Is Globalstar Headed for A Downward Spiral?

Shares of Globalstar Telecommunications Ltd. plunged 50 percent on Tuesday after the satellite telephone operator said it would stop paying debt holders so it can save cash to fund its operations into 2002.

Globalstar, which was founded by Loral Space & Communications Ltd. and Qualcomm Inc., said it would save $400 million in 2001 by suspending payments on its funded debt, including its credit facility, vendor financing agreements and senior notes. The company said it will also halt dividend payments on its preferred stock.

Shares of Globalstar were 29/32 lower at $1 at midday on Nasdaq, on volume of 10.1 million shares, after dipping as low as 15/16.

"We believe the actions we have just taken give us the time required to allow the service providers to aggressively add fuel to their new marketing efforts, and thus give us the revenue growth momentum that we need," said a top Globalstar official.

Globalstar said this decision ensures uninterrupted continuation of Globalstar's satellite-based communications service and further deployment of services around the world.

The company reports that as of Dec. 31 it had $195 million to meet obligations to its employees, customers and trade suppliers; a company official confirmed that there would be no associated layoffs.

The company, which is 38 percent-owned by Loral, has had difficulty meeting subscriber expectations. During the week of Jan. 7, the company said it had 31,200 subscribers, short of estimates.

"There's no question that the performance that we had expected up to this day in terms of the take-up rate has not been what we wanted it to be," the official said said. "But we're buying time here to add the kinds of resources that we think are necessary to turn the situation around." Reiterating its claims that the company was still viable, company officials also reported that a task force led by the Blackstone Group, which it retained as its financial adviser, will return in six weeks with a strategic plan that could include the restructuring of Globalstar's debt and identification of other funding opportunities.

Loral said Globalstar's actions will reduce its 2001 cash receipts from the company by $140 million. The cash receipts were expected to be primarily interest payments on debt. Loral also expects to write down its Globalstar investment in a one-time, noncash charge in the fourth quarter of 2000.

Globalstar's action, which will open up cash to fund its operations, in effect, relieves its partners of any necessity to provide additional funding to Globalstar in 2001.

In a separate statement, Qualcomm said that it was evaluating the effects of Globalstar's announcement.

The company said it will reserve a significant portion of its Globalstar-related assets and it expects to incur a small negative impact on operating earnings in its first fiscal quarter ended Dec. 31., at which time Qualcomm had about $610 million in net assets related to its business with Globalstar.