NEW YORK (AP) — Globalstar, trying hard to avoid the financial wreck that befell satellite phone rival Iridium, is halting payments on $3 billion worth of debt to make sure it has enough cash to continue operations into 2002.
The decision announced Tuesday was endorsed by Loral Space & Communications and Qualcomm, two of Globalstar's top investors and creditors owed a combined $1.3 billion. The remaining $1.7 billion is owed on publicly traded debt securities.
Globalstar, based in San Jose, Calif., also said it has retained the Blackstone Group as an adviser to assist in restructuring the company's debt and identifying new funding opportunities.
The suspension of debt payments, which actually began Monday when Globalstar withheld a combined $45 million owed to Loral and Qualcomm, will save about $400 million during 2001. Without that burden, Globalstar expects to meet this year's expenses with about $195 million in cash on hand and any revenues from customers.
By now, nearly a year after the launch of service, Globalstar had hoped business would have picked up enough to help fund operations. The company's phone business generated $1 million in the third quarter.
So far, about 31,200 customers have signed on for the wireless service, well shy of the hundreds of thousands suggested in Globalstar's early projections.
The distress signal from Globalstar comes about two months after Iridium, the first provider of mobile phone service via satellite, was narrowly rescued from financial and physical destruction with a $25 million takeover of the $5 billion venture.
And while Globalstar and its partners reaffirmed their confidence in the venture's business and technology, Tuesday's developments were a bit reminiscent of the early warning signs that preceded Iridium's tailspin into bankruptcy two years ago.
Much like Loral, Motorola and other Iridium backers were determined to give the venture time to build momentum with its target audience — globetrotting professionals and workers in distant places such as the mountains and ships at sea.
However, less than a half year after Iridium's launch in late 1998, Motorola and the others grew impatient. Would-be subscribers were balking at the exorbitant prices for handsets and phone service, leaving Iridium well shy of its goals for customers and usage.
When Motorola refused to pump in more money without contributions from other investors, Iridium began to default on loan payments and filed for bankruptcy in August 1999. Motorola had been threatening to destroy Iridium's satellites before the last-minute takeover was hatched.
Globalstar, which launched commercial service last year, is still hoping for a better reception by charging between $1 and $3 per minute for calls, or about a third of Iridium's rates.
Loral and Qualcomm expressed confidence in Globalstar Tuesday, but both companies found themselves comforting shareholders about the Iridium-like financial mess they are facing.
Loral, which has invested about $1.3 billion in Globalstar and owns about 39 percent of the venture, said in a statement it will continue investment programs such as funding the construction of three Globalstar satellites to be launched in 2002.
However, Loral also said it now intends to write off its Globalstar investment against earnings, reassuring investors that "the actions that Globalstar announced today relieve its partners, including Loral, of any necessity to provide additional funding to Globalstar this year."
Separately, Qualcomm said it is evaluating the impact of Globalstar's announcement, but expects to writeoff "a significant portion" of its $610 million in assets related to Globalstar.
In Tuesday's trading on Wall Street, Globalstar's stock tumbled 86 cents per share to $1.05, down 45 percent for the day and 98 percent from the all-time high of $53.75 reached early last year. Loral's shares rose 25 cents to $5.31, while Qualcomm's fell 88 cents to $70.94.