in the six months ended June 30,2009. Since June 30, 2009, we borrowed approximately $371.2 million under theFacility Agreement.

 

***CapitalExpenditures***

 

In 2005, we commenced capital expenditures for the launch of our eightspare satellites in 2007. In 2008 and 2007, we incurred $0.1 million and$37.6 million (excluding capitalized interest and internal costs),respectively, related to the launch of our eight spare satellites. The totalcost for the launch of the spare satellites was approximately $124.0 millionexclusive of capitalized interest and internal costs. As of December 31,2008, substantially all related payments had been made.

 

Inthe fourth quarter of 2006, we entered into a contract with Thales Alenia Spacefor our second-generation satellite constellation. On June 3, 2009, we andThales Alenia Space entered into an amended and restated contract for theconstruction of the second generation satellites to incorporate prioramendments, acceleration requests and make other non-material changes to thecontract entered into in November 2006. The total contract price,including subsequent additions, is €678.9 million (approximately$936.6 million at a weighted average conversion rate of €1.00 =$1.3797 at June 30, 2009, including approximately €146.8 millionwhich was paid by us in U.S. dollars at a fixed conversion rate of €1.00 =$1.2940). We have made payments in the amount of approximately$400.5 million in related costs through June 30, 2009.

 

In March 2007, we entered into an agreement with Thales AleniaSpace for the construction of the Satellite Operations Control Centers,Telemetry Command Units and In Orbit Test Equipment (collectively, the “ControlNetwork Facility”) for our second-generation satellite constellation. Thisagreement complements the second-generation satellite construction contractwith Thales Alenia Space for the construction of 48 low-earth orbit satellitesand allows Thales Alenia Space to coordinate all aspects of thesecond-generation satellite constellation project, including the transition offirst-generation software and hardware to equipment

 

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forthe second generation. The total contract price for the construction andassociated services is €9.2 million (approximately $13.2 million at aconversion rate of €1.00 = $1.4336) consisting of €4.1 million forthe Satellite Operations Control Centers, €3.1 million for the TelemetryCommand Units and €2.0 million for the In Orbit Test Equipment, withpayments to be made on a quarterly basis through completion of the ControlNetwork Facility in the first quarter of 2010. We have made payments in theamount of approximately €8.2 million (approximately $11.8 million)through June 30, 2009.

 

In September 2007, we entered into a contract with our LaunchProvider for the launch of our second-generation satellites and certain pre andpost-launch services. Pursuant to the contract, as amended, our Launch Providerwill make four firm launches of six satellites each, and up to two replacementlaunches and one optional launch of six satellites, not to exceed a total ofsix launches. The total contract price for the first four launches is$216.1 million. As of June 30, 2009, we have made payments in theaggregate amount of approximately $26.3 million associated with our launchservices contract. The anticipated time period for the first four launchesranges from as early as the first quarter of 2010 through the end of 2010 andthe optional launch is available from the first quarter in 2011 through the endof 2013. Prolonged delays due to postponements by us or our Launch Provider mayresult in adjustments to the payment schedule.

 

In May, 2008, we entered into a contract with Hughes under which Hugheswill design, supply and implement the Radio Access Network (“RAN”) groundnetwork equipment and software upgrades for installation at a number of oursatellite gateway ground stations and satellite interface chips to be a part ofthe User Terminal Subsystem (UTS) in our various next-generation devices. Thetotal contract purchase price of approximately $100.8 million is payablein various increments over a period of 40 months. We have the option topurchase additional RANs and other software and hardware improvements atpre-negotiated prices. As of June 30, 2009, we have made payments in theaggregate amount of approximately $5.9 million associated with thiscontract. We expensed $1.8 million of these payments and capitalized$4.1 million as second-generation ground component.

 

On October 8, 2008, we signed an agreement with Ericsson, aleading global provider of technology and services to telecom operators.According to the $22.7 million contract, Ericsson will work with us todevelop, implement and maintain a ground interface, or core network, systemthat will be installed at our satellite gateway ground stations. The allInternet protocol (IP) based core network system is wireless 3G/4G compatibleand will link our radio access network to the public-switched telephone network(PSTN) and/or Internet. Design of the new core network system is now underway.The agreement represents the final significant ground network infrastructurecomponent for our next-generation of advanced IP-based satellite voice and dataservices.

 

The cost for the satellites, launches and gateway upgrades under thesecontracts with Thales Alenia Space, Hughes, Ericsson and our Launch Providerare included in the estimated $1.29 billion (the majority of which isdenominated in Euros at a weighted average conversion rate of € 1.00=$1.3460and excluding launch costs for the second 24 satellites, internal costs andcapitalized interest) of capital expenditures which we currently anticipatewill be required to procure and deploy our second-generation satelliteconstellation and related gateway upgrades. Since the fourth quarter of 2006,we have used portions of the proceeds from sales of Common Stock to ThermoFunding, the proceeds from our initial public offering, the net proceeds fromthe sale of the 5.75% Notes and borrowings under our credit facility withThermo Funding to fund the approximately $571.3 million (excluding internalcosts) incurred through June 30, 2009. We plan to fund the balance of thecapital expenditures through the use of our new Facility Agreement and proceedsfrom our new 8.00% Notes, additional debt and equity financings (if necessary) andcash flow from operations once we have deployed our second-generation satelliteconstellation.

 

The amount of actual and contractual capital expenditures related tothe construction of the second-generation constellation and satelliteoperations control centers, ground component and related costs and the launchservices contracts is presented in the table below (in millions):

 
| ** **                                                                              | ** ** | **Currency**        | ** ** | **Payments  through  June 30,** | ** ** | **Estimated Future Payments** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| **Contract**                                                                            | ** ** | **of Payment** | ** ** | **2009**                             | ** ** | **2009**                                | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Thales Alenia Second Generation Constellation                                           |       | EUR                 |       | €                               | 298.9      |                                    | €     | 94.2 |   | € | 59.7 |   | € | — |   | € | 226.1 |   | € | 678.9 |   |
| Thales Alenia Satellite Operations Control Centers                                      |       | EUR                 |       | €                               | 8.2        |                                    | €     | 1.0 |   | € | — |   | € | — |   | € | — |   | € | 9.2 |   |
| Arianespace Launch Services                                                             |       | USD                 |       | $                                    | 26.3       |                                    | $          | 131.3 |   | $ | 58.5 |   | $ | — |   | $ | — |   | $ | 216.1 |   |
| Hughes second-generation ground component  (including research and development expense) |       | USD                 |       | $                                    | 5.9        |                                    | $          | 29.1 |   | $ | 60.1 |   | $ | 5.7 |   | $ | — |   | $ | 100.8 |   |
| Ericsson                                                                                |       | USD                 |       | $                                    | —     |                                    | $          | 1.0 |   | $ | 5.9 |   | $ | 13.0 |   | $ | 2.8 |   | $ | 22.7 |   |

 

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Theexchange rate on June 30, 2009 was €1.00 = $1.4048.

 

***Cash Position and Indebtedness***

 

As of June 30,2009, our total cash and cash equivalents were $16.0 million and we had totalindebtedness of $160.4 million compared to total cash and cash equivalents andtotal indebtedness at December 31, 2008 of $12.4 million and $271.9million, respectively.  Since June 30,2009, we drew approximately $371.2 million in loans under our FacilityAgreement.

 

***FacilityAgreement***

 

*CreditFacility*

 

OnJune 5, 2009, we entered into a $586.3 million senior secured facilityagreement (the “Facility Agreement”) with a syndicate of bank lenders,including BNP Paribas, Natixis, Société Générale, Caylon, Crédit Industriel etCommercial as arrangers and BNP Paribas as the security agent and COFACE agent.Ninety-five percent of our obligations under the agreement are guaranteed byCOFACE, the French export credit agency.  The initial funding process ofthe COFACE Facility Agreement began on June 29, 2009 and was completed on July 1,2009. The new facility is comprised of:

 

·                  a $563.3million tranche for future payments to and to reimburse us for amounts wepreviously paid to Thales Alenia Space for construction of oursecond-generation satellites. Such reimbursed amounts will be used by us (a) tomake payments to Arianespace for launch services, Hughes Networks Systems LLCfor ground network equipment, software and satellite interface chips andEricsson Federal Inc. for ground system upgrades, (b) to provide up to$150 million for our working capital and general corporate purposes and (c) topay a portion of the insurance premium to COFACE; and

 

·                  a $23 milliontranche that will be used to make payments to Arianespace for launch servicesand to pay a portion of the insurance premium to COFACE.

 

Thefacility will mature 96 months after the first repayment date.  Scheduledsemi-annual principal repayments will begin the earlier of eight months afterthe launch of the first 24 satellites from the second generation constellationor December 15, 2011. The facility bears interest at a floating LIBORrate, capped at 4%, plus 2.07% through December 2012, increasing to 2.25%through December 2017 and 2.40% thereafter.  Interest payments willbe due on a semi-annual basis.

 

The Facility Agreementrequires that:

 

·                  wenot permit our capital expenditures (other than those funded with cash proceedsfrom insurance and condemnation events, equity issuances or the issuance of ourstock to acquire certain assets) to exceed $391.0 million in 2009 and $234.0million in 2010 (with unused amounts permitted to be carried over to subsequentyears)

 

·                  afterthe second scheduled interest payment, we maintain a minimum liquidity of $5.0million;

 

·                  weachieve for each period the following minimum adjusted consolidated EBITDA:

 
| **Period**      | ** ** | **Minimum Amount** | ** **     |
|-----------------|------------|--------------------|----------------|
|            |       |               |           |
| 1/1/09-12/31/09 |       | $                  | (25.0) million |   |
| 7/1/09-6/30/10  |       | $                  | (21.0) million |   |
| 1/1/10-12/31/10 |       | $                  | (10.0) million |   |
| 7/1/10-6/30/11  |       | $                  | 10.0 million   |   |
| 1/1/11-12/31/11 |       | $                  | 25.0 million   |   |
| 7/1/11-6/30/12  |       | $                  | 35.0 million   |   |
| 1/1/12-12/31/12 |       | $                  | 55.0 million   |   |
| 7/1/12-6/30/12  |       | $                  | 65.0 million   |   |
| 1/1/13-12/31/13 |       | $                  | 78.0 million   |   |

 

·                  beginningin 2011, we maintain a minimum debt service coverage ratio of 1.00:1, graduallyincreasing to a ratio of 1.50:1 through 2019;

 

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·                  beginningin 2012, we maintain a maximum net debt to adjusted consolidated EBITDA ratioof 9.90:1, gradually decreasing to 2.50:1 through 2019.

 

At June 30, 2009, wewere in compliance with the covenants of the Facility Agreement.

 

Ourobligations under the facility are guaranteed on a senior secured basis by allof our domestic subsidiaries and are secured by a first priority lien onsubstantially all of our assets and those of our domestic subsidiaries (otherthan FCC licenses), including patents and trademarks, 100% of the equity of ourdomestic subsidiaries and 65% of the equity of certain foreign subsidiaries.

 

Wepay the borrowings without penalty on the last day of each interest periodafter the full facility has been borrowed or the earlier of seven months afterthe launch of the second generation constellation or November 15, 2011,but amounts repaid may not be reborrowed. We must repay the loans (a) infull upon a change in control or (b) partially (i) if there are excesscash flows on certain dates, (ii) upon certain insurance and condemnationevents and (iii) upon certain asset dispositions. The Facility Agreementincludes covenants that (a) require us to maintain a minimum liquidityamount after the second repayment date, a minimum adjusted consolidated EBITDA,a minimum debt service coverage ratio and a maximum net debt to adjustedconsolidated EBITDA ratio, (b) place limitations on our ability and oursubsidiaries to incur debt, create liens, dispose of assets, carry out mergersand acquisitions, make loans, investments, distributions or other transfers andcapital expenditures or enter into certain transactions with affiliates and (c)limit capital expenditures incurred by us not to exceed $391.0 million in 2009and $234.0 million in 2010. We are permitted to make cash payments underthe terms of our 5.75% Notes.

 

***SubordinatedLoan Agreement***

 

On June 25,2009, we entered into a Loan Agreement with Thermo Funding whereby ThermoFunding agreed to lend us $25 million for the purpose of funding the debtservice reserve account required under the Facility Agreement. This loan issubordinated to, and the debt service reserve account is pledged to secure, allof our obligations under the Facility Agreement. The loan accrues interest at12% per annum, which will be capitalized and added to the outstanding principalin lieu of cash payments. We will make payments to Thermo Funding only whenpermitted under the Facility Agreement. The loan becomes due and payable sixmonths after the obligations under the Facility Agreement have been paid infull, we have a change in control or any acceleration of the maturity of theloans under the Facility Agreement occurs. As additional consideration for theloan, we issued Thermo Funding a warrant to purchase 4,205,608 shares of CommonStock at $0.01 per share with a five-year exercise period.  No Common Stock is issuable upon suchexercise if such issuance would cause Thermo Funding and its affiliates to ownmore than 70% of our outstanding voting stock.

 

We determined thatthe warrant was an equity instrument and recorded it as a part of itsstockholders’ equity with a corresponding debt discount of $5.2 million, whichis netted with the face value of the loan. We will amortize the debt discount associated with thewarrant to interest expense over the term of the loan agreement using aneffective interest rate method. At issuance, we allocated the proceeds under thesubordinated loan agreement to the underlying debt and the warrants based upon theirrelative fair values.

 

***Contingent Equity Agreement***

 

On June 19, 2009, we entered into aContingent Equity Agreement with Thermo Funding whereby Thermo Funding agreedto deposit $60 million into a contingent equity account to fulfill acondition precedent for borrowing under the Facility Agreement. Under the termsof the Facility Agreement, we will be required to make drawings from thisaccount if and to the extent we have an actual or projected deficiency in ourability to meet indebtedness obligations due within a forward-looking90 day period. Thermo Funding pledged the contingent equity account tosecure our obligations under the Facility Agreement. If we make any drawingsfrom the contingent equity account, we will issue Thermo Funding shares of ourCommon Stock calculated using a price per share equal to 80% of thevolume-weighted average closing price of the Common Stock for the 15 tradingdays immediately preceding the draw. Thermo Funding may withdraw any undrawnamounts in the account after we have made the second scheduled repayment underthe Facility Agreement, which we currently expect to be no later than June 15,2012.

 

The Contingent Equity Agreement alsoprovides that we will pay Thermo Funding an availability fee of 10% per yearfor maintaining funds in the contingent equity account. This fee is payablesolely in warrants to purchase Common Stock at $0.01 per share with a five-yearexercise period from issuance, with respect to a number of shares equal to theavailable balance in the contingent equity account divided by $1.37, subject toan annual retroactive adjustment at December 31,2009, subject to certainconditions limiting the maximum number of shares issuable. We issued ThermoFunding a warrant to purchase 4,379,562 shares for this fee at origination ofthe loan. No Common Stock is issuable if it would cause Thermo Funding and itsaffiliates to own more than 70% of our outstanding voting stock. If our Boardof Directors and stockholders approve the creation of a class of nonvoting commonstock in the future, we may issue nonvoting common stock in lieu of CommonStock to the extent issuing Common Stock would cause Thermo Funding and itsaffiliates to exceed this 70% ownership level.

 

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We determined that the warrants issued inconjunction with the availability fee were a liability and recorded it as acomponent of prepaid expenses and other current assets, at issuance. We will amortizethe warrant liability to interest expense over one year.

 

***8.00% Convertible Senior Notes***

 

On June 19,2009, we sold $55 million in aggregate principal amount of 8.00% ConvertibleSenior Unsecured Notes (“8.00% Notes”) and warrants (“Warrants”) to purchase15,277,771 shares of our Common Stock at an initial exercise price of $1.80 pershare to selected institutional investors (including an affiliate of ThermoFunding) in a direct offering registered under the Securities Act of 1933. The8.00% Notes are convertible into shares of Common Stock at an initialconversion price of $1.80 per share of Common Stock, subject to adjustment inthe manner set forth in the supplemental indenture governing the 8.00% Notes.

 

The Warrants have fullratchet anti-dilution protection, and the exercise price of the Warrants issubject to adjustment under certain other circumstances.  In addition, if the closing price of theCommon Stock on September 19, 2010 is less than the exercise price of theWarrants then in effect, the exercise price of the Warrants will be reset toequal the volume-weighted average closing price of the Common Stock for theprevious 15 trading days.  In the eventof certain transactions that involve change of control (“FundamentalTransactions”), the holders of the Warrants have the right to make us purchasethe Warrants for cash, subject to certain conditions. The exercise period forthe Warrants will begin on December 19, 2009 and end on June 19,2014.

 

The8.00% Notes are subordinated to all of our obligations under the FacilityAgreement. The 8.00% Notes are our senior unsecured debt obligations and,except as described in the preceding sentence, rank pari passu with itsexisting unsecured, unsubordinated obligations, including our 5.75% ConvertibleSenior Notes due 2028. There is no sinking fund for the 8.00% Notes. The 8.00%Notes mature at the later of the tenth anniversary of closing or six mothsfollowing the maturity date of the Facility Agreement and bear interest at arate of 8.00% per annum. Interest on the 8.00% Notes is payable in the form ofadditional 8.00% Notes or, subject to certain restrictions, in Common Stock atthe option of the holder. Interest is payable semi-annually in arrears on June 15and December 15 of each year, commencing December 15, 2009.

 

Holdersmay convert their 8.00% Notes at any time. The initial base conversion pricefor the 8.00% Notes is $1.80 per share or 555.6 shares of our Common Stock per$1,000 principal amount of the 8.00% Notes, subject to certain adjustments andlimitations. In addition, if the volume-weighted average closing price for oneshare of our Common Stock for the 15 trading days immediately preceding September 19,2010 (“reset day price”) is less than the base conversion price then in effect,the base conversion rate shall be adjusted to equal the reset day price. If weissue or sell shares of our Common Stock at a price per share less than thebase conversion price on the trading day immediately preceding such issuance orsale subject to certain limitations, the base conversion rate will be adjustedlower based on a formula described in the supplemental indenture governing the8.00% Notes. If at any time the closing price of the Common Stock exceeds 200%of the conversion price of the 8.00% Notes then in effect for 30 consecutivetrading days, all of the outstanding 8.00% Notes will be automaticallyconverted into Common Stock. Upon certain automatic and optional conversions ofthe 8.00% Notes, we will pay holders of the 8.00% Notes a make-whole premium byincreasing the number of shares of Common Stock delivered upon such conversion.The number of additional shares per $1,000 principal amount of 8.00% Notesconstituting the make-whole premium shall be equal to the quotient of (i) theaggregate principal amount of the 8.00% Notes so converted multiplied by32.00%, less the aggregate interest paid on such 8.00% Notes prior tothe applicable Conversion Date dividedby (ii) 95% of thevolume-weighted average Closing Price of the Common Stock for the 10 tradingdays immediately preceding the Conversion Date.

 

Subject to certainexceptions set forth in the supplemental indenture, if certain changes ofcontrol of us or events relating to the listing of the Common Stock occur (a“fundamental change”), the 8.00% Notes are subject to repurchase for cash atthe option of the holders of all or any portion of the 8.00% Notes at apurchase price equal to 100% of the principal amount of the 8.00% Notes, plus amake-whole payment and accrued and unpaid interest, if any. Holders thatrequire us to repurchase 8.00% Notes upon a fundamental change may elect toreceive shares of Common Stock in lieu of cash. Such holders will receive a number of shares equal to (i) thenumber of shares they would have been entitled to receive upon conversion ofthe 8.00% Notes, plus (ii) a make-whole premium of 12% or 15%, dependingon the date of the fundamental change and the amount of the consideration, ifany, received by our shareholders in connection with the fundamental change.

 

Theindenture governing the 8.00% Notes contains customary financial reportingrequirements.  The indenture alsoprovides that upon certain events of default, including without limitationfailure to pay principal or interest, failure to deliver a notice offundamental change, failure to convert the 8.00% Notes when required,acceleration of other material indebtedness and failure to pay materialjudgments, either the trustee or the holders of 25% in aggregate principalamount of the 8.00% Notes may declare the principal of the 8.00% Notes and anyaccrued and unpaid interest through the date of such declaration immediatelydue and payable. In the case of certain events of bankruptcy or insolvencyrelating to us or our significant subsidiaries, the principal amount of the8.00% Notes and accrued interest automatically becomes due and payable.

 

We evaluated thevarious embedded derivatives resulting from the conversion rights and featureswithin the Indenture for bifurcation from the 8.00% Notes under the provisionsof SFAS No. 133, Emerging Issues Task Force Issue No. 07-5, “DeterminingWhether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Stock (“EITF07-5”) and Emerging Issues Task Force Issue No. 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock” (“EITF 00-19”). Based upon its detailed assessment, weconcluded that the conversion rights and features could not be either excludedfrom bifurcation as a result of being clearly and closely related to the 8.00%Notes or were not indexed to our Common Stock and could not be classified instockholders’ equity if freestanding. We recorded this compound embeddedderivative liability as a component of

 

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Other Long TermLiabilities on our Consolidated Balance Sheet with a corresponding debtdiscount which is netted with the face value of the 8.00% Notes. We willamortize the debt discount associated with the compound embedded derivativeliability to interest expense over the term of the 8.00% Notes using aneffective interest rate method. The fair value of the compound embeddedderivative liability will be marked-to-market at the end of each reportingperiod, with any changes in value reported as “Derivative gain (loss)” in theconsolidated statements of operations. We determined the fair value of thecompound embedded derivative was using a lattice valuation methodologyincorporating a Monte Carlo simulation model.

 

Due to the cashsettlement provisions in the warrants, we recorded the warrants as a liabilityas a component of Other long term liabilities on our consolidated balance sheetwith a corresponding debt discount which is netted against the face value ofthe Notes. We amortized the debt discount associated with the warrantsliability to interest expense over the term of the Warrants using an effectiveinterest rate method. The fair value of the warrants liability will bemarked-to-market at the end of each reporting period, with any changes in valuereported as “Derivative gain (loss)” in the consolidated statements ofoperations. We determined the fair value of the Warrants derivative using alattice valuation methodology incorporating a Monte Carlo simulation model.

 

We allocated theproceeds received from the 8.00% Notes among the conversion rights andfeatures, the detachable Warrants, the beneficial conversion feature and theremainder, if any, to the underlying debt. We netted the debt discountassociated with the conversion rights and features and with the face value ofthe 8.00% Notes to determine the carrying amount of the 8.00% Notes. Theaccretion of each debt discount will increase the carrying amount of the debtover the term of the 8.00% Notes. We allocated the proceeds at issuance asfollows (in thousands):

 
| Fair  value of compound embedded derivative |   | $      | 23,542 |   |
|---------------------------------------------|--------|--------|--------|--------|
| Fair  value of warrants                     |   | 12,791 |   |
| Debt                                        |   | 18,667 |   |
| Face  Value of 8.00% Notes                  |   | $      | 55,000 |   |

 

***5.75%Convertible Senior Notes due 2028***

 

We have issued $150.0million aggregate principal amount of 5.75% Senior Convertible Notes due 2028pursuant to a base indenture and a supplemental indenture each dated as of April 15,2008 (“5.75% Notes”).

 

We placed approximately$25.5 million of the proceeds of the offering of the 5.75% Notes in an escrowaccount that is being used to make the first six scheduled semi-annual interestpayments on the 5.75% Notes. We pledged its interest in this escrow account tothe Trustee as security for these interest payments. At June 30, 2009, thebalance in the escrow account was $8.3 million.

 

Except for the pledge ofthe escrow account, the 5.75% Notes are our senior unsecured debt obligations.The 5.75% Notes mature on April 1, 2028 and bear interest at a rate of5.75% per annum. Interest on the 5.75% Notes is payable semi-annually inarrears on April 1 and October 1 of each year.

 

Subject to certainexceptions set forth in the Indenture, the Notes are subject to repurchase forcash at the option of the holders of all or any portion of the Notes (i) oneach of April 1, 2013, April 1, 2018 and April 1, 2023 or (ii) upona fundamental change, both at a purchase price equal to 100% of the principalamount of the Notes, plus accrued and unpaid interest, if any. A fundamentalchange will occur upon certain changes in the our ownership, or certain eventsrelating to the trading of our Common Stock.

 

Holders may convert their5.75% Notes into shares of Common Stock, subject to our option to deliver cashin lieu of all or a portion of the shares at their option at any time prior tomaturity. The 5.75% Notes are convertible at an initial conversion rate of166.1820 shares of Common Stock per $1,000 principal amount of 5.75% Notes,subject to adjustment. In addition to receiving the applicable amount of sharesof Common Stock or cash in lieu of all or a portion of the shares, holders of5.75% Notes who convert them prior to April 1, 2011 will receive the cashproceeds from the sale by the Escrow Agent of the portion of the governmentsecurities in the escrow account that are remaining with respect to any of thefirst six interest payments that have not been made on the 5.75% Notes beingconverted.

 

Holders who convert their5.75% Notes in connection with a fundamental change occurring on or prior to April 1,2013 will be entitled to an increase in the conversion rate as specified in theindenture governing the 5.75% Notes.

 

Exceptas described above with respect to holders of 5.75% Notes who convert their5.75% Notes prior to April 1, 2011, there is no circumstance in whichholders could receive cash in addition to the maximum number of shares ofcommon stock issuable upon conversion of the 5.75% Notes.

 

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If we make at least 10scheduled semi-annual interest payments, the 5.75% Notes are subject toredemption at the our option at any time on or after April 1, 2013, at aprice equal to 100% of the principal amount of the 5.75% Notes to be redeemed,plus accrued and unpaid interest, if any.

 

Theindenture governing the 5.75% Notes contains customary financial reportingrequirements and also contains restrictions on mergers and asset sales. Theindenture also provides that upon certain events of default, including withoutlimitation failure to pay principal or interest, failure to deliver a notice offundamental change, failure to convert the 5.75% Notes when required,acceleration of other material indebtedness and failure to pay materialjudgments, either the trustee or the holders of 25% in aggregate principalamount of the 5.75% Notes may declare the principal of the 5.75% Notes and anyaccrued and unpaid interest through the date of such declaration immediatelydue and payable. In the case of certain events of bankruptcy or insolvency relatingto our or our significant subsidiaries, the principal amount of the 5.75% Notesand accrued interest automatically becomes due and payable.

 

*Conversionof 5.75% Notes*

 

In2008, $36.0 million aggregate principal amount of 5.75% Notes, or 24% of the 5.75%Notes originally issued, were converted into Common Stock. We also exchanged anadditional $42.2 million aggregate principal amount of Notes, or 28% of the5.75% Notes originally issued for a combination of Common Stock and cash. Wehave issued approximately 23.6 million shares of Common Stock and paid anominal amount of cash for fractional shares in connection with the conversionsand exchanges. In addition, the holders whose 5.75% Notes were converted orexchanged received an early conversion make whole amount of approximately $9.3million representing the next five semi-annual interest payments that wouldhave become due on the converted 5.75% Notes, which was paid from funds in anescrow account maintained for the benefit of the holders of 5.75% Notes. In theexchanges, 5.75% Note holders received additional consideration in the form ofcash payments or additional shares of our Common Stock in the amount ofapproximately $1.1 million to induce exchanges. After these transactions,approximately $71.8 million aggregate principal amount of 5.75% Notes remainedoutstanding at June 30, 2009.

 

*Common Stock Offering and ShareLending Agreement*

 

Concurrentlywith the offering of the 5.75% Notes, we entered into a share lending agreement(the “Share Lending Agreement”) with Merrill Lynch International (the “Borrower”),pursuant to which we agreed to lend up to 36,144,570 shares of Common Stock(the “Borrowed Shares”) to the Borrower, subject to certain adjustments, for aperiod ending on the earliest of (i) at the Company’s option, at any timeafter the entire principal amount of the 5.75% Notes ceases to be outstanding, (ii) thewritten agreement of the Company and the Borrower to terminate, (iii) theoccurrence of a Borrower default, at the option of Lender, and (iv) theoccurrence of a Lender default, at the option of the Borrower. Pursuant to theShare Lending Agreement, upon the termination of the share loan, the Borrowermust return the Borrowed Shares to us. Upon the conversion of 5.75% Notes (inwhole or in part), a number of Borrowed Shares proportional to the conversionrate for such notes must be returned to us. At our election, the Borrower maydeliver cash equal to the market value of the corresponding Borrowed Sharesinstead of returning to us the Borrowed Shares otherwise required byconversions of 5.75% Notes.

 

Pursuantto and upon the terms of the Share Lending Agreement, we will issue and lendthe Borrowed Shares to the Borrower as a share loan. The Borrowing Agent alsois acting as an underwriter (the “Equity Underwriter”) with respect to theBorrowed Shares, which are being offered to the public. The Borrowed Sharesincluded approximately 32.0 million shares of Common Stock initially loaned byus to the Borrower on separate occasions, delivered pursuant to the ShareLending Agreement and the Underwriting Agreement, and an additional 4.1 millionshares of Common Stock that, from time to time, may be borrowed from theCompany by the Borrower pursuant to the Share Lending Agreement and theUnderwriting Agreement and subsequently offered and sold at prevailing marketprices at the time of sale or negotiated prices. The Borrowed Shares are freetrading shares. At June 30, 2009, approximately 17.3 million BorrowedShares remained outstanding.

 

We did not receive anyproceeds from the sale of the Borrowed Shares pursuant to the Share LendingAgreement, and it will not reserve any proceeds from any future sale. TheBorrower has received all of the proceeds from the sale of Borrowed Sharespursuant to the Share Lending Agreement and will receive all of the proceedsfrom any future sale. At our election, the Borrower may remit cash equal to themarket value of the corresponding Borrowed Shares instead of returning theBorrowed Shares due back to us as a result of conversions by Note holders. Seebelow.

 

The Borrowed Shares aretreated as issued and outstanding for corporate law purposes, and accordingly,the holders of the Borrowed Shares will have all of the rights of a holder ofour outstanding shares, including the right to vote the shares on all matterssubmitted to a vote of our tockholders and the right to receive any dividendsor other distributions that we may pay or makes on our outstanding shares ofCommon Stock. However, under the Share Lending Agreement, the Borrower hasagreed:

 

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·                  To pay, within one business day after the relevant payment date, to usn amount equal to any cash dividends that the Company pays on the BorrowedShares; and

 

·                  To pay or deliver to us, upon termination of the loan of BorrowedShares, any other distribution, in liquidation or otherwise, that we make onthe Borrowed Shares.

 

To the extent the Borrowed Shares we initiallylent under the share lending agreement and offered in the Common Stock offeringhave not been sold or returned to it, the Borrower has agreed that it will notvote any such Borrowed Shares. The Borrower has also agreed under the sharelending agreement that it will not transfer or dispose of any Borrowed Shares,other than to its affiliates, unless the transfer or disposition is pursuant toa registration statement that is effective under the Securities Act. However,investors that purchase the shares from the Borrower (and any subsequenttransferees of such purchasers) will be entitled to the same voting rights withrespect to those shares as any other holder of our Common Stock.

 

On December 18,2008, we entered into Amendment No. 1 to Share Lending Agreement with theBorrower and the Borrowing Agent. Pursuant to Amendment No.1, we have theoption to request the Borrower to deliver cash instead of returning BorrowedShares upon any termination of loans at the Borrower’s option, at thetermination date of the Share Lending Agreement or when the outstanding loanedshares exceed the maximum number of shares permitted under the Share LendingAgreement.  The consent of the Borrower is required for any cashsettlement, which consent may not be unreasonably withheld, subject to theBorrower’s determination of applicable legal, regulatory or self-regulatoryrequirements or other internal policies. Any loans settled in shares ofour Common Stock will be subject to a return fee based on the stock price asagreed by us and the Borrower.  The return fee will not be less than$0.005 per share or exceed $0.05 per share.

 

As aresult of this amendment, we believe that, under generally accepted accountingprinciples in the United States as currently in effect, the approximately 17.3million Borrowed Shares outstanding at June 30, 2009 under the ShareLending Agreement will be considered outstanding for the purpose of computingand reporting its earnings per share. Prior to this amendment, we did notconsider the Borrowed Shares outstanding for the purpose of computing andreporting our earnings per share due to the substantial elimination of theeconomic dilution due to contractual provisions that otherwise would haveresulted from the issuance of the Borrowed Shares.

 

Weevaluated the various embedded derivatives within the Indenture for bifurcationfrom the 5.75% Notes under the provisions of FASB’s Statement of FinancialStandards No.133, “Accounting for Derivative Instruments and Hedging Activities”(“SFAS No. 133”), Emerging Issues Task Force Issue No. 01-6, “The Meaningof Indexed to a Company’s Own Stock” (“EITF 01-6”) and Emerging Issues TaskForce Issue No. 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”).Based upon its detailed assessment, the Company concluded that these embeddedderivatives were either (i) excluded from bifurcation as a result of beingclearly and closely related to the 5.75% Notes or are indexed to our CommonStock and would be classified in stockholders’ equity if freestanding or (ii) thefair value of the embedded derivatives was estimated to be immaterial.

 

Weadopted FSP APB 14-1 on January 1, 2009, and it is applied on aretrospective basis. FSP APB 14-1 calls for a separation of the liability andequity components of the convertible debt instrument. The carryingamount of the liability component is computed by measuring the fair value of asimilar liability (including any embedded features other than the conversionoption) that does not have an associated equity component. The carrying amountof the equity component is represented by the embedded conversion option bydeducting the fair value of the liability component from the initial proceedsascribed to the convertible debt instrument as a whole. The excess of theprincipal amount of the liability component over its carrying amount isrecorded as debt discount and is amortized to interest cost using the interestmethod over a period of five years. The adoption of FSP APB 14-1 resulted in a decrease inour long-term debt of approximately $23.1 million; an increase in itsstockholders’ equity of approximately $28.3 million; and an increase in its netproperty, plant and equipment of approximately $5.9 million as of December 31,2008.The adoption of FSP APB 14-1 changed the our full year 2008 ConsolidatedStatement of Operations, because the gains associated with conversions andexchanges of 5.75% Notes in 2008 were recorded in stockholders’ equity prior toadoption of this standard. The adoption of FSP APB 14-1 impacted ourConsolidated Statement of Operations for the three and six month periods ended June 30,2008 by reducing the net loss by approximately $0.2 million. At June 30,2009 and December 31, 2008, the remaining term for amortization associatedwith debt discount was approximately 45 and 51 months, respectively. The annualeffective interest rate utilized for the amortization of debt discount duringthe three and six month periods ended June 30, 2009 was 9.14. The interestcost associated with the coupon rate on the 5.75% Notes plus the correspondingdebt discount amortized during the three and six month periods ended June 30,2009, was $2.2 million and $4.4  million,respectively, all of which was capitalized. The carrying amount of the equity and liabilitycomponent, as of June 30, 2009 and December 31, 2008, is presentedbelow (in thousands):

 

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| ** **                       | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                             |       |                    |       |                        |       |
| Equity                           |       | $                       | 54,675     |                        | $          | 54,675 |   |
| Liability:                       |       |                    |       |                        |       |
| Principal                        |       | 71,804                  |       | 71,804                      |       |
| Unamortized debt discount        |       | (20,847                 | )          | (23,134                     | )          |
| Net carrying amount of liability |       | $                       | 50,957     |                        | $          | 48,670 |   |

 

***Credit Agreement***

 

On August 16, 2006, we entered into an amended and restated creditagreement with Wachovia Investment Holdings, LLC, as administrative agentand swingline lender, and Wachovia Bank, National Association, as issuinglender, which was subsequently amended on September 29 and October 26,2006. On December 17, 2007, Thermo Funding was assigned all the rights(except indemnification rights) and assumed all the obligations of theadministrative agent and the lenders under the amended and restated creditagreement and the credit agreement was again amended and restated. On December 18,2008, we entered into a First Amendment to Second Amended and Restated CreditAgreement with Thermo Funding, as lender and administrative agent, to increasethe amount available to us under the revolving credit facility from$50 million to $100 million. We have also borrowed an aggregate of$100.0 million under the term loan facility of the credit agreement.  In May 2009, $7.5 million of the creditagreement was converted into 10 million shares of our common stock.

 

To hedge a portion of the interest rate risk with respect to thedelayed draw term loans, we entered into a five-year interest rate swapagreement. See “Note 11: Interest rate derivative” of the Notes to theunaudited interim consolidated financial statements in Part I, Item 1of this Report. Upon the assumption of the credit agreement by Thermo Funding,the interest rate swap agreement was amended to require us to providecollateral in cash and securities equal to the negative value of the interestrate swap. On December 10, 2008, we terminated the interest rate swapagreement by making a payment of approximately $9.2 million.

 

OnJune 19, 2009, Thermo Funding exchanged all of the outstanding secured debt (includingaccrued interest) owed to it by us under the credit agreement, which totaledapproximately $180.2 million, for one share of Series A ConvertiblePreferred Stock (the “Series A Preferred”), and the credit agreement wasterminated.  The Series A Preferredincludes the following terms:

 

*Liquidation**Preference*.The Series A Preferred has a $0.01 liquidation preference upon anyvoluntary or involuntary liquidation, dissolution or winding up of the company.

 

*Dividend Preference*.  TheSeries A Preferred has no dividend preference to the Common Stock.

 

*Voting Rights*. Subject to the conversion limitation setforth below, Thermo Funding may vote its share of Series A Preferred withholders of our Common Stock, voting as a single class, on an as-convertedbasis.

 

*Conversion**Rightsand Limitations*.  The Series APreferred is convertible into 126,174,034 shares of Common Stock or any classof nonvoting common stock which we may be authorized to issue in thefuture.  In addition, no Common Stock isissuable upon such conversion if such issuance would cause Thermo Funding andits affiliates to own more than 70% of our outstanding voting stock. If ourBoard of Directors and stockholders approve the creation of a class ofnonvoting common stock in the future, we may issue nonvoting common stock inlieu of common stock to the extent issuing Common Stock would cause ThermoFunding and its affiliates to exceed this 70% ownership level.

 

*Additional Issuances*.  We may notissue additional shares of Series A Preferred or create any other class orseries of capital stock that ranks senior to or on parity with the Series APreferred without the consent of Thermo Funding.

 

We determinedthat the exchange of debt for Series A Preferred was a capital transactionand did not record any gain as a result of this exchange.

 

***Contractual Obligations andCommitments***

 

At June 30, 2009, we have a remaining commitment to purchase atotal of $49.4 million of mobile phones, services and other equipment undervarious commercial agreements with QUALCOMM. We expect to fund this remainingcommitment from our working capital, funds generated by our operations, and, ifnecessary, additional capital from the issuance of equity or debt or acombination thereof. On October 28, 2008, we and QUALCOMM amended ouragreement to extend the term for 12 months and defer delivery of mobilephones and related equipment until 2011.

 

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Effective August 10, 2007 (the “Effective Date”), our board ofdirectors, upon recommendation of the Compensation Committee, approved theconcurrent termination of our Executive Incentive Compensation Plan and awardsof restricted stock or restricted stock units under our 2006 Equity IncentivePlan to five executive officers (the “Participants”). Each Award Agreementprovides that the recipient will receive awards of restricted Common Stock orrestricted stock units, which upon vesting, each entitle him to one share ofour Common Stock. Total benefits per Participant (valued at the grant date) areapproximately $6.0 million, which represents an increase of approximately$1.5 million in potential compensation compared to the maximum potentialbenefits under the Executive Incentive Compensation Plan. However, the newAward Agreements extend the vesting period by up to two years and provide forpayment in shares of Common Stock instead of cash, thereby enabling us toconserve our cash for capital expenditures for the procurement and launch ofour second-generation satellite constellation and related ground stationupgrades. One of the original five Participants left our employ in January 2009and agreed to provide consulting services through December 31, 2009. If hefulfills all the terms of the consulting agreement, he will receive all but$750,000 of the original compensation in accordance with a modified vestingschedule.

 

InNovember 2006, we and Thales Alenia Space entered into a definitive contractpursuant to which Thales Alenia Space will construct 48 low-earth-orbitsatellites in two batches (the first of 25, including a proto-flight modelsatellite, and the second of 23) for our second-generation satelliteconstellation. In June 2009, we and Thales Alenia Space France entered into anamended and restated contract for the construction of the second generationsatellites to incorporate prior amendments, acceleration requests and makeother non-material changes to the contract entered into in November 2006. Underthe contract, Thales Alenia Space also will provide launch support services andmission operations support services. We have contracted separately with ourLaunch Provider for launch services and will do so for launch insurance for thesatellites. The total contract price, including subsequent additions, will beapproximately €678.9 million, (approximately $936.6 million at a weightedaverage conversion rate of €1.00 = $1.3797 at June 30, 2009 includingapproximately €146.8 million which was paid by us in U.S. dollars at afixed conversion rate of €1.00 = $1.2940. We are also obligated to payThales Alenia Space up to $75.0 million in bonus payments depending uponthe fulfillment of various conditions, including our cumulative EBITDAexceeding certain projections, Thales Alenia Space’s achievement of thespecified delivery schedule and satisfactory operation of the satellites afterdelivery. The approximately €12.4 million ($16.0 million paid by usto Thales Alenia Space pursuant to an Authorization to Proceed dated October 5,2006, as amended, was credited against payments to be made by us under thecontract. We have established and maintained an escrow account with acommercial bank to secure our payment obligations under the contract. Theinitial escrow deposit was €40.0 million. We and Thales Alenia Spaceentered into the escrow agreement on December 21, 2006. Upon completion ofthe Facility agreement, amounts in the escrow account became unrestricted andwas reclassed to cash and cash equivalents

 

In March 2007, we entered into an agreement with Thales Alenia Spacefor the construction of the Satellite Operations Control Centers, TelemetryCommand Units and In Orbit Test Equipment (collectively, the “Control NetworkFacility”) for our second-generation satellite constellation. This agreementcomplements the second-generation satellite construction contract with ThalesAlenia Space for the construction of 48 low-earth orbit satellites and allowsThales Alenia Space to coordinate all aspects of the second-generationsatellite constellation project, including the transition of first-generationsoftware and hardware to equipment for the second generation. The totalcontract price for the construction and associated services is€9.2 million (approximately $13.2 million at a weighted averageconversion rate of €1.00 = $1.4336) consisting of €4.1 million forthe Satellite Operations Control Centers, €3.1 million for the TelemetryCommand Units and €2.0 million for the In Orbit Test Equipment, withpayments to be made on a quarterly basis through completion of the ControlNetwork Facility in the first quarter of 2010. We have the option to terminatethe contract if excusable delays affecting Thales Alenia Space’s ability toperform the contract total six consecutive months or at its convenience. If weterminate the contract, we must pay Thales Alenia Space the lesser of itsunpaid costs for work performed by Thales Alenia Space and its subcontractorsor payments for the next two quarters following termination. If Thales AleniaSpace has not completed the Control Network Facility acceptance review withinsixty days of the due date, we will be entitled to certain liquidated damages.Failure to complete the Control Network Facility acceptance review on or beforesix months after the due date results in a default by Thales Alenia Space,entitling us to a refund of all payments, except for liquidated damage amountspreviously paid or with respect to items where final delivery has occurred. TheControl Network Facility, when accepted, will be covered by a limited one-yearwarranty. The contract contains customary arbitration and indemnificationprovisions. We have made payments in the amount of approximately€8.2 million (approximately $11.8 million) through June 30,2009.

 

In September 2007, we entered into a contract with Arianespace (our “LaunchProvider”) for the launch of our second-generation satellites and certain preand post-launch services. Pursuant to the contract, as amended, our LaunchProvider will make four firm launches of six satellites each, and up to tworeplacement launches and one optional launch of six satellites each, not exceeda total of six launches. The total contract price for the first four launchesis $216.1 million. The cost for the launch of the first 24 satellites underthis contract is included in the estimated $1.29 billion (at a weightedaverage conversion rate of €1.00=$1.3460) to procure and deploy oursecond-generation satellite constellation and related gateway upgrades. Theanticipated launch windows for 

 

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thefirst four launches ranges from as early as the first quarter of 2010 throughthe end of 2010 and the optional launch is available from the first quarter in2011 through the end of 2013. Prolonged delays due to postponements by us orour Launch Provider may result in adjustments to the payment schedule. On July 5,2008, we amended our agreement with our Launch Provider for the launch of oursecond-generation satellites and certain pre and post-launch services. Underthe amended terms, we could defer payment on up to 75% of certain amounts dueto the Launch Provider. The deferred payments incurred annual interest at 8.5%to 12% and become payable one month before the corresponding launch date. In June 2009, we and the LaunchProvider again amended their agreement modifying the agreement in certainrespects including cancelling the deferred payment provisions. We paid all deferredpayment amounts under to the vendor in July 2009.As of June 30,2009, we had incurred $26.3 million associated with the launch servicescontract.

 

In May 2008, we entered into a contract with Hughes under which Hugheswill design, supply and implement the Radio Access Network (“RAN”) groundnetwork equipment and software upgrades for installation at a number of oursatellite gateway ground stations and satellite interface chips to be a part ofthe User Terminal Subsystem (UTS) in our various next-generation devices. Thetotal contract purchase price of approximately $100.8 million is payablein various increments over a period of 40 months. We have the option topurchase additional RANs and other software and hardware improvements at pre-negotiatedprices. As of June 30, 2009, we have made payments in the amount ofapproximately $5.9 million associated with this contract. We expensed$1.8 million of these payments and capitalized $4.1 million assecond-generation ground component.

 

In October 2008, we signed an agreement with Ericsson, a leading globalprovider of technology and services to telecom operators. According to the$22.7 million contract, Ericsson will work with us to develop, implementand maintain a ground interface, or core network, system that will be installedat our satellite gateway ground stations. The all Internet protocol (IP) basedcore network system is wireless 3G/4G compatible and will link our radio accessnetwork to the public-switched telephone network (PSTN) and/or Internet. Designof the new core network system is now underway. The agreement represents thefinal significant ground network infrastructure component for ournext-generation of advanced IP-based satellite voice and data services.

 

**Off-BalanceSheet Transactions**

 

We have no materialoff-balance sheet transactions.

 

**Recently Issued Accounting Pronouncements**

 

Theinformation provided under “Note 1: The Company and Summary of SignificantAccounting Policies — Recent Accounting Pronouncements” of the notes tounaudited interim consolidated financial statements in Part I, Item 1 ofthis Report is incorporated herein by reference.

 

**Item 3. Quantitative and Qualitative Disclosures about Market Risk**

 

Our services and products are sold, distributed or available in over120 countries. Our international sales are made primarily in U.S. dollars,Canadian dollars, Brazilian reais and Euros. In some cases insufficientsupplies of U.S. currency may require us to accept payment in other foreigncurrencies. We reduce our currency exchange risk from revenues in currenciesother than the U.S. dollar by requiring payment in U.S. dollars wheneverpossible and purchasing foreign currencies on the spot market when rates arefavorable. We currently do not purchase hedging instruments to hedge foreigncurrencies. However, our Facility Agreement requires us to do so on termsreasonably acceptable to the COFACE agent not later than 90 days after theend of any quarter in which more than 25% of our revenue is originallydenominated in a single currency other than U.S. or Canadian dollars.

 

Asdiscussed in “Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources—ContractualObligations and Commitments,” we have entered into two separate contracts withThales Alenia Space to construct 48 low earth orbit satellites for oursecond-generation satellite constellation and to provide launch-related andoperations support services, and to construct the Satellite Operations ControlCenters, Telemetry Command Units and In-Orbit Test Equipment for oursecond-generation satellite constellation. A substantial majority of thepayments under the Thales Alenia Space agreements is denominated in Euros.

 

Our exposure to fluctuations in currency exchangerates has increased significantly as a result of portions of our contracts forthe construction of our second-generation constellation satellite and therelated control network facility, which are payable primarily in Euros. A 1.0%decline in the relative value of the U.S. dollar, on the remaining balancerelated to these contracts of approximately €227.0 million on June 30,2009, would result in $3.2 million of additional payments. See “Note 3:Property and Equipment” of the unaudited interim consolidated financialstatements in Part I, Item 1 of this Report.

 

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Our interest rate riskarises from our variable rate debt under our Facility Agreement, under whichloans bear interest at a floating rate based on the LIBOR. In order to minimizethe interest rate risk, we completed an arrangement with the lenders under theFacility Agreement to limit the interest to which we are exposed.  The interest rate capprovides limits on the 6 month Libor rate (“Base Rate”) used to calculate thecoupon interest on outstanding amounts on the Facility Agreement of 4.00% fromthe date of issuance through December 2012. Thereafter, the Base Rate iscapped at 5.50% should the Base Rate not exceed 6.5%. Should the Base Rateexceed 6.5%, our Base rate will be 1% less then the then 6 month Libor rate. The applicable margin from the base rate ranges from 2.07% to 2.4%through the termination date of the facility. Assuming that we borrowed the entire $586.3 million under theFacility Agreement, a 1.0% change in interest rates would result in achange to interest expense of approximately $5.9 million annually.

 

**Item 4. Controls and Procedures**

 

*(a)**                              **Evaluationof disclosure controls and procedures.*

 

Our management, with the participation of our chief executive officerand chief financial officer, evaluated the effectiveness of our disclosurecontrols and procedures pursuant to Rule 13a-15(b) under theSecurities Exchange Act of 1934 as of June 30, 2009, the end of the periodcovered by this Report. The evaluation included certain internal control areasin which we have made and are continuing to make changes to improve and enhancecontrols. This evaluation was based on the guidelines established in *Internal Control—Integrated Framework*issued 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 welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives.

 

Based on this evaluation, our chief executive officer and chieffinancial officer concluded that as of June 30, 2009 our disclosurecontrols and procedures were effective to provide reasonable assurance thatinformation we are required to disclose in reports that we file or submit underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules andforms, and that such information is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer,as appropriate, to allow timely decisions regarding required disclosure.

 

We believe that the consolidated financial statements included in thisReport fairly present, in all material respects, our consolidated financialposition and results of operations as of and for the three and six months endedJune 30, 2009.

 

*(b)**                              **Changesin internal control over financial reporting.*

 

As of June 30, 2009, our management, with the participation of ourchief executive officer and chief financial officer, evaluated our internal controlover financial reporting. Based on that evaluation, our CEO and CFO concludedthat there were no changes in our internal control over financial reportingthat occurred during the quarter ended June 30, 2009, that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II:OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

We are involved incertain litigation matters as discussed elsewhere in this Report. For moredetailed information on litigation matters outstanding please see Note 9 of theNotes to unaudited interim consolidated financial statements in Part I,Item 1 of this Report. From time to time, we are involved in various otherlitigation matters involving ordinary and routine claims incidental to ourbusiness. Management currently believes that the outcome of these proceedings,either individually or in the aggregate, will not have a material adverseeffect on our business, results of operations or financial conditions.

 

**Item 1A.Risk Factors**

 

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

 

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***Risks Related to Our Business***

 

***Our indebtedness could impair ourability to react to changes in our business and may limit our ability to usedebt to fund future capital needs.***

 

Our indebtedness could adversely affect our financial condition. If the$586.3 million in committed facilities under our Facility Agreement hadbeen drawn fully and our 8% Notes had been outstanding in addition to our 5.75%Notes, at June 30, 2009, our indebtedness would have been $862.7 million.This would have resulted in an annual interest expense of approximately $94.9 million,assuming an interest rate of 11.0%.

 

Furthermore, if an event of default were to occur with respect to ourFacility Agreement or other indebtedness, our creditors could accelerate thematurity of our indebtedness. Our indebtedness under our credit agreement issecured by a lien on substantially all of our assets and the assets of ourdomestic subsidiaries and the lenders could foreclose on these assets to repaythe indebtedness.

 

Our ability to make scheduled payments on or to refinance indebtednessobligations depends on our financial condition and operating performance, whichare subject to prevailing economic and competitive conditions and to certainfinancial, business and other factors beyond our control. We may not be able tomaintain a level of cash flows from operating activities sufficient to permitus to pay the principal, premium, if any, and interest on our indebtedness. Ifour cash flows and capital resources are insufficient to fund our debt serviceobligations, we could face substantial liquidity problems and could be forcedto sell assets, seek additional capital or seek to restructure or refinance ourindebtedness. These alternative measures may not be successful or feasible. OurFacility Agreement restricts our ability to sell assets. Even if we couldconsummate those sales, the proceeds that we realize from them may not beadequate to meet any debt service obligations then due.

 

***We have a short operating history.Our predecessor incurred substantial losses. Our operating results havefluctuated, with operating losses in three of the last five years, and maycontinue to do so.***

 

We acquired the assets of Old Globalstar in December 2003 in aproceeding under the Bankruptcy Code. Prior to that time, Old Globalstarincurred substantial losses, including operating losses of $260.7 millionin 2003. Since our acquisition of the Globalstar business, we incurred anoperating loss of $3.5 million in 2004, had operating profits of$21.9 million in 2005 and $15.7 million in 2006, and incurredoperating losses of $24.6 million and $57.7 million in 2007 and 2008respectively. Largely as a result of problems with our two-way communicationsservices, we incurred an operating loss of $35.5 million during the sixmonths ended June 30, 2009. We expect that our operating results willcontinue to be volatile, at least until we have deployed and placed intoservice our second-generation satellite constellation.

 

***Our satellites have a limited lifeand most have degraded, which causes our network to be compromised and which materiallyand adversely affects our business, prospects and profitability.***

 

Since the first Old Globalstar satellites were launched in 1998, tensatellites have failed in orbit and have been retired, and we expect others tofail in the future. We consider a satellite “failed” only when it can no longerprovide any communications service, and we do not intend to undertake anyfurther efforts to return it to service. Six of these satellite failures havebeen attributed to anomalies of the S-band antenna. In-orbit failure may resultfrom various causes, including component failure, loss of power or fuel,inability to control positioning of the satellite, solar or other astronomicalevents, including solar radiation and flares, the quality of construction, gradualdegradation of solar panels, the durability of components, and collision withother satellites or space debris. Radiation induced failure of satellitecomponents may result in damage to or loss of a satellite before the end of itscurrently expected life.

 

As a result of the issues described above, some of our in-orbitsatellites may not be fully functioning at any given time. As discussed below,all of our current satellites launched before 2007 have experienced degradationor failures of some type, mainly of their S-band downlink communicationscapabilities. Except for the ten satellites that have been decommissioned, thisdoes not impair their ability to continue to support Simplex data transmissionsin the L-band, and accordingly, we do not classify them as “failed.”

 

Although we do not incur any direct cash costs related to the failureof a satellite, if a satellite fails, we record an impairment charge reflectingits net book value. There are some remote tools we use to remedy certain typesof problems affecting the performance of our satellites, but the physicalrepair of satellites in space is not feasible. We do not insure our satellitesagainst in-orbit failures, whether such failures are caused by internal orexternal factors.

 

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*S-bandAntenna Amplifier Degradation*

 

The degradation of the S-band antenna amplifier in our satelliteslaunched prior to 2007, has negatively affected our ability to provide two-wayvoice and data communications at all times and in all locations. The S-bandantenna provides the downlink from the satellite to a subscriber’s phone ordata terminal. Degraded performance of the S-band antenna reduces the callcompletion rate for two-way voice and data communication between the affectedsatellites and the subscriber and may reduce the duration of a call. When theS-band antenna on a satellite ceases to be functional, two-way communication isimpossible over that satellite, but not for simplex service and over theconstellation as a whole. The root cause of the degradation in performance ofthe S-band antenna amplifiers is unknown, although we believe it may resultfrom the satellites being exposed to radiation over their life in orbit. TheS-band antenna amplifier degradation does not affect adversely our one-waySimplex data transmission services, which utilize only the L-band uplink from asubscriber’s Simplex terminal to the satellites.

 

In the past, we have reconfigured our constellation and placed lessimpaired satellites into key orbital positions to maximize our capacity andquality of service. We will continue to do this. We forecast the time andduration of two-way service coverage at any particular location in our servicearea, and we have made this information available without charge to ourcustomers and service providers, including our wholly owned operatingsubsidiaries, value added resellers, and IGO’s, so that they may work withtheir subscribers to reduce the impact of the service interruptions in theirrespective service areas. Nonetheless, we expect the S-band antenna amplifierdegradation to continue as our satellites age in orbit. Substantially all ofour in-orbit satellites launched prior to 2007 have ceased to be able toprovide two-way communications as a result of this degradation.

 

Accordingly, as the number of in-orbit satellites (other than the eightspare satellites launched in 2007) with properly functioning S-band antennaamplifiers has decreased, even with optimized placement in orbit of the eightspare satellites, increasingly larger coverage gaps have occurred and willcontinue to occur over areas in which we have provided two-way communicationsservice. This has materially adversely affected our ability to attract newsubscribers and maintain our existing subscribers for our two-waycommunications services, equipment sales of two-way communication devices,retail average revenue per unit, or ARPU, and our results of operations and islikely to have a further material adverse effect on each of these in thefuture. If our subscriber base declines, our ability to attract and retainsubscribers at higher rates when our second-generation constellation is placedin service may be affected adversely.

 

During the first six months of 2009, our ARPU decreased by 36% to$24.44 from $38.36 for the same period in 2008. In addition, our servicerevenue declined from $32.7 million to $23.7 million. We believe thatcustomer reaction to the S-band antenna amplifier degradation and our relatedprice reductions have been the primary causes of the reductions in servicerevenue. If we are unable to maintain our customer base for two-waycommunications service, our business and profitability may be furthermaterially and adversely affected. In addition, after our second-generationsatellite constellation becomes operational, we may face challenges inmaintaining our current subscriber base for two-way communications servicebecause we plan then to increase prices, consistent with market conditions, toreflect our improved two-way service and coverage.

 

***Our business plan includesexploiting our ATC license in the United States by combining ATC services withour existing business. If we are unable to accomplish this effectively, ouranticipated future revenues and profitability will be reduced and we will loseour investment in developing ATC services.***

 

The FCC licenses us to use a portion of our spectrum to provide ATCservices in the United States in combination with our existing communicationservices. If we can integrate ATC services with our existing business, whichwill require us to make satisfactory arrangements with terrestrial wireless orother communications service providers, we will be able to use the spectrumcurrently licensed to us to provide an integrated telecommunications offeringincorporating both our satellite and ground station system and aterrestrial-based cellular-like system. If successful, this will allow us to addressa broader market for our products and services, thereby increasing our revenueand profitability and the value of our business. However, neither we nor anyother company has yet successfully integrated a commercial ATC service withsatellite services, and we may be unable to do so.

 

Northern Sky Research estimates that development of an independentterrestrial network to provide ATC services could cost $2.5 to$3.0 billion in the United States alone. We do not expect to havesufficient capital resources to develop independently the terrestrial componentof an ATC network. Therefore, in the foreseeable future full exploitation ofour ATC opportunity will require us to lease portions of our ATC-licensedspectrum to, or form satisfactory partnerships, service contracts, jointventures or other arrangements with, other telecommunications or spectrum-basedservice providers.

 

We have entered into an ATC lease agreement with Open RangeCommunications Inc. We may not be able to establish additional arrangementsto exploit our ATC authority at all or on favorable terms and, if sucharrangements are established, the other parties may not fulfill theirobligations. If we are unable to form additional suitable partnerships or enterinto service contracts, joint venture agreements or additional leases, we maynot be able to capitalize fully on our plan to deploy ATC services, which wouldlimit our ability to expand our business and reduce our revenues andprofitability, and adversely affect the value of our ATC license. In addition,in such event we will lose any resources we have invested in developing ATCservices, which may be substantial.

 

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The FCC rules governing ATC are relatively new and are subject tointerpretation. The scope of ATC services that we will be permitted andrequired to provide under our existing FCC license is unclear and we may berequired to seek additional amendments to our ATC license to execute ourbusiness plan. The FCC’s rules require ATC service providers todemonstrate that their mobile satellite and ATC services satisfy certain gatingcriteria, such as constituting an “integrated service offering,” and maintainat least one in-orbit spare satellite. The FCC reserves the right to rescindATC authority if the FCC determines that a licensee has failed to provide an “integratedservice offering” or to comply with other gating criteria. It is thereforepossible that we could lose our existing or future ATC authority, in which casewe could lose all or much of our investment in developing ATC services, as wellas future revenues from such services.

 

The development and operation of our ATC system may also infringe onunknown and unidentified intellectual property rights of other persons, whichcould require us to modify our business plan, thereby increasing ourdevelopment costs and slowing our time to market. If we are unable to meet theregulatory requirements applicable to ATC services or develop or acquire therequired technology, we may not be able to realize our plan to offer ATCservices, which would decrease our revenues and profitability.

 

Wehave decided to register our second generation satellite constellation with theInternational Telecommunication Union (the ITU) through France rather than theUnited States.  The French radiofrequencyspectrum regulatory agency, ANFR, submitted the technical papers to the ITU onour behalf in July 2009.  As with thefirst generation constellation, we will be required to coordinate our spectrumassignments with other companies that use any portion of our spectrumbands.  We cannot predict how long thecoordination process will take; however, we are able to use the frequenciesduring the coordination process in accordance with our national licenses.

 

***Implementation of our business plandepends 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 notincrease as we expect.***

 

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

 

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

 

·                  the level of marketacceptance and demand for all of our services;

 

·                  our ability to introduce newproducts and services that meet this market demand;

 

·                  our ability to retain ourexisting voice and duplex data customers until we have launched oursecond-generation satellite constellation;

 

·                  our ability to obtainadditional business using our existing spectrum resources both in the UnitedStates and internationally;

 

·                  our ability to control thecosts of developing an integrated network providing related products andservices;

 

·                  our ability to marketsuccessfully our new Simplex products and services, especially our SPOTsatellite messenger products and services;

 

·                  our ability to develop anddeploy innovative network management techniques to permit mobile devices totransition between satellite and terrestrial modes;

 

·                  our ability to limit theeffects of further degradation of, and to maintain the capacity and control of,our existing satellite network;

 

·                  our ability to sell theequipment inventory on hand and under commitment to purchase from QUALCOMM;

 

·                  our ability to complete theconstruction, delivery and launch of our second-generation satellites and, oncelaunched, our ability to maintain their health, capacity and control;

 

·                  the effectiveness of ourcompetitors in developing and offering similar products and services and inpersuading our customers to switch service providers; and

 

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·                  with the addition of ourretail product line, general economic conditions that affect consumerdiscretionary spending and consumer confidence, which have declined sharply inthe current recession.

 

***The implementation of our businessplan and our ability to return to profitability assumes that we are able togenerate sufficient revenue and cash flow as our existing satelliteconstellation continues to age, and to deploy successfully oursecond-generation satellite constellation, both of which are contingent on anumber of factors.***

 

As a result of the factors described above, our customers currently areunable to access our two-way communications service at all times and places.Our ability to generate revenue and positive cash flow, at least until oursecond- generation satellite constellation is deployed and begins to generaterevenue, will depend upon several factors, including:

 

·                  whether we can maintain asufficient number of our existing two-way communications service customers;

 

·                  whether we can introducesuccessfully new product and service offerings; and

 

·                  whether we can continue tocompete successfully against other mobile satellite service providers.

 

Our ability to generate revenue and cash flow has been adverselyimpacted by our need to reduce our prices for two-way communications servicesas we seek to maintain our customer base in the face of the challenges to ourtwo-way services. We have implemented a new pricing strategy in the UnitedStates and Canada designed to stem further diminution of revenue from two-wayservices described above. Further, our business plan and our ability to returnto profitability assume that we will be able to deploy successfully oursecond-generation satellite constellation. In order to do so, we are dependenton third parties, such as Thales Alenia Space and our Launch Provider, to buildand launch our satellites. The construction of these satellites is technicallycomplex and subject to construction and delivery delays that could result froma variety of causes, including the failure of third-party vendors to perform asanticipated and changes in the technical specifications of the satellites.Although we have entered into contracts with Thales Alenia Space thatanticipate launch of our second-generation satellites beginning in the firstquarter of 2010 into late 2010, and we have arranged with Thales Alenia Spacefor acceleration of a portion of the initial 24 satellites by up to fourmonths, there can be no assurance that the delivery of these satellites will betimely. We have not arranged an alternative source if Thales Alenia Space isunable or unwilling to fulfill these contracts. If Thales Alenia Space fails todeliver these initial satellites in a timely manner, our ability to meet ourprojected launch schedule would be materially adversely affected, and ouroperations and business plan, which assume a functioning second-generationsatellite constellation by 2010, would be materially adversely affected.

 

We have filed an application with the FCC to modify our constellationlicense to take account of the technical improvements in our second-generationsatellites and to change our approved orbital configuration. If the FCC werenot to grant our application as filed, we might not be able to re-establish ourduplex services as soon as planned.

 

A significant delay in placing our new satellites into commercialservice will have a material adverse affect in our operations and financialcondition which may cause us to receive additional financing. Furthermore, wemay not be able to obtain additional financing on favorable terms, or at all.

 

***We depend in large part on theefforts of third parties for the retail sale of our services and products. Theinability of these third parties to sell our services and products successfullymay decrease our revenue and profitability.***

 

For each of the six months ended June 30, 2009 and 2008, wederived approximately 95% and 87% of our revenue from products and servicessold through independent agents, dealers and resellers, including, outside theUnited States, independent gateway operators. If these third parties are unableto market our products and services successfully, our revenue and profitabilitymay decrease.

 

***We depend on independent gatewayoperators to market our services in important regions around the world. If theindependent gateway operators are unable to do this successfully, we will notbe 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 usersin the United States, Canada, a portion of Western Europe, Central America andthe northern portion of South America, either directly or through agents,dealers and resellers, we depend on independent gateway operators to purchase,install, operate and maintain gateway equipment, to sell phones and data userterminals, and to market our services in other regions where these independentgateway operators hold exclusive or non-exclusive rights. Not all of theindependent gateway operators have been successful and, in some regions, theyhave not initiated service or sold as much usage as originally anticipated.Some of the independent gateway operators are not earning revenues sufficientto fund their operating costs. If they are unable to continue in business, wewill lose the revenue we receive for selling equipment to them and providingservices to their customers. Although we have implemented a strategy for the acquisitionof certain independent gateway

 

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operatorswhen circumstances permit, we may not be able to continue to implement thisstrategy on favorable terms and may not be able to realize the additionalefficiencies that we anticipate from this strategy. In some regions it isimpracticable to acquire the independent gateway operators either because localregulatory requirements or business or cultural norms do not permit anacquisition, because the expected revenue increase from an acquisition would beinsufficient to justify the transaction, or because the independent gatewayoperator will not sell at a price acceptable to us. In those regions, ourrevenue and profits may be adversely affected if those independent gatewayoperators do not fulfill their own business plans to increase substantiallytheir sales of services and products.

 

***Our success in generating sufficientcash from operations to fund a portion of the cost of our second-generationsatellite constellation will depend on the market acceptance and success of ourcurrent and future products and services, which may not occur.***

 

In 2007, we launched new products to expand the scope of our Simplexservices. On November 1, 2007, we introduced the SPOT satellite messenger,aimed at both recreational and commercial customers who require personaltracking, emergency location and messaging solutions that operate beyond therange of traditional terrestrial and wireless communications.

 

We plan on introducing additional Duplex and Simplex products andservices. However, we cannot predict with certainty the potential longer termdemand for these products and services or the extent to which we will be ableto meet demand. Our business plan assumes growing our Duplex subscriber basebeyond levels achieved in the past, rapidly growing our Simplex subscriber baseand returning the business to profitability. However, we may not be able togenerate sufficient positive cash flow from our operations to enable us to funda portion of the cost of our second-generation satellite constellation. Amongother things, end user acceptance of our Duplex and Simplex will depend upon:

 

·                  the actual size of theaddressable market;

 

·                  our ability to provideattractive service offerings at competitive prices to our target markets;

 

·                  the cost and availability ofuser equipment, including the data modems that operate on our network;

 

·                  the effectiveness of ourcompetitors in developing and offering alternate technologies or lower pricedservices; and

 

·                  general and local economicconditions, which have been adversely affected by the current recession.

 

Our business plan assumes a rapidly growing subscriber base for Simplexproducts. If we cannot implement this business plan successfully and gainmarket acceptance for these planned Simplex products and services, ourbusiness, financial condition, results of operations and liquidity could be materiallyand adversely affected.

 

Because consumers will use SPOT satellite messenger products andservices in isolated and, in some cases, dangerous locations, we cannot predictwhether users of the device who suffer injury or death may seek to assert claimsagainst us alleging failure of the device to facilitate timely emergencyresponse. Although we will seek to limit our exposure to any such claimsthrough appropriate disclaimers and liability insurance coverage, we cannotassure investors that the disclaimers will be effective, claims will not ariseor insurance coverage will be sufficient.

 

***We have incurred substantialcontractual obligations.***

 

As of June 30, 2009, we had aggregate contractual obligations ofover $1.29 billion (a substantial portion of which is denominated inEuros) related to the procurement and deployment of our second-generationsatellite constellation and related ground installations, the purchase ofmobile phones and related equipment and other contractual obligations. Thenature of these purchases requires us to enter into long-term fixed pricecontracts. We could cancel some of these purchase commitments, subject to theincurrence of specified cancellation penalties. We believe we currently havemost of the funds necessary to fulfill these purchase commitments and may needto access additional funds through debt and equity issuances.

 

In addition, our cost of services is comprised primarily of networkoperating costs, which are generally fixed in nature. Accordingly, we aregenerally unable to adjust our operating costs or capital expenditures to matchfluctuations in our revenue.

 

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***We currently are unable to offerservice in important regions of the world due to the absence of gateways inthose areas, which is limiting our growth and our ability to compete.***

 

Our objective is to establish a worldwide service network, eitherdirectly or through independent gateway operators, but to date we have beenunable to do so in certain areas of the world and we may not succeed in doingso in the future. We have been unable to finance our own gateways or to findcapable independent gateway operators for several important regions andcountries, including Eastern and Southern Africa, India, and certain parts ofSoutheast Asia. In addition to the lack of global service availability,cost-effective roaming is not yet available in certain countries because the independentgateway operators have been unable to reach business arrangements with oneanother. This could reduce overall demand for our products and services andundermine our value for potential users who require service in these areas.

 

***Rapid and significant technologicalchanges in the satellite communications industry may impair our competitiveposition and require us to make significant additional capital expenditures.***

 

The hardware and software we utilize in operating our gateways weredesigned and manufactured over 10 years ago and portions are becomingobsolete. We have contracted to replace the hardware and software beginning in2011; however the original equipment may become less reliable as it ages andwill be more difficult and expensive to service. Although we maintaininventories of spare parts, it nonetheless may be difficult or impossible toobtain all necessary replacement parts for the hardware before the newequipment and software is fully deployed. We expect to face competition in thefuture from companies using new technologies and new satellite systems. Thespace and communications industries are subject to rapid advances andinnovations in technology. New technology could render our system obsolete orless competitive by satisfying consumer demand in more attractive ways orthrough the introduction of incompatible standards. Particular technologicaldevelopments that could adversely affect us include the deployment by ourcompetitors of new satellites with greater power, greater flexibility, greaterefficiency or greater capabilities, as well as continuing improvements interrestrial wireless technologies. We have had to commit, and must continue tocommit, to make significant capital expenditures to keep up with technologicalchanges and remain competitive. Customer acceptance of the services andproducts that we offer will continually be affected by technology-baseddifferences in our product and service offerings. New technologies may beprotected by patents and therefore may not be available to us.

 

***A natural disaster could diminishour ability to provide communications service.***

 

Natural disasters could damage or destroy our ground stations resultingin a disruption of service to our customers. In addition, the collateraleffects of such disasters such as flooding may impair the functioning of ourground equipment. If a natural disaster were to impair or destroy any of ourground facilities, we might be unable to provide service to our customers inthe affected area for a period of time. Even if our gateways are not affectedby natural disasters, our service could be disrupted if a natural disasterdamages the public switch telephone network or terrestrial wireless networks orour ability to connect to the public switch telephone network or terrestrialwireless networks. Such failure or service disruptions could harm our businessand results of operations.

 

***We may not be able to launch oursatellites successfully. Loss of one or more satellites during launch coulddelay or impair our ability to offer our services or reduce our revenues andlaunch insurance will not fully cover this risk.***

 

We have in the past insured the launch of our satellites, but we do notinsure our existing satellites during their remaining in-orbit operationallives. Insurance proceeds would likely be available in the event of a launchfailure, but acquiring replacements for any of the satellites will cause adelay in the deployment of our second-generation constellation and anyinsurance proceeds would not cover lost revenue.

 

We anticipate our launch failure insurance policy to include specifiedexclusions, deductibles and material change limitations. Some (but not all)exclusions could include damage arising from acts of war, anti-satellitedevices and other similar potential risks for which exclusions were customaryin the industry at the time the policy was written.

 

If launch insurance rates were to rise substantially, our future launchcosts would increase. In addition, in light of increasing costs, the scope ofinsurance exclusions and limitations on the nature of the losses for which wecan obtain insurance, or other business reasons, we may conclude that it doesnot make business sense to obtain third-party insurance and may decide topursue other strategies for mitigating the risk of a satellite launch failure,such as purchasing additional spare satellites or obtaining relaunch guarantiesfrom the launch provider. It is also possible that insurance could becomeunavailable, either generally or for a specific launch vehicle, or that newinsurance could be subject to broader exclusions on coverage, in which event wewould bear the risk of launch failures.

 

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***An FCC decision to license a secondCDMA operator in our band, or to take other steps that would reduce ourexisting spectrum allocation or impose additional spectrum sharing agreementson us, could adversely affect our services and operations.***

 

Under the FCC’s plan for mobile satellite services in our frequencybands, we must share frequencies in the United States with other licensedmobile satellite services operators. To date, there are no other authorizedCDMA-based mobile satellite services operators and no pending applications forauthorization. However the FCC or other regulatory authorities may require usto share spectrum with other systems that are not currently licensed by theUnited States or any other jurisdiction. The FCC’s decision to reduce thenumber of channels we have available in our L-band may impair our ability togrow over the long term.

 

***Spectrum values historically havebeen volatile, which could cause the value of our company to fluctuate.***

 

Our business plan may include forming strategic partnerships tomaximize value for our spectrum, network assets and combined service offeringsin the United States and internationally. Value that we may be able to realizefrom such partnerships will depend in part on the value ascribed to ourspectrum. Valuations of spectrum in other frequency bands historically havebeen volatile, and we cannot predict at what amount a future partner may bewilling to value our spectrum and other assets. In addition, to the extent thatthe FCC takes action that makes additional spectrum available or promotes themore flexible use or greater availability (e.g., via spectrum leasing ornew spectrum sales) of existing satellite or terrestrial spectrum allocations,the availability of such additional spectrum could reduce the value of ourspectrum authorizations and business.

 

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

 

*Satellite-basedCompetitors*

 

There are currently four other satellite operators providing servicessimilar to ours on a global or regional basis: Iridium, Inmarsat and itssubsidiary ACeS, SkyTerra, and Thuraya. In addition, ICO Global Communications(Holdings) Limited launched a satellite in 2008, TerreStar Corporation launcheda satellite in 2009 and SkyTerra plan to launch their new satellites in thenext year. The provision of satellite-based products and services is subject todownward price pressure when the capacity exceeds demand.

 

Although we believe there is currently no commercially availableproduct comparable in size, price and functionality to our SPOT satellitemessenger, other providers of satellite-based products could introduce theirown similar products if the SPOT satellite messenger is successful, which maymaterially adversely affect our business plan. In addition, we may facecompetition from new competitors or new technologies. With so many companiestargeting many of the same customers, we may not be able to retain successfullyour existing customers and attract new customers and as a result may not growour customer base and revenue.

 

*TerrestrialCompetitors*

 

In addition to our satellite-based competitors, terrestrial wireless voiceand data service providers are continuing to expand into rural and remoteareas, particularly in less developed countries, and providing the same generaltypes of services and products that we provide through our satellite-basedsystem. Many of these companies have greater resources, greater namerecognition and newer technologies than we do. Industry consolidation couldadversely affect us by increasing the scale or scope of our competitors andthereby making it more difficult for us to compete. We could lose market shareand revenue as a result of increasing competition from the extension ofland-based communication services.

 

Although satellite communications services and ground-basedcommunications services are not perfect substitutes, the two compete in certainmarkets and for certain services. Consumers generally perceive wireless voicecommunication products and services as cheaper and more convenient thansatellite-based ones.

 

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*ATCCompetitors*

 

We also expect to compete with a number of other satellite companiesthat plan to develop ATC integrated networks. For example, SkyTerra and ICOGlobal have received licenses from the FCC to operate an ATC network. Othercompetitors are expected to seek approval from the FCC to operate ATC services.Any of these competitors could offer an integrated satellite and terrestrialnetwork before we do, could combine with terrestrial networks that provide themwith greater financial or operational flexibility than we have, or could offeran ATC network that customers prefer over ours.

 

***The loss of customers, particularlyour large customers, may reduce our future revenues.***

 

We may lose customers due to competition, consolidation, regulatorydevelopments, business developments affecting our customers or their customers,the constellation degradation or for other reasons. Our top 10 customers forthe six months ended June 30, 2009 and 2008 accounted for, in theaggregate, approximately 10% and 11% of our total revenues of$30.9 million and $45.1 million, respectively. For the six monthsended June 30, 2009 and 2008, revenues from our largest customer were$0.5 million or 2%, and $0.9 million or 2% of our total revenues,respectively. If we fail to maintain our relationships with our majorcustomers, if we lose them and fail to replace them with other similarcustomers, or if we experience reduced demand from our major customers, ourprofitability could be significantly reduced through the loss of theserevenues. In addition, we may be required to record additional costs to theextent that amounts due from these customers become uncollectible. Moregenerally, our customers may fail to renew or may cancel their servicecontracts with us, which could negatively affect future revenues andprofitability.

 

Our customers include multiple agencies of the U.S. government. Servicesales to U.S. government agencies constituted approximately 7% and 13% of ourtotal service revenue for the six months ended June 30, 2009 and 2008,respectively. Government sales are made pursuant to individual purchase ordersplaced from time to time by the governmental agencies and are not related tolong-term contracts. U.S. government agencies may terminate their business withus at any time without penalty and are subject to changes in government budgetsand appropriations.

 

***Our business is subject to extensivegovernment regulation, which mandates how we may operate our business and mayincrease our cost of providing services, slow our expansion into new marketsand subject our services to additional competitive pressures.***

 

Our ownership and operation of wireless communication systems aresubject to significant regulation in the United States by the FCC and inforeign jurisdictions by similar local authorities. The rules andregulations of the FCC or these foreign authorities may change and may notcontinue to permit our operations as presently conducted or as we plan toconduct them. For example, the FCC has cancelled and refused to date toreinstate our license for spectrum in the 2 GHz band and has since licensedthis spectrum to other entities for their mobile satellite service systems.

 

Failure to provide services in accordance with the terms of ourlicenses or failure to operate our satellites, ground stations, or otherterrestrial facilities (including those necessary to provide ATC services) asrequired by our licenses and applicable government regulations could result inthe imposition of government sanctions against us, up to and includingcancellation of our licenses.

 

Our system requires regulatory authorization in each of the markets inwhich we or the independent gateway operators provide service. We and theindependent gateway operators may not be able to obtain or retain allregulatory approvals needed for operations. For example, the company with whichOld Globalstar contracted to establish an independent gateway operation inSouth Africa was unable to obtain an operating license from the Republic ofSouth Africa and abandoned the business in 2001. Regulatory changes, such asthose resulting from judicial decisions or adoption of treaties, legislation orregulation in countries where we operate or intend to operate, may alsosignificantly affect our business. Because regulations in each country aredifferent, we may not be aware if some of the independent gateway operatorsand/or persons with which we or they do business do not hold the requisite licensesand approvals.

 

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

 

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Our operations are subject to certain regulations of the United StatesState Department’s Directorate of Defense Trade Controls (i.e., the exportof satellites and related technical data), United States Treasury Department’sOffice of Foreign Assets Control (i.e., financial transactions) and theUnited States Commerce Department’s Bureau of Industry and Security(i.e., our gateways and phones). These regulations may limit or delay ourability to operate in a particular country. As new laws and regulations areissued, we may be required to modify our business plans or operations. If wefail to comply with these regulations in any country, we could be subject tosanctions that could affect, materially and adversely, our ability to operate inthat country. Failure to obtain the authorizations necessary to use ourassigned radio frequency spectrum and to distribute our products in certaincountries could have a material adverse effect on our ability to generaterevenue and on our overall competitive position.

 

***If we do not develop, acquire andmaintain proprietary information and intellectual property rights, it couldlimit the growth of our business and reduce our market share.***

 

Our business depends on technical knowledge, and we believe that ourfuture success is based, in part, on our ability to keep up with newtechnological 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 takendiligent steps to protect that information, the information may be disclosed toothers or others may independently develop similar information, systems andknow-how. Protection of our information, systems and know-how may result inlitigation, the cost of which could be substantial. Third parties may assertclaims that our products or services infringe on their proprietary rights. Anysuch claims, if made, may prevent or limit our sales of products or services orincrease our costs of sales. Thus far, two companies have filed lawsuitsagainst us for allegedly infringing with their patent rights. See “Item 1—LegalProceedings.” Additional claims could be made in the future.

 

We license much of the software we require to support critical gatewayoperations from third parties, including QUALCOMM and SpaceSystems/Loral Inc. This software was developed or customized specificallyfor our use. We also license software to support customer service functions,such as billing, from third parties which developed or customized itspecifically for our use. If the third party licensors were to cease to supportand service the software, or the licenses were to no longer be available oncommercially reasonable terms, it may be difficult, expensive or impossible toobtain such services from alternative vendors. Replacing such software could bedifficult, time consuming and expensive, and might require us to obtainsubstitute technology with lower quality or performance standards or at a greatercost.

 

***We face special risks by doingbusiness 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 currentlyare the United States and Canada, we have substantial markets for our mobilesatellite services in, and our business plan includes, developing countries orregions that are underserved by existing telecommunications systems, such asrural Venezuela, Brazil and Central America. Developing countries are morelikely than industrialized countries to experience market, currency andinterest rate fluctuations and may have higher inflation. In addition, thesecountries present risks relating to government policy, price, wage and exchangecontrols, social instability, expropriation and other adverse economic,political and diplomatic conditions.

 

Although we receive a majority of our revenues in U.S. dollars, and ourindependent gateway operators are required to pay us in U.S. dollars, limitedavailability of U.S. currency in some local markets or governmental controls onthe export of currency may prevent an independent gateway operator from makingpayments in U.S. dollars or delay the availability of payment due to foreignbank currency processing and approval. In addition, exchange rate fluctuationsmay affect our ability to control the prices charged for the independentgateway operators’ services.

 

***Fluctuations in currency exchangerates may adversely impact our financial results.***

 

Our operations involve transactions in a variety of currencies. Salesdenominated in foreign currencies primarily involve the Canadian dollar and theEuro. A substantial majority of our obligations are denominated in Euros.Accordingly, our operating results may be significantly affected byfluctuations in the exchange rates for these currencies, and increases in thevalue of the Euro compared to the U.S. dollar have effectively substantiallyincreased the Euro-denominated costs of procuring our second-generationsatellite constellation and related ground facilities. Further declines in thedollar will exacerbate this problem. A 1% decline in the dollar vis-à-vis theEuro would increase our committed purchase obligations by approximately$5.9 million. Approximately 36% and 37% of our total sales were to retailcustomers in Canada, Europe, Venezuela and Brazil (which we added in the firstquarter of 2008) during 2008 and 2007, respectively. Our results of operationsfor 2008 and 2007 reflected losses of $4.5 million and $8.2 million,respectively, on foreign currency transactions. Our exposure to fluctuations incurrency exchange rates has increased significantly as a result of oursatellite contracts. We may be unable to offset unfavorable currency movementsas they adversely affect our revenue and expenses or to hedge them effectively.Our inability to do so could have a substantial negative impact on ouroperating results and cash flows.

 

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***If we become subject tounanticipated foreign tax liabilities, it could materially increase our costs.***

 

We operate in various foreign tax jurisdictions. We believe that wehave complied in all material respects with our obligations to pay taxes inthese jurisdictions. However, our position is subject to review and possiblechallenge by the taxing authorities of these jurisdictions. If the applicabletaxing authorities were to challenge successfully our current tax positions, orif there were changes in the manner in which we conduct our activities, wecould become subject to material unanticipated tax liabilities. We may alsobecome subject to additional tax liabilities as a result of changes in taxlaws, which could in certain circumstances have a retroactive effect. As aresult of our acquisition of an independent gateway operator in Brazil during2008, we are exposed to potential pre-acquisition tax liabilities estimated atapproximately $11.1 million, for which we are fully indemnified by theseller. We may also be exposed to potential pre-acquisition liabilities forwhich we may not be fully indemnified by the seller or the seller may fail toperform its indemnification obligations.

 

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

 

We depend on QUALCOMM as the exclusive manufacturer of phones using theIS 41 CDMA North American standard, which incorporates QUALCOMM proprietarytechnology. QUALCOMM may terminate its business relationship with us when itscurrent contractual obligations are completed in approximately two years. Inaddition, we currently have a maintenance and support contract with QUALCOMMthat ends in 2009. If QUALCOMM terminates any one of these relationships, wemay not be able to find a replacement supplier or perform the maintenance andsupport ourselves. Although we have contracted with Hughes and Ericsson toprovide new hardware and software for our ground component, there could be asubstantial period of time in which their products or services are notavailable and QUALCOMM no longer supports its products and services.

 

We depend on Axonn L.L.C. to produce and sell the data modems throughwhich we provide our Simplex service, including our SPOT satellite messengerproducts, which incorporate Axonn proprietary technology. Axonn is currentlyour sole source for obtaining these data modems. If Axonn were to ceaseproducing and selling these data modems, in order to continue to expand ourSimplex service, we would either have to acquire from Axonn the right to havethe modems manufactured by another vendor or develop a modem that did not relyon Axonn’s proprietary technology. We have no long-term commitments from Axonnfor the production and sale of these data modems.

 

***Pursuing strategic transactions maycause us to incur additional risks.***

 

We may pursue acquisitions, joint ventures or other strategictransactions on an opportunistic basis, although no new transactions that wouldbe financially significant to us are probable at this time. We may face costsand risks arising from any such transactions, including integrating a newbusiness into our business or managing a joint venture. These may includelegal, organizational, financial and other costs and risks.

 

In addition, if we were to choose to engage in any major businesscombination or similar strategic transaction, we may require significantexternal financing in connection with the transaction. Depending on marketconditions, investor perceptions of us and other factors, we may not be able toobtain capital on acceptable terms, in acceptable amounts or at appropriatetimes to implement any such transaction. Any such financing, if obtained, mayfurther dilute our existing stockholders.

 

***Restrictive covenants in ourFacility Agreement impose restrictions that may limit our operating andfinancial flexibility.***

 

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

 

·                  incur or guaranteeadditional indebtedness;

 

·                  pay dividends or makedistributions to our stockholders;

 

·                  make investments,acquisitions or capital expenditures;

 

·                  repurchase or redeem capitalstock or subordinated indebtedness;

 

·                  grant liens on our assets;

 

·                  incur restrictions on theability of our subsidiaries to pay dividends or to make other payments to us;

 

·                  enter into transactions withour affiliates;

 

·                  merge or consolidate withother entities or transfer all or substantially all of our assets; and

 

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·                  transfer or sell assets.

 

Complying with these restrictive covenants, as well as the financialcovenants in the Facility Agreement and those that may be contained in anyagreements governing future indebtedness, may impair our ability to finance ouroperations or capital needs or to take advantage of other favorable businessopportunities. Our ability to comply with these covenants will depend on ourfuture performance, which may be affected by events beyond our control. If weviolate any of these covenants and are unable to obtain waivers, we would be indefault under the agreement and payment of the indebtedness could beaccelerated. The acceleration of our indebtedness under one agreement maypermit acceleration of indebtedness under other agreements that containcross-default or cross-acceleration provisions. If our indebtedness isaccelerated, we may not be able to repay our indebtedness or borrow sufficientfunds to refinance it. Even if we are able to obtain new financing, it may notbe on commercially reasonable terms or on terms that are acceptable to us. Ifour indebtedness is in default for any reason, our business, financialcondition and results of operations could be materially and adversely affected.In addition, complying with these covenants may also cause us to take actionsthat are not favorable to holders of the common stock and may make it moredifficult for us to successfully execute our business plan and compete againstcompanies who are not subject to such restrictions. Furthermore, our ability todraw on our credit facility is subject to conditions, including that no defaultis continuing or would be likely to result from a proposed plan.

 

**Risks Related to Our Common Stock**

 

***Recessionary indicators andcontinued volatility in global economic conditions and the financial marketshave adversely affected and may continue to affect adversely sales of our SPOTsatellite messenger.***

 

The volatility and disruption to the financial markets has reachedunprecedented levels and has significantly adversely impacted global economicconditions. As a result, consumer confidence and demand have declined substantially.These conditions could lead to further reduced consumer spending in theforeseeable future, especially for discretionary travel and related products. Asubstantial portion of the potential addressable market for our SPOT satellitemessenger products and services relates to recreational users, such as mountainclimbers, campers, kayakers, sport fishermen and wilderness hikers. Thesepotential customers may reduce their activities due to economic conditions,which could adversely affect our business, financial condition, results ofoperations and liquidity. These disruptions have had and may continue to have amaterial adverse effect on the market price of our Common Stock.

 

***Failure to satisfy NASDAQ GlobalSelect Market listing requirements may result in our common stock being removedfrom listing on the NASDAQ Global Select Market.***

 

Our Common Stock is currently listed on the NASDAQ Global Select Marketunder the symbol “GSAT.” For continued inclusion on the NASDAQ Global SelectMarket, we must generally maintain, among other requirements, either (a) stockholders’equity of at least $10 million, a minimum closing bid price of $1.00 pershare and a market value of our public float of at least $5 million; or (b) marketcapitalization of at least $50 million, a minimum closing bid price of$1.00 per share and a market value of our public float of at least$15 million. If we fail to meet the minimum closing bid price or theminimum market value standards described above for at least 30 consecutive tradingdays, our Common Stock could be at risk of being removed from listing on theNASDAQ Global Select Market. If our Common Stock were removed from listing onthe NASDAQ Global Select Market, our Common Stock may be transferred to theNASDAQ Capital Market if we satisfy the listing criteria for the NASDAQ CapitalMarket, or trading of our Common Stock may be conducted in the over-the-countermarket in the so-called “pink sheets” or, if available, the NationalAssociation of Securities Dealer’s “Electronic Bulletin Board.” Consequently,broker-dealers may be less willing or able to sell and/or make a market in ourCommon Stock, which may make it more difficult for shareholders to dispose of,or to obtain accurate quotations for the price of, our Common Stock. Removal ofour Common Stock from listing on the NASDAQ Global Select Market may also makeit more difficult for us to raise capital through the sale of our securities.

 

In addition, if our Common Stock is not listed on a U.S. national stockexchange, such as NASDAQ, or approved for quotation and trading on a nationalautomated dealer quotation system or established automated over-the-countertrading market, holders of our 5.75% Convertible Senior Notes and our 8%Convertible Senior Unsecured Notes will have the option to require us torepurchase the Notes, which we may not have sufficient financial resources todo.

 

***We do not expect to pay dividends onour common stock in the foreseeable future.***

 

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

 

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***The market price of our common stockis 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 anticipatedvariations in our operating results;

 

·                  further failure in theperformance of our current or future satellites or a delay in the launch of oursecond-generation satellites;

 

·                  changes in financialestimates by research analysts, or any failure by us to meet or exceed any suchestimates, or changes in the recommendations of any research analysts thatelect to follow our common stock or the common stock of our competitors;

 

·                  actual or anticipatedchanges in economic, political or market conditions, such as recessions orinternational currency fluctuations;

 

·                  actual or anticipatedchanges in the regulatory environment affecting our industry;

 

·                  actual or anticipated salesof common stock by our controlling stockholder or others;

 

·                  changes in the marketvaluations of our industry peers; and

 

·                  announcements by us or ourcompetitors of significant acquisitions, strategic partnerships, divestitures,joint ventures or other strategic initiatives.

 

The trading price of our common stock might also decline in reaction toevents that affect other companies in our industry even if these events do notdirectly affect us. You may be unable to resell your shares of our common stockat or above the initial purchase price. Additionally, because we are acontrolled company there is a limited market for our common stock and we cannotassure you that a trading market will develop further or be maintained.

 

Trading volume for our common stock historically has been low. Sales ofsignificant amounts of shares of our common stock in the public market couldlower the market price of our stock.

 

***The future issuance of additionalshares of our common stock could cause dilution of ownership interests andadversely affect our stock price.***

 

We may in the future issue our previously authorized and unissuedsecurities, resulting in the dilution of the ownership interests of our currentstockholders. We are currently authorized to issue 800 million shares ofcommon stock, of which approximately 141.2 million were issued andoutstanding as of June 30, 2009 and 658.8 million were available forfuture issuance, of which approximately 197.7 million shares are reserved forspecific future issuances. The potential issuance of such additional shares ofcommon stock, whether directly or pursuant to any conversion right of anyconvertible securities, may create downward pressure on the trading price ofour common stock. We may also issue additional shares of our common stock orother securities that are convertible into or exercisable for common stock forcapital raising or other business purposes. Future sales of substantial amountsof common stock, or the perception that sales could occur, could have amaterial adverse effect on the price of our common stock.

 

***We have issued and may issue sharesof preferred stock or debt securities with greater rights than our commonstock.***

 

Subject to the rules of The NASDAQ Global Select Market, ourcertificate of incorporation authorizes our board of directors to issue one ormore series of preferred stock and set the terms of the preferred stock withoutseeking any further approval from holders of our common stock. Currently, thereare 100 million shares of preferred stock authorized and one share of Series AConvertible Preferred Stock issued which has a $0.01 liquidity preference andis convertible into shares of Common Stock. Any preferred stock that is issuedmay rank ahead of our common stock in terms of dividends, priority andliquidation premiums and may have greater voting rights than holders of ourcommon stock.

 

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

 

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

 

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***Provisions in our charter documentsand 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 ofincorporation, amended and restated bylaws and our Facility Agreement andindentures could hamper a third party’s acquisition of us or discourage a thirdparty from attempting to acquire control of us. These provisions include:

 

·                  the absence of cumulativevoting in the election of our directors, which means that the holders of amajority of our common stock may elect all of the directors standing forelection;

 

·                  the ability of our board ofdirectors to issue preferred stock with voting rights or with rights senior tothose of the common stock without any further vote or action by the holders ofour common stock;

 

·                  the division of our board ofdirectors into three separate classes serving staggered three-year terms;

 

·                  the ability of ourstockholders, at such time when Thermo does not own a majority of ouroutstanding capital stock entitled to vote in the election of directors, toremove our directors only for cause and only by the vote of at least 662/3% of the outstanding shares of capital stockentitled to vote in the election of directors;

 

·                  prohibitions, at such timewhen Thermo does not own a majority of our outstanding capital stock entitledto vote in the election of directors, on our stockholders acting by writtenconsent;

 

·                  prohibitions on ourstockholders calling special meetings of stockholders or filling vacancies onour board of directors;

 

·                  the requirement, at suchtime when Thermo does not own a majority of our outstanding capital stockentitled to vote in the election of directors, that our stockholders mustobtain a super-majority vote to amend or repeal our amended and restatedcertificate of incorporation or bylaws;

 

·                  change of control provisionsin our Facility Agreement, which provide that a change of control willconstitute an event of default and, unless waived by the lenders, will resultin the acceleration of the maturity of all indebtedness under the creditagreement;

 

·                  change of control provisionsrelating to our 5.75% Convertible Senior Notes and 8% Convertible SeniorUnsecured Notes, which provide that a change of control will permit holders ofthe Notes to demand immediate repayment; and

 

·                  change of control provisionsin our 2006 Equity Incentive Plan, which provide that a change of control mayaccelerate the vesting of all outstanding stock options, stock appreciationrights and restricted stock.

 

We also are subject to Section 203 of the Delaware GeneralCorporation Law, which, subject to certain exceptions, prohibits us fromengaging in any business combination with any interested stockholder, asdefined in that section, for a period of three years following the date onwhich that stockholder became an interested stockholder. This provision doesnot apply to Thermo, which became our principal stockholder prior to ourinitial public offering.

 

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

 

***We are controlled by Thermo, whoseinterests may conflict with yours.***

 

As of June 30, 2009, Thermo owned approximately 53% of ouroutstanding common stock. Additionally, Thermo owns Series A Preferred Stock, warrantsand 8.00% Notes that may be converted into or exercised for additional sharesof Common Stock. Thermo is able to control the election of all of the membersof our board of directors and the vote on substantially all other matters,including significant corporate transactions such as the approval of a mergeror other transaction involving our sale.

 

We have depended substantially on Thermo to provide capital to financeour business. In 2006 and 2007, Thermo Funding purchased an aggregate of$200 million of our Common Stock at prices substantially above market. On December 17,2007, Thermo Funding assumed all of the obligations and was assigned all of therights (other than indemnification rights) of the administrative agent and thelenders under our amended and restated credit agreement. In connection withfulfilling the conditions precedent to our Facility Agreement, in June 2009,Thermo agreed to convert the loans outstanding under the credit agreement intoequity and terminate the credit agreement. In addition, Thermo and itsaffiliates deposited $60.0 million in a contingent equity account to fulfill acondition precedent for borrowing under the Facility Agreement, purchased $11.4million of our 8% Notes, and loaned us $25.0 million to fund our debt servicereserve account under the Facility Agreement.

 

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Thermo is controlled by James Monroe III, our chairman. Through Thermo,Mr. Monroe holds equity interests in, and serves as an executive officeror director of, a diverse group of privately-owned businesses not otherwiserelated to us. Although Mr. Monroe receives no compensation from us, hehas advised us that he intends to devote whatever portion of his time isnecessary to perform his duties as our chairman. We do reimburse Thermo and Mr. Monroefor certain expenses they incur in connection with our business.

 

The interests of Thermo may conflict with the interests of our otherstockholders. Thermo may take actions it believes will benefit its equityinvestment in us or loans to us even though such actions might not be in yourbest interests as a holder of our common stock.

 

***As a “controlled company,” asdefined in the NASDAQ Marketplace Rules, we qualify for, and rely on, exemptionsfrom certain corporate governance requirements.***

 

Thermo owns Common Stock representing more than a majority of thevoting power in election of our directors. As a result, we are considered a “controlledcompany” within the meaning of the corporate governance standards in the NASDAQMarketplace Rules. Under these rules, a “controlled company” may elect not tocomply with certain corporate governance requirements, including therequirement that a majority of its board of directors consist of independent directors,the requirement that it have a nominating/corporate governance committee thatis composed entirely of independent directors with a written charter addressingthe committee’s purpose and responsibilities and the requirement that it have acompensation committee that is composed entirely of independent directors witha written charter addressing the committee’s purpose and responsibilities. Wehave elected to be treated as a controlled company and thus utilize theseexemptions. As a result, we do not have a majority of independent directors nordo we have compensation and nominating/corporate governance committeesconsisting entirely of independent directors. Accordingly, you do not have thesame protection afforded to stockholders of companies that are subject to allof the NASDAQ Marketplace corporate governance requirements.

 

***Our pre-emptive rights offering,which we may commence in the future, is not in strict compliance with thetechnical requirements of our prior certificate of incorporation.***

 

Our certificate of incorporation as in effect when we entered into theirrevocable standby stock purchase agreement with Thermo Funding in 2006provided that stockholders who are accredited investors (as defined under theSecurities Act) were entitled to pre-emptive rights with respect to thetransaction with Thermo Funding. We may offer our stockholders as of June 15,2006 who are accredited investors the opportunity to participate in thetransaction contemplated by the irrevocable standby stock purchase agreementwith Thermo Funding on a pro rata basis on substantially the same terms asThermo Funding. Some of our stockholders could allege that the offering doesnot comply fully with the terms of our prior certificate of incorporation.Although we believe any variance from the requirements of our formercertificate of incorporation is immaterial and that we had valid reasons fordelaying the pre-emptive rights offering until after our initial publicoffering, a court may not agree with our position if these stockholders allegethat we have violated their pre-emptive rights. In that case, we can notpredict the type of remedy the court could award such stockholders.

 

***The pre-emptive rights offering,which we are required to make to our existing stockholders, will be done on aregistered basis, and may negatively affect the trading price of our stock.***

 

The pre-emptive rights offering will be made pursuant to a registrationstatement filed with, and potentially reviewed by, the SEC. After giving effectto waivers that we have already received, up to 785,328 shares of our CommonStock may be purchased if the pre-emptive rights offering is fully subscribed.Such shares may be purchased at approximately $16.17 per share, regardless ofthe trading price of our Common Stock. The nature of the pre-emptive rightsoffering may negatively affect the trading price of our Common Stock.

 

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**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

Afterapproval of certain transactions by our Board of Directors, on June 24,2009 we obtained written consent of these actions from affiliates of JamesMonroe III, our principal stockholder, who collectively held 76,405,771 sharesof our common stock, representing the right to vote approximately 54% of thetotal issued and outstanding shares on that date. We were required to obtainstockholder approval in compliance with Nasdaq Stock Market Listing Rules.  These resolutions: 

 

1.               Approved the issuance of $55 million aggregate principal amount ofour 8% Convertible Senior Unsecured Notes, the issuance of additional Notes andshares of Common Stock to pay interest on the Notes, the issuance of CommonStock issuable upon conversion of the Notes, the issuance to purchasers of theNotes of warrants to purchase 15,277,771 shares of Common Stock, and theissuance of Common Stock upon the exercise of the warrants, all in accordancewith the terms of the Indenture dated as of April 15, 2008 between theCompany and U.S. Bank, National Association, as trustee, as supplemented by theSecond Supplemental Indenture dated June 19, 2009 between the Company andU.S. Bank, National Association, as trustee, and the warrants issued onJune 19, 2009, as applicable. 

2.               Approved the issuance of one share of our Series A ConvertiblePreferred Stock, convertible into 126,174,034 shares of Common Stock (or, if aclass of nonvoting common stock is created in the future, shares of nonvotingcommon stock) to Thermo Funding in exchange for the full amount of$180,176,520.30 in secured debt (including accrued interest) outstanding underthe Second Amended and Restated Credit Agreement by and between us and ThermoFunding dated as of December 17, 2007, as amended. 

3.               Approved the issuance to Thermo Funding of shares of Common Stock at aprice that is 80% of the then-current market price in exchange for funds drawnby us, if any, under the $60 million contingent equity facility providedby Thermo Funding pursuant to the Contingent Equity Agreement between us andThermo Funding dated as of June 19, 2009, as required by the AccountsAgreement between us, Thermo Funding and BNP Paribas dated as of June 5,2009. 

4.               Approved the issuance to Thermo Funding of warrants to purchase CommonStock (or, if such a class of stock is created in the future, nonvoting commonstock) in respect of the availability fee for amounts maintained in thecontingent equity account in accordance with the terms of the Contingent EquityAgreement. 

5.               Approved the issuance to Thermo Funding of warrants to purchase4,205,608 shares of Common Stock in accordance with the terms of the LoanAgreement between the Company and Thermo Funding dated as of June 25,2009, and the issuance of the shares of Common Stock subject to the warrantsupon their exercise thereof. 

 

Weinformed our stockholders of these actions by delivery of an InformationStatement on Schedule 14C.  Thestockholder consent became effective on August 6, 2009.

 

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**Item 6.Exhibits**

** **
| **Number** | ** ** | **Description**                                                                                                                                                     |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1        |       | Certificate of  Designation for Series A Convertible Preferred Stock                                                                                           |
|       |       |                                                                                                                                                                |
| 4.1        |       | Warrant issued to  Thermo Funding Company LLC pursuant to the Contingent Equity Agreement dated  as of June 19, 2009                                                |
|       |       |                                                                                                                                                                |
| 4.2        |       | Form of Warrant for  issuances to Thermo Funding Company LLC pursuant to the Loan Agreement dated  as of June 25, 2009.                                             |
|       |       |                                                                                                                                                                |
| 10.1       |       | COFACE Facility  Agreement between Globalstar, Inc., BNP Paribas Societe General,  Natixis, Calyon and Credit Industrial et Commercial dated June 5, 2009 |
|       |       |                                                                                                                                                                |
| 10.2† |       | Amended and Restated  Satellite Construction Contract between Globalstar, Inc. and Thales  Alenia Space dated June 3, 2009                                |
|       |       |                                                                                                                                                                |
| 10.3       |       | Conversion Agreement  between Globalstar, Inc. and Thermo Funding Company LLC dated as of June 19,  2009                                                  |
|       |       |                                                                                                                                                                |
| 10.4       |       | Contingent Equity  Agreement between Globalstar, Inc. and Thermo Funding Company LLC dated  as of June 19, 2009                                           |
|       |       |                                                                                                                                                                |
| 10.5       |       | Loan Agreement between  Globalstar, Inc. and Thermo Funding Company LLC dated as of June 25,  2009                                                        |
|       |       |                                                                                                                                                                |
| 10.6† |       | Amendment No. 2 to  Launch Services Contract between Globalstar, Inc. and Arianespace dated June 24,  2009                                           |
|       |       |                                                                                                                                                                |
| 31.1       |       | Section 302  Certification of the Chief Executive Officer                                                                                                      |
|       |       |                                                                                                                                                                |
| 31.2       |       | Section 302  Certification of the Chief Financial Officer                                                                                                      |
|       |       |                                                                                                                                                                |
| 32.1       |       | Section 906  Certifications                                                                                                                                    |

 

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†                                          Portions of theexhibit have been omitted pursuant to a request for confidential treatmentfiled with the Commission. The omitted portions of the exhibit have been filedwith the Commission.

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                        | GLOBALSTAR, INC. |
|-----------------------------|------------------|
|                        |             |
|                        | By:              | /s/Peter J. Dalton |
| Date: August 10,  2009 |             | Peter J. Dalton |
|                        |             | Chief Executive Officer |
|                        |             |   |
|                        | By:              | /s/ FUAD AHMAD |
| Date: August 10,  2009 |             | Fuad Ahmad |
|                        |             | Senior Vice  President and Chief Financial Officer |

 

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