Capstone Project
Citsse: ACC599
Date: 06/15/2013

Abstract
In this paper, we are going to discuss the following items related to our 5th assignment: Capstone Project. As a corporate accountant, I felt more comfortable selecting the company I work for. I was actively involved in the preparation of the 10-k. I have selected for the case study the MNC Globalstar, Inc. a leading provider of Mobile Satellite Services.
1. Write a twelve to fifteen (12-15) page paper in which you create an executive summary of the company that discusses the company, industry, products and services, and competitive advantages in the marketplace.
2. Evaluate the financial condition of the company and its ability to achieve the strategic objectives as discussed in the annual report.
3. Analyze the company’s profitability trends and recommend strategies for management to improve or capitalize on these trends.
4. Evaluate the company’s cash position. Articulate its ability to invest in capital projects in future years.
5. Analyze the effectiveness of the company’s inventory or service costing methods. Make a recommendation for improvement in this area.
6. Evaluate the adequacy or risks of the internal control environment noted in the annual report by management, and internal and external auditors.
7. Assess the risk to the company related to foreign currency translations, foreign economic events, and international financial reporting standard requirements in order to summarize the risk tolerance level for the company.
8. From reading the annual report and reviewing the website, determine where the company appears vulnerable for displaying unethical behavior.
9. From the research conducted in this paper, predict where this company will be financially in five (5) years. Thoroughly provide your rationale for your prediction.

1. Globalstar, Inc. is a leading provider of Mobile Satellite Services (“MSS”) including voice and data communications services globally via satellite. By providing wireless services in areas not served or underserved by terrestrial wireless and wireline networks, Globalstar seeks to meet its customers' increasing desire for connectivity. The company offers voice and data communication services over its own network of in-orbit satellites and active ground stations (or “gateways”), which Globalstar will refer to collectively as the Globalstar System.
In 2006 Globalstar began a process of designing, manufacturing and deploying a second-generation constellation of Low Earth Orbit (“LEO”) satellites to replace its first-generation constellation. The second-generation satellites are designed to last twice as long in space, have 40% greater capacity and be built at a significantly low cost compared to its first-generation satellites. This effort has culminated in the successful launch of its second-generation satellites, with the fifth launch occurring on February 6, 2013. Three prior launches of second-generation satellites were successfully completed in October 2010, July 2011 and December 2011.Globalstar is integrating all of the new second-generation satellites with certain first-generation satellites to form its second-generation constellation. As Globalstar place each new satellite into service, its service levels increase for its voice and Duplex data customers. When placed into service, the second-generation satellites launched in February 2013 will complete the restoration of its constellation’s Duplex capabilities. Globalstar expect this substantial increase in service levels to result in its products and services becoming more desirable to existing and potential customers. (Bloomberg Businessweek. 2012)
At December 31, 2012, Globalstar served approximately 562,000 subscribers. Globalstar increased its net subscribers by 16% from December 31, 2011 to December 31, 2012. Globalstar count "subscribers" based on the number of devices that are subject to agreements which entitle them to use its voice or data communications services rather than the number of persons or entities who own or lease those devices.
Globalstar currently provide the following communications services via satellite:
• Two-way voice communication and data transmissions, which Globalstar call “Duplex,” between mobile or fixed devices; and
• One-way data transmissions between a mobile or fixed device that transmits its location and other information to a central monitoring station, which includes the SPOT family of consumer market products (“SPOT”) and Simplex products.
Globalstar services are available only with equipment designed to work on its network. The equipment Globalstar offer to its customers consists principally of:
• Duplex products, including voice and two-way data;
• Consumer retail SPOT products; and
• Commercial Simplex one-way transmission products Globalstar designed its second-generation constellation to support its current lineup of Duplex, SPOT family (SPOT Satellite GPS Messenger and SPOT Connect) and Simplex data products. With the improvement in both coverage and service quality for its Duplex product offerings resulting from the deployment of its second-generation constellation, Globalstar anticipate an expansion of its subscriber base and increases in its average revenue per user, or “ARPU.”

Industry Communications industry sectors that are relevant to Globalstar’s business include:
• Mobile satellite services, which provide customers with connectivity to mobile and fixed devices using a network of satellites and ground facilities;
• Fixed satellite services, which use geostationary satellites to provide customers with voice and broadband communications links between fixed points on the earth's surface; and
• Terrestrial services, which use a terrestrial network to provide wireless or wireline connectivity and are complementary to satellite services. Within the major satellite sectors, fixed satellite services and mobile satellite services operators differ significantly from each other. Fixed satellite services providers, such as Intelsat Ltd., Eutelsat Communications and SES S.A., and aperture terminals companies, such as Hughes and Gilat Satellite Networks, are characterized by large, often stationary or "fixed," ground terminals that send and receive high-bandwidth signals to and from the satellite network for video and high speed data customers and international telephone markets. On the other hand, mobile satellite services providers, such as Globalstar, Inmarsat P.L.C. (“Inmarsat”) and Iridium Communications, Inc. (“Iridium”), focus more on voice and data services (including data services which track the location of remote assets such as shipping containers), where mobility or small sized terminals are essential. As mobile satellite terminals begin to offer higher bandwidth to support a wider range of applications, Globalstar expect mobile satellite services operators will increasingly compete with fixed satellite services operators.
LEO systems, such as the systems Globalstar and Iridium currently operate, reduce transmission delay compared to a geosynchronous system due to the shorter distance signals have to travel. In addition, LEO systems are less prone to signal blockage and, consequently, Globalstar believe to provide a better overall quality of service. (Bloomberg Businessweek. 2012)
Competition
The global communications industry is highly competitive. Globalstar currently face substantial competition from other service providers that offer a range of mobile and fixed communications options. Globalstar’s most direct competition comes from other global mobile satellite services providers. The two largest global competitors are Inmarsat and Iridium. Globalstar compete primarily on the basis of coverage, quality, portability and pricing of services and products. Globalstar compete with regional mobile satellite communications services in several markets. In these cases, Globalstar’s competitors serve customers who require regional, not global, mobile voice and data services, so the competitors present a viable alternative to Globalstar’s services. All of these competitors operate geostationary satellites. Globalstar’s regional mobile satellite services competitors currently include Thuraya, principally in the Middle East and Africa and ACeS (now operated by Inmarsat) in Asia. (Bloomberg Businessweek. 2012)
2. Globalstar is going through some financial difficulties that represent serious threats to the existence of the company. If the company fail to obtain, on a timely basis, additional external financing, as well as amendments to and restructuring of the existing debt obligations and amendments to certain other contractual obligations, Globalstar may not be able to continue as a going concern.
The current sources of liquidity include cash on hand ($11.8 million at December 31, 2012), cash flows from operations ($6.9 million for the year ended December 31, 2012), funds available under the Facility Agreement ($0.7 million at December 31, 2012, subject to certain restrictions). Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources), funds available from the Terrapin Opportunity, L.P. (“Terrapin”) equity line agreement ($30.0 million at December 31, 2012, subject to certain conditions precedent. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources), interest earned from funds previously held in the contingent equity account ($1.1 million at December 31, 2012), and amounts held in the debt service reserve account ($8.9 million at December 31, 2012). These sources of liquidity are not sufficient to meet the existing contractual obligations over the next 12 months. As a result, there is substantial doubt that Globalstar can continue as a going concern if the company do not raise additional external financing. In order to continue as a going concern, Globalstar must obtain additional external financing; amend the Facility Agreement and certain other contractual obligations; and restructure the 5.75% Convertible Senior Unsecured Notes (the “5.75% Notes”). In addition, substantial uncertainties remain related to the noncompliance with certain of the Facility Agreement’s covenants and the impact and timing of the company’s plan to improve operating cash flows and to restructure the contractual obligations. If the resolution of these uncertainties materially and negatively impacts cash and liquidity, Globalstar’s ability to continue to execute the business plans will be adversely affected. Completion of the foregoing actions is not solely within the company’s control and Globalstar may be unable to successfully complete one or all of these action. (Bloomberg Businessweek. 2012)
3. Globalstar incurred operating losses of $95.0 million, $73.2 million and $59.8 million in 2012, 2011, and 2010, respectively. These losses are largely a result of problems with the two-way communications services and the delay in launching the second-generation constellation.
Total operating expenses increased $25.2 million, or approximately 17%, to $171.3 million from $146.1 million in 2011. This increase is primarily due to the $22.0 million agreed termination charge related to the settlement with Thales regarding the construction of Phase 3 satellites, as well as the recognition of a loss of approximately $7.1 million related to an adjustment made to the carrying value of the first-generation constellation.
For the short and long term, Globalstar’s first concern should be raising enough funds to help the company building the constellation and go back to a 100% operational network. If the company survives until those goals are achieved, the revenue will drastically grow, as Globalstar experienced it before the last bankruptcy, and the operation will start generating profits. To be able to improve the cash flows from operations, Globalstar may take the following actions:
• Continuing to identify and pursue opportunities to construct new gateways in areas of the world where the Company has not previously operated.
• Continuing to pursue numerous opportunities in the field of aviation; including next-generation “space-based” air traffic management services, in association with the Company’s technology partner, ADS-B Technologies, LLC.
• Completing second-generation ground infrastructure upgrades that will permit the Company to offer a new suite of consumer and enterprise products that leverage the Company’s new, inexpensive chip architecture.
• Continuing to control operating expenses while redirecting available resources to the marketing and sale of product offerings.
• Improving its key business processes and leveraging its information technology platform.
• Introducing new and innovative Simplex and Duplex products to the market that will further drive sales volume and revenue.
4. As of December 31, 2012, cash and cash equivalents were $11.8 million; cash available under the Facility Agreement was $0.7 million (subject to certain restrictions); interest earned from funds previously held in the contingent equity account was $1.1 million, and amounts held in the company’s debt service reserve account were $8.9 million; compared to cash and cash equivalents, cash available under the Facility Agreement and cash in the contingent equity account at December 31, 2011 of $9.9 million, $8.0 million and $45.8 million, respectively. The carrying amount of current and long-term debt outstanding was $655.9 million and $95.1 million, respectively, at December 31, 2012 compared to current and long-term debt of $0 million and $723.9 million, respectively, at December 31, 2011. On December 28, 2012, Globalstar entered into an equity line agreement with Terrapin under which the company may require Terrapin to purchase up to $30.0 million of common stock. (Yahoo finance, 2013).
Due to the launch delays, Globalstar expect that it may not be in compliance with certain financial and nonfinancial covenants specified in the Facility Agreement during the next 12 months. Projected noncompliance with covenants include, but are not limited to, minimum consolidated adjusted EBITDA, minimum debt service coverage ratio, minimum net debt to adjusted consolidated EBITDA, and final in-orbit acceptance of the second-generation satellites by April 30, 2013. If Globalstar cannot obtain either a waiver or an amendment, any of these failures to comply would represent an additional event of default. An event of default under the Facility Agreement would permit the lenders to accelerate the indebtedness under the Facility Agreement. That acceleration would permit acceleration of Globalstar’s obligations under other indebtedness that contains cross-acceleration provisions. (Yahoo finance, 2013).
5. Inventory consists of purchased products, including fixed and mobile user terminals and accessories. Globalstar compute cost using the first-in, first-out (FIFO) method and state inventory transactions at the lower of cost or market. Inventory write-downs are measured as the difference between the cost of inventory and market, and are recorded as a cost of subscriber equipment sales - reduction in the value of inventory. At the point of any inventory write-downs to market, a new, lower cost basis for that inventory is established, and any subsequent changes in facts and circumstances do not result in the restoration of the former cost basis or increase in that newly established cost basis.
Globalstar review product sales and returns from the previous 12 months and future demand forecasts and write off any excess or obsolete inventory. The company also assess inventory for obsolescence by testing finished goods to ensure they have been properly stored and maintained so that they will perform according to specifications. In addition, Globalstar assess the market for competing products to determine that the existing inventory will be competitive in the marketplace. The company also record a liability for firm, non-cancelable and unconditional purchase commitments with contact manufacturers and suppliers for quantities in excess of the future demand forecasts consistent with the valuation of the excess and obsolete inventory.
If there were to be a sudden and significant decrease in future demand for Globalstar’s products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, Globalstar could be required to write down the inventory, and their liability for purchase commitments with contract manufacturers and suppliers, and accordingly gross margin could be adversely affected.
6. According to the annual report by management, and internal and external auditors, and based on the evaluation, management has concluded the Company's internal control over financial reporting was effective as of December 31, 2012.
Globalstar has Crowe Horwath LLP as external auditors, according to the report of independent registered public accounting firm, Globalstar’s financial statements present fairly, in all material respects, the financial position of the company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Although, it is important to point out the fact that Globalstar has suffered recurring losses from operations and is not in compliance with certain financial and nonfinancial covenants under certain long-term debt agreements. This creates a liquidity deficiency that raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
7. Although Globalstar’s most economically important geographic markets currently are the United States and Canada, the company has substantial markets for the mobile satellite services, and the business plan includes developing countries or regions that are underserved by existing telecommunications systems, such as rural Venezuela, Brazil and Central America. Developing countries are more likely than industrialized countries to experience market, currency and interest rate fluctuations and may have higher inflation. In addition, these countries present risks relating to government policy, price, wage and exchange controls, social instability, expropriation and other adverse economic, political and diplomatic conditions. (Kurtin, Owen D, 2012).
Globalstar receive a majority of the revenues in U.S. dollars. Limited availability of U.S. currency in some local markets or governmental controls on the export of currency may prevent independent gateway operators from making payments in U.S. dollars or delay the availability of payment due to foreign bank currency processing and approval. In addition, exchange rate fluctuations may affect Globalstar’s ability to control the prices charged for the independent gateway operators' services.
Globalstar’s operations involve transactions in a variety of currencies. Sales denominated in foreign currencies primarily involve the Canadian dollar, the euro, and the Brazilian real. Certain of the company’s obligations are denominated in euros. Accordingly, the operating results may be significantly affected by fluctuations in the exchange rates for these currencies. For example, increases in the value of the euro compared to the U.S. dollar can effectively increase the euro-denominated costs of procuring Globalstar’s second-generation satellites. Approximately 29% and 34% of the total sales were to retail customers located primarily in Canada, Europe, Central America, and South America during 2012 and 2011, respectively. The results of operations for 2012 and 2011 included losses of $2.0 million and $0.5 million, respectively, on foreign currency transactions. Globalstar may be unable to offset unfavorable currency movements as they adversely affect the revenue and expenses. The company’s inability to do so could have a substantial negative impact on the operating results and cash flows. (Kurtin, Owen D, 2012).
8. From my personal experience inside the company, we have not experienced unethical behavior cases in the past nor should we anticipate any in the near future. The reason is simple: most people have been working there since the beginning. The CEO inspires most of us and he is personally involved with the most part of the operation. But from a professional standpoint, since the company keeps hiring new personal, there will be always a potential threat. The fact that the company is not in compliance with certain financial and nonfinancial covenants under certain long-term debt agreements raises some question about the reasons behind the non-compliance part. I think that the company should create an internal audit department instead of counting only on the corporate controller and the audit committee in the board. The internal auditors may reinforce the internal controls and point out weakness that gives the opportunity for an unethical behavior.
9. It is very hard to predict Globalstar’s future because of the number of uncertainty threatening the operational side mentioned earlier in this paper. For example, On October 12, 2012, Globalstar entered into Waiver Letter No. 11 to the Facility Agreement, which permitted to make a draw from the contingent equity account. In the waiver letter, Globalstar acknowledged the lenders’ conclusion that events of default did occur as a result of the company entering into settlement agreements with Thales related to the arbitration ruling. As of the date of this paper, the agent for the Facility Agreement has not notified Globalstar of the lenders’ intention to accelerate the debt; however, the comopany have shown the borrowings as current on the December 31, 2012 balance sheet in accordance with applicable accounting rules. Globalstar is currently working with the lenders to obtain all necessary waivers or amendments associated with any default issues, but there can be no assurance that Globalstar will be successful. On October 24, 2012, the lenders permitted funding of $2.3 million of the amount available under the Facility Agreement to make a milestone payment to Thales. In November and December 2012, the lenders permitted Globalstar to withdraw funds available in the contingent equity account. The lenders currently are not permitting funding of the remaining $0.7 million available under the Facility Agreement.
Due to the launch delays, Globalstar expect that they may not be in compliance with certain financial and nonfinancial covenants specified in the Facility Agreement during the next 12 months. If they cannot obtain either a waiver or an amendment, Globalstar’s failure to comply with these covenants would represent an additional event of default. An event of default under the Facility Agreement would permit the lenders to accelerate the indebtedness under the Facility Agreement. That acceleration would permit holders of the company’s obligations under other agreements that contain cross-acceleration provisions to accelerate that indebtedness and Globalstar’s ability to continue to execute the business plans will be adversely affected. Completion of the foregoing actions is not solely within the company’s control and they may be unable to successfully complete one or all of these actions.

References

Bloomberg Businessweek. (2012). Globalstar Inc (GSAT:OTCQB) 10-K, Retrieved Jun, 2013 from: http://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=GSAT GlobeNewswire, May 2013. Globalstar Announces Further Extension of Forbearance Agreement Regarding 5.75% Senior Notes. Retrieved Jun, 2013 from: http://www.nasdaq.com/article/globalstar-announces-further-extension-of-forbearance-agreement-regarding-575-senior-notes-20130513-01162#ixzz2WQXxf2Fp
Kurtin, Owen D., Satellite News June, 2012. Risk Factors: LightSquared Bankruptcy and Globalstar Arbitration. Retrieved Jun, 2013 from: https://web-ebscohost-com.libdatab.strayer.edu/ehost/detail?sid=dedc9dbe-0243-4235-a2e3-4f082ff64e5a%40sessionmgr15&vid=5&hid=18&bdata=JnNpdGU9ZWhvc3QtbGl2ZSZzY29wZT1zaXRl#db=bth&AN=77693874 SATMAGAZINE. June 2012 . Executive Spotlight: Jay Monroe . Retrieved Jun, 2013 from: http://www.satmagazine.com/cgi-bin/display_article.cgi?number=1630840184
SEEKINGALPHA Aug 2011. 14 Compelling Shorts for a New Bear Market. Retrieved Jun, 2013 from: http://seekingalpha.com/article/283743-14-compelling-shorts-for-a-new-bear-market-part-3?source=nasdaq. TELECOMMUNICATIONS REPORTS, February 1, 2013. Spectrum Advocates Question Globalstar Petition. Retrieved Jun, 2013 from: https://web-ebscohost-com.libdatab.strayer.edu/ehost/pdfviewer/pdfviewer?sid=dedc9dbe-0243-4235-a2e3-4f082ff64e5a%40sessionmgr15&vid=5&hid=18
Wireless Services, October 2010. FCC Suspends Globalstar’s ATC Authority, Forcing Open Range to Scramble for Spectrum. Retrieved Jun, 2013 from: https://web-ebscohost-com.libdatab.strayer.edu/ehost/pdfviewer/pdfviewer?sid=dedc9dbe-0243-4235-a2e3-4f082ff64e5a%40sessionmgr15&vid=5&hid=18 Yahoo finance, Form 8-K on 14-May-2013. Entry into a Material Definitive Agreement, Regulation FD Disclosure, Financial. Retrieved Jun, 2013 from: http://biz.yahoo.com/e/130514/gsat8-k.html