'Worst Case Scenario' in SEC Filing Spooks Investors, Customers

 

 

PARIS — Globalstar officials expressed confidence Feb. 8 that they will be able to squeeze sufficient performance from their existing constellation of mobile-communications satellites to maintain business equilibrium until the spacecraft for the second-generation constellation begin arriving in orbit around late 2009.

 

Seeking to calm investors and customers unnerved by the company's Feb. 5 announcement, which raised the specter of a possible system collapse in 2008, Chief Executive Jay Monroe and President Anthony J. Navarra said Globalstar's technical resources and cash position are both strong enough to assure operations until the new satellites are in orbit.

 

"The fact is that on at least two occasions in the past we have faced technical difficulties with the system and we found fixes for them," Navarra said. "But these occurred before we were a publicly traded company with an obligation to make public statements like this immediately."

 

Milpitas, Calif.-based Globalstar announced Feb. 5 that its current 40-satellite constellation, which the company previously had said would provide service until 2010, is degrading more rapidly than predicted.

 

Performance of the solid-state power amplifiers that feed the S-band antennas and permit two-way communications links is eroding, likely because of the high daily radiation dose at the constellation's orbital altitude of 1,414 kilometers.

 

In a warning that sent Globalstar stock diving by more than 20 percent Feb. 6 and led some industry observers to begin writing Globalstar's obituary, the company's statement to the U.S. Securities and Exchange Commission said: "[I]f the degradation of the S-band antenna amplifiers continues at the current rate, and if the company is unsuccessful in developing additional technical solutions, the quality of two-way communications services will decline, and by some time in 2008 substantially all of the company's currently in-orbit satellites will cease to be able to support two-way communications services."

 

In a Feb. 8 interview, Monroe and Navarra addressed three points: what Globalstar and its contractors knew — and when they knew — about the constellation's health; what remedial measures might be taken to arrest the performance decline; and whether the company has access to enough cash to finance its second-generation constellation over the next two to three years even if subscriber revenues drop in parallel with satellite performance.

 

Globalstar completed an initial stock offering on the U.S. Nasdaq exchange in November and had listed the S-band amplifier issue as one of many risk factors investors should consider. But it maintained that the constellation — whose satellites were designed to last seven and a half years in orbit and were launched between 1998 and 2000 — was healthy enough to operate until the second-generation satellites were available.

 

Monroe said Globalstar's assessment at the time of the stock offering was based on an early 2006 in-depth review of the constellation's health performed by an outside consultancy.

 

He said none of the first-generation contractors, including prime contractor Space Systems/Loral and payload integrator Alcatel Alenia Space, had been assigned to follow the health of the satellites. Loral, like Globalstar, had been through Chapter 11 bankruptcy in the United States and had long since stopped constellation monitoring, Monroe said.

 

Similarly, he said, Alcatel Alenia Space, which since early 2006 had been negotiating a second-generation manufacturing contract with Globalstar, had not been given access to data on the first-generation satellites' performance. As a non-U.S. company, Alcatel Alenia would need technical-assistance agreements approved by the U.S. State Department before receiving any such information.

 

Blaise Jaeger, Alcatel Alenia Space's vice president for telecommunications business, said Feb. 8 that Alcatel Alenia Space was just as surprised as everyone else by the most recent assessment of the Globalstar satellites' health.

 

Similarly, Monroe said Globalstar's contract with Space Systems/Loral "ended a very long time ago" even though Loral more recently had been hired to refurbish eight spare first-generation satellites. These satellites are scheduled for launch aboard two Russian Soyuz rockets in 2007.

 

Soon after its successful stock offering, Globalstar signed an $860 million contract with Alcatel Alenia Space to build 48 second-generation Globalstar satellites, with the first spacecraft to be ready for launch in the second half of 2009.

 

Monroe and Navarra said a fresh system review by outside consultants began in January as part of a regular annual update Globalstar performs for its financial audit. It is this review, which is still ongoing, that turned up the extent of the S-band amplifier problem.

 

A publicly traded company in the United States is under legal obligation to announce developments of potential material importance. Monroe said this accounts for the Feb. 5 announcement, which he said provides a worst-case analysis of the situation.

 

"The language we used is about as conservative an assessment as you can make," Monroe said.

 

Navarra said that along with the continuing system review by the outside consultants, Globalstar is running three parallel investigations in the search for technical fixes to the power-amplifier problem.

 

One focuses on the satellites and how their power levels might be adjusted to minimize the amplifier-degradation effect. A second review focuses on the system's gateway Earth stations and how their operation could be modified to compensate for satellites' diminishing power. The third review is analyzing Globalstar users' telephone handsets, and whether their functions could be optimized to reduce the effects of the decline on customers.

 

Navarra agreed that, given its age, the Globalstar constellation might be compared to an automobile whose tires have been worn to a point where little or no tread remains.

 

"In that case you rotate the tires to maximize performance, you increase or decrease tire pressure depending on driving conditions — there are things you can do," Navarra said. "We know how to fix these kinds of things. We just need time to do it."

 

Monroe said Globalstar had begun discussing with Alcatel whether the second-generation satellites could be delivered more quickly than originally planned. It is unclear whether the schedule can be substantially accelerated, however.

 

"We are brainstorming with Globalstar now on what the possibilities are," Jaeger said. "There may be ways of moving more quickly, but we cannot perform miracles."

 

Monroe said Globalstar still has no launch contracts signed for the second-generation constellation. Launching 48 satellites, perhaps six or eight at a time, also will be a factor for Globalstar to contend with as it tries to speed deployment.

 

Globalstar has said its second-generation system will cost about $1.2 billion, a figure that includes the construction, launch and insurance of its satellites, as well as an upgrade of the gateway Earth stations.

 

Industry officials say the total likely will be closer to $1.5 billion.

 

Whatever the final number, Globalstar has said it will finance the second-generation system from operating revenues and from loans and commitments from its principal shareholder, Thermo Capital Partners.

 

A service-availability decline, and even the rumor of one, could affect Globalstar's subscriber growth and make it more difficult to maintain payments to Alcatel Alenia Space to keep working on the new satellites.

 

The Alcatel Alenia Space contract requires Globalstar to establish an escrow account from which Alcatel Alenia Space draws in quarterly increments through 2013. The account was established in late December with the required initial deposit of 40 million euros ($52 million).

 

Globalstar said that as of Jan. 1 it had cash and cash commitments from Thermo Capital Partners totaling $195 million, plus two untapped loans totaling $150 million and a credit agreement that makes another $150 million available under certain conditions.

 

Monroe said that unlike an operator of a geostationary satellite, Globalstar's capital expenses are "slow and steady. We have a relatively long capex cycle, and we don't see any new cash issues with Globalstar for years to come."