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Globalstar defaults on debt

Loral, Qualcomm hit by exposure to troubled satellite operator January 16, 2001: 2:25 p.m. ET

NEW YORK (CNNfn) - The troubled satellite telephone service Globalstar Telecommunications LP said Tuesday it suspended debt payments and hired a financial adviser to explore "strategic alternatives" for the company.

The suspension of both principal and interest payments -- designed to save Globalstar $400 million this year -- comes as the company's stock has collapsed from about $46 a year ago to about $1 at present, destroying about $4.5 billion of market value along the way. Globalstar's fate is approaching that of Iridium, a $5 billion satellite phone service backed by Motorola, which filed for bankruptcy in 1999 after it failed to attract enough subscribers to its pricey service.

Globalstar (GSTRF: Research, Estimates), based in New York, is a global mobile satellite telephone service that is 39 percent owned by Loral (LOR: Research, Estimates), a satellite communications company. It provides mobile telephone service to regions of the world that are too remote to have standard cellular phone service, such as parts of Canada, Russia, and Australia.

At the end of last year's third quarter, Globalstar had attracted only 21,300 subscribers to its service and generated a paltry $1.2 million in revenue for that quarter. Its subscriber base has since risen to 31,200, which is still much smaller than the venture's founders had expected.

Loral's bottom line has been hard hit by Globalstar's problems. As of the end of last year, the New York-based satellite operator had invested about $1.3 billion in Globalstar to acquire 39 percent of its equity and about 27 percent of its debt.

Loral said Tuesday that it intends to write down its Globalstar investment to "an appropriate value" in a one-time non-cash charge in the fourth quarter of 2000.

Globalstar said Tuesday that it is suspending payment on its debt and dividend payments on its preferred stock so that it will have sufficient funds to continue marketing its service.

"The Globalstar system delivers highly valuable services, and Globalstar's actions will provide it with the additional time it needs to expand its customer base, develop new applications and demonstrate its viability," said Bernard Schwartz, chairman and CEO of Loral, in a statement.

The actions that Globalstar announced Tuesday relieve its partners, including Loral, of the need to provide additional funding to Globalstar this year. Loral said it will continue to support its joint participation in service provider franchises in Brazil, Canada, Mexico and Russia.

"Consistent with our November guidance," Schwartz continued, "Loral ended 2000 with cash and available credit in excess of $440 million. Although Globalstar's actions will reduce Loral's 2001 cash receipts from Globalstar by $140 million, we will continue our current investment programs, including funding the construction of three satellites due to be launched in 2002."

Globalstar said that it had $195 million in cash on hand as of Dec. 31, enough to meet its ongoing obligations to employees, customers, and trade suppliers. The suspension of principal and interest payments on its funded debt will conserve approximately $400 million of the company's cash for the year 2001, the company said.

Globalstar did not make the $45 million interest and principal payments due Monday on its Loral credit facility and under its vendor financing agreements with Qualcomm (QCOM: Research, Estimates) and Loral.

Globalstar said it hired the Blackstone Group as its financial adviser to explore options including restructuring the company's debt, identifying funding opportunities, and pursuing "other strategic alternatives."

Qualcomm's exposure

The mobile phone technology company Qualcomm owns about 6 percent of Globalstar's equity and has about $610 million in exposure to the satellite venture through receivables, inventory, deferred costs, unearned revenue and investment-related assets.

Qualcomm said Tuesday that it plans to take reserves against a "significant portion" of its Globalstar-related assets and incur a "small negative impact" to operating earnings in its first fiscal quarter ending Dec. 31. Despite these effects, Qualcomm said it remains comfortable with the mean of analysts' estimates of 28 cents per share in pro forma earnings in the first quarter of fiscal 2001.

San Diego, Calif.-based Qualcomm supplies phone handsets and infrastructure equipment to Globalstar, which accounted for about 7 percent of Qualcomm's revenue last year. In a research note issued Tuesday morning, Merrill Lynch analyst Michael Ching said that Qualcomm is likely to take charges in its March quarter also because of its financial exposure to Globalstar.

"We think that Qualcomm was somewhat aggressive in its accounting practices in terms of recognizing some of the payments from Globalstar, which will likely lead Qualcomm to take a larger write-down than we previously expected," Ching said in a research note.

Ching also said he remains concerned about the growth outlook for mobile phone chips based on the Qualcomm's CDMA technology.

"Our concern on Qualcomm relates to the outlook for the handset and CDMA business," Ching wrote. "As we have indicated previously, we remain concerned that the company may take down forecasts for future earnings because we think the company's CDMA forecasts are too aggressive."

In Tuesday afternoon trading, Qualcomm was down $2 at $69.81, Loral lost 19 cents at $4.88 and Globalstar shed 84 cents to $1.06

-- Martin Thompson (, January 16, 2001

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