Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
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 September 30, 2011
 
OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to
 
Commission file number 001-33117
 
GLOBALSTAR, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
41-2116508
(State or Other Jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
   
 
300 Holiday Square Blvd.
Covington, Louisiana 70433
(Address of principal executive offices and zip code)
 
(985) 335-1500
Registrant’s telephone number, including area code
 
Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ¨ No x
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨
 
Accelerated filer x
     
Non-accelerated filer ¨
 
Smaller reporting company  ¨
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
 
As of October 28, 2011, 294,771,836 shares of voting common stock and 19,275,750 shares of nonvoting common stock were outstanding. Unless the context otherwise requires, references to common stock in this Report mean Registrant’s voting common stock. 
 
 
 

 
  
GLOBALSTAR, INC.
TABLE OF CONTENTS
 
 
Page
   
PART I -  Financial Information
 
     
Item 1.
Financial Statements
1
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
34
     
Item 4.
Controls and Procedures
35
     
PART II -  Other Information
 
     
Item 1. 
Legal Proceedings
35
     
Item 1A.
Risk Factors
35
     
Item 6.
Exhibits
37
     
Signatures
38
 
 
 

 
 
GLOBALSTAR, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues:
                       
Service revenues
 
$
14,198
   
$
13,389
   
$
41,774
   
$
38,751
 
Subscriber equipment sales
   
3,989
     
4,834
     
13,666
     
12,665
 
Total revenues
   
18,187
     
18,223
     
55,440
     
51,416
 
Operating expenses:
                               
Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
   
8,332
     
7,995
     
22,684
     
22,587
 
Cost of subscriber equipment sales
   
2,871
     
3,329
     
9,321
     
9,317
 
Reduction in the value of equipment
   
979
     
-
     
1,401
     
61
 
Reduction in the value of assets
   
3,038
     
-
     
3,484
     
-
 
Marketing, general, and administrative
   
12,249
     
12,911
     
34,004
     
31,245
 
Depreciation, amortization, and accretion
   
12,106
     
7,301
     
35,512
     
19,164
 
Total operating expenses
   
39,575
     
31,536
     
106,406
     
82,374
 
Loss from operations
   
(21,388
)
   
(13,313
)
   
(50,966
)
   
(30,958
)
Other income (expense):
                               
Interest income
   
3
     
63
     
14
     
402
 
Interest expense, net of amounts capitalized
   
(1,235
)
   
(1,202
)
   
(3,613
)
   
(3,794
)
Derivative gain (loss)
   
23,793
     
(9,150
)
   
34,090
     
(42,185
)
Other
   
(1,876
)
   
(883
)
   
(573
)
   
(2,742
)
Total other income (expense)
   
20,685
     
(11,172
)
   
29,918
     
(48,319
)
Loss before income taxes
   
(703
)
   
(24,485
)
   
(21,048
)
   
(79,277
)
Income tax (benefit) expense
   
(22)
     
8
     
167
     
107
 
Net loss
 
$
(681
)
 
$
(24,493
)
 
$
(21,215
)
 
$
(79,384
)
Loss per common share:
                               
Basic
 
$
(0.00
)
 
$
(0.09
)
 
$
(0.07
)
 
$
(0.28
)
Diluted
   
(0.00
)
   
(0.09
)
   
(0.07
)
   
(0.28
)
Weighted-average shares outstanding:
                               
Basic
   
295,513
     
287,502
     
294,519
     
281,701
 
Diluted
   
295,513
     
287,502
     
294,519
     
281,701
 
 
See accompanying notes to unaudited interim condensed consolidated financial statements.
 
 
1

 
  
GLOBALSTAR, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share data)
 
   
(Unaudited)
September 30,
2011
   
(Audited)
December 31,
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
6,080
   
$
33,017
 
Restricted cash
   
     
2,064
 
Accounts receivable, net of allowance of $8,781 (2011) and $5,971 (2010)
   
13,220
     
13,671
 
Inventory
   
50,003
     
55,635
 
Advances for inventory
   
9,367
     
9,431
 
Prepaid expenses and other current assets
   
7,021
     
5,061
 
Total current assets
   
85,691
     
118,879
 
Property and equipment, net
   
1,205,535
     
1,150,470
 
Restricted cash
   
46,777
     
34,276
 
Deferred financing costs
   
54,411
     
59,870
 
Intangible and other assets, net
   
14,385
     
23,313
 
Total assets
 
$
1,406,799
   
$
1,386,808
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Current maturities of long-term debt
 
$
16,711
   
$
 
Accounts payable
   
32,442
     
26,434
 
Accrued expenses
   
32,264
     
48,162
 
Payables to affiliates
   
210
     
710
 
Deferred revenue
   
18,539
     
19,150
 
Total current liabilities
   
100,166
     
94,456
 
                 
Long-term debt
   
701,169
     
664,543
 
Employee benefit obligations
   
4,240
     
4,727
 
Derivative liabilities
   
28,794
     
60,819
 
Deferred revenue
   
4,422
     
3,875
 
Other non-current liabilities
   
16,904
     
22,970
 
Total non-current liabilities
   
755,529
     
756,934
 
Stockholders’ equity:
               
Preferred Stock of $0.0001 par value; 100,000,000 shares authorized and none issued and outstanding at September 30, 2011 and December 31, 2010:
               
Series A Preferred Convertible Stock of $0.0001 par value;  One share authorized and  none issued and outstanding at September 30, 2011 and December 31, 2010
   
     
 
Voting Common Stock of $0.0001 par value; 865,000,000 shares authorized; 294,743,000 and 290,683,000 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
   
29
     
29
 
Nonvoting Common Stock of $0.0001 par value; 135,000,000 shares authorized and 19,276,000 shares issued and outstanding at September 30, 2011 and December 31, 2010
   
2
     
2
 
Additional paid-in capital
   
773,495
     
736,455
 
Accumulated other comprehensive loss
   
(409)
     
(268
)
Retained deficit
   
(222,013)
     
(200,800
)
Total stockholders’ equity
   
551,104
     
535,418
 
Total liabilities and stockholders’ equity
 
$
1,406,799
   
$
1,386,808
 
 
 See accompanying notes to unaudited interim condensed consolidated financial statements.
 
 
2

 
 
 
GLOBALSTAR, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
2011
   
September 30,
2010
 
             
Cash flows from operating activities:
           
             
Net loss
 
$
(21,215
)
 
$
(79,384
)
Adjustments to reconcile net loss to net cash from operating activities:
               
Depreciation, amortization, and accretion
   
35,512
     
19,164
 
Change in fair value of derivative assets and liabilities
   
(34,090
)
   
42,185
 
Stock-based compensation expense
   
1,908
     
43
 
Amortization of deferred financing costs
   
2,734
     
2,536
 
Provisions for bad debt
   
2,245
     
368
 
Contingent reimbursements
   
1,853
     
 
Impairment of assets and equipment
   
4,885
     
61
 
Loss on equity method investments
   
315
     
2,627
 
Foreign currency and other, net
   
1,254
     
0
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(1,955
)
   
(2,960
)
Inventory
   
3,240
     
(164
)
Prepaid expenses and other current assets
   
(1,395
)
   
232
 
Other assets
   
(831
)
   
921
 
Accounts payable
   
(703
)
   
1,596
 
Payables to affiliates
   
(500
)
   
142
 
Accrued expenses and employee benefit obligations
   
(1,499
)
   
2,837
 
Other non-current liabilities
   
(2,546
)
   
750
 
Deferred revenue
   
(62
)
   
1,096
 
Net cash used in operating activities
   
(10,850
)
   
(7,688
)
Cash flows from investing activities:
               
Second-generation satellites, ground and related launch costs
   
(71,212
)
   
(157,383
)
Property and equipment additions
   
(2,385
)
   
(5,473
)
Investment in businesses
   
(500
)
   
(1,110
)
Restricted cash
   
(10,436
)
   
2,064
 
Net cash used in investing activities
   
(84,533
)
   
(161,902
)
Cash flows from financing activities:
               
Proceeds from exercise of warrants and stock options
   
526
     
6,249
 
Borrowings from Facility Agreement
   
18,659
     
153,055
 
Proceeds from the issuance of 5.0% convertible notes
   
38,000
     
 
Borrowings from subordinated loan agreement
   
12,500
     
 
Payment of deferred financing costs
   
(925
)
   
 
Net cash from financing activities
   
68,760
     
159,304
 
Effect of exchange rate changes on cash
   
(314
)
   
(143
)
Net decrease in cash and cash equivalents
   
(26,937
)
   
(10,429
)
Cash and cash equivalents, beginning of period
   
33,017
     
67,881
 
Cash and cash equivalents, end of period
 
$
6,080
   
$
57,452
 
Supplemental disclosure of cash flow information:
               
Cash paid for:
               
Interest
 
$
19,097
   
$
14,761
 
Income taxes
 
$
82
   
$
108
 
Supplemental disclosure of non-cash financing and investing activities:
               
Reduction in accrued second-generation satellites and launch costs
 
$
3,992
   
$
42,070
 
Increase in capitalized accrued interest for second-generation satellites and launch costs
 
$
1,117
   
$
5,217
 
Capitalization of the accretion of debt discount and amortization of prepaid finance costs
 
$
17,962
   
$
22,351
 
Payments made in Common Stock
 
$
3,539
   
$
1,811
 
Reduction in assets and liabilities due to note conversion
 
$
1,538
   
$
7,685
 
Conversion of convertible notes into common stock
 
$
1,000
   
$
4,239
 
Conversion of contingent equity account derivative liability to equity
 
$
5,955
   
$
11,940
 
Value of warrants issued in connection with the contingent equity account loan fee
 
$
8,318
   
$
8,510
 
Recognition of a beneficial conversion feature on long-term debt
 
$
17,100
   
$
 
Value of warrants issued in connection with raising capital and debt
 
$
8,081
   
$
 
Recognition of contingent reimbursements
 
$
1,852
   
$
 
 
See accompanying notes to unaudited interim condensed consolidated financial statements.
 
 
3

 
 
GLOBALSTAR, INC.
 
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. BASIS OF PRESENTATION
 
The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and footnote disclosures normally in financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission; however, management believes the disclosures made are adequate to make the information presented not misleading. These financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
 
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition; property and equipment; inventory; derivative instruments; litigation, claims and contingencies; allowance for doubtful accounts; pension plan; stock-based compensation; intangible assets; and income taxes. Actual results could differ from these estimates.
 
All significant intercompany transactions and balances have been eliminated in the consolidation. In the opinion of management, such information includes all adjustments, consisting of normal recurring adjustments, that are necessary for a fair presentation of the Company’s condensed consolidated financial position, results of operations, and cash flows for the periods presented. These unaudited interim condensed consolidated financial statements include the accounts of Globalstar and its majority owned or otherwise controlled subsidiaries. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the full year or any future period.
 
2. MANAGEMENT'S PLANS REGARDING FUTURE OPERATIONS
 
The Company has generated operating losses and negative operating cash flows for the nine months ended September 30, 2011 and for each of the previous three years.  The Company’s first-generation satellite constellation has deteriorated over time resulting in substantially reduced ability to provide reliable two-way voice and data communication service (“Duplex”), and accordingly, the Company’s operations have been adversely affected.  Based on currently available cash and financing commitments, the Company does not have sufficient liquidity to meet its existing contractual obligations and funding requirements over the next 12 months and, therefore, must obtain additional financing.   The Company has developed a plan to improve operations; complete the launch of 24 second-generation satellites; complete the development, construction, and activation of additional second-generation satellites and next generation ground upgrades; and obtain additional financing as described below.
 
Improved Operations

 As of September 30, 2011, Management had completed the relocation of its corporate headquarters, product development center, customer care operations, call center and other global business functions including finance, accounting, sales, marketing and corporate communications to one location; obtained the required licensing to activate its ground stations in North America to send and receive call traffic with the second-generation satellites; and improved the Company’s cost structure by reducing headcount and other operating costs.

Management has begun several initiatives designed to increase revenues and further reduce operating costs of the business, which include: marketing its Duplex products and services to increase both average revenue per user (“ARPU”) and the number of Duplex subscribers (which depends upon successfully completing the launches of the remaining second-generation satellites and mitigating the momentum wheel issues on the second-generation satellites discussed below); introducing, marketing, and selling products (including the Company’s Duplex, SPOT, and Simplex products targeted to the consumer and enterprise markets, respectively) to expand the Company’s subscriber base and increase revenues; and continuing to restructure operations by reducing costs in underperforming markets and consolidating resources around the world to operate its network more efficiently.

Completion of the Launch of 24 Second-Generation Satellites and Procurement of Additional Second-Generation Satellites
 
The success of the Company’s plan to increase revenues depends upon the successful completion of the launch of the second-generation satellites and maintenance of a healthy constellation post-launch.  The Company has launched 12 of the first 24 second-generation satellites (six satellites were launched in both July 2011 and October 2010).  Certain of the second-generation satellites that have already been launched have experienced in-orbit anomalies associated with their momentum wheels. The Company is currently working with Thales Alenia Space (“Thales”) to develop a solution to the problem.  The Company cannot guarantee that a successful solution will be found and one or more satellites may not provide reliable service going forward. (See Note 3 for further description of the anomalies related to the second-generation satellites and the factors impacting the timing of the remaining launches.)  The remaining two launches of six satellites each were previously delayed due to issues with the Soyuz launch vehicle. The launch campaign has been scheduled to resume in December 2011; however the launch dates may change due to factors beyond Globalstar’s control, including continued review of the momentum wheel issue.  Any delay or satellite operation issues, regardless of the cause, may adversely affect Globalstar’s results of operations, cash flow and financial condition.
 
 The Company plans to integrate the 24 second-generation satellites with the eight first-generation satellites that were launched in 2007 to form its second-generation constellation.  The eight first-generation satellites are providing Duplex, SPOT and Simplex services; however, the Company expects that these satellites will experience degradation similar to the degradation experienced by the initial constellation and that they will no longer be capable of providing reliable Duplex service beyond 2013. Certain of the eight first-generation satellites are experiencing the initial stages of degradation and are not providing service at this time.

The Company has a contract with Thales to construct additional second-generation satellites at fixed pricing.  These additional second-generation satellites are intended to replace the eight first-generation satellites when they are no longer capable of providing reliable Duplex service, and can also serve as replacement satellites should the in-orbit anomalies experienced by the second-generation satellites already launched require that certain satellites be de-orbited. The Company is currently in arbitration with Thales to determine if the Company can enforce certain rights under this contract to place an order for additional second-generation satellites, and if so at what pricing.  (See Note 12 for a further description of the arbitration.)

If the Company is unable to develop a solution for the momentum wheel issues, complete the launch of the remaining 12 second-generation satellites in a reasonable timeframe, or receive a favorable outcome in the Thales arbitration, its ability to continue to execute its business plan will be adversely affected.
 
 
4

 
 
Next Generation Ground Upgrades
 
The Company has focused on constructing, developing, and ultimately activating the next generation constellation, ground stations and equipment. The Next Generation Ground Upgrades were developed to improve the performance of the company’s current lineup of Duplex, SPOT, and Simplex products and services and replace the aging ground network currently in place.   The Company plans to integrate the Next Generation Ground Upgrades with its Second-Generation Constellation.   As a result, as of September 30, 2011, the Company is committed to several significant contracts for the construction, development and deployment of these assets.  The Company continues to seek to amend these contracts to provide the Company with additional options to defer cash outlays until it can obtain additional capital to pay for these commitments to purchase these assets.  
 
In March 2011, the Company entered into an agreement with Hughes Network Systems, LLC (“Hughes”) which extended to July 31, 2011 the deadline for the Company to make certain scheduled payments previously due.  In October 2011, after a $5.0 million payment from the Company to Hughes against amounts outstanding, the Company entered into an additional amended agreement with Hughes to further extend to December 31, 2011 the deadline for the Company to make the required payments.   Additionally, the Company entered into an agreement with Ericsson, Inc. (the contract was transferred from Oceus Networks) which extended to February 23, 2012 (or earlier if the Company obtains additional financing) the deadline for the Company to make scheduled milestone payments which were previously due at various times during 2011. (See Note 3 for a further description of the contract amendments.)

If the Company is unable to continue to modify successfully the contract payment terms or obtain additional capital to pay these obligations as they became due, its ability to continue to execute its business plan will be adversely affected.

Obtain Additional Financing

The Company has cash on hand ($6.1 million as of September 30, 2011) and use of the remaining funds ($8.0 million as of September 30, 2011) available under the Facility Agreement (which are restricted to paying its satellite manufacturer).  The Company intends to seek additional financing not yet arranged to fund the completion of the launch of the first 24 second-generation satellites, additional second-generation satellites, and next generation ground upgrades and operations.  Although the Company has been successful in raising capital thus far, there can be no assurance that it will be successful in acquiring such financing in the future.

The Company has a contingent equity agreement (see Note 4) entered into with Thermo in 2009 in conjunction with the close of the Facility Agreement.  The Company may use funds in the contingent equity account ($60 million as of September 30, 2011) to pay operating expenses, inventory purchases, taxes, maintenance, principal and interest payments under the Credit Facility and certain other budgeted costs.  In addition, as amended on September 30, 2011, the Company may use funds in the contingent equity account to pay capital expenditures related to the completion and launch of 25 second-generation satellites, provided that, if the funds are used for capital expenditures, the Company must raise proceeds from equity or subordinated loans in the same amount as the proposed contingent equity withdrawal.

On November 3, 2011, the Company drew $5.4 million of the $60.0 million contingent equity account and issued Thermo 11.4 million shares of common stock consistent with the terms of the contingent equity agreement.  The Company intends to continue to make draws in the fourth quarter of 2011 and in 2012 to fund certain operating expenses, inventory purchases, and interest payments.  However, the Company will not be permitted to draw funds from the contingent equity account without lender approval if an event of default has occurred. The Company intends to use the cash collected from operations to fund a portion of the remaining capital expenditures for its third and fourth launches of second-generation satellites.
 
If the Company is unable to obtain additional capital from additional debt or equity financings over the next 12 months, its ability to continue to execute its business plan will be adversely affected.
 
3.  PROPERTY AND EQUIPMENT
 
Property and equipment consists of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
Globalstar System:
           
Space component
 
$
472,755
   
$
171,888
 
Ground component
   
49,247
     
49,818
 
Construction in progress:
               
Space component
   
702,627
     
933,806
 
Ground component
   
79,813
     
60,350
 
Other
   
1,039
     
2,794
 
Internally developed and purchased software
   
13,669
     
14,141
 
Equipment
   
12,300
     
11,480
 
Land and buildings
   
4,185
     
4,359
 
Leasehold improvements
   
1,399
     
1,406
 
     
1,337,034
     
1,250,042
 
Accumulated depreciation
   
(131,499
)
   
(99,572
)
   
$
1,205,535
   
$
1,150,470
 
 
 
5

 
 
 Capital Expenditure Contracts
 
The following table summarizes the total contract price of the Company’s capital expenditure contracts (in thousands):

   
Contract
 
   
Price
 
Thales Alenia second-generation satellites (Phase 1 and 2) and satellite operations control center
 
$
638,618
 
Arianespace launch services
   
216,000
 
Launch insurance
   
39,903
 
Hughes next-generation ground component
   
104,375
 
Ericsson next-generation ground network
   
28,253
 
Total
 
$
1,027,149
 
 
As of September 30, 2011, the Company has incurred $941.8 million of costs under these contracts.  Of the amounts incurred, the Company has capitalized $936.3 million and expensed $5.5 million.
 
Second-Generation Satellites
 
The Company and Thales have entered into a contract for the construction of the Company’s second-generation low-earth orbit satellites and related services. The Company has launched 12 of the 24 second-generation satellites (six satellites were launched in both July 2011 and October 2010). The remaining two launches of six satellites each were previously delayed due to issues with the Soyuz launch vehicle. The launch campaign has been scheduled to resume in December 2011; however the launch dates may change due to factors beyond Globalstar’s control, including continued review of the momentum wheel issue. 
 
In August 2011, the Company received its final authorization to operate its second-generation satellite constellation. The French Ministry commenced the process to register the satellites with the United Nations under the Convention on Registration of Objects Launched into Outer Space. As a result, the Company activated its ground stations in North America to send and receive call traffic with the second-generation satellites, thus improving coverage availability for the Company’s Duplex customers in that region.
 
The Company’s second-generation satellites were designed with four momentum wheels.  The design requires three functioning momentum wheels for operations and one momentum wheel is redundant (a non-operating wheel acting as a spare on the satellite in space).  Momentum wheels are flywheels used to provide attitude control and stability on spacecraft.
 
As previously announced, one of the six second-generation satellites launched in October 2010 has experienced an in-orbit anomaly associated with its momentum wheels.  In July 2011, the spare wheel also experienced a similar anomaly, which then required the Company to place the satellite into a “safe hold” mode.  In this mode the satellite remains stable in its operational orbit while a potential solution, involving a firmware update, is developed.  This satellite is not currently providing communication services. One additional second-generation satellite launched in October 2010 has experienced a similar anomaly, but is currently providing full communication services.  Additional satellites in the first batch of six satellites could also be impacted by the similar anomaly.

In October 2011, Thales informed the Company that it had identified further momentum wheel issues that could impact the six second-generation satellites launched in July 2011 and the six satellites launched in October 2010.

The Company is working with Thales to develop a software solution that will allow the satellites to operate with two momentum wheels instead of the designed three.  At this time, the Company can provide no assurance that a satisfactory solution will be developed.  If the Company is unable to develop and implement a solution to resolve these anomalies, it would record an impairment charge for the satellites that are no longer capable of providing communication services.  If the Company is able to develop and implement a solution, it can provide no assurance that the solution would allow the satellites with only two functioning momentum wheels to provide full communication service over its designed 15-year life.  As of September 30, 2011, the gross cost of each of these satellites is approximately $43.1 million.  
  
The Company also has a contract with Thales to construct additional second-generation satellites at a fixed price. The Company is currently in arbitration with Thales to enforce certain rights under this contract under which the Company has placed for additional satellites.  (See Note 12.)
 
The Company and Arianespace (the “Launch Provider”) have entered into a contract for the launch of the Company’s second-generation satellites and certain pre and post-launch services under which the Launch Provider agreed to make four launches of six satellites each and one optional launch of six satellites. Notwithstanding the one optional launch, the Company may contract separately with the Launch Provider or another provider of launch services after the Launch Provider’s firm launch commitments are fulfilled.
 
Next-Generation Gateways and Other Ground Facilities
 
The Company and Hughes Network Systems, LLC (“Hughes”)  entered into an agreement under which Hughes will design, supply and implement (a) the Radio Access Network (RAN) ground network equipment and software upgrades for installation at a number of the Company’s satellite gateway ground stations and (b) satellite interface chips to be a part of the User Terminal Subsystem (UTS) in various next-generation Globalstar devices. The Company has the option to purchase additional RANs and other software and hardware improvements at pre-negotiated prices.

In March 2011, the Company entered into an agreement with Hughes which extended to July 31, 2011 the deadline for the Company to make certain scheduled payments previously due prior to July 31, 2011.  The deferred payments incurred interest at the rate of 10% per annum.  Neither the Company nor Hughes terminated the contract by July 31, 2011.  In September 2011, the Company paid $5.0 million of these deferred payments and in October 2011, entered into an amended agreement with Hughes to extend to December 31, 2011 the deadline for the Company to make the remaining required payments.  The deferred payments will continue to incur interest at the rate of 10% per annum.  As of September 30, 2011, the Company had recorded $22.8 million in accounts payable related to these required payments and had incurred and capitalized $72.8 million of costs related to this contract, which is recorded as an asset in property and equipment.  If the Company is unable to modify successfully the contract payment terms the contract may be terminated, and the Company may be required to record an impairment charge.

In March 2011, the Company entered into an agreement with Ericsson, Inc. (the contract was transferred from Oceus Networks) which extended to February 23, 2012 (or earlier if the Company obtains additional financing) the deadline for the Company to make scheduled milestone payments which were previously due at various times during 2011. The milestone payments that have been or are expected to be invoiced in 2011, which may be deferred to February 23, 2012, total $6.2 million. The deferred payments will incur interest at a rate of 6.5% per annum.
 
 
6

 
 
Capitalized Interest and Depreciation Expense
 
The following tables summarize capitalized interest for the periods indicated below (in thousands):
 
   
As of
 
   
September 30, 2011
   
December 31, 
2010
 
             
Total Interest Capitalized
 
$
162,045
   
$
122,222
 
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 
2011
   
September 30, 
2010
   
September 30, 2011
   
September 30, 2010
 
                         
Current Period Interest Capitalized
 
$
14,221
   
$
12,208
   
$
39,823
   
$
35,310
 
 
The following table summarizes depreciation expense for the periods indicated below (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 
2011
   
September 30, 
2010
   
September 30, 2011
   
September 30, 2010
 
                         
Depreciation Expense
 
$
12,078
   
$
5,588
   
$
33,550
   
$
16,618
 
  
 
4. BORROWINGS
 
Long-term debt consists of the following (in thousands):
 
   
As of
 
   
September 30,
2011
   
December 31,
2010
 
Facility Agreement
 
$
578,296
   
$
559,637
 
5.00% Convertible Senior Unsecured Notes
   
11,745
     
 
8.00% Convertible Senior Unsecured Notes
   
23,520
     
21,014
 
5.75% Convertible Senior Unsecured Notes
   
62,600
     
58,465
 
Subordinated Loan
   
41,719
     
25,427
 
     
717,880
     
664,543
 
Less current portion
   
16,711
     
 
Total long-term debt
 
$
701,169
   
$
664,543
 
 
Facility Agreement
 
The Company has a $586.3 million senior secured facility agreement (the “Facility Agreement”) that will mature 96 months after the first repayment date. Scheduled semi-annual principal repayments will begin the earlier of eight months after the last launch of 24 second-generation satellites or six months after December 15, 2011. The facility bears interest at a floating LIBOR rate, plus a margin of 2.07% through December 2012, increasing to 2.25% through December 2017 and 2.40% thereafter.  Ninety-five percent of the Company’s obligations under the Facility Agreement are guaranteed by COFACE, the French export credit agency.  The Company’s obligations under the facility are guaranteed on a senior secured basis by all of its domestic subsidiaries and are secured by a first priority lien on substantially all of the assets of the Company and its domestic subsidiaries (other than their FCC licenses), including patents and trademarks, 100% of the equity of the Company’s domestic subsidiaries and 65% of the equity of certain foreign subsidiaries.  The Facility Agreement contains customary events of default and requires that the Company satisfy various financial and nonfinancial covenants.  If the Company violates any of these covenants and is unable to obtain waivers, the Company would be in default under the agreement and payment of the indebtedness could be accelerated or prohibit the Company from utilizing the Facility Agreement until the default has been remediated.  The acceleration of the Company’s indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-default or cross –acceleration provisions.  As of September 30, 2011, the Company was in compliance with all such covenants, however, unless it is able to obtain additional financing (See Note 2), the Company expects to be out of compliance with certain covenants, including certain covenants effective July 30, 2012, within the next 12 months.

On September 30, 2011, the Company entered into a Deed of Waiver and Amendment to its Facility Agreement which delays the last date for final in-orbit acceptance of 18 second-generation satellites by eight months to August 1, 2012; permits the Company to order six second-generation satellites under the Contract with Thales provided that the purchase price does not exceed €55.2 million; requires that, following an acceptance of the order by Thales, Thermo Capital Partners LLC (“Thermo”) fund no less than $25 million into an escrow account to provide for the initial payments for the satellites (the Company intends to issue additional equity or subordinated indebtedness to Thermo in return); specifies that, in addition to operating expenses, inventory purchases, taxes, maintenance and certain other budgeted costs, the Company may use funds in the contingent equity account (currently $60 million) to pay capital expenditures related to the completion and launch of 25 second-generation satellites, provided that, if the funds are used for capital expenditures, the Company must raise proceeds from equity or subordinated loans in the same amount as the proposed contingent equity withdrawal; and extends the term of the contingent equity agreement to December 31, 2014.
 
 
7

 
 
5.00% Convertible Senior Notes
 
On June 14, 2011, the Company entered into a Third Supplemental Indenture relating to the sale and issuance by the Company to selected investors (including an affiliate of Thermo) in private transactions of up to $50 million in aggregate principal amount of the Company’s 5.0% Convertible Senior Unsecured Notes (the “5.0% Notes”) and warrants (the “5.0% warrants”) to purchase up to 20 million shares of voting common stock of the Company at an exercise price of $1.25 per share.  The 5.0% Notes are convertible into shares of common stock at an initial conversion price of $1.25 per share of common stock, subject to adjustment in the manner set forth in the Indenture. The 5.0% Notes are guaranteed on a subordinated basis by substantially all of the Company’s domestic subsidiaries (the “Guarantors”), on an unconditional joint and several basis, pursuant to a Guaranty Agreement (the “Guaranty”). The 5.0% warrants are exercisable until five years after their issuance.  The 5.0% Notes and 5.0% warrants have anti-dilution protection in the event of certain stock splits or extraordinary share distributions, and a reset of the conversion and exercise price on April 15, 2013 if the Company’s common stock is then below the initial conversion and exercise price.

On June 14 and 20, 2011, the Company issued $30 million and $8 million, respectively, in aggregate principal amount of the 5.0% Notes, the related Guaranty, and 5.0% warrants to purchase 12,000,000 and 3,200,000 shares of common stock, respectively.  The securities were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933 as a transaction not involving a public offering.  Subsequently, the securities were registered for resale under the Securities Act of 1933.

In October 2011, the Company agreed with the holders of its 5.0% Notes and 5.0% warrants and related guaranty to extend the holders’ right to purchase up to $12 million of additional 5.0% Notes and a corresponding number of 5.0% warrants on the same terms to November 17, 2011.  This date may be extended by mutual agreement of the parties.
 
The 5.0% Notes are senior unsecured debt obligations of the Company and rank pari passu with the Company’s existing 5.75% and 8.00% Convertible Senior Notes and are subordinated to the Company’s obligations pursuant to its Facility Agreement. There is no sinking fund for the 5.0% Notes. The 5.0% Notes will mature at the earlier to occur of (i) December 14, 2021, or (ii) six months following the maturity date of the Facility Agreement and bear interest at a rate of 5.0% per annum. Interest on the Notes will be payable in-kind semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2011. Under certain circumstances, interest on the 5.0% Notes will be payable in cash at the election of the holder if such payments are permitted under the Facility Agreement.
 
Subject to certain exceptions set forth in the Indenture, the 5.0% Notes will be subject to repurchase for cash at the option of the holders of all or any portion of the 5.0% Notes upon a fundamental change at a purchase price equal to 100% of the principal amount of the 5.0% Notes, plus a make-whole payment and accrued and unpaid interest, if any. A fundamental change will occur upon certain changes in the ownership of the Company or certain events relating to the trading of the common stock.
 
Holders may convert their 5.0% Notes into convertible stock at their option at any time. Upon conversion of the 5.0% Notes, the Company will pay the holders of the 5.0% Notes a make-whole premium by increasing the number of shares of common stock delivered upon such conversion. The number of additional shares constituting the make-whole premium per $1,000 principal amount of 5.0% Notes will equal the quotient of (i) the aggregate principal amount of the Securities so converted multiplied by 25.00%, less the aggregate interest paid on such Securities prior to the applicable Conversion Date divided by (ii) 95% of the volume-weighted average Closing Price of the Common Stock for the 10 trading days immediately preceding the conversion date.
 
The Indenture contains customary financial reporting requirements and also contains restrictions on the issuance of additional indebtedness, liens, loans and investments, dividends and other restricted payments, mergers, asset sales, certain transactions with affiliates and layering of debt. The Indenture also provides that upon certain events of default, including without limitation failure to pay principal or interest, failure to deliver a notice of fundamental change, failure to convert the 5.0% Notes when required, defaults under other material indebtedness and failure to pay material judgments, either the trustee or the holders of 20% in aggregate principal amount of the 5.0% Notes may declare the principal of the 5.0% Notes and any accrued and unpaid interest through the date of such declaration immediately due and payable. In the case of certain events of bankruptcy or insolvency relating to the Company or its significant subsidiaries, the principal amount of the 5.0% Notes and accrued interest automatically will become due and payable.  The Company was in compliance with the terms of the Indenture as of September 30, 2011.
 
The Company evaluated the various embedded derivatives resulting from the conversion rights and features within the Indenture for bifurcation from the 5.0% Notes.  Due to the provisions and reset features in the 5.0% warrants, the Company recorded the 5.0% warrants as equity with a corresponding debt discount which is netted against the face value of the 5.0% Notes. The Company is accreting the debt discount associated with the 5.0% warrants to interest expense over the term of the 5.0% warrants using the effective interest rate method. The Company determined the relative fair value of the 5.0% warrants using a Monte Carlo simulation model based upon a risk-neutral stock price model.
 
The Company evaluated the embedded derivative resulting from the contingent put feature within the Indenture for bifurcation from the 5.0% Notes. The contingent put feature was not deemed clearly and closely related to the 5.0% Notes and had to be bifurcated as a stand alone derivative. The Company recorded this embedded derivative liability as a non-current liability on its Consolidated Balance Sheets with a corresponding debt discount which is netted against the principal amount of the 5.0% Notes.
 
The Company evaluated the conversion option within the convertible notes to determine whether the conversion price was beneficial to the note holders. The Company recorded a beneficial conversion feature (“BCF”) related to the issuance of the 5.0% Notes.  The BCF for the 5.0% Notes is recognized and measured by allocating a portion of the proceeds to beneficial conversion feature, based on relative fair value, and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion feature. The Company is accreting the discount recorded in connection with the BCF valuation as interest expense over the term of the 5.0% Notes, using the effective interest rate method.
 
The Company netted the debt discount associated with the 5.0% warrants, the beneficial conversion feature, and the contingent put feature against the face value of the 5.0% Notes to determine the carrying amount of the 5.0% Notes. The accretion of debt discount will increase the carrying amount of the debt over the term of the 5.0% Notes. The Company allocated the proceeds at issuance as follows (in thousands):
 
Debt
 
$
11,316
 
Fair value of 5.0% Warrants
   
8,081
 
Beneficial Conversion Feature
   
17,100
 
Contingent Put Feature
   
1,503
 
Face Value of 5.0% Notes
 
$
38,000
 
 
As of September 30, 2011 there had been no conversions and approximately $38.0 million aggregate principal amount of 5.0% Notes remained outstanding.
  
 
8

 
 
8.00% Convertible Senior Notes
 
In 2009, the Company issued $55.0 million in aggregate principal amount of 8.00% Notes (the “8.00% Notes”) and Warrants (the “8.00% Warrants”) to purchase shares of the Company’s common stock. The 8.00% Notes mature at the later of the tenth anniversary of closing (June 19, 2019) or six months following the maturity date of the Facility Agreement and bear interest at a rate of 8.00% per annum. Interest on the 8.00% Notes is payable in the form of additional 8.00% Notes or, subject to certain restrictions, in common stock at the option of the holder. Interest is payable semi-annually in arrears on June 15 and December 15 of each year.  The 8.00% Notes are subordinated to all of the Company’s obligations under the Facility Agreement. The 8.00% Notes are the Company’s senior unsecured debt obligations and rank pari passu with existing unsecured, unsubordinated obligations, including the Company’s 5.0% and 5.75% Notes. The indenture governing the 8.00% Notes contains customary events of default.  The Company was not in default as of September 30, 2011.
 
In April 2011, approximately $0.6 million of 8.00% Warrants were exercised, resulting in the issuance of approximately 0.6 million shares of common stock.

In September 2011, the Company issued stock at $0.52 per share, which is below the $0.87 per share strike price of the 8.00% Warrants, in connection with the contingent consideration paid as part of the acquisition of Axonn. Given this transaction and the related provisions in the warrant agreements, the holders of the 8.00% Warrants received additional 8.00% Warrants to purchase 15.0 million shares of common stock and the strike price of all of the 8.00% Warrants was reset to $0.52. There was no adjustment made to the conversion price of the 8.00% Notes, which are convertible into shares of common stock, as a result of this transaction.

As of September 30, 2011 and December 31, 2010, approximately $15.6 million and $14.6 million of the 8.00% Notes had been converted, resulting in the issuance of approximately 14.2 million and 13.4 million shares of common stock, and $46.2 million and $45.5 million in 8.00% Notes remained outstanding.

5.75% Convertible Senior Notes
 
In 2008 the Company issued $150.0 million aggregate principal amount of 5.75% Notes (the “5.75% Notes”), which, subject to certain exceptions set forth in the indenture, are subject to repurchase by the Company for cash at the option of the holders in whole or part (i) on each of April 1, 2013, April 1, 2018 and April 1, 2023 or (ii) upon a fundamental change, both at a purchase price equal to 100% of the principal amount of the 5.75% Notes, plus accrued and unpaid interest, if any.  Holders may convert their 5.75% Notes into shares of common stock at their option at any time prior to maturity, subject to the Company’s option to deliver cash in lieu of all or a portion of the shares.  The indenture governing the 5.75% Notes contains customary events of default. The Company was not in default as of September 30, 2011.
 
The Company placed approximately $25.5 million of the proceeds of the offering of the 5.75% Notes in an escrow account that is being used to make the first six scheduled semi-annual interest payments on the 5.75% Notes. The Company pledged its interest in this escrow account to the trustee for the 5.75% Notes as security for these interest payments. As of September 30, 2011 and December 31, 2010, the balance in the escrow account was $0 and $2.1 million, respectively.
 
Except for the pledge of the escrow account, the 5.75% Notes are senior unsecured debt obligations of the Company. The 5.75% Notes mature on April 1, 2028 and bear interest at a rate of 5.75% per annum. Interest on the 5.75% Notes is payable semi-annually in arrears on April 1 and October 1 of each year.
 
As of September 30, 2011 and December 31, 2010, approximately $71.8 million aggregate principal amount of 5.75% Notes remained outstanding.
 
Share Lending Agreement
 
Concurrently with the offering of the 5.75% Notes, the Company entered into a share lending agreement (the “Share Lending Agreement”) with Merrill Lynch International (the “Borrower”), pursuant to which the Company agreed to lend up to 36,144,570 shares of common stock (the “Borrowed Shares”) to the Borrower, subject to certain adjustments, for a period ending on the earliest of (i) at the Company’s option, at any time after the entire principal amount of the 5.75% Notes ceases to be outstanding, (ii) the written agreement of the Company and the Borrower to terminate, (iii) the occurrence of a Borrower default, at the option of Lender, and (iv) the occurrence of a Lender default, at the option of the Borrower. Pursuant to the Share Lending Agreement, upon the termination of the share loan, the Borrower must return the Borrowed Shares to the Company. Upon the conversion of 5.75% Notes (in whole or in part), a number of Borrowed Shares proportional to the conversion rate for such notes must be returned to the Company. At the Company’s election, the Borrower may deliver cash equal to the market value of the corresponding Borrowed Shares instead of returning to the Company the Borrowed Shares otherwise required by conversions of 5.75% Notes.
  
Pursuant to and upon the terms of the Share Lending Agreement, the Company will issue and lend the Borrowed Shares to the Borrower as a share loan. The Borrowing Agent also is acting as an underwriter with respect to the Borrowed Shares, which are being offered to the public. The Borrowed Shares included approximately 32.0 million shares of common stock initially loaned by the Company to the Borrower on separate occasions, delivered pursuant to the Share Lending Agreement and the Underwriting Agreement, and an additional 4.1 million shares of common stock that, from time to time, may be borrowed from the Company by the Borrower pursuant to the Share Lending Agreement and the Underwriting Agreement and subsequently offered and sold at prevailing market prices at the time of sale or negotiated prices. The Borrowed Shares are free trading shares. At each of September 30, 2011 and December 31, 2010, approximately 17.3 million Borrowed Shares remained outstanding.  As of September 30, 2011 and December 31, 2010, the unamortized amount of issuance costs associated with the Share Lending Agreement was $2.7 million and $4.0 million, respectively.
 
Subordinated Loan Agreement
 
The Company has a loan agreement with Thermo whereby Thermo has loaned the Company $25.0 million to fund the debt service reserve account required under the Facility Agreement. The loan accrues interest at 12% per annum, which is capitalized and added to the outstanding principal in lieu of cash payments.
 
In April and July 2011, in accordance with the terms of the Facility Agreement, $7.6 million and $4.9 million, respectively, was funded to the debt service reserve account for a total of $37.5 million. This amount was recorded in restricted cash as of September 30, 2011.  As of September 30, 2011, $4.2 million of interest, net of amortized debt discount, was outstanding and is included in long-term debt on the balance sheet.
 
The Company will make payments to Thermo only when permitted under the Facility Agreement. The loan becomes due and payable on the earliest of six months after the obligations under the Facility Agreement have been paid in full, a change in control of the Company or any acceleration of the maturity of the loans under the Facility Agreement occurs. As additional consideration for the loan, the Company issued Thermo a warrant to purchase 4,205,608 shares of common stock at $0.01 per share with a five-year exercise period. No voting common stock is issuable upon such exercise if such issuance would cause Thermo and its affiliates to own more than 70% of the Company’s outstanding voting stock. This loan is subordinated to, and the debt service reserve account is pledged to secure, all of the Company’s obligations under the Facility Agreement.
 
 
9

 
 
Contingent Equity Agreement
 
The Company has a contingent equity agreement with Thermo whereby Thermo deposited $60.0 million into a contingent equity account to fulfill a condition precedent for borrowing under the Facility Agreement. Under the terms of the Facility Agreement, the Company will be required to make drawings from this account if and to the extent it has an actual or projected deficiency in its ability to meet costs, liabilities and expenses due within a forward-looking 90-day period. Thermo has pledged the contingent equity account to secure the Company’s obligations under the Facility Agreement. If the Company draws on the contingent equity account, it will issue Thermo shares of common stock calculated using a price per share equal to 80% of the average closing price of the common stock for the 15 trading days immediately preceding the draw.

On September 30, 2011, the Company entered into a Deed of Waiver and Amendment to its Facility Agreement which specifies that, in addition to operating expenses, inventory purchases, taxes, maintenance and certain other budgeted costs, the Company may use funds in the contingent equity account (currently $60 million) to pay capital expenditures related to the completion and launch of 25 second-generation satellites, provided that, if the funds are used for capital expenditures, the Company must raise proceeds from equity or subordinated loans in the same amount as the proposed contingent equity withdrawal.  The Deed of Waiver and Amendment also extends the term of the contingent equity agreement to December 31, 2014.

On November 3, 2011, the Company drew $5.4 million from the $60.0 million contingent equity account. The Company plans to make similar draws in the future to fund operating expenses, working capital and debt requirements.  As a result of the November 3 draw, the Company will issue Thermo 11.4 million shares of common stock calculated using a price per share equal to 80% of the average closing price of the common stock for the 15 trading days immediately preceding the draw.
 
 Thermo borrowed $20 million of the initial $25 million loaned to the Company under the subordinated loan agreement from two Company vendors and also agreed to reimburse another Company vendor if its guarantee of a portion of the debt service reserve account were called.  The Company agreed to grant one of these vendors a one-time option to convert its debt into equity of the Company on the same terms as Thermo at the first call by the Company for funds under the contingent equity agreement.

5. DERIVATIVES
 
The following tables disclose the fair value of the derivative instruments and their impact on the Company’s Condensed Consolidated Statements of Operations (in thousands):
 
  
As of
 
 
September 30, 2011
 
December 31, 2010
 
  
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
Interest rate cap
Intangible and other assets, net
 
$
303
 
Intangible and other assets, net
 
$
1,000
 
Compound embedded conversion option with 8.00% Notes
Derivative liabilities
   
(5,103
)
Derivative liabilities
   
(23,008
)
Warrants issued with 8.00% Notes
Derivative liabilities
   
(14,373
)
Derivative liabilities
   
(29,924
)
Warrants issued in conjunction with contingent equity agreement
Derivative liabilities
   
(6,120
)
Derivative liabilities
   
(7,887
)
Contingent put feature embedded in the 5.0% Notes
Derivative liabilities
   
(3,198
)
Derivative liabilities
   
 
Total
   
$
(28,491
)
   
$
(59,819
)
 
  
Three months ended September 30,
 
 
2011
 
2010
 
 
Location of gain (loss)
recognized
in Statement of
Operations
 
Amount of gain
(loss)
recognized
on Statement of
Operations
 
Location of Loss
recognized in
Statement of
Operations
 
Amount of Loss
recognized
on Statement of
Operations
 
Interest rate cap
Derivative gain (loss)
 
$
(437
)
Derivative gain (loss)
 
$
(728
)
Compound embedded conversion option with 8.00% Notes
Derivative gain (loss)
   
13,330
 
Derivative gain (loss)
   
(4,303
)
Warrants issued with 8.00% Notes
Derivative gain (loss)
   
10,336
 
Derivative gain (loss)
   
(4,013
)
Warrants issued in conjunction with contingent equity agreement
Derivative gain (loss)
   
2,259
 
Derivative gain (loss)
   
(106
)
Contingent put feature embedded in the 5.0% Notes
Derivative gain (loss)
   
(1,695
)
Derivative gain (loss)
   
 —
 
Total
   
$
23,793
     
$
(9,150
)
   
 
  
Nine months ended September 30,
 
 
2011
 
2010
 
 
Location of gain (loss)
recognized
in Statement of
Operations
 
Amount of gain
(loss)
recognized
on Statement of
Operations
 
Location of Loss
recognized in
Statement of
Operations
 
Amount of Loss
recognized
on Statement of
Operations
 
Interest rate cap
Derivative gain (loss)
 
$
(697
)
Derivative gain (loss)
 
$
(6,013
)
Compound embedded conversion option with 8.00% Notes
Derivative gain (loss)
   
17,370
 
Derivative gain (loss)
   
(15,412
)
Warrants issued with 8.00% Notes
Derivative gain (loss)
   
14,987
 
Derivative gain (loss)
   
(17,041
)
Warrants issued in conjunction with contingent equity agreement
Derivative gain (loss)
   
4,125
 
Derivative gain (loss)
   
(3,719
)
Contingent put feature embedded in the 5.0% Notes
Derivative gain (loss)
   
(1,695
)
Derivative gain (loss)
   
 
Total
   
$
34,090
     
$
(42,185
)
 
 
10

 
 
Interest Rate Cap
 
In connection with entering into the Facility Agreement, which provides for interest at a variable rate, the Company entered into ten-year interest rate cap agreements. The interest rate cap agreements reflect a variable notional amount ranging from $14.8 million to $586.3 million at interest rates that provide coverage to the Company for exposure resulting from escalating interest rates over the term of the Facility Agreement. The interest rate cap provides limits on the six-month Libor rate (“Base Rate”) used to calculate the coupon interest on outstanding amounts on the Facility Agreement of 4.00% from the date of issuance through December 2012. Thereafter, the Base Rate is capped at 5.50% should the Base Rate not exceed 6.50%. Should the Base Rate exceed 6.50%, the Company’s Base Rate will be 1.00% less than the then six-month Libor rate.  The fair value of the interest rate cap is marked-to-market at the end of each reporting period.  The Company determined the fair value of the interest rate cap using benchmark yields, reported trades, and broker/dealer quotes at the reporting date.
 
Compound Embedded Conversion Option with 8.00% Notes
 
The Company recorded the conversion rights and features embedded within the 8.00% Convertible Senior Notes as a compound embedded derivative liability with a corresponding debt discount which is netted against the face value of the 8.00% Notes. The Company is accreting the debt discount associated with the compound embedded derivative liability to interest expense over the term of the 8.00% Notes using the effective interest rate method. The fair value of the compound embedded derivative liability is marked-to-market at the end of each reporting period. The Company determined the fair value of the compound embedded derivative using a Monte Carlo simulation model based upon a risk-neutral stock price model. 
 
Warrants Issued with 8.00% Notes
 
Due to the cash settlement provisions and reset features in the warrants issued with the 8.00% Notes, the Company recorded the 8.00% Warrants as a liability with a corresponding debt discount which is netted against the principal amount of the 8.00% Notes. The Company is accreting the debt discount associated with the warrant liability to interest expense over the term of the 8.00% Warrants using the effective interest rate method. The fair value of the warrant liability is marked-to-market at the end of each reporting period. The Company determined the fair value of the 8.00% Warrants derivative using a Monte Carlo simulation model based upon a risk-neutral stock price model.
 
Warrants Issued in Conjunction with Contingent Equity Agreement
 
The Contingent Equity Agreement provides that the Company will pay Thermo an availability fee of 10% per year for maintaining funds in the contingent equity account. This annual fee is payable solely in warrants to purchase common stock at $0.01 per share with a five-year exercise period from issuance. The number of shares subject to the warrants issuable is calculated by taking the outstanding funds available in the contingent equity account multiplied by 10% divided by the lower of the Company’s common stock price on the issuance date or $1.37, but not less than $0.20. The common stock price is subject to a reset provision on certain valuation dates subsequent to issuance whereby the warrant price used in the calculation will be the lower of the warrant price on the issuance date or the Company’s common stock price on the valuation date, but not less than $0.20.
 
The Company determined that the warrants issued in conjunction with the availability fee were a derivative liability. The corresponding benefit is recorded in other assets and is amortized over the one year availability period. On June 19, 2010, the warrants issued on June 19, 2009 and on December 31, 2009 were no longer variable and the related $11.9 million liability was reclassified to equity. 
 
On June 19, 2010, the Company issued warrants to purchase 4,379,562 shares of common stock.  On June 19, 2011, these warrants were subject to the reset provision, and as a result the Company issued additional warrants to purchase 620,438 shares of common stock.  These warrants were no longer variable and the related $6.0 million liability was reclassified to equity.
 
On June 19, 2011, the Company also issued warrants to purchase 5,000,000 shares of common stock (equal to 10% of the outstanding balance in the contingent equity account divided by the Company’s common stock price on that date); these warrants will be subject to the reset provision one year after initial issuance.
 
No voting common stock is issuable if it would cause Thermo and its affiliates to own more than 70% of the Company’s outstanding voting stock. The Company may issue nonvoting common stock in lieu of common stock to the extent issuing common stock would cause Thermo and its affiliates to exceed this 70% ownership level.
 
Contingent put feature embedded in the 5.0% Notes
 
The Company evaluated the embedded derivative resulting from the contingent put feature within the Indenture for bifurcation from the 5.0% Notes. The contingent put feature was not deemed clearly and closely related to the 5.0% Notes and had to be bifurcated as a standalone derivative. The Company recorded this embedded derivative liability as a non-current liability on its Consolidated Balance Sheets with a corresponding debt discount which is netted against the face value of the 5.0% Notes.  The fair value of the contingent put feature liability is marked-to-market at the end of each reporting period. The Company determined the fair value of the contingent put feature derivative using a Monte Carlo simulation model based upon a risk-neutral stock price model. 
 
6. FAIR VALUE MEASUREMENTS
 
The Company follows the authoritative guidance for fair value measurements relating to financial and nonfinancial assets and liabilities, including presentation of required disclosures herein.  This guidance establishes a fair value framework requiring the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities.  Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.  The three levels are defined as follows:
 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
 
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
 
 
11

 
 
Recurring Fair Value Measurements
 
The following table provides a summary of the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 (in thousands):
 
   
Fair Value Measurements at September 30, 2011 using
 
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total Balance
 
Other assets:
                       
Interest rate cap
 
$
   
$
303
   
$
   
$
303
 
Total other assets measured at fair value
 
$
   
$
303
   
$
   
$
303
 
                                 
Other liabilities:
                               
Liability for contingent consideration
 
$
   
$
   
$
(4,215
)
 
$
(4,215
)
Compound embedded conversion option with 8.00% Notes
   
     
     
(5,103
)
   
(5,103
)
Warrants issued with 8.00% Notes
   
     
     
(14,373
)
   
(14,373
)
Warrants issued with contingent equity agreement
   
     
     
(6,120
)
   
(6,120
)
   Contingent put feature embedded in 5.0% Notes
   
     
     
(3,198
)
   
(3,198
)
Total other liabilities measured at fair value
 
$
   
$
   
$
(33,009
)
 
$
(33,009
)
 
  
   
Fair Value Measurements at December 31, 2010 using
 
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total Balance
 
Other assets:
                       
Interest rate cap
 
$
   
$
1,000
   
$
   
$
1,000
 
Total other assets measured at fair value
 
$
   
$
1,000
   
$
   
$
1,000
 
                                 
Other liabilities:
                               
Liability for contingent consideration
 
$
   
$
   
$
(6,019
)
 
$
(6,019
)
Compound embedded conversion option with 8.00% Notes
   
     
     
(23,008
)
   
(23,008
)
Warrants issued with 8.00% Notes
   
     
     
(29,924
)
   
(29,924
)
Warrants issued with contingent equity agreement
   
     
     
(7,887
)
   
(7,887
)
Total other liabilities measured at fair value
 
$
   
$
   
$
(66,838
)
 
$
(66,838
)
 
Interest Rate Cap
 
The fair value of the interest rate cap is determined using observable pricing inputs including benchmark yields, reported trades, and broker/dealer quotes at the reporting date.
 
Derivative Liabilities
 
The derivative liabilities in Level 3 include the compound embedded conversion option in the 8.00% Notes, 8.00% Warrants, contingent equity agreement, and the contingent put feature of the 5.0% Notes. The Company marks-to-market these liabilities at each reporting date with the changes in fair value recognized in the Company’s results of operations.
 
As of September 30, 2011, the Company utilized valuation models that rely exclusively on Level 3 inputs including, among other things: (i) the underlying features of each item, including reset features, make whole premiums, etc.; (ii) stock price volatility ranges from 35% – 105%; (iii) risk-free interest rates ranges from .02% – 1.92%; (iv) dividend yield of 0%; (v) conversion price of $1.61; and (vi) market price of common stock at the valuation date of $0.41.
 
As of December 31, 2010, the Company utilized valuation models that relied exclusively on Level 3 inputs including, among other things: (i) the underlying features of each item, including reset features, make whole premiums, etc.; (ii) stock price volatility ranges from 33% – 106%; (iii) risk-free interest rates ranges from 0.07% – 3.30%; (iv) dividend yield of 0%; (v) conversion price of $1.61; and (vi) market price of common stock at the valuation date of $1.45.
 
Contingent Consideration
 
In connection with the acquisition of Axonn in 2009, the Company is obligated to pay up to an additional $10.8 million in contingent consideration for earnouts based on sales of existing and new products over a five-year earnout period. The Company’s initial estimate of the total earnout expected to be paid was 100%, or $10.8 million. In September 2011, the Company revised its initial estimate of the earnout expected to be paid, which resulted in a reduction of future obligations of $2.0 million, to a revised total earnout of $8.8 million. As of September 30, 2011, the Company has made $2.6 million in earnout payments and expects to make the remaining $6.2 million payments over the earnout period.
 
Changes in the fair value of the earnout payments due to the passage of time will be recorded as accretion expense under operating expenses. The Company will make earnout payments principally in stock, but at its option may pay the earnout in cash after 13 million shares have been issued. The Company has issued 8,205,994 and 7,057,827 shares of voting common stock to Axonn and certain of its lenders as of September 30, 2011 and December 31, 2010, respectively.
 
The fair value of the accrued contingent consideration is determined using a probability-weighted discounted cash flow approach.  That approach is based on significant inputs that are not observable in the market, which are referred to as Level 3 inputs.  The fair value is based on the acquired company reaching specific performance metrics over the next four years of operations. As of September 30, 2011 and December 31, 2010, the Company accrued the fair value of the remaining expected earnout payments of approximately $4.2 million and $6.0 million, respectively.
 
 
12

 
 
Level 3 Reconciliation
 
The following table presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011 as follows (in thousands):
 
 
Balance at June 30, 2011
 
$
(59,296
)
Issuance of contingent equity warrant liability
   
 
Issuance of contingent put feature embedded in 5.0% Notes
   
 
Derivative adjustment related to conversions and exercises
   
 
Contingent consideration
   
2,057
 
Contingent equity warrant liability reclassed to equity
   
 
Unrealized gain, included in derivative gain (loss)
   
24,230
 
Balance at September 30, 2011
 
$
(33,009
)
         
Balance at December 31, 2010
 
$
(66,838
)
Issuance of contingent equity warrant liability
   
(8,313
)
Issuance of contingent put feature embedded in 5.0% Notes
   
(1,503
)
Derivative adjustment related to conversions and exercises
   
1,100
 
Contingent consideration
   
1,803
 
Contingent equity warrant liability reclassed to equity
   
5,955
 
Unrealized gain, included in derivative gain (loss)
   
34,787
 
Balance at September 30, 2011
 
$
(33,009
)
 
The following table presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2010 as follows (in thousands):
 
Balance at June 30, 2010
 
$
(66,618
)
Issuance of contingent equity warrant liability
   
-
 
Derivative adjustment related to conversions and exercises
   
2,448
 
Contingent equity liability reclassed to equity
   
-
 
Contingent consideration
   
(7,092
)
Unrealized loss, included in derivative gain (loss), net
   
(8,182
)
Balance at September 30, 2010
 
$
(79,444
)
         
Balance at December 31, 2009
 
$
(49,755
)
Issuance of contingent equity warrant liability
   
(8,510
)
Derivative adjustment related to conversions and exercises
   
9,451
 
Contingent equity liability reclassed to equity
   
11,940
 
Contingent consideration
   
(7,092
)
Unrealized loss, included in derivative gain (loss), net
   
(35,478
)
Balance at September 30, 2010
 
$
(79,444
)
 
7. RELATED PARTY TRANSACTIONS
 
 
Total purchases from affiliates, excluding interest and capital transactions, were as follows (in thousands):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Purchases of services, equipment, and other transactions
 
$
112
   
$
300
   
$
400
   
$
1,900
 
 
Transactions with Thermo
Thermo incurs certain expenses on behalf of the Company.  The table below summarizes the total expense for the periods indicated below (in thousands):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
General and administrative expense
 
$
10
   
$
271
   
$
119
   
$
352
 
Non-cash expenses
   
102
     
28
     
186
     
112
 
   Total
 
$
112
   
$
299
   
$
305
   
$
464
 
 
General and administrative expenses are related to expenses incurred by Thermo on the Company’s behalf which are charged to the Company.  Non-cash expenses are related to services provided by two executive officers of Thermo (who are also directors of the Company) who receive no cash compensation from the Company which were accounted for as a contribution to capital. The Thermo expense charges are based on actual amounts incurred or upon allocated employee time.
 
 
13

 
 
Thermo and its affiliates have also deposited $60.0 million into a contingent equity account to fulfill a condition precedent for borrowing under the Facility Agreement, purchased $20.0 million of the Company’s 5.0% Notes, purchased $11.4 million of the Company's 8.00% Notes, provided a $2.3 million short-term loan to the Company (which was subsequently converted into nonvoting common stock), and loaned $25.0 million to the Company to fund the debt service reserve account.
 
Other Affiliates
During 2010, the Company purchased services and equipment from a company whose non-executive chairman served as a member of the Company’s board of directors. Effective October 1, 2010, the individual was no longer a member of the Company’s board of directors.
 
8. INCOME TAXES
 
The Company follows authoritative guidance surrounding accounting for uncertainty in income taxes. It is the Company's policy to recognize interest and applicable penalties, if any, related to uncertain tax positions in income tax expense. For the periods ending September 30, 2011 and December 31, 2010, the net deferred tax assets were fully reserved.
 
In September 2011, an agreement was reached with the IRS for an adjustment for interest income and expense on the Section 482 transfer pricing adjustments that has been previously disclosed.  The agreement resulted in a reduction in the Company’s total net operating loss carried forward of $1.7 million for the 2007, 2008 and 2009 income years.  This decrease was reflected as a reduction of the deferred tax asset (which, as noted above, is fully reserved)

The Company's corporate U.S. tax return for 2006 and 2007 and its U.S. partnership tax returns filed for years prior to 2006 remain subject to examination by tax authorities. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states of a period of up to one year after formal notification to the states.
  
Through a prior foreign acquisition the Company acquired a tax liability for which the Company has been indemnified by the previous owners. As of September 30, 2011 and December 31, 2010, the Company had recorded a tax liability of $1.9 million and $10.2 million, respectively, to the foreign tax authorities with an offsetting tax receivable from the previous owners.
 
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Accumulated other comprehensive loss includes all changes in equity during a period from non-owner sources. The change in accumulated other comprehensive income for all periods presented resulted from foreign currency translation adjustments.
 
The components of accumulated other comprehensive loss were as follows (in thousands):
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Accumulated other comprehensive loss, June 30, 2011 and 2010 and December 31, 2010 and 2009, respectively
 
$
(275
)
 
$
(1,286
)
 
$
(268
)
 
$
(1,718
)
Other comprehensive income (loss):
                               
Foreign currency translation adjustments
   
(134
)
   
43
     
(141
)
   
475
 
Accumulated other comprehensive loss, September 30, 2011 and 2010, respectively
 
$
(409
)
 
$
(1,243
)
 
$
(409
)
 
$
(1,243
)

10. STOCK BASED COMPENSATION
 
The Company’s 2006 Equity Incentive Plan (the “Equity Plan”) provides long-term incentives to the Company’s key employees, including officers, directors, consultants and advisers (“Eligible Participants”) and to align stockholder and employee interests.  Under the Equity Plan, the Company may grant incentive stock options, restricted stock awards, restricted stock units, and other stock based awards or any combination thereof to Eligible Participants.  The Compensation Committee of the Company’s Board of Directors establishes the terms and conditions of any awards granted under the plans.  In January 2011, 5,813,653 shares of the Company’s common stock were added to the shares available for issuance under the Equity Plan.
 
Grants to Eligible Participants of incentive stock options, restricted stock awards, and restricted stock units during the period are indicated in the table below (in thousands):
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Grants of restricted stock awards and restricted stock units
   
426
     
225
     
426
     
1,550
 
Grants of options to purchase common stock
   
56
     
1,000
     
1,421
     
1,550
 
Total
   
482
     
1,225
     
1,847
     
3,100
 
 
In June 2011, the Company adopted an Employee Stock Purchase Plan (“ESPP”) which provides eligible employees of the Company and its subsidiaries with an opportunity to acquire shares of its common stock at a discount. The maximum aggregate number of shares of common stock that may be purchased through the Plan is 7,000,000 shares. The number of shares that may be purchased through the Plan will be subject to proportionate adjustments to reflect stock splits, stock dividends, or other changes in the Company’s capital stock.
  
The Plan permits eligible employees to purchase shares of common stock during two annual offering periods beginning on June 15 and December 15, unless adjusted by the Board or one of its designated committees (the “Offering Periods”). Eligible employees may purchase shares of up to 15% of their total compensation per pay period, but may purchase no more than the lesser of $25,000 of shares of common stock or 500,000 shares of common stock in any calendar year, as measured as of the first day of each applicable Offering Period. The price an employee pays is 85% of the fair market value of common stock.  Fair market value is equal to the lesser of the closing price of a share of common stock on either the first or last day of the Offering Period.

 
14

 
 
For the three and nine months ended September 30, 2011, the Company recorded compensation expense of approximately $0.1 million, which is reflected in general and administrative expenses. The first issuance of shares will occur on December 15, 2011.

In October 2011, the Company granted to eligible participants approximately 3,000,000 nonstatutory stock options under its equity plan that vest and become exercisable on the earlier of (i) the first trading day after the Company’s common stock shall have traded on the NASDAQ stock market for more than ten consecutive trading days at or above a per-share closing price of $2.50 or (ii) the day that a binding written agreement is signed for the sale of the Company, as determined by the Company’s board of directors in its discretion reasonably exercised.
  
11. HEADQUARTERS RELOCATION
 
During 2010, the Company announced that it would be relocating its corporate headquarters, product development center, customer care operations, call center and other global business functions including finance, accounting, sales, marketing and corporate communications to Covington, Louisiana.
 
 In connection with the relocation, the Company incurred expenses, including but not limited to, severance, travel expenses, moving expenses, temporary housing, and lease termination payments. As of September 30, 2011 and December 31, 2010, the Company had incurred relocation expenses of approximately $3.9 million and $3.0 million, respectively, and also recorded in property and equipment $1.3 million of facility improvements and replacement equipment in connection with the relocation.
 
The Company entered into a Cooperative Endeavor Agreement with the Louisiana Department of Economic Development (“LED”) to be reimbursed to relocate equipment and personnel from other Company locations to the facility in Covington, Louisiana. The Company records a receivable from the State as reimbursable costs are incurred or as capital expenditures are made. Reimbursements for relocation expenses offset those expenses in the period incurred. Reimbursements for capital expenditures are recorded as deferred costs and offset depreciation expense as the related assets are used in service. These reimbursements, not to exceed $8.1 million, are contingent upon meeting required payroll thresholds. The Company has committed to the State to maintain required payroll amounts for each year covered by the terms of the agreement through 2019. If the Company fails to meet the required payroll in any project year, the Company will reimburse the State for a portion of the shortfall not to exceed the total reimbursement received by the Company from the State. The Company assesses the probability of reimbursement to the State and will record a liability when the amounts are probable and estimable.
 
Through September 30, 2011, the Company had been reimbursed for $5.2 million of expenses incurred in connection with the relocation.  As of September 30, 2011 and December 31, 2010, the Company had recorded a receivable of $0 and $2.6 million, respectively, from the State of Louisiana related to these reimbursements. As of September 30, 2011, due to a recently implemented plan to improve its cost structure by reducing headcount, the Company is not projecting to meet the minimum payroll thresholds required under the contract in future project years, and therefore recorded a $1.9 million provision for contingent reimbursements which the Company estimates will be paid between 2015 and 2019.
 
12. COMMITMENTS AND CONTINGENCIES
 
Contractual Obligations
 
In April 2011, the Company and a potential vendor entered into a contingent agreement for services related to the second-generation satellite constellation.  This agreement was amended on September 30, 2011 to become effective if and when the Company obtains certain financing commitments prior to December 31, 2011.  If the effective date does not occur on or before December 31, 2011, this agreement will terminate and all deposits will be refunded to the Company.  If on or before December 31, 2011, the Company obtains a commitment to finance alternative or competing services other than those to be provided by the potential vendor, the vendor will retain the $6.0 million deposits made by the Company.
 
The Company has issued separate purchase orders for additional phone equipment and accessories under the terms of previously executed commercial agreements with Qualcomm.  Within the terms of the commercial agreements, the Company paid Qualcomm approximately 7.5% to 25% of the total order price as advances for inventory. As of September 30, 2011 and December 31, 2010, total advances to Qualcomm for inventory were $9.2 million and the Company had outstanding commitment balances of approximately $48.9 million.  The Company and Qualcomm are interested in terminating the purchase orders and are negotiating to do so.
 
Arbitration and Litigation
 
On June 3, 2011, the Company filed a demand for arbitration against Thales before the American Arbitration Association to enforce certain rights to order additional satellites under the Amended and Restated Contract for the construction of the Company’s satellites for the second-generation constellation.  Specifically, the Company seeks a declaration that Thales is obligated to manufacture and deliver Phase 3 satellites (additional second-generation satellites beyond the first 25 satellites) in amounts timely ordered by the Company at the Contract price calculable in accordance with the Amended and Restated Contract, along with additional declaratory relief and specific performance.  
 
Thales claims that the Company is not entitled to the fixed pricing for Phase 3 satellites provided under the Amended and Restated Contract and that the price of any Phase 3 satellites ordered by the Company is subject to equitable adjustment.   Thales has subsequently claimed that the Company has terminated all further rights under the Contract to order additional satellites. Thales originally sought a declaration and award of termination charges of €60.5 million, alleging that the Company has terminated the contract for convenience.  Subsequent to their original demands, Thales delivered to the Company an invoice for termination costs under the contract of €51.5 million.   The Company claims that it has previously paid Thales €12.0 million for the procurement of certain long-lead time components and parts for six of these satellites and prepaid €53.0 million for these satellites, which Thales disputes claiming that the €53.0 prepaid was for the construction of the first 25 second-generation satellites and not Phase 3 satellites.  The Company disputes that it has terminated any portion of the contract for convenience and under the unambiguous language of the contract, even if it had terminated any portion of the contract for convenience, management believes the Company would not owe any termination charges as no work has been performed under Phase 3 of the contract.  As such, the Company has not recorded any reserve for Thales’ claims.  Additionally, the Company has claimed up to €395 million would be due to the Company from Thales if a termination for convenience is found by the arbitrator. 
  
The Company has requested and received formal assurance from Thales that the arbitration process will not affect any work being performed pursuant to the Contract regarding manufacture and delivery of the remaining first 25 satellites.
 
 
15

 
 
The panel of three arbitrators has been selected, and the hearing is currently scheduled to begin January 24, 2012.
 
Due to the nature of the Company's business, the Company is involved, from time to time, in various litigation matters or subject to disputes or routine claims regarding its business activities. Legal costs related to these matters are expensed as incurred. In management's opinion, other than the arbitration discussed above, none of the pending litigation, disputes or claims are expected to have a material adverse effect on the Company's financial condition, results of operations or liquidity.
 
Other
  See Note 3 regarding the status of certain second-generation satellites and the potential impairment if the Company is unable to successfully develop and implement a solution to fix the momentum wheel anomalies.
 
13.  GEOGRAPHIC INFORMATION
 
The Company attributes equipment revenue to various countries based on the location equipment is sold.  Service revenue is attributed to the various countries based on where the service is processed.  Long-lived assets consist primarily of property and equipment and are attributed to various countries based on the physical location of the asset at a given fiscal year-end, except for our satellites which are included in the long-lived assets of the United States.  The Company’s information by geographic area is as follows (in thousands):
 
Revenues
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Service:
                       
United States
 
$
9,291
   
$
8,398
   
$
27,282
   
$
24,160
 
Canada
   
2,813
     
3,126
     
8,217
     
8,947
 
Europe
   
1,186
     
791
     
3,238
     
2,295
 
Central and South America
   
828
     
966
     
2,780
     
3,050
 
Others
   
80
     
108
     
257
     
299
 
Total service revenue
 
$
14,198
   
$
13,389
   
$
41,774
   
$
38,751
 
Subscriber equipment:
                               
United States
   
2,633
     
3,711
     
8,695
     
9,066
 
Canada
   
924
     
568
     
2,657
     
1,940
 
Europe
   
220
     
188
     
1,137
     
788
 
Central and South America
   
200
     
345
     
937
     
843
 
Others
   
12
     
22
     
240
     
28
 
Total subscriber equipment revenue
 
$
3,989
   
$
4,834
   
$
13,666
   
$
12,665
 
Total revenue
 
$
18,187
   
$
18,223
   
$
55,440
   
$
51,416
 
 
Long-Lived Assets
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
Long-lived assets:
           
United States
 
$
1,199,454
   
$
1,142,618
 
Central and South America
   
3,686
     
5,125
 
Canada
   
340
     
437
 
Europe
   
162
     
142
 
Others
   
1,893
     
2,148
 
Total long-lived assets
 
$
1,205,535
   
$
1,150,470
 
 
 14. LOSS PER SHARE
 
The Company is required to present basic and diluted earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional common shares that could have been outstanding assuming the exercise of stock options and restricted stock and the potential shares that would have a dilutive effect on earnings per share.
 
For the three and nine months ended September 30, 2011 and 2010, diluted net loss per share of common stock were the same as basic net loss per share of common stock, because the effects of potentially dilutive securities are anti-dilutive.

As of September 30, 2011 and 2010, 17.3 million Borrowed Shares related to the Company’s Share Lending Agreement remained outstanding. The Company does not consider the Borrowed Shares to be outstanding for the purposes of computing and reporting its earnings per share.
 
 
16

 
 
15.  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
 
In connection with the Company’s entering into the sale and issuance of the 5.0% Notes and 5.0% Warrants, certain of the Company’s domestic subsidiaries (the “Guarantor Subsidiaries”), fully, unconditionally, jointly, and severally guaranteed the payment obligations under these Notes.  The following supplemental financial information sets forth, on a consolidating basis, the balance sheets, statements of income and statements of cash flows for Globalstar, Inc. (“Parent Company”), for the Guarantor Subsidiaries and for the Company’s other subsidiaries (the “Non-Guarantor Subsidiaries”).  
 
The supplemental condensed consolidating financial information has been prepared pursuant to the rules and regulations for condensed financial information and does not include disclosures included in annual financial statements.  The principal eliminating entries eliminate investments in subsidiaries, intercompany balances and intercompany revenue and expense.
 
Globalstar, Inc.
 Supplemental Condensed Consolidating Statement of Operations
 Three Months Ended September 30, 2011
(Unaudited)
 
               
Non-
             
   
Parent
   
Guarantor
   
Guarantor
             
   
Company
   
Subsidiaries
   
Subsidiaries
   
Eliminations
   
Consolidated
 
   
(In thousands)
 
Revenues:
                             
Service revenues
  $ 8,120     $ 9,992     $ 5,049     $ (8,963 )   $ 14,198  
Subscriber equipment sales
    301       2,905       229       554       3,989  
 Total revenues
    8,421       12,897       5,278       (8,409 )     18,187  
Operating expenses:
                                       
Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
    4,595       1,421       3,498       (1,182 )     8,332  
Cost of subscriber equipment sales
          2,661       2,187       (1,977 )     2,871  
Reduction in the value of equipment
          312       667             979  
Reduction in the value of assets
    788       2,195       55             3,038  
Marketing, general and administrative
    3,839       5,980       2,431             12,249  
Depreciation, amortization, and accretion
    6,187       9,171       3,836       (7,088 )     12,106  
 Total operating expenses
    15,409       21,740       12,674       (10,247 )     39,575  
(Loss) gain from operations
    (6,988 )     (8,843 )     (7,396 )     1,838       (21,388 )
 Other income (expense):
                                       
Interest income
    309             33       (339     3  
Interest expense, net of amounts capitalized
    (950           (615 )     330       (1,235 )
Derivative gain (loss)
    23,793                         23,793  
Equity in subsidiary earnings
    (16,544 )     (3,349 )           19,893        
Other
    (302 )     247       (1,924 )     103       (1,876 )
 Total other income (expense)
    6,306       (3,102 )     (2,506 )     19,987       20,685  
(Loss) gain before income taxes
    (682 )     (11,945 )     (9,902 )     21,825       (703 )
Income tax (benefit) expense
    (1 )     (23 )     2             (22 )
Net (loss) gain
  $ (681 )   $ (11,922 )   $ (9,904 )   $ 21,825     $ (681 )
 
 
 
17

 
 
Globalstar, Inc.
Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2011
(Unaudited)
 
               
Non-
             
   
Parent
   
Guarantor
   
Guarantor
             
   
Company
   
Subsidiaries
   
Subsidiaries
   
Eliminations
   
Consolidated
 
   
(In thousands)
 
Revenues:
                             
Service revenues
  $ 21,693     $ 29,624     $ 13,179     $ (22,722 )   $ 41,774  
Subscriber equipment sales
    710       10,567       3,871       (1,482 )     13,666  
 Total revenues
    22,403       40,191       17,050       (24,204 )     55,440  
Operating expenses:
                                       
Cost of services (exclusive of depreciation, amortization, and accretion shown separately below)
    9,602       6,262       9,996       (3,176 )     22,684  
Cost of subscriber equipment sales
    529       7,998       3,472       (2,678 )     9,321  
Reduction in the value of equipment
          735       666             1,401  
Reduction in the value of assets
    1,073       2,356       55             3,484  
Marketing, general and administrative
    8,702       17,470       7,832             34,004  
Depreciation, amortization, and accretion
    16,208       27,396       10,901       (18,993 )     35,512  
 Total operating expenses
    36,114       62,217       32,922       (24,847 )     106,406  
(Loss) gain from operations
    (13,711 )