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Why the News Could Go From Bad to Worse for Iridium

Also, another Lernahoulian alert.

What more can possibly be said about problems at

Iridium World Communications



With its well-hyped satellite phones, Iridium has made mincemeat of itself. Too few customers. Lousy financial results. Executive turmoil. It's in default of debt covenants. Questions about whether satellite phones are all they're cracked up to be. (Didn't ya just love

James Cramer's

story about how he pulled his Iridium phone out on some deserted island, which is the point of the thing, and it didn't work?)

Yet, according to longtime Iridium skeptics, the story could get worse.

Let's start with the debt issue. Iridium has until May 31 to settle up with its banks, which had granted a 60-day extension on a deadline to meet debt covenants calling for the company to meet specific subscriber and revenue targets by the end of March. At the time it had less than half the required 27,000 subscribers. What happens if the banks get tough?

Well, the answer is that it'll be harder for the company to raise more cash, which it almost certainly will have to do. The company's bonds, which trade at around 30 cents on the dollar, are already signaling that Iridium could have to do some kind of drastic restructuring. And no matter what Iridium does, it'll almost certainly be dilutive to a stock that has already fallen 78% from its high.

Consider the possibilities:

According to the 10-K of Iridium's parent,

Iridium LLC

, under certain circumstances certain investors have agreed to purchase additional stock in the company for up to $243 million. (Dilution.)

Also, if Iridium's financial performance doesn't improve, it could be forced to give more warrants in its stock to



, a large investor and the backer of a large chunk of its debt. (More dilution.)

Finally, if the company can't find cash any other way, it could have to issue more stock. (Yikes, even more dilution.).

An Iridium spokeswoman said the company is currently sticking with a no-comment policy on its financials.

Lernahoulian Alert

BancBoston Robertson Stephens

analyst John Powers, whose firm was an underwriter of

Lernout & Hauspie's


secondary stock offering pulled the plug on Lernout yesterday, by downgrading it to a long-term attractive from a buy. He based his call on "external and internal business concerns ... as we believe there could be income and/or balance sheet pressures over the next few quarters." His laundry list of issues includes increased competition from the recent partnership of


(IBM) - Get Free Report


Philips Electronics

(PHG) - Get Free Report

, the ability to integrate acquisitions and the company's

relationship with


(MSFT) - Get Free Report


Powers, who had downgraded

Network Associates


before its big cliff dive, didn't return my call. And two Lernout spokeswomen didn't respond to my written questions.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.